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Exam 5: Receivables and Sales

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Question 1

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On August 12,a company provides services on account to a customer for $3,000.However,on August 16,the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400.On August 20,the customer makes full payment of the balance owed,excluding the allowance.Record the services provided on August 12,the sales allowance on August 16,and the cash collection on August 20.

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Question 2

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At December 31,Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and $970 (credit) in Allowance for Uncollectible Accounts.An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable.Bad debt expense for the year should be:

A) $6,220.
B) $6,450.
C) $5,250.
D) $7,190.

E) A) and B)
F) B) and D)

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Question 3

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Under the direct write-off method,what adjustment is made at the time an actual bad debt occurs?

A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.

From a balance sheet perspective,the percentage-of-receivables method is typically preferable because assets (net accounts receivable)are reported closer to their net realizable value.

Tom's Textiles shipped the wrong material to a customer,who refused to accept the order.Upon receipt of the material,Tom's would credit Accounts Receivable and debit:

Toppleson Manufacturing reports a receivables turnover ratio of 14.5.The industry average is 10.7.What most likely is causing this difference?

The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect.

Lail Inc.accounts for bad debts using the allowance method.On June 1,Lail Inc.wrote off Andrew Green's $2,500 account.Based on Lail's estimation,Andrew Green will never pay any portion of the balance in his account.What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off?

At December 31,Gill Co.reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) .An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable.The amount of the adjustment for uncollectible accounts would be:

Beverage International reports net credit sales for the year of $240,000.The company's accounts receivable balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000.What is Beverage International's receivables turnover ratio?

On January 1,2012,Alice & Co.lends $5,000 to an employee and accepts a 24-month,10% note.At the end of 2012,what effect will the adjustment for accrued interest revenue have on the Alice & Co.'s financial statements?

The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method,because it always results in a higher amount of net income being reported in the income statement.

Explain how companies account for uncollectible accounts receivable (bad debts).

Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period.

On February 1,2012,Middleton Corp.lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months.How much interest revenue will Middleton Corp report during 2012?

Under the direct write-off method,recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.

When a company sells a $100 service with a 20% trade discount,$80 of revenue is recognized.

Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account.

Give three examples of contra revenue accounts and the transactions with which they are associated.