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BUA 201 Ch. 8

Accounts receivable
Amounts customers owe on account.
Accounts receivable turnover
A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.
Average collection period
The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.
Aging the accounts receivable
A schedule of customer balances classified by the length of time they have been unpaid.
Allowance method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Factor
A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.
Bad Debt Expense
An expense account to record losses from extending credit.
Cash (net) realizable value
The net amount a company expects to receive in cash from receivables.
Concentration of credit risk
The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.
Direct write-off method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.
Dishonored (defaulted) note
A note that is not paid in full at maturity.
Maker
The party in a promissory note who is making the promise to pay.
Trade receivables
Notes and accounts receivable that result from sales transactions.
Receivables
Amounts due from individuals and companies that are expected to be collected in cash.
Percentage-of-receivables basis
A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
Promissory note
A written promise to pay a specified amount of money on demand or at a definite time.
Payee
The party to whom payment of a promissory note is to be made.
Notes receivable
Written promise (as evidenced by a formal instrument) for amounts to be received.
Identify the different types of receivables.
Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.
Explain how accounts receivable are recognized in the accounts.
Companies record accounts receivable when they perform a service on account or at the point-of-sale of merchandise on account. Sales returns and allowances, and cash discounts reduce the amount received on accounts receivable.
Describe the methods used to account for bad debts.
The two methods of accounting for uncollectible accounts are the allowance method and the direct write-off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach.
Compute the interest on notes receivable.
The formula for computing interest is: Face value of note x Annual interest rate x Time in terms of one year
Describe the entries to record the disposition of notes receivable.
Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, however, similar to accounts receivable, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off.
Explain the statement presentation of receivables.
Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement.
Describe the principles of sound accounts receivable management.
To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary.
Identify ratios to analyze a company’s receivables.
The accounts receivable turnover and the average collection period both are useful in analyzing management’s effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information.
Describe methods to accelerate the receipt of cash from receivables.
If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.
A receivable that is evidenced by a formal instrument and that normally requires the payment of interest is: (LO 1)

(a) an account receivable.
(b) a trade receivable.
(c) a note receivable.
(d) a classified receivable.

(c) a note receivable.
Kersee Company on June 15 sells merchandise on account to Soo Eng Co. for $1,000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received? (LO 2)

(a) $700.
(b) $680.
(c) $686.
(d) None of the above.

(c) $686.

($1,000 – $300) x (100% – 2%)

Accounts and notes receivable are reported in the current assets section of the balance sheet at: (LO 3, 6)

(a) cash (net) realizable value
(b) net book value.
(c) lower-of-cost-or-market value.
(d) invoice cost.

(a) cash (net) realizable value
Net credit sales for the month are $800,000. The accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage-of-receivables basis. If Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the balance after adjustment? (LO 3)

(a) $12,000.
(b) $7,000.
(c) $17,000.
(d) $31,000.

(a) $12,000.

($160,000 x .075)

In 2014, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2014, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to Allowance for Doubtful Accounts at December 31, 2014? (LO 3)

(a) $20,000.
(b) $75,000.
(c) $32,000.
(d) $30,000.

(c) $32,000.

($200,000 x .10) + ($30,000 – $18,000)

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal these data:

Accounts receivable $800,000
Allowance for doubtful accounts per books before adjustment (credit) $50,000
Amounts expected to become uncollectible $65,000

What is the cash realizable value of the accounts receivable at December 31, after adjustment? (LO 3)

(a) $685,000.
(b) $750,000.
(c) $800,000.
(d) $735,000.

(d) $735,000.

($800,000 – $65,000)

Which of these statements about promissory notes is incorrect? (LO 4)

(a) The party making the promise to pay is called the maker.
(b) The party to whom payment is to be made is called the payee.
(c) A promissory note is not a negotiable instrument.
(d) A promissory note is more liquid than an account receivable.

(c) A promissory note is not a negotiable instrument.
Michael Co. accepts a $1,000, 3-month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is: (LO 4)

(a) Dr. Notes Receivable 1,030
Cr. Accounts Receivable 1,030

(b) Dr. Notes Receivable 1,000
Cr. Accounts Receivable 1,000

(c) Dr. Notes Receivable 1,000
Cr. Sales Revenue 1,000

(d) Dr. Notes Receivable 1,020
Cr. Accounts Receivable 1,020

(b) Dr. Notes Receivable 1,000
Cr. Accounts Receivable 1,000
Schleis Co. holds Murphy Inc.’s $10,000, 120-day, 9% note. The entry made by Schleis Co. when the note is collected, assuming no interest has previously been accrued, is: (LO 5)

(a) Dr. Cash 10,030
Cr. Notes Receivable 10,300

(b) Dr. Cash 10,000
Cr. Notes Receivable 10,000

(c) Dr. Accounts Receivable 10,300
Cr. Notes Receivable 10,000
Cr. Interest Revenue 300

(d) Dr. Cash 10,300
Cr. Notes Receivable 10,000
Cr. Interest Revenue 300

(d) Dr. Cash 10,300
Cr. Notes Receivable 10,000
Cr. Interest Revenue 300
If a company is concerned about extending credit to a risky customer, it could do any of the following except: (LO 7)

(a) require the customer to pay cash in advance.
(b) require the customer to provide a letter of credit or a bank guarantee.
(c) contact references provided by the customer, such as banks and other suppliers.
(d) provide the customer a lengthy payment period to increase the chance of paying.

(d) provide the customer a lengthy payment period to increase the chance of paying.
Eddy Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. What was the accounts receivable turnover? (LO 8)

(a) 6.4
(b) 8.0
(c) 5.3
(d) 4.0

(a) 6.4

$800,000 / (($100,000 + $150,000) / 2)

Prall Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 7. What is its average collection period (days)? (LO 8)

(a) 2,555
(b) 30
(c) 52
(d) 210

(c) 52

365 days / 7

Which of these statements about Visa credit card sales is incorrect? (LO 9)

(a) The credit card issuer conducts the credit investigation of the customer.
(b) The retailer is not involved in the collection process.
(c) The retailer must wait to receive payment from the issuer.
(d) The retailer receives cash more quickly than it would from individual customers.

(c) The retailer must wait to receive payment from the issuer.
Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Good Stuff Retailers will include a credit to Sales Revenue of $50,000 and a debit(s) to: (LO 9)

(a) Cash $48,000 and Service Charge Expense $2,000.
(b) Accounts Receivable $48,000 and Service Charge Expense $2,000.
(c) Cash $50,000.
(d) Accounts Receivable $50,000.

(a) Cash $48,000 and Service Charge Expense $2,000.
A company can accelerate its cash receipts by all of the following except: (LO 9)

(a) offering discounts for early payment.
(b) accepting national credit cards for customer purchases. (c) selling receivables to a factor.
(d) writing off receivables.

(d) writing off receivables.
What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?

(a) A note receivable
(b) An account receivable
(c) Past-due accounts receivables
(d) A trade receivable

(a) A note receivable

A note receivable represent claims for which formal instruments of credit are issued as evidence of the debt. The note normally requires the payment of the principal and interest on a specific date.

When is a receivable recorded by a service organization?

(a) When the related expenses are incurred
(b) When service is provided on account
(c) When the customer pays
(d) When the bill is sent to the customer

(b) When service is provided on account

A receivable is recorded when the service is performed, not at some other specific date.

At what value are accounts receivable reported on the balance sheet?

(a) Cash (net) realizable value
(b) Fair market value
(c) Present value
(d) Maturity value

(a) Cash (net) realizable value

Accounts receivable are reported at net realizable value. This value is the total amount due less an estimate for doubtful accounts.

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

(a) $300,000
(b) $12,000
(c) $7,000
(d) $17,000

(b) $12,000

Because the estimate is based on a percentage of receivables, the $800 balance in the Allowance accounts must be considered. The ending balance required in the allowance account is 7.5% times $160,000, or $12,000. Since there is already a balance of $5,000 in the allowance account, the difference of $7,000 should be added, resulting in a balance of $12,000.

Short-term notes receivable are reported at their cash (net) realizable value.

(a) True
(b) False

(a) True

Like accounts receivable, short-term notes receivable are reported at cash (net) realizable value.

Which one of these statements about promissory notes is incorrect?

(a) A promissory note is more liquid than an account receivable.
(b) A promissory note is not a negotiable instrument.
(c) The party making the promise to pay is called the maker.
(d) The party to whom payment is to be made is called the payee.

(b) A promissory note is not a negotiable instrument.

Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement.

Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable if a company expects the payment to be collected?

(a) Allowance for Doubtful Accounts
(b) Loss on Notes Receivable
(c) Bad Debts Expense
(d) Accounts Receivable

(d) Accounts Receivable

The entry for debit of a dishonored note receivable in default includes a debit to Accounts Receivable and credit to Notes Receivable. The company will then pursue collection along with its other receivables.

Which one of the following is not one of the principles of managing accounts receivable?

(a) Determining from which vendor credit should be requested
(b) Accelerating cash receipts from receivables when necessary
(c) Establishing a payment period
(d) Monitoring collections

(a) Determining from which vendor credit should be requested

Requesting credit from a vendor is a concern for dealing with accounts payable. Determining to whom to extend credit is a principle of managing accounts receivable.

Which of these statements about Visa credit card sales is incorrect?

(a) The retailer must wait to receive payment from the issuer.
(b) The retailer receives cash more quickly than it would from individual customers.
(c) The credit card issuer conducts the credit investigation of the customer.
(d) The retailer is not involved in the collection process.

(a) The retailer must wait to receive payment from the issuer.

There is no wait for payment. The retailer receives payment at the time the credit card is accepted from the customer.

What approach does IFRS require when testing whether the value of loans and receivable are impaired?

(a) A company should estimate how much will not be collected, and then write off amounts not collected.
(b) A company should look at specific loans and receivables to determine if impaired, and then write those off.
(c) A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group.
(d) A company should write off those receivables that are impaired, and then attempt to collect those amounts.

(c) A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group.

A company should look at specific loans and receivables to determine if impaired, and also evaluate them as a group in testing for impairment.

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