ACCT 200 – Chapter 8 (Exam 3)

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.
Accounts receivable are recorded at invoice price. They are reduced by sales returns and allowances. 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 x Interest Rate x Time
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 debts 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 receivables turnover ratio 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.
Amounts customers owe on account.
Accounts Receivable
A schedule of customer balances classified by the length of time they have been unpaid.
Aging the Accounts Receivable
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Allowance Method
The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the receivables turnover ratio.
Average Collection Period
An expense account to record losses from extending credit.
Bad Debts Expense
The net amount a company expects to receive in cash from receivables.
Cash (net) Realizable Value
The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.
Concentration of Credit Risk
A method of accounting for bad debts that involves charging receivable balances to Bed Debts Expense at the time receivables from a particular company are determined to be uncollectible.
Direct write-off method
A note that is not paid in full at maturity.
Dishonored note
A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.
Factor
The party in a promissory note who is making the promise to pay.
Maker
Claims for which formal instruments of credit are issued as evidence of the debt.
Notes Receivable
The party to whom payment of a promissory note is to be made.
Payee
A method of estimating the amount of bad debts expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
Percentage of receivables basis
A written promise to pay a specified amount of money on demand or at a definite time.
Promissory note
Amounts due from individuals and companies that are expected to be collected in cash.
Receivables
A measure of the liquidity of receivables, computed by dividing net credit sales by average net accounts receivables.
Receivables turnover ratio
Notes and accounts receivable that result from sales transactions.
Trade receivables
A receivable that is evidenced by a formal instrumentand that normally requires the payment of interest is:

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?
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:
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 the Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the balance after adjustment?
A. $12,000.
B. $7,000.
C. $17,000.
D. $31,000.
A. $12,000.
($160,000 x .075)
In 2012, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2012, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2012, $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 the Al lowance for Doubtful Accounts at December 31, 2012?
A. $20,000.
B. $75,000.
C. $32,000.
D. $30,000.
C. $32,000.
($200,000 x .10) + ($30,000 – $18,000)
Which of these statements about promissory notes is incorrect?
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.
If a company is concerned about extending credit to a risky customer, it could do any of the following except:
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 receivables turnover ratio?
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 a receivables turnover ratio of 7. What is its average collection period (days)?
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?
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:
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:
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. Past-due accounts receivables
C. An account receivable
D. A trade receivable

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

A. Maturity value
B. Net cash realizable value
C. Fair market value
D. Present value

B. Net cash realizable value
How much accrued interest should be reported on the payee’s December 31 balance sheet ona $5,000, 8%, 9-month note receivable issued on June 1?

A. $233
B. $300
C. $400
D. $33

A. $233
What is often the most critical part of managing receivables?

A. Determining who gets credit and who doesn’t
B. Determining which method to use to account for bad debts
C. Monitoring the receivables
D. Establishing a payment period

A. Determining who gets credit and who doesn’t