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Exam 8: Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue

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Question 1

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Your company has $3,000,000 in credit sales during 2011. The beginning balance of the allowance for doubtful accounts is $3,000 and the company writes off $700 in bad debts during the year. a. Calculate the estimated doubtful accounts using the aging of accounts receivable method given that $1,600,000 of the credit sales are not yet due (estimated that 0.5% are uncollectible), $349,000 are 1-60 days late (estimated that 1.25% are uncollectible) and $12,000 are over 60 days late (estimated that 30% are uncollectible). b. Using the assumptions in the initial problem statement above, and using the aging of accounts method, calculate the bad debt expense. Show your calculation in a T-account for Allowance for Bad Debts and present the journal entry to record bad debt expense. c. Calculate the estimated bad debt expense using the percentage of credit sales method and prepare the journal entry. Historically your company is unable to collect 1% of credit sales.

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Question 2

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On average, 5% of total accounts receivable has been uncollectible in the past. At the end of the year, the balance of accounts receivable is $100,000 and the allowance for doubtful accounts has an unadjusted credit balance of $500. Credit sales during the year were $150,000. Using the aging of accounts receivable method, the estimated bad debt expense would be:

A) $4,500.
B) $5,000.
C) $5,500.
D) $7,500.

E) None of the above
F) B) and C)

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Question 3

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On December 1, 2010, a company loaned a new employee $20,000 to assist with her relocation expenses. The employee signed a 6-month note, with interest of 9%. The company prepares year-end financial statements at December 31. What is the required adjusting entry at December 31 as a result of this note transaction?

When the direct write-off method is used, the entry to write-off a specific account would

On January 1, a company lends a corporate customer $80,000 at 6% interest. The amount of interest revenue that should be recorded for the first quarter is:

The Grass is Greener Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. To record the potential bad debts, The Grass is Greener Corporation would:

The accounts receivable account for each customer is called a subsidiary account.

If the company changes its credit granting policies and begins granting credit to less creditworthy customers, which of the following statements is true regarding the likely effect on the receivables turnover ratio and the days to collect measure?

Assuming the entry to record bad debt expense was $8,250, what is the balance in the allowance for doubtful accounts after this entry was made?

What is the days to collect for 2011 (rounded to the nearest whole number) ?

A company's unadjusted trial balance at the end of the year includes the following: The company uses the allowance method and has completed the aging schedule which indicates $5,800 of accounts are estimated uncollectible. What is the amount of bad debt expense to be recorded for the year?

Your company lent a customer $5,000 to satisfy the customer's overdue accounts receivable. The loan is for one year at an annual interest rate of 5%. Six months later the customer repays the principal and interest. The principal part of the repayment should be recorded as a:

Assuming the company estimates bad debts as 1.3% of credit sales, what is the required adjusting entry to record bad debt expense for the year?

The Grass is Greener Corporation is owed $11,890 by a client for landscaping. The account is overdue and the client is having difficulty paying. Why might the Grass is Greener Corporation extend a note receivable to the client?

Credit card companies charge a fee to the seller that accepts the credit cards and this fee is recorded by the seller as a non-operating expense on the Income Statement.

A company uses the direct write-off method and discovers a customer's account in the amount of $3,000 will not be paid because the customer has declared bankruptcy. What is the journal entry that would be made to record this write-off?

The journal entry to record the write-off on May 1 would include which of the following?

During the year, a company that uses the allowance method concludes that $6,844 of specific customer accounts will not be collected. These are written off by:

Receivables might be sold ("factored") to:

Companies A and B both report net income growth of 12% per year. Company A has a receivables turnover ratio of 5.6, which is smaller than its previous year. Company B has a receivables turnover ratio of 11.3, which is higher than its previous year. All other things equal: