Accounts Receivable

Medium Test

Medium Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Which of the following is true?

a. sales discounts is a revenue
b. sales discounts is an operating expense
c. sales discounts is a contra-revenue
d. sales discounts is an other expense

Answer
C. Sales discounts is a reduction to sales, it is a contra-revenue account. It is not an expense because nothing is provided to the company.
2. When a sale of receivables occurs and the buyer withholds a portion of the cash until all receivables are collected, the sale is typically recorded as

a. an assignment
b. with recourse
c. without recourse
d. a pledge

Answer
B. With recourse means the seller is responsible for uncollectible receivables. The buyer typically withholds a portion of the sale and pays this amount to the seller after all amounts have been collected. The buyer does this to make sure the seller takes responsibility for uncollectible accounts.
3. When an account is written off, the account bad debt expense will

a. increase
b. decrease
c. not change
d. it depends on the current balance in the allowance account

Answer
C. Write-offs are recorded with a debit to the allowance account and a credit to accounts receivable. Bad debt expense is not recorded when accounts are written off, it is only recorded when it is estimated in the same period as the sale.
4. Bad debt expense is recorded on the income statement as

a. a selling expense
b. a contra – revenue account
c. an administrative expense
d. an other expense

Answer
A. Bad debt expense is recorded in the category selling expense. It is a cost of selling to the customer on credit.
5. The principle that requires the use of an allowance account is

a. the realization principle
b. the revenue recognition principle
c. the matching principle
d. the going concern principle

Answer
C. The matching principle requires the expense to be recorded in the same period the sale occurs. The account balance for accounts receivable must agree with the list of who owes and how much is owed; therefore, accounts receivable can not be decreased without knowing who will not pay. The allowance account is used instead of the accounts receivable account. The allowance account represents that some amounts won’t be collected, however, the exact amount or customer who won’t pay is not known.
6. When a company uses the % of sales method, the amount recorded to bad debt is equal to

a. the cumulative total the company does not expect to collect
b. the historical % of sales not collected x current period sales
c. the historical % of accounts receivable not collected x current period sales
d. the historical % of accounts written-offs x total accounts receivable

Answer
B. The % of sales method directly calculates the amount of bad debt expense recorded this period. The calculation is the historical % of sales x current period sales.
7. When a company uses the % of accounts receivable method, the amount recorded to bad debt is always equal to

a. the difference in the total the company does not expect to collect at the end of the period and the current unadjusted balance in the allowance account.
b. the historical % of sales not collected x current period sales
c. the historical % of accounts receivable not collected x current period sales
d. the historical % of accounts written-offs x total accounts receivable

Answer
A. The % of accounts receivable method calculates what the ending balance in the allowance account must be. The adjustment to bad debt expense is the amount that it takes to get the current unadjusted balance to the total amount the company does not expect to collect (the calculated amount).
8. When a customer pays an account that was written off, the company should record

a. a debit to accounts receivable and a credit to cash only
b. a debit to accounts receivable and a credit to the allowance account and then a debit to cash and a credit to accounts receivable
c. a credit to accounts receivable and a debit to the allowance account and then a debit to cash and a credit to accounts receivable
d. a debit to the allowance account and a credit to bad debt expense

Answer
B. Two entries must be made when a customer pays an account that was previously written off. 1st the account must be put back on the books with a debit to accounts receivable and a credit to the allowance (reverse the write-off entry). 2nd cash is increased (debit) and the receivable is decreased (credit) to reflect the payment received.
9. Which of the following transactions will affect the income statement and the balance sheet?

a. collecting from a customer
b. providing goods to a customer
c. an account that is written off
d. both b. and c.

Answer
B. Providing goods to a customer is recorded with a debit (increase) to accounts receivable and a credit (increase) to sales. Sales is an income statement account and accounts receivable is a balance sheet account. (a. & c.) affects two balance sheet accounts. (a) affects cash and accounts receivable and (c) affects accounts receivable and the allowance account.
10. A company reported sales of $10,000. The beginning balance of accounts
receivable was $3,000 and the ending balance of accounts receivable is $2,700. How much cash was collected from customer during the period?

a. $ 300
b. $10,300
c. $ 9,700
d. $13,000

Answer
B. Cash collected will be sales plus or minus the change in accounts receivable. When accounts receivable increases, less cash is collected than sales. When accounts receivable decreases, more cash is collected than sales. In this situation accounts receivable decreases by $300 which is added to sales to get cash collections of $10,300.
11. The following information was listed on the unadjusted trial balance

Debit Credit
Accounts receivable $500,000
Allowance for Uncollectible Accounts 10,000
Sales (98% on account) $2,000,000

The beginning balance of accounts receivable was $470,000.
Write-offs during the period totaled $32,000.

Prepare the journal entries to record

A. Total sales during the period
B. Cash collections during the period
C. Write-offs during the period
D. Bad debt expense given historical write-offs were 3% of sales
E. Bad debt expense given historical write-offs were 5% of accounts receivable and D. was not recorded.

Answer
A.
Accounts Receivable          1,960,000
Cash                                            40,000
       Sales                                            2,000,000

B.
Cash                                        1,898,000
       Accounts Receivable                1,898,000

Collections are recorded to receivables, so use the accounts receivable account to determine the amount:

Beginning accounts receivable       470,000
+ credit sales only                          1,960,000  
– collections                                                  ??
– write-offs                                           (32,000)
= Ending accounts receivable          500,000

Collections must be 1,898,000 for ending accounts receivable to be 500,000

C.
Allowance for uncollectible accts    32,000
       Accounts Receivable                            32,000

D.
Bad Debt Expense                             58,800
       Allowance for uncollectible accts               58,800

Credit Sales  x  historical % of sales  =  Bad debt expense
1,960,000  x  .03  =  58,800

The amount calculated is the amount of bad debt expense recorded 

(% of sales is the easy method because the current balance in the allowance account does not matter)

E.
Bad Debt Expense                        35,000
       
Allowance for uncollectible accounts        35,000

Ending accounts Receivable x historical % of A/R =  Ending balance in allowance
500,000 x .05  = 25,000

The amount that must be recorded to get the ending balance to 25,000 is computed as follows:

Beginning allowance balance      ??not given
–  Write-offs                                         (32,000)
= balance before adjustment             10,000
+ bad debt expense                                    ??
= balance allowance acct must be   (25,000)

The bad debt balance must be (35,000). The allowance account is a contra asset and must have a negative ending balance. A debit balance (positive) will only be an unadjusted amount.

12.  Prepare the balance sheet section of accounts receivable using information provided in problem 11. given bad debt expense was recorded using the % of accounts receivable method.
Answer
Accounts Receivable                          500,000
– allowance for uncollectible accts  (25,000)
= Net Accounts Receivable                475,000

Amounts on the balance sheet are always the final ending balance in the accounts.

13. A company has the following accounts receivable aging as of December 31st

    Estimated
% UnCollectible
Current $560,000 3 %
30 Days Past Due $120,000 15%
60 Days Past Due $ 40,000 20%
90+ Days Past Due $ 38,000 35%
Total $758,000

Credit sales for the year totaled $5,500,000. The company estimates that 4% of total sales will be uncollectible. The “allowance for uncollectible accounts” account had a normal balance of $82,000 on January 1st. $47,000 of uncollectible accounts was written off during the year. The company uses the % of sales method at the end of each month during the year and the accounts receivable (aging) method to get the allowance as correct as possible at the end of the year.

A. Using the % of sales method, prepare the journal entry to record uncollectible
accounts expense. (Make one journal entry for the entire year)

B. Record the journal entry that was made to write-off uncollectible accounts.

C. Using the % of accounts receivable (aging) method, prepare the journal entry to record uncollectible accounts expense at the end of the year to true up your estimates during the year.

D. How would the balance sheet report accounts receivable on December 31st?

Answer
13.A.

Credit sales 5,500,000
x historical % sales       x .04
= Bad debt expense 220,000

Bad Debt Expense                               220,000
            Allowance for uncollectible accounts          220,000

Increase bad debt expense
Increase the allowance account

13.B.
Allowance for uncollectible accounts            47,000
            Accounts receivable                                       47,000

Decrease the allowance account
Decrease accounts receivable

 

Balance x % uncollectible = Amount uncollectible
560,000 .03 16,800
120,000 .15 18,000
40,000 .20 8,000
38,000 .35 13,300
Total estimated uncollectible 56,100

56,100 must be the ending credit balance in the allowance account

First year of operations beginning balance of the allowance account equals 0.
The adjustment to bad debt is computed as follows:

Beginning allowance balance (82,000)
+ bad debt expense % sales (220,000)
– write-offs 47,000
+ bad debt expense % a/r ??
= ending allowance balance (56,100)

The allowance account must be decreased (debit) by $198,900 to get to the ending balance to 56,100. Bad debt expense is decreased for the same amount

13.C.
Allowance for uncollectible accounts 198,900
                    Bad Debt Expense                198,900

Too much expense was recorded during the year using the % of sales method and the expense must be decreased.

13.D.

Accounts Receivable 758,000
– Allowance for U.A. (56,100)
= Net Accounts Receivable 701,900
14. A company is in need of cash and has accounts receivable of $600,000. To raise cash, the company sold $500,000 of their accounts receivable for a fee of 1.8%. 95% of the cash was received immediately and the rest was withheld for anticipated uncollectible amounts. Record the sale of receivables given the terms of the sale was

A. with recourse
B. without recourse

Answer
Compute the finance fee:
500,000 x 1.8% = 9,000

Compute the estimated uncollectible amount:
500,000 x 5% = 25,000

Compute the amount received initially:
500,000 x 95% = 475,000

Compute the amount to be received later from factor:
500,000 x 5% = 25,000

14.A. With recourse:

Cash 466,000
Loss on sale of A/R 34,000 **
Receivable from factor 25,000
                Recourse Liability 25,000
               Accounts Receivable 500,000

** The loss is equal to the fee plus the estimated uncollectible amount.

14.B. Without recourse:

Cash 466,000
Loss (fee) 9,000
Receivable from factor 25,000
                Accounts Receivable 500,000
15.  During the current year the company had credit sales of $875,000.  The company collected $832,000 from customers during the year. The beginning balance in accounts receivable and the allowance account was $139,000 and $22,000, respectively.  During the year $7,000 of accounts were written off. One invoice that was written off for $765 was collected after it was written off. At the end of the year, the company estimated total uncollectible accounts to be $13,000.

 Record all required entries related to accounts receivable for the year.

Answer
There are 4 transactions that are recorded related to accounts receivable, in this order:

1)  credit sales for the current period
2)  collections from customers
3)  write-offs
4)  estimate of bad debt expense

and you must record the account that was paid that was previously written off.

1)
Accounts Receivable
              875,000
       Sales                                               875,000

2)
Cash
                                          832,000
       Accounts Receivable                   832,000

3)
Allowance for Uncollectible Accts
  7,000
       Accounts Receivable                         7,000

4)
Bad debt expense
                            2,765
       Allowance for uncollectible accts         2,765

Collection of the account previously written off:

Accounts Receivable                765
       Allowance for uncollectible accounts        765
Cash                                             765
       Accounts receivable                                     765

4)
Bad debt expense is recorded to the allowance account, so use this account to determine the amount recorded:

Beginning allowance account          (22,000)
+ – Bad debt expense                                  ??
– Write-offs                                              7,000
+ Write –off reversals                            (765)
Ending allowance account                (13,000)

Bad debt expense must be $2,765 in order for allowance balance to be $13,000.