Receivables – Problem Bank | Test Bank 10th - Test Bank | Financial Accounting Information for Decisions 10e by John Wild by John Wild. DOCX document preview.
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Student name:__________
FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) A supplementary record created to maintain a separate account for each customer is called the ________________________.
2) A(n) ____________________ is a written promise to pay a specified amount, usually with interest, either on demand or at a stated future date.
3) The person to whom a note is payable to is known as the ______________.
4) ____________________ is the charge for using borrowed money until its due date.
5) The ____________________ of a note is the day the note (principal and interest) must be repaid.
6) Converting receivables to cash before they are due is usually done by either (1) _______________________ or (2) ________________________________.
7) The accounts receivable turnover is calculated by dividing _________________ by ________________.
8) The_________________ method of accounting for bad debts records the loss from an uncollectible account receivable at the time it is determined to be uncollectible.
9) ____________________________ are amounts owed by customers from credit sales where payment is required in periodic amounts over an extended time period.
10) To write off an uncollectible account receivable when the allowance method of accounting for uncollectible accounts is used, a company should debit _______________________ and credit accounts receivable.
11) The _________________________ method assumes that a percent of credit sales for a period is uncollectible.
12) ________________________ are amounts due from customers for credit sales.
13) The _______________________ method classifies each receivable by how long it is past its due date, and assumes that the longer an amount is past due, the more likely it is uncollectible.
14) Felton Corporation purchased $4,000 in merchandise from Marita Company Felton signed a 60-day, 10%, $4,000 promissory note. Marita should record the sale with a journal entry debiting ____________________ for $ ________ and crediting __________________ for $ ________.
15) When the maker of a note is unable or refuses to pay at maturity, the note is said to be ___________________.
16) _______________ refers to the amount expected to be received from receivables.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
17) Describe how accounts receivable arise and how they accounted for, including the use of a subsidiary ledger and an allowance account.
18) Define a note receivable and explain how to calculate the interest due on a short-term note receivable.
19) Explain the options a company may use to convert its receivables to cash before they are due.
20) What is the accounts receivable turnover ratio? How is it calculated and how is it used to assess financial condition?
21) Describe the differences in how the direct write-off method and the allowance method are applied in accounting for uncollectible accounts receivables.
22) The allowance method of accounting for bad debts requires an estimate of bad debt expense at the end of each accounting period. The two common methods to determine the estimate amount are the percent of sales method and the percent of receivables method. Explain the basic differences between the two methods.
23) Explain how to record the receipt (acceptance) of a note receivable.
24) Explain the difference between honoring and dishonoring a note receivable.
25) What are some of the considerations management should make when assessing the accounts receivable turnover ratio?
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
26) A company allows its customers to use Visa credit cards to charge purchases. Visa charges a 2.5% fee. Assume that on April 13, the company sold $20,000 worth of merchandise to customers who used Visa credit cards. Prepare the company's journal entry to record the credit card sales for April 13.
27) Gemstone Products allows customers to use Visa credit cards to charge purchases. Visa charges a 3% processing fee. Assume that on January 18, Gemstone Products sold $18,000 of merchandise to customers using Visa credit cards. Prepare the general journal entry to record this transaction.
28) Mercks uses the perpetual inventory system and accepts Discover credit cards. Discover charges a 3% fee. Prepare journal entries to record the following transaction.
March 11 | Sold merchandise for $4,500 (that had cost $2,100) and accepted the customer’s Discover card. |
29) Woods Company uses a perpetual inventory system and accepts the World Express bank credit card from its customers. World Express charges a 3.5% service fee. On February 28, Woods sold $24,000 worth of merchandise to customers (that had cost $14,400) using the World Express charge card. Prepare the journal entries to record February 28 sales.
30) What is the maturity date of a 120-day note receivable dated March 5?
31) Prudence Company receives a $26,000, 90-day, 4% note receivable. What is the amount of interest that is due at maturity?
32) Prudence Company receives a $26,000, 90-day, 4% note receivable. What is the total principal and interest due at maturity?
33) Calculate the amount of interest that would be owed on a $18,000, 60-day, 8% note receivable at maturity.
34) If a 90-day note receivable is dated July 12, what is the maturity date of the note?
35) If a 60-day note receivable is dated September 22, what is the maturity date of the note?
36) On May 31, a company had a balance in its accounts receivable of $103,200. Prepare journal entries to record the following transactions for June. Assume the company uses a perpetual inventory system.
June 2 | Sold merchandise on account, $12,000. The cost of the merchandise was $7,200. |
June 8 | Sold $15,000 worth of accounts receivable to First Bank. First Bank charged a 4% factoring fee. |
June 20 | Borrowed $30,000 cash from Second National Bank, pledging $31,500 worth of accounts receivable as collateral for the loan. |
37) Orman Company sold $80,000 of accounts receivable to First Savings and incurred a 3% factoring fee. Prepare the journal entry for Orman Company to record the sale.
38) Flax had net sales of $7,875 and its average accounts receivables is $1,250. Calculate Flax’s accounts receivable turnover:
39) Morgan had net sales of $310,000 and average accounts receivable of $77,500. Its competitor, Stanley, had net sales of $286,700 and average accounts receivable of $61,000. Calculate the accounts receivable turnover for both companies. Which company is doing a better job of managing its accounts receivables?
40) A company reports the following results in its financial statements:
Year 3 | Year 2 | Year 1 | |
Net Sales | $ 2,940,000 | $ 2,100,000 | $ 1,900,000 |
Accounts Receivable, Ending Balance | 229,000 | 171,000 | 165,000 |
Calculate the company accounts receivable turnover for Year 2 and Year 3. Compare these two results and give a possible explanation for any significant change.
41) The Links Company uses the percent of sales method of accounting for uncollectible accounts receivable. During the current year, the following transactions occurred:
September 7 | Links Company determined that the $8,000 account receivable of the Rainier Company was uncollectible and wrote it off. |
October 15 | Links Company determined that the $3,500 account receivable of the Olympic Company was uncollectible and wrote it off. |
November 9 | Rainier Company paid $6,000 of the amount owed to the Links Company. Links Company does not expect further collections from the Rainier Company. |
December 31 | Links Company estimates that 1% of its $1,900,000 of credit sales would be uncollectible. |
1. Prepare the general journal entries to record these transactions.
2. If the balance of the allowance for doubtful accounts was a $4,000 credit on January 1 of the current year, determine the balance of the allowance for uncollectible accounts at December 31 of the current year. Assume that the transactions above are the only transactions affecting the allowance for doubtful accounts during the year.
42) The Lily Company uses the percent of receivables method of accounting for uncollectible accounts receivable, and a perpetual inventory system. As of January 1, its net accounts receivable totaled $192,000 (Accounts Receivable $200,000 less an $8,000 Allowance for Doubtful Accounts). During the current year, the following transactions occurred.
1) Merchandise costing $1,050,000 was sold on account for $1,400,000.
2) The company collected $1,294,000 from customers on account.
3) $6,000 of accounts receivable were deemed uncollectible and written off.
4) $1,000 of accounts receivable previously written off as uncollectible were recovered.
5) At year-end, Lily Company estimates that 4% of its accounts receivable are uncollectible.
Prepare journal entries to record these transactions.
43) The Tulip Company uses the percent of receivables method of accounting for uncollectible accounts receivable, and a perpetual inventory system. As of January 1, its net accounts receivable totaled $485,000 (Accounts Receivable $500,000 less a $15,000 Allowance for Doubtful Accounts). During the current year, the following transactions occurred.
1) Merchandise costing $2,400,000 was sold on account for $4,000,000.
2) The company collected $3,880,000 from customers on account.
3) $20,000 of accounts receivable were deemed uncollectible and written off.
4) $3,000 of accounts receivable previously written off as uncollectible were recovered.
5) At year-end, Lily Company estimates that 3% of its accounts receivable are uncollectible.Prepare journal entries to record these transactions.
44) The Branson Company uses the percent of sales method of accounting for uncollectible accounts receivable. During the current year, the following transactions occurred:
March 7 | Branson Company determined that the $2,000 account receivable of the Bing Company was uncollectible and wrote it off. |
June 9 | Bing Company paid $1,500 of the amount owed to the Branson Company. Branson Company does not expect further collections from the Bing Company. |
December 31 | Branson Company estimates that 1.5% of its $900,000 of credit sales will be uncollectible. |
Prepare the general journal entries to record these transactions.
45) Thatcher Company had a January 1, credit balance in its Allowance for Doubtful Accounts of $4,000 for the current year. The following transactions and events affected the Allowance for Doubtful Accounts during the current year:
April 15 | Bean's account receivable of $2,700 was deemed uncollectible. |
July 1 | Cho paid the full amount of a previously written-off account receivable. This receivable of $1,300 had been written off in the prior year. |
December 31 | Bad debts expense of $4,500 was recorded. |
What amount should appear in the allowance for doubtful accounts in the December 31, balance sheet for the current year?
46) Owens Company uses the direct write-off method of accounting for uncollectible accounts receivable. On December 6, Year 1, Owens sold $6,300 of merchandise to the Valley Company. On August 8, Year 2, after numerous attempts to collect the account, Owens determined that the account of the Valley Company was uncollectible.
a. Prepare the journal entry required to record the transactions on August 8.
b. Assuming that the $6,300 is material, explain how the direct write-off method violates the expense recognition principle in this case.
47) At December 31 of the current year, a company reported the following:
Total sales for the current year: $980,000 (which includes $160,000 in cash sales)
Accounts receivable balance at December 31, end of current year: $160,000
Allowance for Doubtful Accounts balance at January 1, beginning of current year: $7,300 credit
Bad debts written off during the current year: $5,800.
Prepare the necessary adjusting entries to record bad debts expense assuming this company's bad debts are estimated to equal 5% of accounts receivable.
48) At December 31 of the current year, a company reported the following:
Total sales for the current year: $980,000 (which includes $160,000 in cash sales)
Accounts receivable balance at December 31, end of current year: $160,000
Allowance for Doubtful Accounts balance at January 1, beginning of current year: $7,300
Bad debts written off during the current year: $5,800.
Prepare the necessary adjusting entries to record bad debts expense assuming this company's bad debts are estimated to equal 1.5% of credit sales:
49) A company has the following unadjusted account balances at December 31, of the current year; Accounts Receivable of $185,700 and Allowance for Doubtful Accounts of $1,600 (credit balance). The company uses the aging of accounts receivable to estimate its bad debts. The following aging schedule reflects its accounts receivable at the current year-end:
Account Age | Balance | Estimated Uncollectible Percentage |
Current (not yet due) | $ 96,000 | 1.0% |
1—30 days past due | 64,000 | 2.5% |
30—60 days past due | 16,000 | 11.0% |
61—90 days past due | 6,500 | 37.0% |
Over 90 days past due | 3,200 | 70.0% |
Total | $ 185,700 |
1. Calculate the amount of the Allowance for Doubtful Accounts that should appear on the December 31, of the current year, balance sheet.
2. Prepare the adjusting journal entry to record bad debts expense for the current year.
50) A company has the following unadjusted account balances at December 31, of the current year; Accounts Receivable of $183,400 and Allowance for Doubtful Accounts of $1,600 (credit balance). The company uses the aging of accounts receivable to estimate its bad debts. The following aging schedule reflects its accounts receivable at the current year-end:
Account Age | Balance | Estimated Uncollectible Percentage |
Current (not yet due) | $ 106,000 | 2.0% |
1—30 days past due | 54,000 | 4.0% |
30—60 days past due | 12,000 | 10.0% |
61—90 days past due | 8,500 | 25.0% |
Over 90 days past due | 2,900 | 75.0% |
Total | $ 183,400 |
1. Calculate the amount of the Allowance for Doubtful Accounts that should appear on the December 31, of the current year, balance sheet.
51) A company had the following items and amounts in its unadjusted trial balance as of December 31 of the current year:
Debit | Credit | |
Cash sales | $ 188,000 | |
Credit sales | 275,000 | |
Accounts receivable | $ 76,000 | |
Allowance for doubtful accounts | 1,000 |
Prepare the adjusting entry to estimate bad debts assuming an aging analysis estimates that 8% of the outstanding accounts receivable will be uncollectible.
52) A company had the following items and amounts in its unadjusted trial balance as of December 31 of the current year:
Debit | Credit | |
Cash sales | $ 188,000 | |
Credit sales | 275,000 | |
Accounts receivable | $ 76,000 | |
Allowance for doubtful accounts | 1,000 |
Prepare the adjusting entry to estimate bad debts assuming bad debts are estimated to be 2.5% of credit sales.
53) A company uses the aging of accounts receivable method to estimate its bad debts expense. On December 31 of the current year an aging analysis of accounts receivable revealed the following:
Account Age | Balance | Estimated Uncollectible Percentage |
Current (not yet due) | $ 620,000 | 0.5% |
1—30 days past due | 270,000 | 2.0% |
30—60 days past due | 145,000 | 8.0% |
61—90 days past due | 55,000 | 20.0% |
90—120 days past due | 32,000 | 50.0% |
Over 120 days past due | 18,000 | 70.0% |
Total | $ 1,140,000 |
Required:
a. Calculate the amount of the Allowance for Doubtful Accounts that should be reported on the current year-end balance sheet.
b. Calculate the amount of the Bad Debts Expense that should be reported on the current year's income statement, assuming that the credit balance of the Allowance for Doubtful Accounts on January 1 of the current year was $41,000 and that accounts receivable written off during the current year totaled $43,200.
c. Prepare the adjusting entry to record bad debts expense on December 31 of the current year.
d. Show how Accounts Receivable will appear on the current year-end balance sheet as of December 31.
54) On December 31, of the current year, Spectrum Company’s unadjusted trial balance revealed the following: Accounts receivable of $185,600; Sales Revenue of $1,280,000; (75% were on credit), and Allowance for Doubtful Accounts of $1,600 (credit balance).
Prepare the adjusting journal entry to record Spectrum’s estimate for bad debts assuming:
1. 6.0% of the accounts receivable balance is assumed to be uncollectible.
2. Bad debts expense is estimated to be 1.5% of credit sales.
3. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the balance sheet after adjustment assuming the percentage of sales method is used.
4. Prepare the entry to write off a $1,500 account receivable on January 1 of the next year.
5. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the balance sheet immediately after writing off the account in part 4 assuming the percentage of sales method is used.
55) Each December 31, Kimura Company ages its accounts receivable to determine the amount of its adjustment for bad debts. At the end of the current year, management estimated that $16,900 of the accounts receivable balances would be uncollectible. The Allowance for Doubtful Accounts account had a debit balance of $1,200 before any year-end adjustment for bad debts. Prepare the adjusting journal entry that Kimura Company should make on December 31, of the current year.
56) A company that uses the percent of sales to account for its bad debts had credit sales of $740,000 in Year 1, including a $720 sale to Marshall Fresh. On December 31, Year 1, the company estimated its bad debts at 1.5% of its credit sales. On June 1, Year 2, the company wrote off, as uncollectible, the $720 account of Marshall Fresh. On December 21, Year 2, Marshall Fresh unexpectedly paid his account in full. Prepare the necessary journal entries:
(a) On December 31, Year 1, to reflect the estimate of bad debts expense.
(b) On June 1, Year 2, to write off the bad debt.
(c) On December 21, Year 2, to record the unexpected collection.
57) The following series of transactions occurred during Year 1 and Year 2, when Foxworth Company sold merchandise to Kevin Lewis. Foxworth’s annual accounting period ends on December 31.
10/01/Year 1 | Sold $12,000 of merchandise to K. Lewis, terms n/30. |
11/15/Year 1 | Lewis reports that he cannot pay the account until early next year. He agrees to exchange the account for a 120-day, 12% note receivable. |
12/31/Year 1 | Prepared the adjusting journal entry to record accrued interest on the note. |
03/15/Year 2 | Foxworth receives a check from Lewis for the maturity value (with interest) of the note. |
03/22/Year 2 | Foxworth receives notification that Lewis’ check is being returned for nonsufficient funds (NSF). |
12/31/Year 2 | Foxworth writes off Lewis’ account as uncollectible. |
Prepare Foxworth Company's journal entries to record the above transactions. The company uses the allowance method to account for its bad debt expense.
58) Prepare general journal entries for the following transactions of Norman Company, assuming they use the allowance method to account for uncollectible accounts.
April 01 | Sold $3,500 of merchandise to Lance Company receiving an 8%, 90-day, $3,500 note. |
April 15 | Wrote off $1,500 owed by Guy Company from a previous period sale. |
April 30 | Received a $5,000, 6%, 30-day note receivable from James Company as settlement for its $5,000 account receivable. |
May 30 | The note received from James on April 30 was collected in full. |
June 30 | Lance Company was unable to pay the note on the due date. |
July 15 | Guy Company paid $1,000 of the amount written off on April 15. |
59) Jordan Company uses the allowance method of accounting for uncollectible accounts. Jordan Company accepted a $5,000, 12%, 90-day note dated May 16, from Beckam Company in exchange for its past-due account receivable. Make the necessary general journal entries for Jordan Company on May 16 and the August 14 maturity date, assuming that the:
a. Note is held until maturity and collected in full at that time.
b. Note is dishonored; the amount of the note and its interest are written off as uncollectible.
60) Prepare general journal entries for the following transactions for the current year:
April 25 | Sold $4,500 of merchandise to Dunn corporation receiving a 10%, 60-day,$4,500 note receivable. |
June 24 | The note of Dunn corporation received on April 25 was dishonored. |
61) The following data are taken from the comparative balance sheets of Grayling Company. Compute and interpret its accounts receivable turnover for Year 2. Competitors average a turnover of 7.5. How is the company doing in relation to its competitors?
Year 2 | Year 1 | |
Accounts receivable, net | 180,100 | 220,100 |
Net sales | 1,500,750 | 1,495,600 |
62) On July 31, Orwell Company has $448,800 of accounts receivable.
1. Prepare journal entries to record the following selected August transactions. The company uses the perpetual inventory system.
2. Explain what should be included in the footnotes to the August 31 financial statements as a result of these transactions.
3. Calculate the balance in the Accounts Receivable account as of August 10.
August 3 | Sold $250,000 of merchandise (that cost $122,000) to customers on credit. |
August 5 | Sold $300,000 of accounts receivable to Cash Solutions. Cash Solutions charges a 7% factoring fee. |
August 8 | Received $165,200 from customers in payment on their accounts. |
August 9 | Borrowed $50,000 cash from State Bank, pledging $65,000 of accounts receivable as security for the loan. The note is a 90-day, 9% note. |
63) On September 30, Waldon Company has $540,250 of accounts receivable. Waldon uses the allowance method of accounting for bad debts and has an existing credit balance in the allowance for doubtful accounts of $13,750.
1. Prepare journal entries to record the following selected October transactions. The company uses the perpetual inventory system.
a. Sold $305,000 of merchandise (that cost $178,500) to customers on credit.
b. Received $395,100 cash in payment of accounts receivable.
c. Wrote off $15,700 of uncollectible accounts receivable.
d. In adjusting the accounts on October 31, its fiscal year-end, the company estimated that 4.0% of accounts receivable will be uncollectible.
2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its October 31 balance sheet.
64) Bonita Company estimates uncollectible accounts using the allowance method at December 31. It prepared the following aging of receivables analysis.
Total | Current | Days 1 to 30 | Past 31 to 60 | Due 61 to 90 | Over 90 | |
Accounts receivable | $ 110,000 | 68,000 | 17,000 | 10,000 | 8,000 | 7,000 |
Percent uncollectible | 1% | 2% | 5% | 8% | 13% |
a. Estimate the balance of the Allowance for Doubtful Accounts using the aging of accounts receivable method.
b. Prepare the adjusting entry to record Bad Debts Expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $550 credit.
c. Prepare the adjusting entry to record Bad Debts Expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $300 debit.
65) On May 31, Cray has $375,800 of accounts receivable. Cray uses the allowance method of accounting for bad debts and has an existing credit balance in the allowance for doubtful accounts of $14,250.
1. Prepare journal entries to record the following selected May transactions. The company uses the perpetual inventory system.
a. Sold $415,200 of merchandise (that cost $249,000) to customers on credit.
b. Received $465,800 cash in payment of accounts receivable.
c. Wrote off $15,800 of uncollectible accounts receivable.
d. In adjusting the accounts on May 31, its fiscal year-end, the company estimated that 4.0% of accounts receivable will be uncollectible.
2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its May 31 balance sheet.
66) At December 31, Yarrow Company reports the following results for its calendar year from the adjusted trial balance.
Credit sales | $ 2,300,000 |
Cash sales | 1,050,000 |
Accounts Receivable | 295,000 |
Allowance for doubtful accounts (credit balance) | 750 |
a. Prepare the adjusting entry to record Bad Debts Expense assuming uncollectibles are estimated to be 1.1% of credit sales.
b. Prepare the adjusting entry to record Bad Debts Expense assuming uncollectibles are estimated to be .8% of total sales.
c. Prepare the adjusting entry to record Bad Debts Expense assuming uncollectibles are estimated to be 7.0% of year-end accounts receivable.
67) White Company allows customers to make purchases on credit. The terms of all credit sales are 2/10, n/30, and all sales are recorded at the gross price. Other customers can use a bank credit card where the bank charges a 4% fee for credit card sales. White uses the perpetual inventory method. Prepare journal entries to record the following selected transactions and events.
June 4 | Sold $12,000 of merchandise (cost $7,000) on credit to Grant. |
June 6 | Sold $17,000 of merchandise (cost $9,350) to customers who used a bank credit card. |
June 8 | Sold $8,500 of merchandise (cost $4,500) on credit to Emma Company. |
June 10 | Accepted a $6,700, 45-day, 6% note dated this day in granting Cory Tam a time extension on his past-due account receivable. |
June 12 | Received Grant’s check in full payment of the purchase on June 4. |
June 15 | Wrote off the account of Z. Westmore against the Allowance for Doubtful Accounts. The $1,580 balance stemmed from a credit sale in January. |
June 20 | Accepted a $6,240, 30-day, 10% note dates this day in granting F. Potter a time extension on his past-due account receivable. |
July 17 | Received the amount previously written-off from Z. Westmore. |
July 20 | F. Potter dishonored his note when presented for payment. |
July 25 | Received payment of principal plus interest from Cory Tam. |
Answer Key
Test name: John Wild Ch07 Problem Material
1) accounts receivable ledger or accounts receivable subsidiary ledger
2) promissory note
3) payee
4) Interest
5) maturity date
6) [selling them to a factor, pledging them as security for a loan]
7) [net sales, average accounts receivable]
8) direct write-off
9) Installment accounts receivable
10) allowance for doubtful accounts
11) percent of sales
12) Accounts receivable
13) aging of accounts receivable
14) [notes receivable, 4, 000, sales, 4, 000]
15) dishonored
16) Realizable value
17) Accounts receivable arise from credit sales to customers. Accounts receivable are reported at their realizable value, which is their total amount less an estimate for the amount of uncollectible accounts. Accounts receivable are also recorded into an accounts receivable subsidiary ledger that separately lists amounts owed by individual customers.
18) A note receivable is a promissory note, which is a written promise to pay a specified amount of money either on demand or at a stated future date. Interest on a note receivable that matures in less than one year is calculated by multiplying the principal of the note times the annual interest rate times the time expressed in fraction of year.
19) A company's receivables are normally converted to cash as the customers pay off their accounts. However, options are available to a company that wishes to convert its receivables before they are due. A company can sell the receivables to a factor, paying a fee for the service, or the company can pledge its receivables as security for a loan.
20) The accounts receivable turnover ratio is used to measure how often, on average, receivables are collected during an accounting period. It is calculated by dividing net sales by average accounts receivable. Analysts use the ratio to measure both the quality and liquidity of accounts receivable. Quality refers to the likelihood of collection without loss. Liquidity refers to the speed of collections.
21) The direct write-off method records the loss from an uncollectible account receivable when a specific individual account is determined to be uncollectible. Under the allowance method, estimated bad debt expense is recorded at the end of each accounting period by debiting Bad Debts Expense and crediting Allowance for Doubtful Accounts. The amount of bad debts expense is determined by applying one of several estimation methods. Individual uncollectible accounts are later written off with a debit to the Allowance for Doubtful Accounts and a credit to the specific account receivable.
22) The percent of sales method emphasizes the income statement relationship between Bad Debts Expense and Sales. It is based on the expense recognition principle and assumes that bad debts are incurred and can be estimated at the time of sale. The accounts receivable method emphasizes the realizable value of Accounts Receivable. The accounts receivable method uses either a percent of total accounts receivable or an aging of accounts receivable to estimate the amount of uncollectible accounts.
23) The receipt of a note receivable is recorded by entering the total amount borrowed (principal) as a debit to Notes Receivable and as a credit to the account representing the asset or service exchanged for the note (typically cash, sales, or accounts receivable).
24) When a note is honored, the maker of the note pays the note at maturity. When a note is dishonored, the maker is unable or refuses to pay the note at maturity.
25) Since the accounts receivable turnover ratio reflects how well management is doing in granting credit to customers, it is useful for comparing internally and with competitors. A high turnover in comparison with competitors suggests that management should consider using less strict credit terms to increase sales. A lower turnover suggests management should consider more strict credit terms and more aggressive collection efforts to avoid having resources tied up in accounts receivable.
26)
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