CHAPTER%208

CHAPTER%208 - CHAPTER 8 Reporting and Analyzing Receivables...

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Unformatted text preview: CHAPTER 8 Reporting and Analyzing Receivables ANSWERS TO QUESTIONS 1. Accounts receivable are amounts customers owe on account. They result from the sale of goods and services in the normal course of business operations (i.e., in trade). Notes receivable represent claims that are evidenced by formal instruments of credit. 2. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. 3. The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and matched against sales in the same accounting period in which the sales occurred. (2) Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off as uncollectible. 4. Lauren should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change. 5. The adjusting entry under the percentage of receivables basis is: Bad Debts Expense.................................................................................. 2,600......................................................................................................... Allowance for Doubtful Accounts ($5,800 $3,200)........................... 2,600 6. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debts Expense and credited to Accounts Receivable. The direct write-off method makes no attempt to match bad debts expense to sales revenues or to show the cash realizable value of the receivables in the balance sheet. 7. Offering credit usually results in an increase in sales because customers prefer to buy now and pay later. If a company decides to extend credit to customers, it should also establish credit standards to determine if a particular customer is credit worthy. Standards that are easily met can result in additional sales being made to customers that may not be able to meet the tighter credit policies of competitors. If such customers fail to pay, the additional sales revenue will be offset by higher collection costs and bad debts expense. 8. A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.endorsement....
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CHAPTER%208 - CHAPTER 8 Reporting and Analyzing Receivables...

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