Chapter 7 homework - Solutions to Questions and Multiple Choice Questions 1 Accounts receivable arise when a company makes a sale on account The

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Solutions to Questions and Multiple Choice Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Accounts receivable arise when a company makes a sale on account. The balance represents an amount owed to the company. Trade receivables are amounts owed by customers. Other receivables are amounts owed by parties other than customers, such as employees or subsidiaries. Net realizable value, book value and carrying value of the Accounts Receivable is the debit balance in Accounts Receivable less the credit balance in its contra account, Allowance for Uncollectible Accounts. The direct write-off method of accounting for bad debts debits Bad Debts Expense and credits Accounts Receivable when an account is determined to be uncollectible and is written off. The allowance method estimates bad debts expense each accounting period and maintains an allowance account, the Allowance for Uncollectible Accounts, a contra-asset account. When specific customers' accounts are determined to be uncollectible, they are written off against the Allowance for Uncollectible Accounts. The allowance method is the preferred method of accounting for bad debts because it better matches the cost of sales against sales revenue (income statement) and values Accounts Receivable at net realizable value (balance sheet). When the company uses the allowance method to account for bad debts, writing off an account has no effect on income. The expense was recognized when the company made the adjusting entry to the Allowance for Uncollectible Accounts. Bad debts expense in the allowance method can be estimated two different ways. The percentage of sales method estimates the period's bad debts expense by taking a percentage of the period's net credit sales. The accounts receivable method requires the company to estimate the amount of the year end balance of accounts receivable it believes will not be collected. This estimate should be the year end balance in the allowance account. The difference between the balance in the Allowance account prior to adjustment (if positive) and the estimate is the current period's bad debts expense. The percent of sales method focuses on the income statement because the focus is on getting the expense just right for the income statement. The estimate is based on the sales figure from the income statement. The accounts receivable method focuses on the balance sheet and getting the correct net realizable value on the balance sheet. The estimate of bad debts is based on the Accounts Receivable balance from the balance sheet. Accounts receivable arise from credit sales, called sales on account, where the customer receives the goods and pays later. Notes receivable are generally interest-bearing and for longer periods of time than accounts receivable. Segregation of duties with regard to cash requires that the person who has physical custody of the
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This note was uploaded on 11/24/2009 for the course BA 2301 taught by Professor Mattpolze during the Fall '08 term at University of Texas at Dallas, Richardson.

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Chapter 7 homework - Solutions to Questions and Multiple Choice Questions 1 Accounts receivable arise when a company makes a sale on account The

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