Fall 2010_Section Problem Set 5 (Chap 6)

Fall 2010_Section Problem Set 5 (Chap 6) - AEM 2210 Section...

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AEM 2210 Section Problem Set 5 Covering Material from Chapter 6 Name: Section: Material Review Net Sales = Sales Revenue – Sales Discounts - Returns and Allowances - Credit Card Discounts Contra-revenue accounts o Credit Card Discounts – debited when incurred; amount in the receivable account (also debited) is the difference between the Sales Revenue amount and the credit card discount o Sales Discounts - recorded when the payment is received within the discount period o Sales Returns and Allowances – debited when items are returned; Accounts Receivable decrease (credit) Accounting for bad debts o Most businesses create a contra-asset account called “Allowance for Bad Debt” with a credit balance for payments they do not expect to receive o When they are certain these payments will never come, they decrease the Allowance for Bad Debt (debit) and the Accounts Receivable (credit) accounts How do companies estimate the amount that should be in their Allowance for Bad Debt account? o Percent of credit sales – based on historical uncollectible amounts Uncollectible amount * net credit sales Journal entry: Bad Debt Expense $100 Allowance for Bad Debt $100 o Aging of Accounts Receivable - accounts of each customer grouped according to the amount of time since sale was made uncollectible estimates calculated as percentages for each time period based on historical uncollectibles Percentages are applied to the total in each time period o Journal entry when it is reasonably assumed that a specific amount will not be collected (called writing off): Allowance for Bad Debt $100
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Accounts Receivable $100
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Bank Reconciliation – the difference between cash in the company’s books and cash on the bank statement o Balance on Bank Statement must equal Balance on Books Balance on Bank Statement + Deposits in Transit – Outstanding Checks +/- Bank Errors = Adjusted Balance Balance on Books + Deposits by Bank – Service Charges – NSF (insufficient funds) Checks +/- Book Errors = Adjusted Balance o All adjustments to the company’s book statements must be reflected in an adjusting entry to the cash account
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Multiple Choice. 1. As of December 31, Mesa Company has a balance of $5,000 in accounts receivable of which $500 is more than 30 days overdue. Mesa has a credit balance of $45 in the allowance for doubtful accounts. Mesa estimates its bad debts losses at 1% of current accounts and 10% of accounts over thirty days. What adjustment should Mesa make to the allowance for doubtful accounts? A) $95 (credit).
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Fall 2010_Section Problem Set 5 (Chap 6) - AEM 2210 Section...

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