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CHAPTER 8 RECEIVABLES CLASS DISCUSSION QUESTIONS 1. Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or (3) other receivables. 2. Transactions in which merchandise is sold or services are provided on credit generate accounts receivable. 3. a. Current assets b. Investments 4. Examples of other receivables include in- terest receivable, taxes receivable, and re- ceivables from officers or employees . 5. The principle of separation of operations and accounting is violated. ( Note to In- structors: This weakness in internal control may permit embezzlement. For example, the accounts receivable clerk may misap- propriate cash receipts and cover the mis- appropriation by a process called lapping. In lapping, the cash receipts from one ac- count are taken and the cash received on a subsequent account is used to cover the shortage. The receipts on another account are then used to cover the shortage in this latter customer’s account, etc. This lapping generally continues until the records are falsified to correct for the shortage, the cash is returned by the clerk, or the embez- zlement is discovered.) 6. The allowance method 7. Contra asset, credit balance 8. The accounts receivable and allowance for doubtful accounts may be reported at a net amount of $759,900 ($883,150 $123,250) in the Current Assets section of the balance sheet. In this case, the amount of the allowance for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the balance sheet. Alternatively, the ac- counts receivable may be shown at the gross amount of $883,150 less the amount of the allowance for doubtful accounts of $123,250, thus yield- ing net accounts receivable of $759,900. 9. 1. The percentage rate used is excessive in relationship to the volume of ac- counts written off as uncollectible; hence, the balance in the allowance is excessive. 2. A substantial volume of old uncollect- ible accounts is still being carried in the accounts receivable account. 10. An estimate based on analysis of receiv- ables provides the most accurate estimate of the current net realizable value . 11. The advantages of a claim evidenced by a note are (1) the debt is acknowledged, (2) the payment terms are specified, (3) it is a stronger claim in the event of court action, and (4) it is usually more readily transfer- able to a creditor in settlement of a debt or to a bank for cash. 12. a. Ellsworth Company b. Notes Receivable 13. The interest will amount to $6,300 only if the note is payable one year from the date it was created. The usual practice is to state the interest rate in terms of an annual rate, rather than in terms of the period covered by the note.
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