ch09 - CHAPTER 9 Accounting for Receivables ANSWERS TO...

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CHAPTER 9 Accounting for Receivables ANSWERS TO QUESTIONS 1. Accounts receivable are amounts owed by customers 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. Accounts Receivable. ............................................................................................ 40 Interest Revenue . .......................................................................................... 40 4. 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 ac- counting period in which the sale 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. 5. Soo Eng should realize that the decrease in cash realizable value occurs when estimated uncollect- ibles 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. 6. The two bases of estimating uncollectibles are: (1) percentage of sales and (2) percentage of receiv- ables. The percentage of sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage of receivables basis, the balance in the allowance for doubtful accounts is derived from an analysis of individual customer accounts. This method emphasizes cash realizable value. 7. The adjusting entry under the percentage of sales basis is: Bad Debts Expense . ............................................................................ 4,100 Allowance for Doubtful Accounts. ................................................. 4,100 The adjusting entry under the percentage of receivables basis is: Bad Debts Expense . ............................................................................ 2,300 Allowance for Doubtful Accounts ($5,800 – $3,500). .................... 2,300 8. 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. The direct write-off method makes no attempt to match bad debts expense to sales revenues or
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ch09 - CHAPTER 9 Accounting for Receivables ANSWERS TO...

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