Spiceland Chapter 5_Solutions

Spiceland Chapter 5_Solutions - Chapter 05 - Receivables...

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Chapter 05 - Receivables and Sales When recording a credit sale, we debit accounts receivable. Accounts receivable are recorded as assets in the balance sheet. Trade receivables are amounts receivable from customers due to credit sales. Nontrade receivables are receivables from those other than customers and include tax refund claims, interest receivable, and loans by the company to other entities including stockholders and employees. Trade discounts represent a reduction in the listed price of a product or service. A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time. Sales discounts are reported as contra revenues in the income statement. Sales returns and allowances are contra revenue accounts and therefore have normal debit balances. Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s product or service. Sales returns and allowances are reported as contra revenues in the income statement. 5-1 Chapter 5 – Homework Solutions Receivables and Sales REVIEW QUESTIONS Question 5-1 Question 5-2 Question 5-3 Question 5-4
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Chapter 05 - Receivables and Sales An example of earning revenue at one point would be selling a car. An example of earning revenue over a period would be providing an annual magazine subscription. Companies should account for uncollectible accounts receivable using the allowance method. Under this method, a company estimates future bad debts and records those estimates as an expense and contra asset in the current period. The two purposes include reducing accounts receivable to their net realizable value (or amount expected to be collected) and matching expenses (bad debts) in the same period as the revenue (credit sales) they help to generate. Credit sales represent revenue from selling products and services on account in the current period. One of the costs associated with credit sales is bad debts. Therefore, to properly match expenses --bad debts-- with their related revenues --credit sales-- we should record future bad debts with current credit sales. The two financial statement effects of establishing an allowance for uncollectible accounts are: (1) reducing assets and (2) increasing expenses (or reducing net income and ultimately retained earnings). 5-2 Question 5-5 Question 5-6 Question 5-7 answers to Review Questions (continued) Question 5-8 Question 5-9
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Chapter 05 - Receivables and Sales Question 5-10 The year-end adjustment to record the allowance for uncollectible accounts includes a debit to bad debt expense and a credit to the allowance for uncollectible accounts. The amount of the adjustment is the amount needed to adjust the allowance for uncollectible accounts to its estimated ending balance. A debit balance in the allowance for uncollectible accounts before adjustment
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Spiceland Chapter 5_Solutions - Chapter 05 - Receivables...

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