Chapter 7: Summary Cheat Sheet

Valuing Receivables: Key Concepts Accounts Receivable • • Definition: Amounts due from customers for credit sales. Types of Transactions: o Credit Sales: Sales where payment is deferred to a future date. o Bank Credit Card Sales: Sales where payment is processed via bank credit cards and typically involve fees. Direct Write-Off Method • • Description: Bad debt is recorded only when a specific account is determined to be uncollectible. Recording: o Writing Off a Bad Debt: Debit Bad Debt Expense, Credit Accounts Receivable. o Recovery of Bad Debt: Reverse the initial write-off entry if the debt is later collected, then record the cash collection. Allowance Method • • • Description: Estimates bad debt expense in the same period as sales, thus matching expenses with revenues. Allowance for Doubtful Accounts: A contra asset account reducing the accounts receivable balance, reflecting the estimated uncollectible amounts. Recording: o Writing Off a Bad Debt: Debit Allowance for Doubtful Accounts, Credit Accounts Receivable. o Recovery of Bad Debt: Reverse the initial write-off entry, then record the cash collection. Estimating Bad Debts with Allowance Method 1. Percent of Sales: Applies a set percentage to credit sales to estimate bad debts expense. 2. Percent of Accounts Receivable: Applies a percentage to total accounts receivable to estimate the allowance balance. 3. Aging of Accounts Receivable: Divides receivables into categories by age, applying progressively higher percentages to older receivables to reflect higher default risk. Notes Receivable • Definition: A formal promise (promissory note) to pay a specified amount (principal) with interest at a future date. • • Key Terms: o Principal: The original amount of the note. o Maturity Date: The due date for payment. o Interest Calculation: Interest=Principal×Rate×Days360. Recording Transactions: o Note for Sales: Debit Notes Receivable, Credit Sales. o Exchange for Accounts Receivable: Debit Notes Receivable, Credit Accounts Receivable. o Honoring a Note: Debit Cash, Credit Notes Receivable and Interest Revenue. o Dishonored Note: Transfer to Accounts Receivable including accrued interest. o Accrued Interest Adjustment: Record interest revenue at period-end for notes that extend over multiple periods. Additional Transactions Involving Receivables • • Factoring: Selling accounts receivable to a bank or financial institution for immediate cash, less a factoring fee. Pledging: Using accounts receivable as collateral for a loan, with disclosure in the financial statement notes. Multiple Choice Quiz Examples and Answers 1. Bad Debt Calculation for Allowance Adjustment: o Given: Accounts Receivable = $125,650, Allowance credit balance = $328, Net Sales = $572,300, 4% estimated uncollectible. o Solution: Desired balance in Allowance = $125,650 × 0.04 = $5,026.  Adjustment needed = $5,026 - $328 = $4,698 (Answer: d). 2. Bad Debt Calculation with Debit Balance: o Given: Accounts Receivable = $489,300, Allowance debit balance = $554, Net Sales = $1,300,000, 6% estimated uncollectible. o Solution: Desired balance in Allowance = $489,300 × 0.06 = $29,358.  Adjustment needed = $29,358 + $554 = $29,912 (Answer: a). 3. Interest on Note Receivable: o Given: $7,500 note at 5% for 90 days. o Solution: Interest = $7,500 × 0.05 × 90/360 = $93.75 (Answer: a). 4. Maturity Value Calculation: o Given: $9,000 note at 8% for 60 days. o Solution: Interest = $9,000 × 0.08 × 60360 = $120.  Maturity value = $9,000 + $120 = $9,120 (Answer: c). 5. Accounts Receivable Turnover: o Given: Net Sales = $489,600, Average Accounts Receivable = $40,800. o Solution: Accounts Receivable Turnover = 489,600= 12.00 (Answer: d).