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Exam 5: Sales and Receivables

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Question 71

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Which of the following statements is true regarding the two allowance procedures used to estimate bad debts?

A) The percentage of net credit sales method takes into account the existing balance in the Allowance for Doubtful Accounts account.
B) The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account.
C) The aging of accounts receivable method takes into account the existing balance in the Allowance for Doubtful Accounts account.
D) The direct write-off method does a better job of matching revenues and expenses.

E) A) and B)
F) All of the above

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Question 72

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A balance sheet approach to estimating bad debt expense is not permitted under GAAP (Generally Accepted Accounting Principles).

A) True
B) False

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Question 73

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The following comparative financial statements for the years ended December 31,2012 and 2011 are provided for Air Plus Company: $\begin{array}{llll} \text { Balanlce } & \underline { 2012 }&\underline { 2011 }\\ \text {Sheet: } \\& \text { Cash and cash equivalents } & \$ 87,000 & \$ 71,600 \\& \text { Accounts receivables, less allowance for doubtful } & \\& \text { accounts of \$ 90(2012) and \$ 82(2011) } &3,800 & 2,500 \\& \text { Notes receivable } &15,000 & 20,000 \\ \text { Income } \\ \text {Stateme } \\ \text {nt:} \\& \text {Net sale sor the year } &\$ 9,700 & \$ 8,800 \\& \text {Net income for the year } &920 & 1,050\end{array}$ Answer these questions concerning the company's receivables: A) What is the gross anount of accounts receivable at December 31,2012 ? Whyis this amount different than the amount of receivabless shown in the 2012 column of the balance sheet? B) What is the netrealizable valus of accounts receivable at December 31, 2012? What does this amount represent? C) How should accounts receivable be classified on a classified balance sheet?Why?

Aardvark Resale This company sells merchandise only on credit.For the year ended December 31,2012,the following data are available: $\begin{array}{ll}\text { Sales } & \$ 1,200,000 \\\text { Sales returns and allowances } & 50,000 \\\text { Account Receivable-J anuary 1, 2012 } & 225,000 \\\text { Allowance for doubtful accounts-Januayy } 1,2012 & 15,000 \\\text { Collections during 2012 } & 1,050,000 \\\text { Accountswritten off as uncollected during } 2012 & 10,000\end{array}$ -Refer to Aardvark Resale.Can the company use the direct write-off method rather than the allowance method to account for bad debts expense? Explain why or why not.

AT&U Company Data for the year ended December 31,2012,are presented below: $\begin{array}{lc} \text {Sales (credit) } &\$ 2,500,000 \\\text {Sales retuns and allowances } &50,000 \\ \text { Accounts Receivable (December 31, 2012) } & 640,000 \\ \text { Allowance for Doubtful Accounts } &\\ \text {(Before adjustment at December 31, 2012) } &20,000 \\ \text { Estimated amount of uncollected accounts based on aging analysis } &45,000\end{array}$ -Refer to AT&U Company.If the company uses the aging of accounts receivable approach to estimate its bad debts,what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?

Identify two methods of accelerating cash from sales.

Atlantis Tropicals The following information was taken from the company's records at the end of 2012. $\begin{array}{ll}\text { CreditSales } & \$ 1,000,000 \\\text { Sales returns and allowances } & 80,000 \\\text { Accounts Receivable-December } 31,2012 & 255,000 \\\text { Allowance for Doubtful Accounts-December } 31,2012 & \\\quad \text { (Before adjustment for bad debts) } & 23,000 \\\text { Estimated uncollected accounts } \\\quad \text { (per aging schedule at December } 31,2012 \text { ) }& 35,000\end{array}$ -Refer to Atlantis Tropicals.If the aging approach is used to estimate bad debts,how much is the net realizable value of the accounts receivable at December 31,2012?

Abbot Safe & Lock The following information was obtained from the company's records for 2012: $\begin{array}{l} \text {Credit sales dwing the year } &\$ 3,200,000 \\ \text { Accounts receivable-December 31, 2012 } &325,000 \\ \text {Allowance for doubtful ac counts-December 31, 2012 } &35,000 \\ \text {Bad debt expense for the year } &20,000\end{array}$ -Refer to Abbot Safe & Lock.What is the effect on liquidity when the company records its estimate for bad debt expense using the allowance method?

The amount of interest paid is a function of three variables,the amount borrowed,the interest rate,and the length of the loan period.

All Star Auto has an accounts receivable balance after posting net collections from customers for 2012 of $180,000.The customers took advantage of sales discounts of $15,000.Management aged the accounts receivable and estimate for uncollected account percentages as follows: $\begin{array}{ll}\$ 90,000 & \text { Current at } 2 \% \\\$ 50,000 & 1-30 \text { days past che at } 5 \% \\\$ 30,000 & 31-60 \text { days past due at } 10 \% \\\$ 10,000 & 60+\text { days past due at } 25 \%\end{array}$ The net realizable value of the accounts receivable is

Ace Computing Company On January 1,2012,the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $40,000 and $1,500 respectively.During the year,the company reported $80,000 of credit sales.There were $500 of receivables written off as uncollected in 2012.Cash collections of receivables amounted to $78,200.The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance. -Refer to the Ace Computing Company.The amount of bad debts expense recognized in the 2012 income statement will be:

Abundant Returns This company sells its merchandise only on credit.The following data are available at December 31,2012. $\begin{array}{ll} \text { Sales } &\$ 411,000 \\ \text {Sales returns and allowances } &12,000 \\ \text {Accounts receivable at January 1,2012 } &89,000 \\ \text {Allowance for doubtful accounts at January 1, 2012 } &4,100 \\ \text {Cash collections during 2012} &385,100 \\ \text {Accountswritten off as uncollected during 2012} &3,600\end{array}$ -Refer to Abundant Returns.Assume that the company estimates bad debts using the aging method.The aging schedule indicates that $11,500 of the end of the year Accounts Receivable will be uncollected. A) What amount will the company recognize as bad debt expense for the year? B) If the ending balance of Accounts Receivables is $\$ 65,200$ , what is the net realizable value of Accounts Receivable reported on December 31,2012 ?

If a company estimates its bad debt expense on the basis of a receivables aging,the balance in the Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry for bad debts.

What is the purpose of an aging schedule for accounts receivable?