Exam 8: Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue

The Dubious Company operates in an industry where all sales are made on account. Historically, Dubious has experienced a steady 1.0% of credit sales being uncollectible. Presented below is the company's forecast of sales and expenses over the next three years. Using this information: a. Calculate bad debt expense and net income for each of the three years, assuming uncollectible accounts are estimated as 1.0% of sales. b. Comment on the trend in net income changes from Year 1 to Year 2 and from Year 2 to Year 3. c. Suppose the company changes its estimate of uncollectible credit sales to 1.0% in year 1, 2.0% in year 2 and 1.5% in year 3. Calculate the bad debt expense and net income for each of the three years under this alternative scenario. d. Comment on the trend in net income changes determined in requirement c from Year 1 to Year 2 and Year 2 to Year 3. e. Under which scenario (a or c) do you feel most confident when predicting the net income likely to be earned in Year 4? What contributes to this feeling?

Your company uses the percentage of credit sales method for calculating bad debt expense. If your company has $216,000 in total sales, of which $178,000 are on credit, and its historical bad debt loss is 6% of credit sales, bad debt expense is:

The aging of accounts receivable method, also called the balance sheet approach, estimates uncollectible accounts based on the age of each account receivable.

In January 2012, the company writes off a $500 account which it determines is uncollectible. Which of the following is true?

Plasma Inc., has net credit sales of $500,000 during the year. Based on historical information, Plasma estimates that 2% of net credit sales result in bad debts. At the beginning of the year, Plasma has a credit balance in its Allowance for Doubtful Accounts of $4,000. What amount of bad debt expense should Plasma recognize for the year, assuming no specific customer accounts were written off?

When a company lends cash to a customer who signs a promissory note:

Preston Corporation issues a $3,000 note to Fulton Corporation on March 1, which carries interest at an annual rate of 5%. Interest is payable when the note matures on June 30. What entry will Fulton make at its year-end, April 30, if interest on the note has not previously been accrued?

IBM signs an agreement to lend one of its customers $200,000 to be paid back in one year at 5.5% interest. IBM would record this loan as:

In 2011, Lawrence Company had gross sales of $750,000 on account and granted sales discounts of $15,000. On January 1, 2011, the Allowance for Doubtful Accounts had a credit balance of $18,000. During 2011, $30,000 of uncollectible accounts receivable were written off. Past experiences indicate that 3% of net credit sales become uncollectible. Using the percentage of credit sales method, what would be the adjusted balance in The Allowance for Doubtful Accounts at December 31, 2011?

When the direct write-off method is used to account for uncollectible accounts, which of the following accounts would not be used?

At the end of the third year, the Treadwell Tire Company had accounts receivable of $66,600, and at the end of the fourth year, the company had accounts receivable of $72,600. If the company's net sales revenue during the fourth year were $876,000, the days to collect during year four was (rounded to one decimal place):

Which of the following statements is true concerning the allowance for doubtful accounts?

On the balance sheet, the allowance for doubtful accounts:

Factoring refers to an arrangement in which a company sells its receivables to another company called a factor and receives cash, less a fee, immediately.

When a company makes an adjustment in anticipation of future uncollectible debt:

When the amount of accounts receivable written off in the current period exceeds the amount estimated as bad debts in the previous accounting period, the company is required to go back and change their financial statements for the prior period.

A company has a debit balance of $3,500 in the Allowance for Doubtful Accounts. It estimates that 2% of net credit sales of $1,500,000 will be uncollectible. The required journal entry to record bad debt expense should include a debit to:

The receivables turnover ratio of Purrfect Pets, Inc. increases from 10.2 to 13.6. Which of the following statements is true?

A company performed an aging of accounts receivable on December 31 and gathered the following information: What is the net realizable value of accounts receivable to be reported on the balance sheet at December 31?

What is the amount of Bad Debt Expense for 2012?