Question 1

When firms that are temporarily short of cash and unable to borrow from usual sources convert accounts receivable into cash by pledging the accounts receivable, they disclose this information

Accepted Answer

When firms convert accounts receivable into cash by pledging them, this is considered a type of financing activity that would be disclosed in a footnote to the financial statements. This disclosure would provide information about the terms of the arrangement, such as the interest rate and any fees charged by the lender. The income statement and balance sheet may be affected by the financing activity, but the disclosure of the arrangement would not typically be made on these statements themselves.

Question 2

Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.

The 2013 year-end balance in Accounts Receivable, Gross, for Healthy Lawn Maintenance is $1,085,000  An aging of these accounts receivable shows that the estimated uncollectible amount is $24,200.  Before aging the accounts, the Allowance for Uncollectibles has a debit balance of $15,000 from writing off actual accounts during 2013. Healthy Lawn Maintenance would record the following adjusting entry at the end of 2013 to obtain a credit balance in the Allowance for Uncollectibles of $24,200:

Accepted Answer

To achieve a credit balance of $24,200 in the Allowance for Uncollectibles account, starting from a $15,000 debit balance, the company needs to add $39,200 ($24,200 credit balance desired - $15,000 debit balance = $39,200). This adjustment is recorded by debiting Bad Debt Expense and crediting Allowance for Uncollectibles for $39,200.

Question 3

Recognizing revenue before the seller collects cash requires estimating the amount of uncollectible accounts with reasonable accuracy.Both U.S.GAAP and IFRS require the

Accepted Answer

Both US GAAP and IFRS require the allowance method and the direct charge-off method for recognizing uncollectible accounts. The allowance method involves estimating potential bad debts, creating a contra-account to accounts receivable (allowance for doubtful accounts), and adjusting it periodically as necessary. The direct charge-off method involves writing off specific uncollectible accounts as they are identified. Together, these methods allow for reasonable estimation of uncollectible accounts and accurate recognition of revenue before the seller collects cash.

Question 4

Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.

If Healthy Lawn Maintenance’s customers remitted $1,900,000 in cash during 2013, it would make the following journal entries with the following aggregated amounts:

Accepted Answer

When customers pay their invoices, the company records the cash received by debiting Cash and credits Accounts Receivable to indicate that the customer's obligation to pay has been fulfilled. This reflects the actual cash inflow and the reduction in the amount owed by customers.

Question 5

The firm may transfer the accounts receivable to a legally separate entity that issues debt securities to investors. Which of the following is/are true?

Accepted Answer

All of the statements are true. The transfer of accounts receivable to a separate legal entity that issues debt securities to investors is called securitization. The firm participating in securitization typically remits the cash received from customers as they occur, and may be obligated to make payments to investors if customers fail to make sufficient cash payments to cover the principal and interest on the debt securities.

Question 6

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the _____ and crediting _____ This process is called writing off the account.

Accepted Answer

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the Allowance for Uncollectibles and crediting the Accounts Receivable, Gross. This process is called writing off the account. The Allowance for Uncollectibles account is used to accumulate estimated uncollectible amounts, and it reduces the balance of the Accounts Receivable account to the Net realizable value. Therefore, Option C is the best choice as it accurately reflects the process.

Question 7

There are two approaches that management can use to estimate the amount of credit sales that would prove to be uncollectible, they are the _____. Over time, the two methods, correctly used, will give the same cumulative income and asset totals.U.S.GAAP and IFRS do not require firms to use one or the other, and some firms use both methods.

Accepted Answer

The two approaches management can use are the percentage-of-sales procedure and the aging-of-accounts-receivable procedure. The percentage-of-sales procedure estimates uncollectible accounts by applying a percentage to credit sales. The aging-of-accounts-receivable procedure estimates uncollectible accounts based on the age of the accounts receivable. Both methods are acceptable and will ultimately lead to the same cumulative income and asset totals.

Question 8

Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.

Healthy Lawn Maintenance deems uncollectible any customer account not paid after six months. This means that every accounting period, Healthy Lawn Maintenance ascertains which accounts remained uncollected for six months, and treats these customer accounts as uncollectible by writing them off.  If, during 2013, Healthy Lawn Maintenance identified accounts of specific customers totaling $20,000 with unpaid balances for six months and wrote them off, the journal entry would be as follows:

Accepted Answer

The allowance method is used for estimating and accounting for uncollectible accounts. The journal entry would be to debit Bad Debt Expenses and credit Allowance for Uncollectibles for the amount of specific customer accounts that are deemed uncollectible. This reduces the net accounts receivable balance to reflect the estimated realizable value of the accounts receivable. Option A, D, and E are incorrect because they do not reflect the use of the allowance method. Option B is incorrect because it refers to specific accounts instead of the total of accounts receivable.

Question 9

Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.

Assume that Healthy Lawn Maintenance estimates that it will not collect 2% of total credit sales in a given month. At the end of each month, it makes an adjusting entry.  The aggregate effect of these entries during 2013 is as follows:

Accepted Answer

The adjusting entry to record the estimated uncollectible accounts is a debit to Bad Debt Expense and a credit to Allowance for Uncollectibles. This choice reflects that correctly. Choices A, B, D, and E do not reflect the proper accounting treatment for estimating and recording bad debts.

Question 10

A firm that transfers its receivables in exchange for cash can

Accepted Answer

All options (A, B, C) are valid methods for a firm to leverage its accounts receivable for financial gain or liquidity. These include using receivables as collateral for a loan, factoring receivables for immediate cash, and transferring them to a separate entity that issues debt securities.

Question 11

A firm may use its accounts receivable as collateral for a loan from a bank or other financial institution.Which of the following is/are true?

Accepted Answer

All of the above statements are true. The firm maintains control of the accounts receivable and collects cash from customers to repay the loan. If the firm fails to repay the loan, the lender can claim the receivables. The firm will continue to show the receivables as an asset, and there will also be a loan payable liability. It is mandatory for the firm to disclose the lending arrangement in its financial reports to ensure transparency.

Question 12

Discuss how accounts receivable can be analyzed.

Accepted Answer

The answer of Discuss how accounts receivable can be analyzed....

Question 13

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by selling accounts receivable to a bank or financing company.This is called

Accepted Answer

The process where a company sells its accounts receivable to a bank or financing company to raise cash is called factoring. Choice A, assigning accounts receivable, refers to the practice of companies designating specific customers' debt to a factor. Choice B, pledging accounts receivable, refers to using accounts receivable as collateral to obtain a loan from a bank or financing company. Choice D, transferring accounts receivable, is incorrect because it is not a commonly used term in the context of selling accounts receivable.

Question 14

Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013.It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days.During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year.It made journal entries at the end of each month.
(Use the Healthy Lawn information to answer this question.) The aggregate effect of these entries during 2013 is as follows:

Accepted Answer

The correct journal entry for billing customers for services rendered is to debit Accounts Receivable, Gross and credit Sales Revenue. This reflects the amount billed to customers that is expected to be collected.

Question 15

A firm may factor its accounts receivable to a bank or other financial institution in exchange for cash. Which of the following is/are not true?

Accepted Answer

The answer of A firm may factor its accounts receivable...

Question 16

Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S.GAAP and IFRS

Accepted Answer

Under both U.S. GAAP and IFRS, when a firm can reasonably estimate the amount of product returns, it must recognize these returns at the time of sale. This involves using the allowance method (A), debiting a revenue contra account to reflect expected returns and thus adjusting revenues (B), and measuring revenues based on the cash expected to be collected (C). Both standards also require that firms can only recognize revenue when they can reasonably estimate returns (D), ensuring that recognized revenue reflects the actual economic reality.

Question 17

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by

Accepted Answer

All the options provided (A, B, C) are legitimate ways for firms to convert accounts receivable into cash when they are temporarily short of cash and unable to borrow from usual sources. Assigning accounts receivable involves forwarding amounts collected to the lending institution, pledging accounts receivable as collateral involves securing a loan with the receivables, and factoring involves selling the receivables to a third party (a bank or financing company) for immediate cash.

Question 18

The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume of credit business.The firm estimates the appropriate percentage by studying its own experience or by inquiring into the experience of similar firms.Default rates generally fall within the range of _____of credit sales.

Accepted Answer

The range given for default rates in percentage-of-sales procedure is 1% to 2%.

Question 19

After the firm estimates the amount of uncollectible accounts associated with the credit sales of each period, it makes an adjusting entry to debit _____ and credit _____.

Accepted Answer

The adjusting entry for estimating uncollectible accounts involves debiting Bad Debt Expense and crediting Allowance for Uncollectibles. This is because the expense needs to be recognized in the period in which the sale was made, and the allowance needs to be increased to reflect the expected amount of uncollectible accounts. Option A and E are incorrect as they do not involve increasing the allowance account. Option B is incorrect as it involves the gross amount which includes both collectible and uncollectible amounts, and it would not accurately reflect the net realizable value of accounts receivable. Option C is also incorrect as it involves debiting the allowance account, which is opposite to the usual practice.

Question 20

Allowance for Uncollectibles contra account appears among the _____ on a firm's balance sheet as a(n) _____.

Accepted Answer

The answer of Allowance for Uncollectibles contra account appears among...

Quiz 8: Revenue Recognition, Receivables, and Advances From Customers

When firms that are temporarily short of cash and unable to borrow from usual sources convert accounts receivable into cash by pledging the accounts receivable, they disclose this information

Recognizing revenue before the seller collects cash requires estimating the amount of uncollectible accounts with reasonable accuracy.Both U.S.GAAP and IFRS require the

The firm may transfer the accounts receivable to a legally separate entity that issues debt securities to investors. Which of the following is/are true?

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the _ and crediting _ This process is called writing off the account.

A firm that transfers its receivables in exchange for cash can

A firm may use its accounts receivable as collateral for a loan from a bank or other financial institution.Which of the following is/are true?

Discuss how accounts receivable can be analyzed.

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by selling accounts receivable to a bank or financing company.This is called

A firm may factor its accounts receivable to a bank or other financial institution in exchange for cash. Which of the following is/are not true?

Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S.GAAP and IFRS

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by

After the firm estimates the amount of uncollectible accounts associated with the credit sales of each period, it makes an adjusting entry to debit _ and credit _.

Allowance for Uncollectibles contra account appears among the _ on a firm's balance sheet as a(n) _.