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Chptr 7 Acctg
University of Oregon Accounting 211 Chapter 7
|What is the Direct Write off Method?
|Use when accounts are negligible, difficult to estimate, and used in tax accounting. You debit bad expense, credit Accounts Receivable (Wait until you know which went bad)
|What is the allowance Method?
|It provides a better matching of losses with revenues, You don't need to know which expense went bad, Record every period, receivables balance effects net realizable value, Debit bad expense, and credit allowance for doubtful acts.
|Under the allowance method what is the Percentage of Sale Method?
|Estimate based on percentage of credit sale and focuses on Net Revenue estimates
|Under the allowance method what is the Percentage of Receivables Method?
|Include age of receivables method, estimate based on aging of accts receivable balance, focuses on net accounts rec. balance and income statement. It is used by retailers and banks.
|Why is the direct write off method not best match sales and expense?
|Because bad debit expense is not recorded until an account becomes uncollectible, which often occurs in a period after that of a credit sale.
|What is the materiality constraint?
|An amount can be ignored if its effects on the financial statement is unimportant to user's business decisions
|What is the allowance method?
|1. Records estimated bad debts expense in the period when the related sales are recorded.. 2. Reports A/R on the balance sheet at the estimated amount of cash to be collected.
|What is the Credit Allowance for Doubtful Accounts?
|The amount you estimate to not receive (Current Assets= Accts Receivable-Allowance for doubtful accts) not always recorded separately from accounts receivable
|How do you record a bad debit when writing it off?
|Credit accounts receivable and debit allowance for doubtful accounts
|What is the Percent of Sales Method (Income Statement Method)?
|Multiply total sales by % of credit sales to be uncollectible (allowance account ending balance would rarely=bad debts expense on income statement)
|What is the Percent of Receivables Method?
|1. Compute the % uncollectible from total A/R 2. Aging A/R Total dollar amount of all receivables is multiplied by this % to get estimated dollar amount of collectible accounts reported in the balance sheet as AFDA
|What is the Aging of Receivables Method?
|It uses both past & current receivables info to estimate the allowance amount. Each receivable is classified by how long its pst due date. Then estimates are made assuming that the longer an amount is past due the more likely its uncollectible
|What is the most reliable method?
|Aging of accounts receivable method is an examination of specific amounts and is usually the most reliable of the estimation methods.
|What is a promissory note?
|A written promise to pay a specified amount of money, usually w/ interest either on demand or at a definite future date.
|What is the equation for interest?
|Principal of Note x Annual Interest Rate x Time in Years
|Balance of notes receivable account should only include what ?
|Notes that have not matured
|What do you do when a note is dishonored?
|Change it back to an accounts receivable. This says the owner of the dishonored note applies for credit in the future his account will reveal past dealings also reminds a company to continue collection efforts.
|How many companies obtain cash from selling or using as securities/
|What is a factoring fee?
|Percentage that a buyer charges when selling a fee. Debited as a Factoring Fee expense along with cash when note is sold.
|Percent of Sales focuses on what?
|Income Statement and matching (Sales <-> Bad Debit Expense)
|Percent of Receivables and Aging of Receivables focuses on what?
|Balance sheet and emphasis on realizable value (Accts Rec <-> Allowance for doubtful accts)
|What is a bank card?
|(Visa or Masterard) the holder of the account pays interest on the balance carried.
|What are Travel and Entertainment Cards?
|(American Express or Diner's Club) Does not charge card holder. Card agency charges vendors a fee based on % of purchases. Collects money from customer than then pays you , higher Credit Card fee, & record as A/R