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Chapter 8: Q1RQ (page 465)
What is the difference between accounts receivable and notes receivable?
Answer
Notes receivables are long-term payments made under a contract over an extended period with interest. Accounts receivable is the amount of sales for which payment is due from the customer.
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What is the formula to compute interest on a note receivable?
Applying the allowance method (percent-of-receivables) to account for Uncollectibles
The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was \(20,000. During 2018, Lake earned revenue of \)454,000 on account and collected \(325,000 on account. Lake wrote off \)5,600 receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 5% of accounts receivable.
Requirements
1. Assume Lake had an unadjusted \(2,700 credit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake鈥檚 December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method.
2. Assume Lake had an unadjusted \)2,400 debit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake鈥檚 December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method
Why must companies record accrued interest revenue at the end of the accounting period?
Recording credit sales and collections
Steller Corporation had the following transactions in June:
Jun .1 | Sold merchandise inventory on account to Carter Company, \(1,575. |
6 | Sold merchandise inventory for cash, \)550 |
12 | Received cash from Carter Company in full settlement of its accounts receivable |
20 | Sold merchandise inventory on account to Iris Company, \(765 |
22 | Sold merchandise inventory on account to Driver Company, \)230 |
28 | Received cash from Iris Company in partial settlement of its accounts receivable, \(300 |
Requirements
1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.
2. Post the transactions to the general ledger and the accounts receivable subsidiary
ledger. Assume all beginning balances are \)0.
3. Verify the ending balance in the control Accounts Receivable equals the sum of the
balances in the subsidiary ledger.
Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office manager, is designing the internal control system. Regal proposes the following procedures for credit checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:
鈥� The credit department runs a credit check on all customers who apply for credit. When an account proves uncollectible, the credit department authorizes the write off of the accounts receivable.
鈥� Cash receipts come into the credit department, which separates the cash received from the customer remittance slips. The credit department lists all cash receipts by customer name and amount of cash received.
鈥� The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting department for posting to customer accounts.
鈥� The controller compares the daily deposit slip to the total amount posted to customer accounts. Both amounts must agree.
Recall the components of internal control. Identify the internal control weakness in this situation, and propose a way to correct it.
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