Accounting Case
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Chapter 5 Questions
1. When recording a credit sale, what account do we debit? Describe where this account is reported in the financial statements.
Accounts Receivable. It is reported in the balance sheet under current assets.
2. What is the difference between a trade receivable and a nontrade receivable?
Trade Receivable – The legal right to receive cash is valuable and represents an asset of the company.
Nontrade Receivable – Receivables that originate from sources other than customers.
3. Explain the difference between a trade discount and a sales discount. Where are sales discounts reported in the income statement?
Trade Discount – Represents a reduction in the listed price of a product or service.
Sales Discount – Represents a reduction, not in the selling price of product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time.
; Under Revenues
4. Briefly explain the accounting treatment for sales returns and allowances. Where are these accounts reported in the income statement?
With a sales return we reduce the customers account balance if the sale was on account or we issue cash refund if the sale was for cash.
With sales allowance, the seller reduces the customers balance owed or provides at least a partial refund.
; They are deducted from total revenues in the income statement.
5. Revenue can be earned at one point or over a period. Provide an example of each.
At one point – You are given the cash at the time the service/good was provided.
Over a period – Customer purchases something on account receivable.
6. Explain the correct way companies should account for uncollectible accounts receivable (bad debts).
We use the allowance method for uncollectible accounts which involves allowing for the possibility that some accounts will be uncollectible at some point in the future.
7. What two purposes do firms achieve by estimating future uncollectible accounts?
Provide a way to reduce revenue indirectly and it also provides a way to reduce accounts receivable indirectly to its net realizable value, rather than decreasing the accounts receivable balance itself.
8. How does accounting for uncollectible accounts conform to the concept of the matching principle?
We account for events (customers bad debts) that have not yet occurred but are likely to occur.
9. What are the financial statement effects of establishing an allowance for uncollectible accounts?
Adjusting for estimates of future uncollectible accounts matches expenses (bad debts) in the same period as the revenues (credit sales) they help to generate.
10. Describe the year-end adjustment to record the allowance for uncollectible accounts.
Reduces an asset account (accounts receivable) and its contra asset account (Allowance for Uncollectible Accounts).
11. Allowance for Uncollectible Accounts is a contra asset account, which means that its normal balance is a credit. However, it is possible for the account to have a debit balance before year-end adjustments are recorded. Explain how this could happen.
Because you need to write it off which means doing the opposite of the normal balance.
12. We report accounts receivable in the balance sheet at their net realizable value. Explain what this term means.
The amount of cash the firm expects to collect.
13. When we have established an allowance for uncollectible accounts, how do we write off an account receivable as uncollectible? What effect does this write-off have on the reported amount of total