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ADM 1340 CH8 EXAM LATEST UPDATE
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ADM 1340 CH8 EXAM LATESTUPDATE
Receivables - Answer - refers to amounts that are owed to a company by its customers,
employees, the government, and others.
- generally a company's third-largest asset, after its property, plant, and equipment and
inventory.
Other receivables - Answer - Various forms of non-trade receivables that do not result
from the operations of the business.
- These can include interest receivable, loans to company officers, advances to
employees, sales tax recoverable, and income tax receivable.
Subsidiary ledger - Answer - A ledger that is used to manage the detailed information
that would be difficult to track in a general ledger account. A control account in the
general ledger summarizes the information in the subsidiary ledger.
- For example, the accounts receivable subsidiary ledger contains the individual
account detail for each of a company's customers.
control account - Answer - An account in the general ledger that summarizes the details
for a subsidiary ledger and controls it.
- This means that the balance in the control account must always equal the total of the
subsidiary ledger.
- Because Accounts Receivable is the control account for the accounts receivable
subsidiary ledger, the account balance must be equal to all of the individual customer
receivables balances recorded in the subsidiary ledger.
Credit term - Answer - The interest-free period (usually 30 days) provided to customers
purchasing on credit.
- If the customer does not pay in full within the credit term period (usually 30 days), an
interest (financing) charge may be added to the balance due.
- When financing charges are added, the seller recognizes interest revenue and
increases the account receivable amount owed by the customer.
- This can be a substantial amount for some companies.
- For example, assume that Jordache Corp. charges 28% interest on the balance due if
not paid by the end of the month.
- If Sych Ltd., in the previous section, does not pay its outstanding balance of $3,000,
, Jordache would record interest revenue for the month of February of $70
($3,000×28%×1/12)
Bad debts (uncollectible accounts) - Answer Accounts of customers who do not pay
what they have promised to pay; an expense of selling on credit; also called
uncollectible accounts.
Bad Debts Expense - Answer - The cost to the seller of extending credit. It arises from
the failure to collect from some credit customers.
- this new account, Bad Debts Expense, is used instead of debiting a contra sales
account as we did for sales returns and allowances because the responsibilities for
granting credit and collecting accounts should be separated from sales and marketing.
Credit losses from uncollectible receivables - Answer - they are debited to an account
called Bad Debts Expense
Allowance method - Answer - A method of accounting for bad debts that involves
management estimating uncollectible accounts at the end of each period.
- This also means that the bad debts expense can be determined each period.
- This is consistent with the accrual basis of accounting.
Allowance account - Answer - A "contra-asset with a credit balance
- When subtracted from Accounts Receivable, the difference net realizable value
represents an estimate of the cash value of accounts receivable
carrying amount - Answer The balance of the bonds payable account (face amount of
the bonds) less any unamortized discount or plus any unamortized premium.
Percentage of receivables method - Answer - A method of determining bad debts
expense using a percentage of accounts receivable that are likely to be uncollectible.
- This estimate is normally based on the company's past experience, with the effects of
the current economic climate factored in.
- New companies use industry averages as the basis for their estimate.
- This percentage can be assigned to receivables in total or, more commonly, accounts
receivable are stratified (divided further) by the age of the receivables, with a different
percentage assigned to each age group.
Aging of Accounts Receivable Method - Answer - A method of determining bad debts
expense and allowance for doubtful accounts based on an analysis of customer
balances by the length of time they have been outstanding.
- Companies disclose information on the aging of their accounts receivable in the notes
to their financial statements, generally in a note related to the credit risk of their
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