Chapter 5 – Receivables and Sales
Chapter 5
Receivables and Sales
REVIEW QUESTIONS
Question 5-1 (LO 5-1)
When recording a credit sale, we debit accounts receivable. Accounts receivable are reported as
assets in the balance sheet.
Question 5-2 (LO 5-1)
Trade receivables are amounts receivable from customers due to credit sales. Nontrade
Question 5-3 (LO 5-2)
Trade discounts represent a reduction in the listed price of a product or service. A sales discount
Question 5-4 (LO 5-2)
Sales returns and allowances are contra revenue accounts and therefore have normal debit
Question 5-5 (LO 5-2)
An example of recognizing revenue at one point would be selling a car. An example of
Question 5-6 (LO 5-3)
Companies should account for uncollectible accounts receivable using the allowance method.
Question 5-7 (LO 5-3)
The two purposes include reducing accounts receivable to the amount expected to be collected
5-2 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 5-8 (LO 5-3)
Allowing for uncollectible accounts involves recording a contra asset for the amount of
Question 5-9 (LO 5-3)
The two financial statement effects of establishing an allowance for uncollectible accounts are:
Question 5-10 (LO 5-3)
The amount expected to be collected means that there is a possibility that not all accounts
Question 5-11 (LO 5-4)
The write-off of an account as uncollectible includes a debit to the Allowance for Uncollectible
Question 5-12 (LO 5-4)
A debit balance in the allowance for uncollectible accounts before adjustment could occur if
Question 5-13 (LO 5-4)
Question 5-14 (LO 5-5)
The age of accounts receivable refers to how far past due accounts are. The older the account, the
Question 5-15 (LO 5-5)
The year-end adjustment to the allowance for uncollectible accounts normally includes a debit to
Chapter 5 – Receivables and Sales
5-4 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 5-16 (LO 5-6)
The allowance method requires companies to estimate future bad debts and to reflect those
Question 5-17 (LO 5-7)
One common difference is that notes receivable require the borrower to pay interest. Also, notes
Question 5-18 (LO 5-7)
Face value – amount of the note.
Question 5-19 (LO 5-7)
Interest
=
Face
value
x
Annual
interest rate
x
Fraction of
the year
Question 5-20 (LO 5-7)
Question 5-21 (LO 5-8)
The receivables turnover ratio equals net credit sales divided by average accounts receivable.
Question 5-22 (LO 5-8)
The average collection period equals 365 days divided by the receivables turnover ratio. The
ratio shows the approximate number of days the average accounts receivable balance is outstanding.
Typically, a lower number is a good indicator of a company’s effectiveness in managing receivables.
Chapter 5 – Receivables and Sales
Answers to Review Questions (continued)
Question 5-23 (LO 5-8)
A company can attempt to boost sales, and thereby increase its value, by allowing customers to
purchase products and services on account. Some customers may be unwilling or unable to purchase
Question 5-24 (LO 5-9)
The percentage of receivables method is commonly used in practice. Financial accounting rules
Question 5-25 (LO 5-9)
The percentage of receivables method estimates future bad debts based on a balance sheet
account – accounts receivable. The percentage of credit sales method estimates future bad debts
based on an income statement account – credit sales. The current emphasis on better measurement of
assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income
5-6 Financial Accounting, 5e
BRIEF EXERCISES
Brief Exercise 5-1 (LO 5-2)
Debit
Accounts Receivable
3,080
Service Revenue
Service Revenue
Brief Exercise 5-2 (LO 5-2)
Total sales
$750,000
Less:
Net sales
Brief Exercise 5-3 (LO 5-3)
Debit
Credit
Bad Debt Expense
2,000
Allowance for Uncollectible Accounts
Chapter 5 – Receivables and Sales
Brief Exercise 5-4 (LO 5-4)
Debit
Credit
Allowance for Uncollectible Accounts
17,000
Brief Exercise 5-5 (LO 5-4)
September 9
Debit
Credit
Accounts Receivable
7,000
Cash
5-8 Financial Accounting, 5e
Brief Exercise 5-6 (LO 5-5)
Debit
Credit
Bad Debt Expense
2,400
Allowance for Uncollectible Accounts
2,400
Brief Exercise 5-7 (LO 5-5)
Debit
Credit
Bad Debt Expense
3,600
Allowance for Uncollectible Accounts
3,600
Brief Exercise 5-8 (LO 5-5)
Debit
Credit
Bad Debt Expense
12,000
Allowance for Uncollectible Accounts
12,000
Chapter 5 – Receivables and Sales
Brief Exercise 5-9 (LO 5-5)
Debit
Credit
Bad Debt Expense
18,000
Allowance for Uncollectible Accounts
18,000
Brief Exercise 5-10 (LO 5-5)
Age Group
Amount
Receivable
Estimated
Percent
Uncollectible
Estimated
Amount
Uncollectible
Not yet due
Brief Exercise 5-11 (LO 5-5)
Age Group
Amount
Receivable
Estimated
Percent
Uncollectible
Estimated
Amount
Uncollectible
Not yet due
1-60 days past due
Debit
Credit
Bad Debt Expense
5,000
Allowance for Uncollectible Accounts
5,000
5-10 Financial Accounting, 5e
Brief Exercise 5-12 (LO 5-6)
March 14, 2022
Debit
Credit
Bad Debt Expense
Brief Exercise 5-13 (LO 5-6)
December 31, 2021
Debit
Credit
No entry necessary
During 2022
Debit
Credit
Bad Debt Expense
Brief Exercise 5-14 (LO 5-6)
If Brady uses the direct write-off method, then no adjustment is recorded at the end of
2021 to estimate future bad debts. Instead, if Brady uses the allowance method, the
following adjustment would be recorded at the end of 2021:
December 31, 2021
Debit
Credit
Bad Debt Expense
Brief Exercise 5-15 (LO 5-7)
Face
Value
Annual
interest rate
Fraction of
the year
Interest
Chapter 5 – Receivables and Sales
Brief Exercise 5-16 (LO 5-7)
Interest Revenue
Brief Exercise 5-17 (LO 5-9)
Debit
Credit
Bad Debt Expense
4,050
Brief Exercise 5-18 (LO 5-9)
Debit
Credit
Bad Debt Expense
4,050
5-12 Financial Accounting, 5e
Brief Exercise 5-19 (LO 5-1, 5-2, 5-3, 5-5, 5-6, 5-7)
1.
C
2.
E
3.
A
4.
H
5.
B
6.
D
7.
G
8.
F
9.
I
Chapter 5 – Receivables and Sales
EXERCISES
Exercise 5-1 (LO 5-1)
May 7
Debit
Credit
Accounts Receivable
4,000
May 13
Cash
Exercise 5-2 (LO 5-2)
May 1
Debit
Credit
Cash
Exercise 5-3 (LO 5-1, 5-2)
March 12
Debit
Credit
Accounts Receivable
11,000
March 20
Cash
Sales Discounts
5-14 Financial Accounting, 5e
Exercise 5-4 (LO 5-1, 5-2)
March 12
Debit
Credit
Accounts Receivable
11,000
Service Revenue
11,000
March 31
Cash
11,000
Exercise 5-5 (LO 5-1, 5-2)
March 12
Debit
Credit
Service Fee Expense
11,000
Accounts Payable
11,000
March 31
Accounts Payable
11,000
Chapter 5 – Receivables and Sales
Exercise 5-6 (LO 5-1, 5-2)
Requirement 1
April 25
Debit
Credit
Accounts Receivable
3,500
Service Revenue
3,500
(Provide services on account)
Sales Allowances
Accounts Receivable
(Record sales allowance for credit sale)
April 30
Accounts Receivable
Requirement 4
Service revenue
$3,500
Less: Sales allowances
(600)
Net sales
$2,900
Exercise 5-7 (LO 5-3, 5-4)
Requirement 1
December 31, 2021
Debit
Credit
Bad Debt Expense
12,500
($12,500 = $50,000 x 25%)
Requirement 2
During 2022
Debit
Credit
Allowance for Uncollectible Accounts
10,000
(Write off uncollectible accounts)
Requirement 3
During 2022
Debit
Credit
Allowance for Uncollectible Accounts
15,000
Accounts Receivable
15,000
(Write off uncollectible accounts)
Chapter 5 – Receivables and Sales
Exercise 5-8 (LO 5-5)
Requirement 1
December 31, 2021
Debit
Credit
Bad Debt Expense
7,900
Requirement 2
Bad debt expense
$7,900
5-18 Financial Accounting, 5e
Exercise 5-9 (LO 5-5)
Requirement 1
December 31, 2021
Debit
Credit
Bad Debt Expense
28,100
Requirement 2
Bad debt expense
$28,100
Allowance for uncollectible accounts
Requirement 3
Total accounts receivable
$130,000
Less: Allowance for uncollectible accounts
Net accounts receivable
Chapter 5 – Receivables and Sales
Exercise 5-10 (LO 5-5)
Requirement 1
Age Group
Amount
Receivable
Estimated
Percent
Uncollectible
Estimated
Amount
Uncollectible
Not yet due
$50,000
15%
$ 7,500
0-30 days past due
20%
More than 90 days past due
85%
$70,000
Requirement 2
December 31, 2021
Debit
Credit
Bad Debt Expense
12,750
Requirement 3
Total accounts receivable
$ 70,000
Less: Allowance for uncollectible accounts
Net accounts receivable
$ 55,850
Exercise 5-11 (LO 5-5)
Requirement 1
Age Group
Amount
Receivable
Estimated
Percent
Uncollectible
Estimated
Amount
Uncollectible
Not yet due
$ 60,000
4%
$ 2,400
0-60 days past due
More than 120 days past due
Requirement 2
December 31, 2021
Debit
Credit
Bad Debt Expense
23,200
Requirement 3
Total accounts receivable
$110,000
Less: Allowance for uncollectible accounts
Net accounts receivable
Exercise 5-12 (LO 5-3, 5-4, 5-5)
Credit sales
transaction cycle
Assets
Stockholders’
equity
Expenses
1. Provide services on
account
I
NE
I
I
NE