Very Short Question Answer
Receivable can be defined as a monetary claim from debtors for sale of goods on credit, providing services on credit and providing loans and advances. It includes accounts receivable/debtors, notes receivable, bills receivable and other receivables such as interest receivable, rent receivable, etc.
Write any two differences between accounts receivable and notes receivable.
Two differences between accounts receivable and notes receivable are as follows:
|Bases of Difference||Accounts Receivable||Notes Receivable
|1. Drawer||Creditor is the drawer.
|Debtor is the drawer.
|2. Order and promise
|It is an order to pay.
|It is a promise to pay.
What does credit terms 3/10, net 30 mean?
The credit term 3/10, net 30 is a typical credit term and means the following:
“3” shows the discount percentage offered by the seller.
“10” indicates the number of days from the invoice date within which the buyer should pay the invoice in order to receive the discount.
“net 30” states that if the buyer does not pay the full invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.
Briefly explain the methods of estimating bad debts.
The amount of bad debts can be estimated by using the following g methods:
- Percentage of total accounts receivable method: One way companies derive an estimate for the value of bad debts under the allowance method is to calculate bad debts as a percentage of the accounts receivable balance.
- Aging method: In general, the longer an account balance is overdue, the less likely the debt is to be paid. Therefore, many companies maintain an accounts receivable aging schedule, which categorizes each customer’s credit purchases by the length of time they have been outstanding.
- Percentage of credit sales method: Some companies estimate bad debts as a percentage of credit sales.
Write short notes on interest bearing notes and non-interest bearing notes.
Interest bearing notes are those notes in which the rate of interest is explicitly mentioned in the note. Notes receivable almost always require interest receipt. The interest due for the period on which the receivable has been outstanding must be recorded as accrued interest.
Non-interest Bearing or discounting notes receivable are those notes agreement in which there is no explicitly mentioned rate of interest but it is implied always as principles sum. The money is issued or goods are traded always deducting the interest supposed to involved during notes period.
Long Question Answer
Trade Link (P) Ltd is the only wholesale distributor of tracking material in Western region. It has policy of making sales on 30-day credit terms. Its’ annual sales are approximately Rs.14,00,000 of which 75% are on credit. At the end of December, 2019, accounts receivable were presented in the company’s balance sheet as follows:
|Accounts receivable from customers
|Less: Allowance for doubtful account
|Net realizable value of accounts receivable||141,000
During 2020, Rs.10,000 in accounts receivable were written off as uncollectible. Company collected total Rs.990,000 from the credit sales made.
Trade Link has policy of estimating year end allowance for doubtful debt based on 6% of ending accounts receivable. It prepares annual financial statements. Therefore, it makes adjusting entries in its accounting records at the end of calendar year.
- Necessary journal entries related to sales, collections, and accounts written off against the allowance for doubtful accounts during 2020.
- Adjusting entry required at December 31, 2020, to increase the allowance for doubtful accounts up to 6% of the year end accounts receivable.
- Partial balance sheet at the end of December 31, 2020 to show net realizable value of accounts receivable.
During the year 2019, Swastik Company made total sales Rs.15,00,000 of which 80% are on credit. Company collected cash of Rs.12,80,000 from the open account in that year. In the year 2019 it has also wrote off Rs.20,000 as an uncollectible account. The following are balances of accounts at the end of 2018.
Accounts receivable Rs.290,000
Allowance for doubtful debts Rs.24,000
Company’s past performance shows that 10% of its ending balance of accounts receivable is expected to be doubtful debt account.
- Journal entries for sales, collection and uncollectible account.
- Estimated bad debt expenses of 2019 and journalize it.
- Received Rs.2500 from a debtor which already written as bad debt. Journalize it.
The account of Everest Company as on December 31, 2019, shows accounts receivable, Rs.1,70,000; Allowance for uncollectible accounts Rs.950 (credit balance); Credit sales Rs.9,85,000and sales return and allowance Rs.12,000.
Required: Journal entries to adjust for possible uncollectible accounts under each of the following assumptions:
- Uncollectible accounts are estimated at 1% of net credit sales.
- The allowance is to be increased to 3% of accounts receivable.
- How accounts receivable are presented in balance sheet according to (b)?
In the books of Everest Company