Question 1

Which of the following statements regarding methods of accounting for bad debts is true?

Accepted Answer

The answer of Which of the following statements regarding methods...

Question 2

Which of the following statements regarding the recording of interest on notes receivable is true?

Accepted Answer

Interest on notes receivable is recognized as revenue when it is earned, which is not necessarily when the interest is received in cash. This means that even if the company has not yet received the cash interest payment, it should still record the interest earned as revenue and recognize the corresponding interest receivable or accrued interest. Option A is incorrect because interest on notes receivable should be recognized as revenue when it is earned, not only when cash is received. Option B is incorrect because only the portion of the interest payment that corresponds to the interest earned should be recorded as revenue when received, while the remaining amount should be recorded as a reduction of the note receivable. Option D is incorrect because interest earned but not yet received should be recorded in an adjusting entry, but the adjusting entry should include a credit to interest receivable or accrued interest, not a debit.

Question 3

When an adjusting entry is made in anticipation of some receivables being uncollectible, the adjustment reduces:

Accepted Answer

Adjusting entries for uncollectible receivables, often through an allowance for doubtful accounts, reduce both net income (due to increased expense for bad debt) and net accounts receivable (since the allowance account is a contra asset that reduces the total accounts receivable reported on the balance sheet).

Question 4

The aging of accounts receivable method, also called the balance sheet approach, estimates uncollectible accounts based on the age of each account receivable.

Accepted Answer

The aging of accounts receivable method is also known as the balance sheet approach and estimates uncollectible accounts based on the age of each account receivable.

Question 5

Which of the following statements regarding the receivables turnover ratio is true?

Accepted Answer

The receivables turnover ratio measures how efficiently a company is collecting payments from customers by dividing net sales by average accounts receivable.

Question 6

A company extends credit to customers because it expects the:

Accepted Answer

The decision to extend credit to customers is based on the expected increase in sales revenue exceeding the additional costs incurred from extending credit, such as the cost of capital, administration, and bad debts. Ultimately, the company expects to earn a net profit from the extended credit.

Question 7

The Grass is Greener Corporation is owed $11,890 by a client for landscaping. The account is overdue and the client is having difficulty paying. Why might the Grass is Greener Corporation extend a note receivable to the client?

Accepted Answer

By extending a note receivable, the Grass is Greener Corporation strengthens their legal right to be repaid with interest. This creates a legal obligation on the client to repay and can potentially provide more security for the Grass is Greener Corporation in collecting the amount due. It also provides a more formal agreement between the two parties that outlines repayment terms, which can be helpful in the event of future disputes. The other options (A, C, and D) do not apply in this situation.

Question 8

An allowance for doubtful accounts is a contra-account paired with:

Accepted Answer

An allowance for doubtful accounts is a contra-account paired with accounts receivable. This is because it is used to reduce the value of the accounts receivable asset on the balance sheet to reflect the amount that is believed to be uncollectible.

Question 9

The percentage of credit sales method, also called the income statement approach, estimates bad debts based on a historical percentage of sales that lead to bad debt losses.

Accepted Answer

The statement is true. The percentage of credit sales method estimates bad debts based on a historical percentage of sales that lead to bad debt losses. This approach is based on the income statement and focuses on matching the bad debt expense with the sales revenue that it relates to.

Question 10

The Grass is Greener Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. To record the potential bad debts, The Grass is Greener Corporation would:

Accepted Answer

The Grass is Greener Corporation should use the allowance method to record potential bad debts. This involves debiting the Bad Debt Expense account and crediting the Allowance for Doubtful Accounts account. Option C correctly identifies this method and lists the appropriate accounts and amount to record the potential bad debts. Option A incorrectly debits Accounts Receivable instead of the Bad Debt Expense account, and option B incorrectly credits Bad Debt Expense instead of debiting it. Option D incorrectly debits Accounts Receivable instead of the Bad Debt Expense account.

Question 11

If a company did not extend credit to customers:

Accepted Answer

If a company did not extend credit to customers, it would need to have all of its customers pay upfront, which would result in a decrease in sales revenue due to customers who cannot or will not pay upfront. However, the cost of managing credit and collections would also decrease, resulting in an overall decrease in costs. Therefore, both revenue and costs would decrease, and gross profit would not necessarily rise. The option that reflects this is C.

Question 12

The Grass is Greener Corporation uses the allowance method and learns that a customer who owes $350 has gone bankrupt and payment will not be made. The Grass is Greener Corporation should:

Accepted Answer

The allowance method requires the use of a contra-asset account, the Allowance for Doubtful Accounts, to estimate and record potential bad debts. When a customer is deemed uncollectible, the corresponding amount is written off by debiting the Allowance for Doubtful Accounts and crediting Accounts Receivable. Therefore, the correct entry in this scenario would be to debit the Allowance for Doubtful Accounts and credit Accounts Receivable for $350.

Question 13

The Grass is Greener Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. According to the revenue recognition principle and the matching principle, the company should:

Accepted Answer

According to the revenue recognition principle, revenue should be recognized when earned, regardless of when payment is received. Since lawn care has already been provided on account, revenue should be recognized in the same period.

According to the matching principle, expenses should be recognized in the same period as the revenue they helped to generate. In this case, the estimated bad debt expense is an expense that helps to match the revenue earned from providing lawn care on account in the same period.

Therefore, it is best for the company to record an estimate of bad debt expense in the same period as the lawn care is provided. This can be done by creating an adjusting entry to increase the bad debt expense account and increase the allowance for doubtful accounts contra-asset account, which is a valuation account that reduces the overall value of the accounts receivable asset. This will reflect the estimated amount of uncollectible accounts and allow for a more accurate representation of the company's financial position.

Question 14

Neither GAAP nor IFRS allow the use of the direct write-off method.

Accepted Answer

Both GAAP and IFRS require the use of the allowance method for bad debts, as it provides a more accurate representation of financial statements by estimating uncollectible accounts in advance.

Question 15

Over the past five years, a company had average annual credit sales of $320,000 and write-offs this year of $2,000. Credit sales in the current year are $300,000. The balance in the Allowance for Doubtful Accounts is a
$500 credit. Using the percentage of credit sales method, and an estimate of 1%, what amount should the company record as an estimate of bad debt expense?

Accepted Answer

The answer of Over the past five years, a company...

Question 16

Assume the Mirtha Company had the following balances at year-end.  Assume the company recorded no write-offs or recoveries during 2012. What was the amount of bad debt expense reported in 2012?

Accepted Answer

The answer of Assume the Mirtha Company had the following...

Question 17

The direct write-off method is not allowed by GAAP because is ignores the conservatism concept and the matching principle.

Accepted Answer

The direct write-off method does not recognize expenses until the exact amount of bad debt is known, which violates the conservatism concept and the matching principle. Therefore, it is not allowed by GAAP. Instead, the allowance method is required to estimate and recognize bad debt expenses in accordance with these accounting principles.

Question 18

Factoring refers to an arrangement in which a company sells its receivables to another company called a factor and receives cash, less a fee, immediately.

Accepted Answer

This is the definition of factoring.

Question 19

Which of the following statements regarding allowance for doubtful accounts is true?

Accepted Answer

The allowance for doubtful accounts has a normal credit balance. This means that the account is credited (increased) when the bad debt expense is recorded and debited (decreased) when a specific write-off is recorded. Option A is incorrect because under the aging of accounts receivable method, the allowance for doubtful accounts balance is calculated and then subtracted from the total accounts receivable to estimate the amount of bad debt. Option B is incorrect because the allowance for doubtful accounts is a contra-asset account, not a contra-revenue account. Option C is incorrect because the allowance for doubtful accounts is credited when bad debt expense is recorded, not when a specific write-off is recorded.

Question 20

Purrfect Pets sells a $1,500 aquarium to a customer on account. This would be recorded by an entry that includes a:

Accepted Answer

The sale was made on account, meaning the customer has not paid cash. Therefore, the company would record a debit to Accounts Receivable to recognize the amount owed by the customer. A debit to Sales would also be required to record the revenue earned from the sale, but this is not the best choice in this scenario. A debit to Cost of Goods Sold would only be appropriate if the item sold was previously bought by the company for resale.

Quiz 8: Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue