Question 1

When using the allowance method of accounting for uncollectible accounts, the entry to write off Jeannie's uncollectible account is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable-Jeannie.

Accepted Answer

The answer of When using the allowance method of accounting...

Question 2

The advantage of the allowance method of accounting for bad debts is that it identifies the specific customers who will not pay their bills.

Accepted Answer

The advantage of the allowance method is that it estimates the amount of bad debts and creates a contra account to reduce accounts receivable to their net realizable value. It does not specifically identify the customers who will not pay their bills. This is done through credit analysis and monitoring of the aging of accounts receivable.

Question 3

Companies use two methods to account for uncollectible accounts, the direct write-off method and the allowance method.

Accepted Answer

This statement is true as companies do use both the direct write-off method and the allowance method to account for uncollectible accounts.

Question 4

A high accounts receivable turnover in comparison with competitors suggests that the firm should tighten its credit policy.

Accepted Answer

A high accounts receivable turnover indicates that the company is collecting its outstanding debts quickly. This is generally seen as a positive thing and suggests that the company has an effective credit policy in place. If the company were to tighten its credit policy, it could potentially slow down its accounts receivable turnover and negatively impact its cash flow. A low accounts receivable turnover, on the other hand, could suggest that the company needs to tighten its credit policy to reduce the amount of outstanding debts.

Question 5

When using the allowance method of accounting for uncollectible accounts, the entry to record the estimated bad debts expense is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts.

Accepted Answer

This is the correct entry for the allowance method of accounting for uncollectible accounts.

Question 6

No attempt is made to estimate bad debts expense under the allowance method of accounting for uncollectible accounts receivable.

Accepted Answer

The allowance method requires an estimate of the bad debts expense and a corresponding allowance for uncollectible accounts receivable to be established based on historical data and other factors.

Question 7

The accounts receivable turnover indicates how often accounts receivable are received and collected during the period.

Accepted Answer

The accounts receivable turnover is a ratio that measures the efficiency of a company in collecting its accounts receivable. A higher ratio indicates that the company is collecting its accounts receivable more frequently during the given period.

Question 8

The accounts receivable turnover is calculated by dividing average accounts receivable by net sales.

Accepted Answer

The answer of The accounts receivable turnover is calculated by...

Question 9

A Company had net sales of $23,000, and its average account receivables were $5,700. Its accounts receivable turnover is 0.24.

Accepted Answer

The answer of A Company had net sales of $23,000,...

Question 10

Companies follow both the expense recognition (matching)principle and the materiality constraint when applying the direct write-off method.

Accepted Answer

The direct write-off method does not follow the expense recognition principle (matching) as it only recognizes the expense when the bad debt occurs, rather than when the sale is made. However, it does follow the materiality constraint as it allows for small amounts of bad debt to be written off immediately without the need for estimation or allowance calculations.

Question 11

The expense recognition (matching)principle permits the use of the direct write-off method of accounting for uncollectible accounts when bad debts are very large in relation to a company's other financial statement items such as sales and net income.

Accepted Answer

The expense recognition (matching) principle does not permit the use of the direct write-off method of accounting for uncollectible accounts. Instead, the allowance method must be used to estimate and record bad debt expense.

Question 12

The expense recognition (matching)principle requires use of the allowance method of accounting for bad debts.

Accepted Answer

The allowance method of accounting for bad debts is in line with the expense recognition principle. This requires that expenses should be recognized in the same accounting period as the revenue they helped to generate. The allowance method follows this principle by using estimates to match the expense of bad debts with the revenue earned in the same accounting period.

Question 13

The use of the direct write-off method is allowed under the materiality constraint.

Accepted Answer

The direct write-off method is allowed under the materiality constraint because it is only used for immaterial items. For material items, the allowance method is required by Generally Accepted Accounting Principles (GAAP).

Question 14

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

Accepted Answer

The direct write-off method waits until an account is deemed uncollectible before recording the loss, rather than estimating and recording a bad debt expense ahead of time like the allowance method.

Question 15

When using the allowance method of accounting for uncollectible accounts, the recovery of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.

Accepted Answer

When a bad debt is recovered, it is recorded as a debit to Cash and a credit to Accounts Receivable (not Bad Debts Expense). This is because the original entry for the bad debt expense already reduced the accounts receivable balance, so the recovery simply increases it again.

Question 16

A company had net sales of $550,000 and an average accounts receivable of $110,000. Its accounts receivable turnover equals 5.0.

Accepted Answer

Accounts receivable turnover = Net Sales / Average Accounts Receivable = $550,000 / $110,000 = 5.0

Question 17

Allowance for Doubtful Accounts is a contra asset; its balance is added to Accounts receivable.

Accepted Answer

The answer of Allowance for Doubtful Accounts is a contra...

Question 18

After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of reducing Accounts Receivable to its estimated realizable value.

Accepted Answer

The Allowance for Doubtful Accounts is a contra asset account that reduces the Accounts Receivable balance to its estimated realizable value.

Question 19

The allowance method of accounting for bad debts matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.

Accepted Answer

The allowance method estimates future uncollectible accounts and records them as a loss in the same accounting period as the sales they helped produce. This allows for a more accurate matching of expenses to revenue.

Question 20

The realizable value refers to the expected proceeds from converting an asset into cash.

Accepted Answer

Realizable value is the expected cash proceeds from selling or converting an asset into cash.

Quiz 9: Accounting for Receivables