Question 1

The direct write-off method of accounting for doubtful accounts mismatches revenue and expenses and overstates assets.

Accepted Answer

Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. Under this approach, there is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred.

Question 2

The direct write-off method of accounting for doubtful accounts follows the accrual concept of accounting more closely than does the allowance method of accounting for doubtful accounts.

Accepted Answer

The allowance method matches credit losses with the related credit sales in the same time period in which the sale occurs. Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. There is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred.

Question 3

The Allowance for Doubtful Accounts normally has a credit balance.

Accepted Answer

The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts.

Question 4

If the allowance method of recording doubtful accounts is used, the entry to write off an account does not affect net income or total assets.

Accepted Answer

The entry to write-off a specific account receivable is:
Allowance for doubtful accounts XXX
$\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ Accounts receivable XXX
Both Accounts Receivable and the Allowance for Doubtful Accounts decrease; thus, there is no change in net accounts receivable, i.e., no change in net assets. There is no income statement effect.

Question 5

Interest at a rate of 8% on $9,000 for 120 days equals $240.

Accepted Answer

$9,000 x 8% x 120/360 = $240

Question 6

At what amount will accounts receivable for Advantage Company be reported on the balance sheet if the gross receivable balance is $52,000 and the allowance for doubtful accounts is estimated at 4% of gross receivables?

Accepted Answer

Receivables are reported net of the allowance account.
In this case, $52,000 - ($52,000 x 4%) = $49,920.

Question 7

At what amount will accounts receivable for Horizon Company be reported on the balance sheet if the gross receivable balance is $156,000 and the allowance for doubtful accounts is estimated at 4% of gross receivables?

Accepted Answer

Receivables are reported net of the allowance account.
In this case, $156,000 - ($156,000 x 4%) = $149,760.

Question 8

Great Landscapes Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Great Landscapes Company computes a total of $3,600 in estimated doubtful accounts as of December 31, 2019. Its Accounts Receivable account has a balance of $112,800 and its Allowance for Doubtful Accounts has a credit balance of $600 before adjustment at December 31, 2019.
How much bad debts expense will Great Escapes report in 2019?

Accepted Answer

To bring the allowance to the desired balance of $3,600, the Great Landscapes Company will need to increase the allowance account by $3,000, resulting in bad debts expense of that same amount.

Question 9

Green Garden Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Green Garden Company computes a total of $10,800 in estimated doubtful accounts as of December 31, 2019. Its Accounts Receivable account has a balance of $338,400 and its Allowance for Doubtful Accounts has a credit balance of $1,800 before adjustment at December 31, 2019.
How much bad debts expense will Green Garden report in 2019?

Accepted Answer

To bring the allowance to the desired balance of $10,080, the Green Garden Company will need to increase the allowance account by $9,000, resulting in bad debts expense of that same amount.

Question 10

A major shortcoming of the direct write-off method is that credit losses are:

Accepted Answer

Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. Under this approach, there is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred.

Question 11

In accounting for credit losses:

Accepted Answer

The allowance method matches credit losses with the related credit sales in the same time period in which the sale occurs. Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. There is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. Under this approach, expenses are understated and net income, retained earnings and total assets are overstated.

Question 12

On December 31, 2019 before adjusting entries, Accounts Receivable for California Company had a debit balance of $200,000, and the Allowance for Doubtful Accounts had a credit balance of $6,000. Credit sales for the year were $1,600,000.
If credit losses are estimated at 1% of credit sales:

Accepted Answer

Ending balance in Allowance for Doubtful Accounts = $6,000 + ($1,600,000 x 1%) = $22,000

Question 13

On December 31, 2019 before adjusting entries, Accounts Receivable for Atlanta Company had a debit balance of $600,000, and the Allowance for Doubtful Accounts had a credit balance of $18,000. Credit sales for the year were $4,800,000.
If credit losses are estimated at 1% of credit sales:

Accepted Answer

Ending balance in Allowance for Doubtful Accounts = $18,000 + ($4,800,000 x 1%) = $66,000

Question 14

Under the allowance method of accounting for credit losses, the entry to write off a specific account:

Accepted Answer

When a specific account receivable should be written off and removed from a company's balance sheet, the following entry is made:
Allowance for Doubtful accounts XXX
$\quad $ $\quad $ $\quad $ $\quad $ $\quad $ Accounts receivable XYZ Company XXX
To write off the XYZ Company's account receivable
The journal entry to write off an account receivable does not affect a company's net income or total assets.

Question 15

Boulder Beaver Company had a $150,000 beginning balance in Accounts Receivable and a $6,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $600,000 and customers' accounts collected were $590,000. Also, $4,000 in worthless accounts were written off.
What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts?

Accepted Answer

Year-end Allowance for Doubtful Accounts = $6,000 - $4,000 = $2,000
Year-end Accounts receivable = $150,000 + $600,000 - $590,000 - $4,000 = $156,000
Net Accounts Receivable = $156,000 - $2,000 = $154,000

Question 16

John Den Bear Company had a $450,000 beginning balance in Accounts Receivable and a $18,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $1,800,000 and customers' accounts collected were $1,770,000. Also, $12,000 in worthless accounts were written off.
What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts?

Accepted Answer

Year-end Allowance for Doubtful Accounts = $18,000 - $12,000 = $6,000
Year-end Accounts receivable = $450,000 + $1,800,000 - $1,770,000 - $12,000= $468,000
Net Accounts Receivable = $468,000 - $6,000 = $462,000

Question 17

The entry to record the write-off of Ward Company's account under the direct write-off method is:

Accepted Answer

Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. The journal entry made when the direct write-off method is used is:
Bad debt expense - Ward Company XXX
$\quad $ $\quad $ $\quad $ $\quad $ Accounts receivable - Ward Company XXX

Question 18

The entry to record the write-off of Sepich, Inc.'s account using the allowance method is:

Accepted Answer

The journal entry to write off an account receivable does not affect a company's net income or total assets. By means of the year-end adjusting entry, the bad debts expense is reported in the period when the related sales revenue is recorded. Because the Allowance for Doubtful Accounts is deducted from the Accounts Receivable account on the balance sheet, the net realizable value of accounts receivable is unchanged by the account write off. When a specific account receivable should be written off and removed from a company's balance sheet the following entry should be made:
Allowance for Doubtful Accounts XXX
$\quad $ $\quad $ $\quad $ $\quad $ $\quad $ ???Accounts Receivable XXX

Question 19

Assume the following unadjusted account balances at the end of the accounting period for Margarete Company: Accounts Receivable, $100,000; Allowance for Doubtful Accounts, $1,400 (debit balance); and Net sales, $1,200,000.
If Margarete's past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is:

Accepted Answer

Bad debt expense = Credit Sales x % of past credit losses
X = $1,200,000 x 1% = $12,000

Question 20

Assume the following unadjusted account balances at the end of the accounting period for Emmie Company: Accounts Receivable, $300,000; Allowance for Doubtful Accounts, $4,200 (debit balance); and Net sales, $3,600,000.
If Emmie's past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is:

Accepted Answer

Bad debt expense = Credit Sales x % of past credit losses
X = $3,600,000 x 1% = $36,000

Quiz 8: Accounting for Receivables