Question 1

The direct write-off method for uncollectible accounts violates the matching principle.

Accepted Answer

The direct write-off method for uncollectible accounts violates the matching principle because it does not match the bad debt expense with the related sales revenue in the same accounting period. Instead, it waits until a specific account is identified as uncollectible before recording the expense, which may be in a different period from when the related sale was made.

Question 2

Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts receivable.

Accepted Answer

While GAAP does require companies to recognize uncollectible accounts receivable as a loss, it does not dictate the specific method used. Companies have the option to use either the direct write-off method or the allowance method. However, the allowance method is generally preferred and recommended by auditors as it provides a more accurate representation of the true amount of uncollectible accounts.

Question 3

Which of the following statements is true of the direct write-off method?

Accepted Answer

The direct write-off method is generally not recommended for larger companies as it does not provide accurate matching of revenues with expenses and can result in significant fluctuations in net income from period to period. Therefore, it is only suitable for small companies that have very few uncollectible receivables. Choice A is incorrect as GAAP does not prescribe a specific method for accounting for bad debts. Choice B is incorrect as the direct write-off method does not provide better matching of revenues with expenses. Choice C is incorrect as the direct write-off method can result in inaccurate net income due to the lack of matching revenues with expenses.

Question 4

The net realizable value of Accounts Receivable is calculated by subtracting Bad Debts Expense from Accounts Receivable.

Accepted Answer

The net realizable value of Accounts Receivable is calculated by subtracting the Allowance for Doubtful Accounts from Accounts Receivable, not Bad Debts Expense. Bad Debts Expense is an operating expense that is used to estimate the amount of uncollectible accounts.

Question 5

Accounts Receivable has a balance of $32,000,and the Allowance for Bad Debts has a credit balance of $3,500.The allowance method is used.What is the net realizable value of Accounts Receivable before and after a $2,100 account receivable is written off?

Accepted Answer

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Question 6

The two methods of accounting for uncollectible receivables are ________.

Accepted Answer

The two methods of accounting for uncollectible receivables are the allowance method and the direct write-off method. The direct write-off method records the bad debt expense when a specific account receivable is identified as uncollectible and is written off. The allowance method estimates the amount of uncollectible accounts receivable and records the estimated amount as a contra asset account, allowing the company to properly match expenses with revenue. The direct write-off method is generally not acceptable for financial reporting purposes, while the allowance method is required under generally accepted accounting principles (GAAP).

Question 7

Which of the following is true of the balance sheet presentation of the Allowance for Bad Debts?

Accepted Answer

The Allowance for Bad Debts is shown as a contra account related to accounts receivable on the balance sheet. This means that it is subtracted from the total accounts receivable amount, resulting in a net realizable value for accounts receivable. It is not reported as a current liability, operating expense, or a separate/independent line item under current assets.

Question 8

A company with significant amounts of accounts receivable experiences uncollectible accounts from time to time.If the company uses the direct write-off method,the effect of writing off an uncollectible receivable will be ________.

Accepted Answer

When using the direct write-off method, uncollectible receivables are simply removed from the accounts, which results in a reduction in net income as well as total assets. There is no generation of positive cash flow as the bad debt was already accounted for in the original revenue recognition.

Question 9

The direct write-off method is only acceptable for companies that have very few uncollectible receivables.

Accepted Answer

The direct write-off method is generally considered acceptable for companies with very few uncollectible accounts because it has minimal impact on the financial statements, and such companies do not need to comply with the matching principle as strictly as larger companies with more significant amounts of receivables.

Question 10

In order to keep accurate records about the collection of cash for a previously written off account,collection of cash for a previously written off account,a business should re-establish the Accounts Receivable by debiting the receivable account.

Accepted Answer

To keep accurate records, a business should re-establish the Accounts Receivable by debiting the receivable account for the collection of cash for a previously written off account. This ensures that the collection is recorded and tracked properly.

Question 11

Sunrays,Inc.wrote off the account of one of its customers,Brad Doe,in 2016 for $500.On January 21,2017,Brad unexpectedly repaid his account in full.The company uses the direct write-off method to account for uncollectible receivables.Journalize the entries required for Sunrays,Inc.on January 21,2017.

Accepted Answer

The answer of Sunrays,Inc.wrote off the account of one of...

Question 12

Under both the allowance method and the direct-write off method of accounting for uncollectible accounts,the amount of bad debts expense is to be estimated at the end of each accounting period.

Accepted Answer

The answer of Under both the allowance method and the...

Question 13

When a company uses the allowance method to measure bad debts,________.

Accepted Answer

When a company uses the allowance method to measure bad debts, the amount of bad debts expense is estimated at the end of the accounting period. This is based on the company's historical data and other factors such as economic conditions and the creditworthiness of customers. The Bad Debts Expense account is then debited for this estimated amount, and the Allowance for Bad Debts account is credited. The Allowance for Bad Debts account balance is then subtracted from the balance of the Accounts Receivable account to arrive at the net realizable value. When an account is actually written off as uncollectible, the Allowance for Bad Debts account is debited and the Accounts Receivable account is credited.

Question 14

Prepare the journal entry to record an uncollectible account receivable of $10,000,using the direct write-off method.

Accepted Answer

The answer of Prepare the journal entry to record an...

Question 15

In order to keep accurate records about the collection of cash for a previously written off account,collection of cash for a previously written off account,a business should re-establish the Accounts Receivable by crediting the receivable account.

Accepted Answer

The answer of In order to keep accurate records about...

Question 16

The use of the allowance method to record bad debts expense violates the matching principle.

Accepted Answer

The use of the allowance method is a generally accepted accounting practice that follows the matching principle because it estimates and records bad debts expense in the same period as the related sales revenue.

Question 17

A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see from which customers the company will not be able to collect is known as the allowance method.

Accepted Answer

This is the correct definition of the allowance method of accounting for uncollectible receivables.

Question 18

For a company with significant uncollectible receivables,the direct write-off method is unsuitable because ________.

Accepted Answer

The direct write-off method violates the matching principle, which requires expenses to be recognized in the same period as the related revenues. Under the direct write-off method, bad debt expense is only recognized when a specific customer account is deemed uncollectible and written off, which could be in a different period than when the revenue was recognized. This results in an inaccurate portrayal of the company's financial performance and makes financial statement analysis difficult. Therefore, the direct write-off method is not suitable for companies with significant uncollectible receivables.

Question 19

The Allowance for Bad Debts is a contra account to Accounts Receivable.

Accepted Answer

The Allowance for Bad Debts is a contra account because it reduces the amount of Accounts Receivable that is considered collectible.

Question 20

Customer A.Smith owed Stonebridge Electronics $225.On April 27,2016,Stonebridge determined this account receivable to be uncollectible and wrote off the account.The company uses the direct write-off method.On July 15,2016,Stonebridge received a check for $225 from the customer.How should the July 15,2016 transaction be recorded?

Accepted Answer

The direct write-off method requires reversing the write-off by reinstating the account receivable and recording the cash receipt.

Quiz 8: Receivables