Question 1

When a company is using the direct write-off method and an account is written off,the journal entry consists of a:

Accepted Answer

When a company is using the direct write-off method and an account is written off, the journal entry consists of a credit to Accounts receivable and a debit to Bad debts expense. This is because the direct write-off method only allows for bad debts to be recognized when they are actually written off, so the Bad debts expense account is debited to recognize the expense of the uncollectible account. The credit to Accounts receivable represents the reduction in the accounts receivable balance due to the write-off.

Question 2

The direct write-off method is in accordance with the accrual method of accounting,whereas the allowance method is not.

Accepted Answer

The direct write-off method is not in accordance with the accrual method of accounting, whereas the allowance method is. The direct write-off method only recognizes expenses when the accounts receivable are actually deemed uncollectible, regardless of when the sale was made or when the expense was incurred. On the other hand, the allowance method estimates and matches the expense of uncollectible accounts with the revenue in the same accounting period, following the principles of accrual accounting.

Question 3

Which of the following is NOT one of the benefits of a business accepting credit cards from its customers?

Accepted Answer

The statement "The business earns a higher profit on credit card sales than cash sales" is not true. Credit card companies charge fees to businesses for processing credit card transactions, which can lower the profit margin on credit card sales compared to cash sales.

Question 4

On 1 January,Davidson Services has the following balances:
Accounts receivable

Bad debts expense

Davidson has the following transactions during January: Credit sales of $120,000,collections of credit sales of $87,000 and write-offs of $16,000.Davidson uses the direct write-off method.At the end of January,the balance in Accounts receivable is :

Accepted Answer

The answer of On 1 January,Davidson Services has the following...

Question 5

When a business accepts credit cards from customers in payment of sales,the business has to pay a fee to the credit card processor.

Accepted Answer

This fee is typically a percentage of the transaction amount and covers the cost of credit card processing and fraud protection services provided by the processor.

Question 6

Zorro Company has significant amounts of accounts receivable and experiences bad debts from time to time.Zorro uses the direct write-off method.When Zorro Company writes off a bad debt,what is the effect of that single transaction?

Accepted Answer

When Zorro Company writes off a bad debt using the direct write-off method, it will reduce profit as the expense related to bad debt will be recognized in the income statement. This method does not affect total assets or generate positive cash flow.

Question 7

The direct write-off method would be considered acceptable if bad debts were very low.

Accepted Answer

The direct write-off method is an acceptable method for recording bad debts when the amount of bad debts is low because it is simple and easy to use. However, it is not considered preferable for larger amounts of bad debts because it does not accurately match expenses to revenues and can result in distortions in financial statements. Instead, the allowance method is preferred for larger amounts of bad debts.

Question 8

On 1 January,Davidson Services has the following balances:
Accounts receivable

Bad debts expense

Davidson has the following transactions during January: Credit sales of $100,000,collections of credit sales of $85,000,and write-offs of $20,000.Davidson uses the direct write-off method.At the end of January,the balance in Bad debts expense is:

Accepted Answer

The answer of On 1 January,Davidson Services has the following...

Question 9

The following information is from the 2016 records of Armadillo Camera Shop:
$$\begin{array} { | l | r | } 
\hline \text { Accounts receivable, 31 December 2016 } & \$ 20000 \text { (debit) } \
\hline \text { Net credit sales for 2016 } & 95000 \
\hline \text { Accounts written off as uncollectable during 2016 } & 7000 \
\hline \text { Cash sales during 2016 } & 27000 \
\hline
\end{array}$$
Bad debts expense is determined by the direct write-off method.Which of the following will be the amount of Bad debts expense?

Accepted Answer

The direct write-off method records bad debts expense as the amount of accounts written off as uncollectable, which is $7,000.

Question 10

The direct write-off method requires an entry with a credit to Accounts receivable to record the Bad debts expense.

Accepted Answer

The direct write-off method requires a debit to Bad debts expense and a credit to Accounts receivable to record the write-off of a bad debt.

Question 11

A credit card processing company generally uses one of two methods of payment-the net and the gross method.

Accepted Answer

This is true. A credit card processing company can either use the net method, where they deduct fees before transferring the remaining funds to the merchant, or the gross method, where they transfer the full amount and then invoice the fees separately.

Question 12

Which of the following entries would be used to account for bad debts using the direct write-off method?

Accepted Answer

The direct write-off method involves directly reducing the Accounts receivable account for the specific amount of the bad debt. Therefore, the entry would be to debit the Accounts receivable account (reducing the balance to reflect the amount of the bad debt) and credit the Bad debts expense account (recognizing the expense in the period it occurred). Choice A is incorrect because it credits the Bad debts expense account instead of debiting it. Choice B is incorrect because it credits the Allowance for doubtful debts account, which is not used in the direct write-off method. Choice D is incorrect because it debits the Allowance for doubtful debts account, which is not used in the direct write-off method.

Question 13

A company has significant bad debts.Why is the direct write-off method unacceptable?

Accepted Answer

The direct write-off method is not in accordance with the accrual method of accounting, which requires that bad debts be estimated and recorded as an expense in the period in which the related revenue is recognized. This method also fails to match expenses with revenues and does not provide an accurate portrayal of the company's financial position because it only records bad debts when they are deemed uncollectible, which could result in an understatement of liabilities and an overstatement of assets on the balance sheet.

Question 14

Archer Company and Zorro Company both have significant amounts of accounts receivable at any time and both experience bad debts from time to time.Archer uses the percentage of sales method to account for bad debts and Zorro uses the direct write-off method.Archer Company's method complies with IFRS and produces a better matching of revenues and expenses than Zorro Company's method.

Accepted Answer

The percentage of sales method used by Archer Company complies with IFRS and produces a better matching of revenues and expenses than the direct write-off method used by Zorro Company.

Question 15

A company uses the direct write-off method to account for bad debts.Bad debts expense will be estimated as a percentage of sales.

Accepted Answer

The direct write-off method does not involve estimating bad debts as a percentage of sales. Rather, bad debts are only recognized when they are deemed uncollectible and written off.

Question 16

The direct write-off method is used primarily by large,publicly owned companies.

Accepted Answer

The direct write-off method is typically used by small businesses or businesses with relatively low-dollar accounts receivable balances. Larger companies generally use the allowance method to estimate and adjust for bad debt expenses.

Question 17

The following information is from the records of Armadillo Camera Shop:
$$\begin{array} { | l | l | } 
\hline \text { Accounts receivable, 31 December 2016 } & \$ 85,000 \text { (debit) } \
\hline \text { Net credit sales for 2016 } & 160,000 \
\hline \text { Accounts written off as uncollectable during 2016 } & 15,000 \
\hline \text { Cash sales during 2016 } & 41,000 \
\hline
\end{array}$$
The company uses the direct write-off method for bad debts.What is the amount of bad debts expense?

Accepted Answer

The direct write-off method of accounting for bad debts expenses the amount of the specific uncollectible account at the time the account is determined to be uncollectible.

Question 18

Target allows customers to use MasterCard.It reports Sales revenue of $24 000 for the week.MasterCard charges Target a 3% fee.The journal entry for this transaction would be:

Accepted Answer

The correct journal entry records the cash received after deducting the card fee expense from the sales revenue. Cash is debited for $23,280, card fee expense is debited for $720, and sales revenue is credited for $24,000.

Question 19

Charlton Sales has a receivable for $92 that they now deem to be uncollectable.Charlton uses the direct write-off method.Which of the following entries correctly records the write-off?

Accepted Answer

The direct write-off method involves directly debiting Bad Debts Expense and crediting Accounts Receivable when a specific account is deemed uncollectible.

Question 20

Anchor Sales accepts credit cards from its customers.Assume Anchor makes a sale of $100 and the processor charges a 3% fee.Assume that the credit card processing company uses the net method of depositing funds.Which of the following is the journal entry made by Anchor to record the sales revenue?

Accepted Answer

The net method records the cash received after deducting the fee. Anchor receives $97 in cash and records a $3 card fee expense, with $100 in sales revenue.

Quiz 9: Receivables