Question 1

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 Allowance for Doubtful Accounts from Accounts Receivable. Bad Debts Expense is used to estimate the amount of potential bad debts and is recorded as an expense on the income statement.

Question 2

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 because it does not match the expense of uncollectible accounts receivable with the revenue they helped generate in the same accounting period. Instead, it expenses bad debts when they are deemed uncollectible, which could be in a different accounting period than the revenue was earned. This could result in skewed financial statements and misrepresentation of the company's financial health. Therefore, the direct write-off method is unsuitable for a company with significant uncollectible receivables.

Question 3

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 properly account for uncollectible accounts receivable, it does not dictate which method must be used. The direct write-off method is one option, but some companies may choose to use the allowance method instead.

Question 4

Accounts Receivable has a balance of $34,000,and the Allowance for Bad Debts has a credit balance of $3,400.The allowance method is used.What is the net realizable value of Accounts Receivable before and after a $2,300 account receivable is written off?

Accepted Answer

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Question 5

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 6

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

By re-establishing the Accounts Receivable and debiting the receivable account, the business is acknowledging the collection of cash for a previously written off account and updating their records accordingly.

Question 7

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

The statement is true. The allowance method allows a company to estimate its bad debts expense based on past experiences and industry trends, and create an allowance account to adjust the accounts receivable balance. This approach allows for a more accurate representation of the company's financial statements and a better understanding of its credit risk.

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 a company uses the direct write-off method to account for uncollectible accounts, the bad debt expense is not recorded until the specific account is identified as uncollectible and written off. This results in a reduction in the company's net income when the write-off is recorded as an expense. Therefore, the effect of writing off an uncollectible receivable will be a reduction in net income.

Question 9

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 based on a percentage of the outstanding accounts receivable balance. The estimated amount is recorded as a debit to the Bad Debts Expense account and a credit to the Allowance for Bad Debts account. This method uses the allowance account to calculate the net realizable value of accounts receivable by subtracting the allowance for bad debts from the total accounts receivable balance. The Bad Debts Expense account is only debited when an account is actually written off as uncollectible.

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 crediting the receivable account.

Accepted Answer

When a previously written-off account is collected, the business should re-establish the Accounts Receivable by debiting the receivable account, not crediting it.

Question 11

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 12

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

Accepted Answer

The allowance method is used to estimate and record bad debts expense in the same period in which the related sales are recorded, which conforms to the matching principle. The estimate is based on past experience and current economic conditions, and allows for a more accurate reporting of net accounts receivable and income. Therefore, the use of the allowance method does not violate the matching principle.

Question 13

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

Accepted Answer

The direct write-off method is only suitable for small companies that have very few uncollectible receivables because it does not consider the timing of when the bad debt expense should be recorded. It also does not provide better matching of revenues with expenses, and it is not required by GAAP for public companies. Therefore, option (D) is the only true statement.

Question 14

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 15

Customer A.Smith owed Stonebridge Electronics $325.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 $325 from the customer.How should the July 15,2016 transaction be recorded?

Accepted Answer

The answer of Customer A.Smith owed Stonebridge Electronics $325.On April...

Question 16

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 uncollectible accounts as a bad debt expense at the time they are determined to be uncollectible, while the allowance method estimates uncollectible accounts and records an allowance for doubtful accounts to adjust the accounts receivable to their net realizable value. The allowance method is considered better because it matches expenses with revenues and provides a more accurate representation of the company's financial position.

Question 17

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

Accepted Answer

The direct write-off method does not match the recognition of bad debts expense with the related credit sales in the same accounting period, which violates the matching principle.

Question 18

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

Under the allowance method, bad debts expense is estimated at the end of each period, but under the direct write-off method, bad debts are only recognized when specific accounts are deemed uncollectible.

Question 19

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 accounts receivable to arrive at the net realizable value of accounts receivable. This presentation helps to reflect the portion of accounts receivable that is estimated to be uncollectible.

Question 20

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

Accepted Answer

The Allowance for Bad Debts is a contra account to Accounts Receivable because it reflects the portion of the accounts receivable balance that the company does not expect to collect. As a contra account, it reduces the overall balance of the accounts receivable account on the balance sheet. The net realizable value of accounts receivable is calculated by subtracting the Allowance for Bad Debts from the Accounts Receivable balance.

Quiz 9: Receivables