Question 1

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 delays recognizing the expense until the payment is deemed uncollectible, which can be in a different accounting period than when the sale occurred. This can result in overstated revenues and understated expenses in the period of sale, and the reverse in the period of write-off. Instead, the allowance method is recommended, which estimates bad debt expense in the same period that the related revenue is recognized. This method also provides a more accurate representation of the company's uncollectible receivables on the balance sheet.

Question 2

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

Accepted Answer

The use of the allowance method to record bad debts expense is based on the matching principle.

Question 3

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

Accepted Answer

The direct write-off method is not in accordance with GAAP and is only suitable for small companies with few uncollectible receivables. It does not provide better matching of revenues with expenses or result in more accurate net income.

Question 4

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

Accepted Answer

The direct write-off method for uncollectible accounts does not match the expense with the related revenue in the same period, which violates the matching principle. This method only recognizes the bad debt expense when the specific account is identified as uncollectible and written off, which may occur in a different period from when the related revenue was recognized.

Question 5

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

Accepted Answer

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

Question 6

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 only acceptable for companies with very few uncollectible receivables because it does not adhere to the matching principle of accounting, which requires expenses to be matched with revenues in the period in which they are incurred.

Question 7

On January 1,All City Services has the following balances: Accounts Receivable $22,000
Bad Debts Expense $0
All City has the following transactions during January: Credit sales of $120,000,collections of credit sales of $84,000,and write-offs of $18,000.All City uses the direct write-off method.The amount of Bad Debts Expense for January is ________.

Accepted Answer

Under the direct write-off method, Bad Debts Expense is recognized when debts are deemed uncollectible and written off. Therefore, the Bad Debts Expense for January is the amount written off, which is $18,000.

Question 8

Moonlight Company wrote off the account of one of its customers,X,in 2018 for $500.On January 21,2019,X unexpectedly repaid his account in full.The company uses the direct write-off method to account for uncollectible receivables.Journalize the entries required for Moonlight Company on January 21,2019.Omit explanations.

Accepted Answer

The answer of Moonlight Company wrote off the account of...

Question 9

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 write off an uncollectible receivable, it directly reduces the accounts receivable balance and recognizes a bad debt expense, which reduces the net income. Therefore, the effect of writing off an uncollectible receivable will be a reduction in net income.

Question 10

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 accurately describes the allowance method of accounting for uncollectible receivables.

Question 11

In order to keep accurate records about the 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 debiting the receivable account, the business is re-establishing the receivable and acknowledging that there are still outstanding amounts owed on the account. This allows for accurate tracking of any future collections or payments.

Question 12

Customer G.Smith owed Stonehollow Electronics $125.On April 27,2018,Stonehollow determined this account receivable to be uncollectible and wrote off the account.The company uses the direct write-off method.On July 15,2018,Stonehollow received a check for $125 from the customer.How should the July 15,2018 transaction be recorded?

Accepted Answer

The answer of Customer G.Smith owed Stonehollow Electronics $125.On April...

Question 13

On January 1,Five Star Services has the following balances: Accounts Receivable $26,000 (debit)
Bad Debts Expense $0
Five Star Services has the following transactions during January: Credit sales of $100,000,collections of credit sales of $87,000,and write-offs of $18,000.Five Star Services uses the direct write-off method.At the end of January,the balance of Accounts Receivable is ________.

Accepted Answer

Beginning balance $26,000 + Credit Sales $100,000 - Collections $87,000 - Write-offs $18,000 = $21,000

Question 14

Once an accounts receivable is written off ________.

Accepted Answer

When an accounts receivable is written off, it means that the company no longer expects to receive payment from the customer. As a result, the customer's accounts receivable is removed from the company's books. This does not necessarily mean that the company cannot continue to pursue collection efforts, but the account is no longer classified as an accounts receivable. It is not necessary to turn the account over to a collection agency, although some companies may choose to do so.

Question 15

In order to keep accurate records about the 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 receivable account is debited.

Question 16

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 is used to reduce the amount of Accounts Receivable to reflect the estimated amount of uncollectible accounts.

Question 17

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

Accepted Answer

The allowance method is required by GAAP.

Question 18

The allowance method of accounting for uncollectible receivables ________.

Accepted Answer

The allowance method of accounting for uncollectible receivables is used to measure bad debts, ensuring that expenses are matched with the revenues they help generate, in accordance with the matching principle. This method involves estimating and recording bad debt expenses in the same period as the revenues, not when the receivable is actually written off, and uses a contra asset account (Allowance for Doubtful Accounts), not a contra liability account.

Question 19

Which of the following statements regarding the allowance method of accounting for uncollectible receivables is incorrect?

Accepted Answer

In the allowance method, bad debt expense is estimated based on historical data and industry benchmarks. It is not based on actual write-offs of uncollectible accounts. So, option A is incorrect.

Question 20

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

Accepted Answer

Under the allowance method, the amount of bad debts expense is estimated at the end of each accounting period. However, under the direct write-off method, bad debts expense is not estimated but rather recognized when an account is deemed uncollectible.

Quiz 9: Receivables