Question 1

When an account receivable that was previously written off is collected,it is necessary to reverse the entry for the write-off before recording the collection.

Accepted Answer

This is because the write-off entry was created to remove the account receivable from the books and reduce the amount of assets and income. When the account is collected, it would increase the assets and income, so the write-off entry must be reversed before recording the collection.

Question 2

Under the allowance method,Uncollectible Accounts Expense is not recorded when an individual customer defaults.

Accepted Answer

Under the allowance method, Uncollectible Accounts Expense is recorded in advance of customer defaults, based on an estimate of bad debts, rather than at the moment an individual customer defaults.

Question 3

Loans to company employees should be included with accounts receivable on the balance sheet.

Accepted Answer

Loans to company employees are not considered accounts receivable but are instead classified as a separate asset on the balance sheet, often under notes receivable or other receivables, as they do not arise from the company's ordinary business operations.

Question 4

Bad debts are considered as an expense of selling on credit.

Accepted Answer

Bad debts are debts that are either uncollectible or unlikely to be collected. Since they represent a loss to the company, they are considered an expense of selling on credit.

Question 5

Uncollectible accounts should not be estimated because it is impossible to know which accounts will not be collected.

Accepted Answer

Uncollectible accounts should be estimated based on historical data and industry trends, even though it's not possible to know with certainty which specific accounts will not be collected.

Question 6

The direct charge-off method of recognizing uncollectible accounts is not in accordance with generally accepted accounting principles.

Accepted Answer

The direct charge-off method violates the matching principle by not matching expenses with revenues in the same accounting period. Instead, the allowance method of recognizing uncollectible accounts is generally accepted by GAAP.

Question 7

Both the allowance method and the direct charge-off method are acceptable for tax purposes.

Accepted Answer

For tax purposes, the IRS generally requires the use of the direct charge-off method, not the allowance method, for writing off bad debts.

Question 8

The existence of uncollectible accounts is evidence of poor credit policies.

Accepted Answer

The existence of uncollectible accounts is a normal part of doing business on credit, not necessarily indicative of poor credit policies. Businesses typically expect some level of accounts to be uncollectible due to various reasons like financial difficulties faced by customers.

Question 9

A promissory note may be issued for an amount to be determined at a future date.

Accepted Answer

A promissory note must specify a definite amount of money to be paid. It cannot be for an amount that is to be determined at a future date, as the essence of a promissory note is to evidence a fixed amount of debt.

Question 10

The allowance for uncollectible accounts is similar to accumulated depreciation in that it represents the total of all accounts written off over the years.

Accepted Answer

The allowance for uncollectible accounts represents the estimated amount of accounts receivable that will not be collected in the future. It is not the total of all accounts written off in the past. Accumulated depreciation, on the other hand, represents the total depreciation expense recorded for an asset over its useful life.

Question 11

Following a lenient credit-granting policy will probably result in fewer defaults by customers.

Accepted Answer

Following a lenient credit-granting policy means that customers with a higher risk of default may be approved for credit. This increases the likelihood of defaults, as these customers may have difficulty making payments. A stricter credit-granting policy can result in fewer defaults, as it ensures that only customers with a lower risk of default are approved for credit.

Question 12

When the allowance method is used,the write-off of an account receivable results in an expense at the time of write-off.

Accepted Answer

When using the allowance method, the expense is recognized earlier when the allowance for doubtful accounts is established, not at the time of the actual write-off of a specific account receivable.

Question 13

Under the allowance method,uncollectible accounts must be estimated if the matching rule is to be followed.

Accepted Answer

The allowance method requires estimation of uncollectible accounts in order to match expenses with revenues and report accurate financial statements. This is done by setting aside a portion of accounts receivable as a reserve for bad debts, based on historical experience and other factors.

Question 14

The debtor named in a promissory note is called the payee.

Accepted Answer

The debtor named in a promissory note is actually the one who owes the payment, and is called the maker or issuer of the note. The payee is the one who will receive payment from the maker.

Question 15

The allowance method of handling bad debts violates the matching principle.

Accepted Answer

The allowance method adheres to the matching principle by estimating and matching bad debt expense to the revenues it helped generate within the same accounting period.

Question 16

Because bad debt losses are incurred to generate sales,they should be charged against the sales that they helped generate.

Accepted Answer

Bad debt losses are an expense related to sales revenue, meaning that they should be matched against the sales that they helped generate. This is in accordance with the matching principle of accounting, which states that expenses should be recognized in the same period as the revenues they helped to generate. Failing to charge bad debt losses against sales would lead to an overstatement of net income and an inaccurate representation of a company's financial performance.

Question 17

Notes receivable due within 90 days and cash are examples of short-term financial assets.

Accepted Answer

Short-term financial assets are those that can be converted into cash within a short period of time, usually within 90 days. Examples of such assets include notes receivable due within 90 days and cash.

Question 18

The direct charge-off method makes no attempt to match bad-debt losses with revenues.

Accepted Answer

The direct charge-off method simply writes off the uncollectible accounts as they are identified, without any attempt to match the bad debt losses with revenues. It does not consider the specific transaction and revenue it is associated with.

Question 19

When using the direct charge-off method,year-end adjustments for uncollectible accounts expense are not made.

Accepted Answer

The direct charge-off method involves writing off the uncollectible accounts directly as they are identified, and the expense is recognized at that time. Therefore, no year-end adjustments are necessary for uncollectible accounts expense.

Question 20

Under the accounts receivable aging method,the balance in Allowance for Uncollectible Accounts must be considered prior to adjusting for estimated uncollectible accounts.

Accepted Answer

The balance in Allowance for Uncollectible Accounts is a contra account to Accounts Receivable and represents the estimated amount of accounts that will not be collected. It must be considered prior to adjusting for estimated uncollectible accounts to ensure that the ending balance accurately reflects the estimated percentage of accounts receivable that will not be collected.

Quiz 9: Receivables