Question 1

The use of an allowance for bad debts is required under the materiality constraint.

Accepted Answer

The use of an allowance for bad debts is required under the matching principle, which requires expenses to be recognized in the same period as the related revenues. The materiality constraint is used to determine if certain events or transactions are significant enough to require disclosure in financial statements.

Question 2

The percent of sales method of estimating bad debts is focused more on realizable value of accounts receivable than matching.

Accepted Answer

The answer of The percent of sales method of estimating...

Question 3

The aging method of determining bad debts expense is based on the knowledge that the longer a receivable is past due, the lower the likelihood of collection.

Accepted Answer

The aging method is based on the premise that the longer a receivable is past due, the less likely it is to be collected, so the allowance for bad debts is calculated based on the age of the receivables. Therefore, the statement is true.

Question 4

When using the allowance method of accounting for uncollectible accounts, the entry to record the bad debts expense is a debit to Bad Debts Expense and a credit to Accounts Receivable.

Accepted Answer

The entry to record the bad debts expense under the allowance method is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts, not directly to Accounts Receivable.

Question 5

A company has sales of $350,000 and estimates that 0.7% of its sales are uncollectible. The estimated amount of bad debts expense is $2,450.
$350,000 x .007 = $2,450

Accepted Answer

The calculation of $2,450 as bad debts expense confirms that 0.7% of sales are estimated to be uncollectible based on the given information.

Question 6

The aging of accounts receivable involves classifying each account receivable by how long it is past its due date and estimating the percent of each uncollectible class.

Accepted Answer

The aging of accounts receivable involves categorizing each account by how long it has been past the due date and estimating the percentage of each category that is unlikely to be collected.

Question 7

The advantage of the allowance method of accounting for bad debts is that it identifies the specific customers who will not pay their bills.

Accepted Answer

The advantage of the allowance method is that it estimates and records the amount of bad debts that are likely to occur, rather than specifically identifying individual customers who will not pay their bills. This allows for a more accurate representation of the company's financial statements.

Question 8

When using the allowance method of accounting for uncollectible accounts, the entry to write off Harold's uncollectible account is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable - Harold.

Accepted Answer

The allowance method involves debiting Allowance for Doubtful Accounts and crediting the specific Accounts Receivable (in this case, Harold's) to write off an uncollectible account, reflecting the reduction in both the allowance and the accounts receivable balance.

Question 9

Companies use two methods to account for uncollectible accounts, the direct write-off method and the allowance method.

Accepted Answer

This statement is true.

Question 10

Companies follow both the matching principle and the materiality constraint when applying the direct write-off method.

Accepted Answer

The direct write-off method does not follow the matching principle as it does not match expenses with the revenues they generate. It also does not follow the materiality constraint as all bad debts are written off regardless of their size.

Question 11

The percent of accounts receivable method for bad debts estimation uses only income statement account balances to estimate bad debts.

Accepted Answer

The answer of The percent of accounts receivable method for...

Question 12

When a company holds a large number of notes receivable it sometimes sets up a controlling account and a subsidiary ledger for notes.

Accepted Answer

This is true. By setting up a controlling account and a subsidiary ledger, the company can keep track of individual notes receivable separately while still having an overall view of their total notes receivable balance. It also allows for more efficient tracking and management of the notes.

Question 13

Under the allowance method of accounting for uncollectible accounts receivable, no attempt is made to estimate bad debts expense.

Accepted Answer

The allowance method requires an estimate of bad debts expense based on past experience and other relevant factors.

Question 14

A company has $90,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are uncollectible. The current credit balance (before adjustments) in the allowance for doubtful accounts is $800. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $7,000.

Accepted Answer

Desired balance in allowance: $90,000 * .06 = $5,400 credit
Current balance in allowance: 800 credit
Adjustment to allowance: $4,600 credit

Question 15

The materiality constraint permits the use of the direct write-off method of accounting for uncollectible accounts when bad debts are very large in relation to a company's other financial statement items such as sales and net income.

Accepted Answer

The materiality constraint allows for the use of the direct write-off method when bad debts are insignificant or immaterial in relation to a company's other financial statement items, not when they are very large.

Question 16

The percent of sales method for estimating bad debts assumes that a given percent of a company's credit sales for the period are uncollectible.

Accepted Answer

The percent of sales method is based on the assumption that a given percent of a company's credit sales will eventually become bad debt. This method is also known as the income statement approach since it estimates bad debt expense as a percentage of sales revenue.

Question 17

After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of reducing accounts receivable to its estimated realizable value.

Accepted Answer

This statement is true. The Allowance for Doubtful Accounts is a contra asset account that is used to reduce accounts receivable to its estimated realizable value by accounting for potential uncollectible accounts. Adjustments to the Allowance for Doubtful Accounts are made at the end of each accounting period to ensure that the balance reflects the estimated amount of uncollectible accounts at that time.

Question 18

When using the allowance method of accounting for uncollectible accounts, the recovery of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.

Accepted Answer

The recovery of a bad debt would be recorded as a debit to Cash and a credit to Accounts Receivable. This is because the original entry for the bad debt recorded a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts, which reduced Accounts Receivable. When the bad debt is recovered, Accounts Receivable is increased and Allowance for Doubtful Accounts is reduced, so the credit goes to Accounts Receivable.

Question 19

Installment accounts receivable is another name for aging of accounts receivable.

Accepted Answer

Installment accounts receivable refers to accounts that are paid off in recurring installments over a period of time, whereas aging of accounts receivable refers to the process of categorizing outstanding accounts by their age to help monitor and manage collections.

Question 20

The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible from the total accounts receivable or (2) aging accounts receivable.

Accepted Answer

The statement accurately describes the two methods used in the accounts receivable method to estimate bad debts.

Quiz 9: Accounting for Receivables