Question 1

Allowance for Bad Debts is a contra-liability account.

Accepted Answer

Allowance for Bad Debts is a contra-asset account, not a contra-liability account. It reduces the accounts receivable balance to reflect the estimated uncollectible amounts.

Question 2

The amount of the year-end adjustment for Allowance for Bad Debts is equal to the aging percent of uncollectible accounts multiplied by the amount of accounts receivable.

Accepted Answer

The year-end adjustment for Allowance for Bad Debts is calculated by applying the aging percent of uncollectible accounts to the accounts receivable balance, but it also considers the existing balance in the allowance account to determine the adjustment needed.

Question 3

If after aging the accounts receivables, it is estimated that $900 will not be collected and the allowance account has an existing debit balance of $200, the adjusting entry would be for the amount of $700.

Accepted Answer

The adjusting entry should be for $1,100 to account for the $900 estimated uncollectible amount plus the $200 existing debit balance in the allowance account.

Question 4

If after taking a percentage of sales on account, it is estimated that $1,000 will not be collected and the allowance account has an existing credit balance of $200, the adjusting entry would be for the amount of $1,200.

Accepted Answer

The adjusting entry should be for $800, which is the difference needed to bring the allowance account to the estimated uncollectible amount of $1,000.

Question 5

When a large balance accumulates in the allowance for bad debts account, the percentage of sales used to estimate uncollectibles should be modified.

Accepted Answer

If a large balance accumulates in the allowance for bad debts account, it may indicate that the current percentage of sales used to estimate uncollectibles is too low. In order to account for the higher risk of bad debts, the percentage of sales should be modified to better reflect this risk.

Question 6

The percentage of receivables method of estimating uncollectible accounts is based on the relationship between the amount of accounts payable and the amount of uncollectible accounts.

Accepted Answer

The percentage of receivables method is based on the relationship between the total amount of accounts receivable and the estimated percentage of those receivables that will ultimately prove uncollectible. It is not based on the relationship between accounts payable and uncollectible accounts.

Question 7

The direct write-off method of determining bad debt expense is subjective and can be manipulated by management.

Accepted Answer

The direct write-off method is subjective because it relies on management's discretion to determine when a debt is uncollectible, which can be influenced by their incentives or personal biases. Therefore, this method can be manipulated by management to either defer or accelerate the recognition of bad debt expense, impacting financial statements and ratios.

Question 8

If after aging the accounts receivables, it is estimated that $1,800 will not be collected and the allowance account has an existing credit balance of $300, the adjusting entry would be for the amount of $1,500.

Accepted Answer

The existing credit balance in the allowance account reduces the amount of bad debt expense needed to cover the estimated uncollectible accounts, so the adjusting entry would be for the net amount of $1,500 ($1,800 estimated uncollectible - $300 existing credit balance).

Question 9

In aging the receivables, the estimate of uncollectible accounts is based on past experience and increases as the number of days past due increases.

Accepted Answer

As the number of days past due increases, the likelihood of the account becoming uncollectible also increases. Therefore, the estimate of uncollectible accounts is based on past experience with aging the receivables.

Question 10

The balance of the allowance for bad debts account after adjustment, using the percentage of sales method, must be equal to the percent of uncollectible accounts multiplied by the amount of credit sales.

Accepted Answer

The percentage of sales method calculates the bad debt expense for the period, not the ending balance of the allowance for bad debts account. The ending balance is adjusted by adding the calculated bad debt expense to the existing balance.

Question 11

The direct write-off method is simple to apply.

Accepted Answer

The direct write-off method is a straightforward accounting method where we write off bad debts as they occur. It does not require any estimation or provision for doubtful debts, making it simple to apply.

Question 12

Under the percentage of sales method, the credit sales are analyzed to estimate the amount that will not be collected.

Accepted Answer

The percentage of sales method is a method used to estimate bad debts expense by analyzing credit sales and estimating the percentage of those sales that will not be collected.

Question 13

Under the percentage of sales method, the adjusting entry at the end of the period for bad debt expense is affected by the current balance in the allowance for bad debts account.

Accepted Answer

The percentage of sales method calculates bad debt expense based on a percentage of total sales, independent of the current balance in the allowance for bad debts account.

Question 14

Computing a percentage of accounts receivable is the simplest and most commonly used approach to estimating uncollectible accounts.

Accepted Answer

The answer of Computing a percentage of accounts receivable is...

Question 15

The percentage of receivables method is often referred to as aging the receivables.

Accepted Answer

The percentage of receivables method is commonly known as aging the receivables because it involves classifying and analyzing a company's current and past due accounts receivable balances based on the length of time an invoice has been outstanding. This method is used to calculate the estimated bad debt expense for a given period.

Question 16

If actual write-offs are significantly higher or lower than estimated uncollectible accounts over a number of periods, a large debit or credit balance will accumulate in the allowance for bad debts account.

Accepted Answer

If actual write-offs (the actual amount of accounts that cannot be collected) are different from the estimated uncollectible accounts (the amount that the company predicts will not be collected) over time, it will cause a difference between the amount in the allowance for bad debts account and the actual amount of bad debts. This will result in a large debit or credit balance in the allowance for bad debts account.

Question 17

Once an account has been written off using the direct write-off method, it will not be collected.

Accepted Answer

The direct write-off method is not ideal because it only writes off the account once it is deemed uncollectible. However, there is still a possibility of collecting the debt after it has been written off. Therefore, it is not guaranteed that the account will not be collected, and it is possible to reverse the write-off if the debt is collected later.

Question 18

The allowance for bad debts account may have a credit balance prior to adjustment.

Accepted Answer

The allowance for bad debts is a contra-asset account, which means it has an opposite balance to the accounts it is associated with. As the accounts receivable balance increases with a debit, the allowance for bad debts account increases with a credit, resulting in a credit balance.

Question 19

In aging the receivables, each customer's balance is analyzed separately to determine how long it has been outstanding.

Accepted Answer

Aging the receivables involves analyzing each customer's balance separately to determine how long it has been outstanding. This helps in estimating the likelihood of collecting the outstanding amount and in identifying any potential issues with collecting payments from specific customers.

Question 20

The allowance for bad debts account is sometimes referred to as Allowance for Doubtful Accounts.

Accepted Answer

The allowance for bad debts account is often referred to as Allowance for Doubtful Accounts or Allowance for Uncollectible Accounts.

Quiz 16: Accounting for Accounts Receivable