Question 1

Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $390,000 and credit sales are $1,300,000. An aging of accounts receivable shows that approximately 5% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense $\quad 17,000$
Allowance for Doubtful Accounts $\quad 17,000$
b. Bad Debt Expense $\quad 19,500$
Allowance for Doubtful Accounts $\quad 19,500$
c. Bad Debt Expense $~~~~$ 22,000 
Allowance for Doubtful Accounts $\quad 22,000$
d. Bad Debt Expense $~~~~~$65,000
Allowance for Doubtful Accounts $\quad 65,000$

Accepted Answer

The answer of Tanning Company analyzes its receivables to estimate...

Question 2

Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts

Accepted Answer

When a year-end adjustment is made for estimated uncollectible accounts, the allowance for doubtful accounts (contra asset) is increased, which in turn reduces the accounts receivable (asset) balance. As a result, the total assets decrease.

Question 3

Indications that an account may be uncollectible include all of the following except the customer

Accepted Answer

If a customer is making small but regular payments, it indicates that they are trying to fulfill their financial obligation, which is a positive sign. On the other hand, if a customer closes its business, files for bankruptcy, or cannot be located, it signals that the account may be uncollectible.

Question 4

A debit balance in Allowance for Doubtful Accounts

Accepted Answer

A debit balance in Allowance for Doubtful Accounts indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. This means that the company has already estimated and set aside funds for potential bad debt write-offs, but the actual write-offs have surpassed their estimates, resulting in a debit balance in the account.

Question 5

You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to

Accepted Answer

When a customer goes bankrupt and is unable to make future payments, we need to write off the accounts receivable balance as uncollectible. Since we use the allowance method, we would have already recorded an allowance for doubtful accounts based on our estimate of uncollectible accounts. Therefore, the entry we make is to debit Allowance for Doubtful Accounts (to reduce the allowance balance) and credit Accounts Receivable (to write off the accounts receivable balance). This does not affect the income statement accounts like Bad Debt Expense. Hence, option C is the best choice.

Question 6

Selling receivables

Accepted Answer

Selling receivables shifts some of the risk to the buyer, as they take on the responsibility of collecting the money owed from customers. This can provide a company with immediate cash flow and reduce their exposure to bad debt expenses. It does not necessarily result in bad debt expense or delay the receipt of cash, and is not solely done when an account becomes uncollectible.

Question 7

When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when

Accepted Answer

Bad Debt Expense is debited when management estimates the amount of uncollectibles using the allowance method. This is because the allowance method involves estimating and recording bad debts before they actually occur, rather than waiting until accounts become past due or are written off.

Question 8

If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible?

Accepted Answer

The direct write-off method involves debiting the Bad Debt Expense account and crediting the Accounts Receivable account to write off a customer's account as uncollectible. Option A (Uncollectible Accounts Receivable) and option C (Allowance for Doubtful Accounts) are not correct as they are used in the allowance method of accounting for uncollectible receivables. Option B (Accounts Receivable) is not correct as it is not an expense account and the direct write-off method requires debiting an expense account such as Bad Debt Expense.

Question 9

An aging of a company's accounts receivable indicates that the estimate of uncollectible accounts totals $6,400. If Allowance for Doubtful Accounts has a $1,300 debit balance, the adjustment to record the bad debt expense for the period will require a

Accepted Answer

The adjustment requires a debit to Bad Debt Expense for $7,700 to account for both the existing $1,300 debit balance in the Allowance for Doubtful Accounts and the additional $6,400 estimated as uncollectible, totaling $7,700.

Question 10

On the balance sheet, the amount shown for Allowance for Doubtful Accounts is equal to the

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account that represents the estimated amount of accounts receivable that the company expects will not be collected. The amount shown for Allowance for Doubtful Accounts on the balance sheet is equal to the total estimated uncollectible accounts as of the end of the year. Options A, B, and D are not correct as they do not accurately reflect the purpose of the allowance account.

Question 11

To record estimated uncollectible receivables using the allowance method, the adjusting entry would be a

Accepted Answer

The allowance method involves estimating the amount of uncollectible accounts and recording that amount as Bad Debt Expense, which is a debit. The offsetting credit goes to Allowance for Doubtful Accounts, which is a contra asset account. This creates a reserve that reflects the company's best estimate of the amount of its accounts receivable that ultimately will not be collected. Therefore, the adjusting entry would be a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.

Question 12

If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible?

Accepted Answer

The direct write-off method involves directly writing off accounts receivable when they are deemed uncollectible. Therefore, the general ledger account that is credited to write off a customer's account as uncollectible would be Accounts Receivable. Option A, Uncollectible Accounts Expense, is a general ledger account that is used under the allowance method of accounting for uncollectible receivables. Option C, Allowance for Doubtful Accounts, is a contra-asset account that is used under the allowance method. Option D, Interest Expense, is not related to the accounting treatment of uncollectible receivables.

Question 13

If the allowance method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible?

Accepted Answer

The Allowance for Doubtful Accounts is debited when writing off a customer's account as uncollectible under the allowance method, which reduces the allowance account and the accounts receivable account without affecting the income statement at the time of the write-off.

Question 14

What is the type of account and normal balance of Allowance for Doubtful Accounts?

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account, meaning it is offset against Accounts Receivable. It has a credit normal balance because it reduces the overall balance of Accounts Receivable.

Question 15

If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible?

Accepted Answer

The answer of If the allowance method of accounting for...

Question 16

Lowery Co. uses the direct write-off method of accounting for uncollectible accounts receivable. Lowery has a customer whose accounts receivable balance has been determined to likely be uncollectible. The entry to write off this account would be

Accepted Answer

The direct write-off method involves the recognition of bad debts as an expense at the point when the account is deemed uncollectible. Therefore, the entry to write off an account would involve debiting Bad Debt Expense and crediting Accounts Receivable. Option A involves debiting the Allowance account, which is not used in the direct write-off method. Option B involves crediting Notes Receivable which is not relevant to the situation. Option C involves crediting the Allowance account which is not used in the direct write-off method.

Question 17

After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $340,000 and Allowance for Doubtful Accounts has a balance of $51,000. What is the net realizable value of accounts receivable?

Accepted Answer

The net realizable value of accounts receivable is calculated as Accounts Receivable minus Allowance for Doubtful Accounts. Therefore, the net realizable value of accounts receivable is $289,000 ($340,000 - $51,000).

Question 18

One of the weaknesses of the direct write-off method is that it

Accepted Answer

The direct write-off method violates the matching principle by not matching the expenses with the revenues in the same period. It only recognizes bad debts when they occur, which may lead to inaccurate reporting of income for the period.

Question 19

An aging of a company's accounts receivable indicates that the estimate of uncollectible receivables totals $7,900. If Allowance for Doubtful Accounts has a $700 credit balance, the adjustment to record the bad debt expense for the period will require a

Accepted Answer

The adjustment to record the bad debt expense requires the Allowance for Doubtful Accounts to reflect the new estimate of $7,900 in uncollectible receivables. With a current credit balance of $700, an additional $7,200 (=$7,900 - $700) needs to be added to the allowance account. This is done by debiting Bad Debt Expense for $7,200 and crediting Allowance for Doubtful Accounts for the same amount.

Question 20

The balance in Allowance for Doubtful Accounts will directly impact the end-of-period adjustment for bad debt expense when using the

Accepted Answer

The allowance method based on aging the receivables requires an estimate of the amount of accounts receivable that will not be collected. The balance in the Allowance for Doubtful Accounts is used to adjust the amount of bad debt expense reported on the income statement. This adjustment is made at the end of the accounting period based on the aging of the receivables and the estimated percentage of each category that will be uncollectible. The direct write-off method does not use an allowance account, so the balance in Allowance for Doubtful Accounts is irrelevant. The accrual method may or may not use an allowance account, but it is the aging of the receivables that determines the adjustment to bad debt expense, not the balance in the Allowance for Doubtful Accounts. The declining value method is not commonly used for accounting for bad debt expense.

Quiz 9: Receivables