Question 1

When does an account become uncollectible?

Accepted Answer

There is no general rule for when an account becomes uncollectible, as it depends on various factors such as payment history, creditworthiness of the debtor, economic conditions, and collection efforts. Therefore, it cannot be determined by converting accounts receivable into notes receivable or availing discounts on them, nor does it happen at the end of the fiscal year. It requires a case-by-case analysis by the company's management or accounting department to determine when an account should be written off as uncollectible.

Question 2

The direct write-off method of accounting for uncollectible accounts

Accepted Answer

The direct write-off method is often used by small companies and companies with few receivables. This method recognizes uncollectible accounts as an expense only when they are actually determined to be uncollectible and written off. It does not provide an estimate of uncollectible accounts on the balance sheet, nor does it match expenses with revenues.

Question 3

The receivable that is usually evidenced by a formal instrument of credit is a(n)

Accepted Answer

A note receivable is a written promise to pay a specific amount of money at a future date. It is typically supported by a formal instrument of credit and includes specific payment terms such as interest rate and maturity date. Accounts receivable, on the other hand, are usually informal in nature and involve an ongoing business relationship between the seller and the buyer. Trade receivables refer to the money owed by customers for goods and services sold on credit, which can include both accounts and notes receivable. Income tax receivable is a type of asset that arises when a company has overpaid its taxes and is owed a refund from the government.

Question 4

The two methods of accounting for uncollectible receivables are the allowance method and the

Accepted Answer

The direct write-off method is not considered a realistic approach since it delays the recognition of bad debts expense until an account becomes uncollectible. This method violates the matching principle, which requires that expenses be recorded in the same period as the revenues they help to generate. The equity, interest, and cost methods are not related to accounting for uncollectible receivables. Therefore, the best choice is B, the direct write-off method.

Question 5

A note receivable due in 18 months is listed on the balance sheet under the caption

Accepted Answer

A note receivable due in 18 months is considered a long-term asset, and it is typically classified under investments on the balance sheet.

Question 6

Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expense is debited

Accepted Answer

Under the direct write-off method, Bad Debts Expense is debited when an account is determined to be worthless. This means that when a company determines that a customer will not pay their outstanding balance, the company writes off the account as uncollectible and records a debit to Bad Debts Expense. This method is not based on past due dates or pre-determined amounts of credit sales.

Question 7

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 as it is associated with accounts receivable and reduces the amount of accounts receivable. Its normal balance is credit as it represents a reserve for potential bad debts.

Question 8

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 9

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

Accepted Answer

The direct write-off method violates the matching principle because it delays recognizing bad debts expense until the specific customer's account is deemed uncollectible. This could result in misstated financial statements if bad debts are not accurately estimated or if there is a delay in writing off uncollectible accounts.

Question 10

Two methods of accounting for uncollectible accounts are the

Accepted Answer

The two methods of accounting for uncollectible accounts are the direct write-off method and the allowance method. The direct write-off method recognizes bad debts expense only when an account is deemed uncollectible and is written off. The allowance method estimates the amount of uncollectible accounts based on past experience and records an adjusting entry to the allowance for doubtful accounts to reflect this estimated amount. The allowance method is preferred for financial reporting as it provides a more accurate estimate of the amount of uncollectible accounts.

Question 11

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 12

The term "receivables" includes all

Accepted Answer

Receivables refer to money claims against other entities, such as accounts receivable or notes receivable. Merchandise to be collected would be considered inventory, and cash to be paid to creditors or debtors would be categorized as accounts payable or notes payable, respectively.

Question 13

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

Under the direct write-off method, the specific customer account is directly written off as uncollectible and the general ledger account that is credited is Accounts Receivable. Uncollectible Accounts Expense is only used under the allowance method, while Allowance for Doubtful Accounts is a contra asset account used to offset Accounts Receivable in the allowance method. Interest Expense is unrelated to recording uncollectible receivables.

Question 14

An alternative name for Bad Debt Expense is

Accepted Answer

Bad debt expense is an expense that a company incurs when it cannot collect its accounts receivable. It is also referred to as Uncollectible Accounts Expense as it represents the portion of accounts receivable that a company does not expect to collect. Choice A (Collection Expense) refers to the expense incurred to collect accounts receivable and Choice B (Credit Loss Expense) is not a commonly used term in accounting for bad debt expense. Choice D (Deadbeat Expense) is not a proper accounting term and is considered informal slang.

Question 15

The 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 which of the following?:

Accepted Answer

The direct write-off method of accounting for uncollectible accounts receivable requires that the bad debt expense be debited and the accounts receivable be credited, as it directly writes off the uncollectible amount. Option A is incorrect as it involves the use of an allowance account, which is not used in the direct write-off method. Option B is incorrect as it involves sales returns and allowances, which are not related to the uncollectibility of accounts receivable. Option C is incorrect as it involves the use of the allowance account, which, as mentioned before, is not used in the direct write-off method.

Question 16

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

Accepted Answer

The Allowance for Doubtful Accounts is a contra asset account that represents the estimated amount of accounts receivable that are expected to be uncollectible at the end of the year. This estimate is based on historical collection patterns and other factors such as economic conditions and specific customer circumstances. Therefore, the amount shown for the Allowance for Doubtful Accounts is equal to the total estimated uncollectible accounts as of the end of the year. Option A is incorrect because the uncollectible accounts expense represents the amount of bad debt written off during the year, not the estimate of uncollectible accounts. Option B is incorrect because the total of the accounts receivables written-off during the year would be shown in the income statement, not the balance sheet. Option D is incorrect because the allowance is based on estimates and not on the sum of past due accounts.

Question 17

Which of the following receivables would not be classified as an "other receivable"?

Accepted Answer

Notes receivable are a separate category of receivables and would not be classified as an "other receivable." Advance to an employee, interest receivable, and refundable income tax are all examples of "other receivables" that do not fit into a specific category such as accounts receivable or notes receivable.

Question 18

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 the accounts receivable?

Accepted Answer

The net realizable value of accounts receivable is the difference between the accounts receivable balance and the allowance for doubtful accounts balance. Therefore, the net realizable value is $289,000 ($340,000 - $51,000).

Question 19

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

When using the direct write-off method, the Bad Debts Expense account is debited to write off a customer's account as uncollectible. This is because the direct write-off method does not anticipate uncollectible accounts and so does not provide an allowance for doubtful accounts. As a result, the expense is recognized only when a specific account is deemed uncollectible and written off.

Question 20

Notes or accounts receivables that result from sales transactions are often called

Accepted Answer

Trade receivables are accounts receivables that result from sales transactions. Non-trade receivables refer to any other type of receivables, such as loans to employees or other types of loans. Merchandise receivables refer specifically to receivables related to the sale of goods or merchandise. Sales receivables is not a commonly used term in accounting.

Quiz 9: Receivables