Question 1

The direct write-off method is generally not permitted for financial reporting purposes because:

Accepted Answer

The direct write-off method does not properly match expenses (bad debts) with the revenues (credit sales) that they help to generate, violating the matching principle. The allowance method is preferred because it makes estimates for future bad debts and matches a portion of these expenses with the same accounting period's credit sales.

Question 2

McConnell's Bakeries had the following balances on December 31, 2012, before any adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell's estimates uncollectible accounts based on an aging of accounts receivable as shown below: $$\begin{array} { | c | c | c | } 
\hline \begin{array} { c } 
\text { Age Group } \
\text { (days past due) }
\end{array} & \begin{array} { c } 
\text { Accounts } \
\text { Receivable }
\end{array} & \begin{array} { c } 
\text { Estimated Percent } \
\text { Uncollectible }
\end{array} \
\hline \text { Not yet due } & \$ 50,000 & 4 \% \
\hline 0 - 30 & \$ 20,000 & 8 \% \
\hline 31 - 60 & \$ 18,000 & 10 \% \
\hline \text { More than } 60 & \$ 12,000 & 40 \% \
\hline
\end{array}$$ What amount of bad debt expense did McConnell's record in its December 31, 2012, adjustment to the allowance account?

Accepted Answer

The answer of McConnell's Bakeries had the following balances on...

Question 3

A company collects an account receivable previously written off. Indicate how this transaction would affect the following five financial statement items:

Accepted Answer

The answer of A company collects an account receivable previously...

Question 4

Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?

Accepted Answer

Under the direct write-off method, no allowance for bad debts is maintained. Instead, the bad debt expense is recognized at the time an actual bad debt occurs by directly reducing the Accounts Receivable and recording a debit to the Bad Debt Expense account. Therefore, the correct adjustment is to debit Bad Debt Expense and credit Accounts Receivable.

Question 5

During 2012, Bears Inc. recorded credit sales of $500,000. Before adjustments at year-end, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not to collect 5% of the amount not yet past due and 20% of the amount past due?

Accepted Answer

($250,000 x 5%) + ($50,000 x 20%) - $2,500 = $20,000.

Question 6

Which accounting principle does the direct write-off method violate?

Accepted Answer

The answer of Which accounting principle does the direct write-off...

Question 7

The primary difference between a note receivable and an account receivable is:

Accepted Answer

The primary difference between a note receivable and an account receivable is that a note receivable is evidenced by a written debt instrument, while an account receivable is not necessarily documented in writing. Both are considered current assets and are expected to be collected. However, a note receivable typically has a specific repayment date and interest rate, while an account receivable generally does not.

Question 8

At the beginning of 2012, the balance in Jackson Enterprises' Allowance for Uncollectible Accounts was $31,800. During 2012, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a:

Accepted Answer

The answer of At the beginning of 2012, the balance...

Question 9

When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?

Accepted Answer

The allowance method requires a company to estimate its uncollectible accounts and create an allowance for that purpose. When an account is deemed uncollectible, the allowance for that account is then used to write it off. Therefore, to write off an uncollectible account using the allowance method, we would debit the allowance account for the amount of the uncollectible account and credit the accounts receivable account for the same amount. Option D correctly follows this procedure. Option A is incorrect because it debits the bad debt expense account, which is used to record estimated uncollectible accounts, rather than the allowance account. Option B is also incorrect because it debits the allowance account instead of the bad debt expense account. Option C is incorrect because it credits accounts receivable rather than debiting it.

Question 10

The following information pertains to Lightning, Inc. at the end of December: $$\begin{array} { l r } 
\text { Credit Sales } & \$ 60,000 \
\text { Accounts Payable } & 10,000 \
\text { Accounts Receivable } & 7,000 \
\text { Allowance for Uncollectible Accounts } & \$ 400 \text { credit } \
\text { Cash Sales } & 20,000
\end{array}$$ Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables less than 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 less than 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense?

Accepted Answer

The answer of The following information pertains to Lightning, Inc....

Question 11

Using the allowance method, writing off an actual bad debts would include a:

Accepted Answer

The answer of Using the allowance method, writing off an...

Question 12

Collections of accounts receivable that previously have been written off are credited to:

Accepted Answer

When a previously written-off account is collected, it is recognized as a recovery of an account that was previously written off. As such, the collection would be credited to the Accounts Receivable account, which would reduce the amount of the write-off recorded in the prior period. A, C, and D are not appropriate because a gain would not be recognized from the collection of a previously written-off receivable, Bad Debt Expense has already been recognized in the earlier period, and the collection does not impact retained earnings.

Question 13

Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts?

Accepted Answer

Under the direct write-off method, no adjustment is made at the end of the year to account for possible future bad debts. Bad debts are only recognized when they occur, meaning that when a customer fails to pay, the company will directly reduce the balance of accounts receivable and recognize a bad debt expense at that point in time.

Question 14

When using an aging method for estimating uncollectible accounts:

Accepted Answer

When using an aging method for estimating uncollectible accounts, older accounts are considered less likely to be collected. This is because the longer an account remains unpaid, the less likely it is to be collected. The number of days the account is past due is also considered in the aging method. Therefore, choice B is incorrect. Choice C is also incorrect as older accounts are not considered more likely to be collected. Choice D is incorrect as the aging method is used specifically for estimating uncollectible accounts.

Question 15

Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. This transaction would include a:

Accepted Answer

Since the company received a note for the balance of the sale, the transaction would include a debit to Notes Receivable.

Question 16

On December 31, 2012, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts: $$\begin{array} { | c | c | c | } 
\hline \begin{array} { c } 
\text { Age Group } \
\text { (days past due) }
\end{array} & \begin{array} { c } 
\text { Accounts } \
\text { Receivable }
\end{array} & \begin{array} { c } 
\text { Estimated Percent } \
\text { Uncollectible }
\end{array} \
\hline 0 - 30 & \$ 50,000 & 5 \% \
\hline 31 - 60 & \$ 20,000 & 10 \% \
\hline 61 - 90 & \$ 10,000 & 20 \% \
\hline
\end{array}$$ What is the amount of bad debt expense to be reported on Andy Inc.'s financial statements for 2012?

Accepted Answer

The total estimated uncollectible amount is calculated as follows: (5% of $50,000) + (10% of $20,000) + (20% of $10,000) = $2,500 + $2,000 + $2,000 = $6,500. Since there is already a $1,500 debit balance in the Allowance for Uncollectible Accounts, the bad debt expense needed to adjust the allowance to the estimated uncollectible amount is $6,500 + $1,500 = $8,000.

Question 17

Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?

Accepted Answer

The direct write-off method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts. This method records bad debts expense only when a specific account is deemed uncollectible and written off as a loss. This method does not use estimates and violates the matching principle of accounting. The other methods listed (allowance method, aging method, percentage-of-receivables method) are all acceptable methods for accounting for uncollectible accounts under GAAP.

Question 18

Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account?

Accepted Answer

($600,000 x 1%) + ($100,000 x 10%) + ($50,000 x 20%) = $26,000.

Question 19

Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green's $2,500 account. Based on Lail's estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off?

Accepted Answer

The answer of Lail Inc. accounts for bad debts using...

Question 20

If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false?

Accepted Answer

The answer of If the direct write-off method is used...

Quiz 5: Receivables and Sales