Question 1

Bad Debt Expense is considered

Accepted Answer

Bad Debt Expense is a necessary risk of doing business on a credit basis because not all customers will be able to pay their debts. Despite efforts to assess customers' creditworthiness and implement credit policies and internal controls, there will always be a risk that some customers will default on their payments. Therefore, Bad Debt Expense must be recognized as an expense in order to properly match expenses with revenues and accurately reflect the financial position of the company.

Question 2

Bad Debt Expense is sometimes called

Accepted Answer

Bad Debt Expense is typically referred to as Uncollectible Accounts Expense, as it represents the cost of non-payment by customers or clients. Allowance for Doubtful Accounts is a contra-asset account used to offset Accounts Receivable, and Loss from Default is not a commonly used term in accounting for bad debt.

Question 3

The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles

Accepted Answer

When an account previously written off is collected under the allowance method, it requires reinstating the account and then recording the cash collection. This process reverses the write-off and records the cash receipt without affecting the current period's income, as the bad debt expense was recognized in the period the account was initially written off.

Question 4

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 records uncollectible accounts as an expense when they are determined to be uncollectible. The allowance method involves estimating the amount of uncollectible accounts and recording an allowance for doubtful accounts as a contra asset account. When an account is determined to be uncollectible, it is written off against the allowance account. The direct write-off method is not recommended under GAAP, and the allowance method is the preferred method of accounting for uncollectible accounts.

Question 5

When an account is written off using the allowance method, the

Accepted Answer

When an account is written off using the allowance method, the total accounts receivable will decrease as the specific account being written off will be removed from the receivables balance. The allowance account has already been adjusted for the estimated bad debt, so there is no further impact on the allowance account or cash realizable value of total accounts receivable.

Question 6

The allowance method of accounting for uncollectible accounts is required if

Accepted Answer

The allowance method is required when bad debts are significant in amount because it provides a more accurate reflection of the realizable value of accounts receivable on the balance sheet by estimating and matching bad debt expenses to the periods in which the related sales occur.

Question 7

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 recorded when a specific customer's account is deemed uncollectible. This is usually done after attempts to collect the debt have been unsuccessful, and the company decides to write off or remove the uncollectible amount from accounts receivable. Therefore, option D is the correct answer.

Question 8

An alternative name for Bad Debt Expense is

Accepted Answer

Bad Debt Expense is also known as Uncollectible Accounts Expense because it represents the amount of accounts receivable that the company expects to be unable to collect. It is an expense that is recognized in the period when the company determines that a particular customer is unlikely to pay its debts. The expense lowers the company's net income and reduces the value of its accounts receivable on the balance sheet.

Question 9

An aging of a company's accounts receivable indicates that $7,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a

Accepted Answer

To record the estimated bad debts for the aging of accounts receivable, we need to increase the allowance for doubtful accounts. Since there is already a credit balance of $1,100 in the allowance account, we only need to debit it for the additional estimated amount of $5,900 ($7,000 - $1,100). This will result in a total allowance for doubtful accounts of $6,000 ($1,100 + $5,900), matching the estimated uncollectible amount. Therefore, the correct entry is a debit to Bad Debt Expense for $5,900 and a credit to Allowance for Doubtful Accounts for $5,900.

Question 10

The method of accounting for uncollectible accounts that results in a better matching of expenses with revenues is the

Accepted Answer

The answer of The method of accounting for uncollectible accounts...

Question 11

A reasonable amount of uncollectible accounts is evidence

Accepted Answer

A reasonable amount of uncollectible accounts indicates that the credit policy is allowing for some risk but is not being too lenient or too strict. It shows that the credit manager is making sound judgments by balancing the risk of extending credit with the need to increase sales.

Question 12

A debit balance in the Allowance for Doubtful Accounts

Accepted Answer

A debit balance in the Allowance for Doubtful Accounts indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. This means that the company had previously estimated a certain amount for doubtful accounts, but actual write-offs were higher than that estimation. As a result, the allowance account was debited to reflect the additional expense of bad debt.

Question 13

Allowance for Doubtful Accounts on the statement of financial position

Accepted Answer

Allowance for Doubtful Accounts is a contra account to Accounts Receivable, meaning it reduces the value of Accounts Receivable. Therefore, it is offset against Accounts Receivable on the statement of financial position.

Question 14

When the allowance method of accounting for uncollectible accounts is used, Bad Debts Expense is recorded

Accepted Answer

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

Question 15

Under the allowance method of accounting for uncollectible accounts,

Accepted Answer

Under the allowance method, the cash realizable value of accounts receivable remains the same before and after an account is written off because the write-off is offset by a reduction in the Allowance for Doubtful Accounts.

Question 16

When an account is written off using the allowance method, accounts receivable

Accepted Answer

When an account is written off using the allowance method, the accounts receivable balance is unchanged because the specific receivable being written off is removed from accounts receivable and the allowance for doubtful accounts simultaneously, resulting in a decrease in both accounts receivable and the allowance account.

Question 17

The best managed companies will have

Accepted Answer

Even the best managed companies may have some accounts that end up being uncollectible due to various reasons such as financial difficulties of the customer or other unexpected events. However, the key is to minimize such occurrences through efficient credit management policies and procedures. Having no uncollectible accounts may not always be a realistic goal, and having a very strict credit policy may prevent the company from acquiring profitable customers who may have a good track record of paying their debts. A very lenient credit policy, on the other hand, may result in higher instances of bad debt and financial losses for the company.

Question 18

The percentage of sales basis of estimating expected uncollectibles

Accepted Answer

The percentage of sales basis of estimating expected uncollectibles is based on the matching principle, which emphasizes matching expenses with revenues in the same accounting period. This approach estimates bad debts as a percentage of credit sales for the period, which reflects the company's current performance and provides a more accurate estimate of expected uncollectibles than historical data. Therefore, choice A is the best answer.

Question 19

If an account is collected after having been previously written off,

Accepted Answer

If an account is collected after having been previously written off, it means that the company had previously recognized the loss on the account and written it off as uncollectible, debiting the allowance for doubtful accounts and crediting accounts receivable. When the account is collected, it will result in a debit to accounts receivable to reflect the receipt of the payment, and a credit to the allowance for doubtful accounts to reverse the previous write-off. The income statement will also be affected as bad debt expense will decrease, and the statement of financial position will be affected as assets and equity will increase. Therefore, both the income statement and statement of financial position accounts will be affected.

Question 20

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

Accepted Answer

The allowance method requires an adjusting entry to be made at the end of each accounting period to estimate the amount of accounts receivable that may not be collected. This is done by debiting Bad Debt Expense (an income statement account) and crediting Allowance for Doubtful Accounts (a contra-asset account). This entry reduces the net income and the accounts receivable balance, while creating a reserve for potential bad debts. Option A is incorrect because it would increase the accounts receivable balance, which is not the purpose of the entry. Option C is incorrect because it would decrease the accounts receivable balance without recognizing the expense for the period. Option D is incorrect because it creates a loss on credit sales, which is not typically used in accounting for bad debts.

Quiz 8: Accounting for Receivables