Question 1

The best managed companies will have

Accepted Answer

No company can guarantee that all of their accounts will be collected, as there will always be some unexpected events that can lead to non-payment. However, a well-managed company will have measures in place to minimize the number of uncollectible accounts and mitigate any risks. This includes conducting thorough credit checks, setting credit limits for customers, regularly monitoring accounts receivable, and quickly addressing any issues with late payments or delinquent accounts. Therefore, the best choice is D, some accounts that will prove to be uncollectible.

Question 2

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

Accepted Answer

When an account that was previously written off is collected, there will be both a debit and a credit to Accounts Receivable. The debit will be for the amount received, which increases the balance of Accounts Receivable, and the credit will be to either Bad Debt Expense or Allowance for Doubtful Accounts, depending on the accounting method used. However, the gross accounts receivable will remain unchanged as only the allowance account is used to reduce it.

Question 3

Allowance for Doubtful Accounts on the balance sheet

Accepted Answer

The Allowance for Doubtful Accounts is a contra asset account that is used to offset the accounts receivable account on the balance sheet. This allows for the presentation of the net realizable value of accounts receivable, which is the total amount of accounts receivable that is expected to be collected after accounting for any bad debts.

Question 4

When an account becomes uncollectible and must be written off,

Accepted Answer

When an account becomes uncollectible and must be written off, it means that the company is giving up on collecting that amount. Therefore, Accounts Receivable, which reflects the company's expected collections, should be credited to reduce the amount of outstanding receivables. The other options (A, C, D) are all related to the company's estimation of uncollectible accounts and wouldn't be used when an account is actually being written off.

Question 5

At December 31, 2017, Chambers Co. has gross accounts receivable of $127,000. There is a $10,000 credit balance in the allowance for doubtful accounts. Historically, bad debt expense has averaged 15% of accounts receivable. The company's bad debt expense for 2017 is

Accepted Answer

First, we need to calculate the net accounts receivable:
Gross accounts receivable - Allowance for doubtful accounts = Net accounts receivable
$127,000 - $10,000 = $117,000

Next, we can calculate the expected bad debt expense for the year:
Net accounts receivable * Historical percentage = Expected bad debt expense
$117,000 * 15% = $17,550

Finally, we need to adjust for the existing credit balance in the allowance account:
Expected bad debt expense - Existing credit balance = Adjusted bad debt expense
$17,550 - $10,000 = $7,550

Therefore, the answer is (B) $9,050.

Question 6

Under the allowance method of accounting for uncollectible accounts,

Accepted Answer

Under the allowance method, the net realizable value of accounts receivable remains the same before and after an account is written off because the write-off reduces both the accounts receivable and the allowance for doubtful accounts by the same amount.

Question 7

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

Accepted Answer

When an account is written off using the allowance method, the allowance for doubtful accounts decreases because the specific uncollectible account is removed from the allowance.

Question 8

Bad Debts Expense is considered

Accepted Answer

Bad Debts Expense is a necessary risk of doing business on a credit approach, as not all customers will be able to pay their debts. It is an expected cost that companies must account for and manage when extending credit to customers.

Question 9

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 did not estimate enough for bad debts and had to write off more than anticipated, resulting in a debit balance.

Question 10

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

Accepted Answer

The collection of an account previously written off does not affect profit because the write-off and subsequent collection are balance sheet transactions. The write-off reduces accounts receivable and the allowance for doubtful accounts, while the collection reverses this, with no impact on the income statement.

Question 11

When the allowance method of accounting for uncollectible accounts is used, bad debts expense is recorded

Accepted Answer

The allowance method matches bad debt expense to the same period in which the related credit sales are made, adhering to the matching principle.

Question 12

An aging of a company's accounts receivable indicates $10,000 is estimated to be uncollectible. The company has a $2,000 debit balance in its allowance for doubtful accounts. The adjustment to record bad debt expense for the period will require a(n)

Accepted Answer

The aging of accounts receivable indicates $10,000 is estimated to be uncollectible, therefore, the bad debt expense will be recorded as a debit for $10,000. The company's allowance for doubtful accounts already has a debit balance of $2,000, which means the $10,000 bad debt expense needs to offset this balance, resulting in a net debit of $8,000 to the Bad Debt Expense account. Therefore, the correct answer is option C.

Question 13

An increase in the bad debt expense would NOT be caused by

Accepted Answer

An increase in cash sales would not directly impact the bad debt expense as there is no credit extension involved. Bad debt expense is the expense incurred by a company due to non-payment of credit sales. Poor economic climate, an increase in credit sales, and a decrease in the quality of customers can all lead to an increase in bad debt expense as it becomes more difficult for customers to pay back their debts.

Question 14

At December 31, 2017, Chambers Co. has gross accounts receivable of $127,000. There is a $10,000 credit balance in the allowance for doubtful accounts. Historically, bad debt expense has averaged 15% of accounts receivable. The allowance for doubtful accounts at December 31, 2017 is

Accepted Answer

The answer of At December 31, 2017, Chambers Co. has...

Question 15

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

Accepted Answer

When the allowance method is used, Bad Debts Expense is debited in the period when management estimates the amount of uncollectibles based on past experience and current economic conditions. This estimation is typically done at the end of the accounting period in an adjusting entry. A, B, and D do not accurately describe when Bad Debts Expense is debited using the allowance method.

Question 16

If a company fails to record estimated bad debts expense,

Accepted Answer

If a company fails to record estimated bad debts expense, profit will be overstated because accounts receivable will be overstated. This is because bad debts expense is the cost of the company doing business on credit, meaning that some customers will ultimately not pay their bills. By failing to take this into account, the company is essentially assuming that all of its customers will pay on time, leading to an overstated profit figure.

Question 17

A reasonable amount of uncollectible accounts is evidence

Accepted Answer

A reasonable amount of uncollectible accounts is evidence of a sound credit policy as it indicates that the company is extending credit to customers who are capable of paying, but some may not be able to due to unforeseen circumstances such as financial issues or bankruptcy. It is also a normal part of doing business that not all customers will be able to pay their debts in full. However, if the uncollectible accounts are too high, it may indicate a need to review and adjust the credit policy.

Question 18

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

Accepted Answer

To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts. This entry recognizes the expense of uncollectible accounts and reduces the accounts receivable balance by recording an allowance for doubtful accounts. Option A is incorrect because it increases accounts receivable and does not recognize any expense. Option C is incorrect because it increases the allowance for doubtful accounts without recognizing the expense associated with it. Option D is incorrect because it recognizes an expense but does not reduce accounts receivable by establishing an allowance for doubtful accounts.

Question 19

An aging of a company's accounts receivable indicates that $4,000 is 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 adjustment for bad debts, we need to increase the allowance for doubtful accounts and decrease the accounts receivable. The aging of the accounts receivable indicated that $4,000 is estimated to be uncollectible, so the Bad Debts Expense should be debited for $4,000. However, we already have a credit balance of $1,100 in the Allowance for Doubtful Accounts, so we only need to debit the allowance account for the remaining amount of $2,900 ($4,000 - $1,100). Therefore, the correct entry is to debit the Bad Debts Expense for $2,900 and credit the Allowance for Doubtful Accounts for $2,900. Answer choice C is the correct choice.

Question 20

An alternative name for Bad Debts Expense is

Accepted Answer

Bad Debts Expense is also known as Uncollectible Accounts Expense, as it represents the amount of accounts receivable that the business expects to be unable to collect from its customers.

Quiz 8: Accounting for Receivables