Question 1

Which of the following statements is not correct?
A)When using the direct charge-off method, there is no Allowance for Doubtful Accounts account.
B)The use of the direct charge-off method of recording losses from uncollectible accounts usually results in the balance in the Accounts Receivable account being overstated.
C)The direct charge-off method of recording losses from uncollectible accounts is the method required by Federal income tax laws.
D)The direct charge-off method of recording losses from uncollectible accounts is an application of the matching principle.

Accepted Answer

The direct charge-off method does not adhere to the matching principle because it records bad debt expense only when specific accounts are deemed uncollectible, rather than estimating and matching expenses to revenues in the same period.

Question 2

The adjusting entry to record estimated losses from uncollectible accounts consists of a debit to Allowance for Doubtful Accounts.

Accepted Answer

The adjusting entry to record estimated losses from uncollectible accounts consists of a debit to Bad Debt Expense (or a similar expense account) and a credit to Allowance for Doubtful Accounts.

Question 3

To achieve good internal control over accounts receivable, it is important to separate the recording of accounts receivable transactions and the collection of cash from customers.

Accepted Answer

By separating the recording of accounts receivable transactions and the collection of cash from customers, a company can prevent errors or fraudulent activities such as overbilling or skimming of cash. This helps in maintaining accurate records which ensure that the company's financial statements are reliable.

Question 4

Allowance for Doubtful Accounts is a liability account.

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account, reducing the total value of accounts receivable on the balance sheet to reflect the amount that is expected to be uncollectible.

Question 5

When the estimate of the losses from uncollectible accounts is based on the aging method, the primary concern is proper valuation of the accounts receivable on the balance sheet.

Accepted Answer

The aging method is used to estimate the amount of uncollectible accounts receivable, but the key concern is ensuring that the balance sheet accurately reflects the current value of the remaining accounts receivable. Proper valuation of the accounts receivable involves determining the allowances for doubtful accounts and ensuring that they are reported accurately on the balance sheet.

Question 6

Allowance for Doubtful Accounts is classified as
A)a Liability on the Balance Sheet.
B)a Contra Asset on the Balance Sheet.
C)a Contra Expense on the Income Statement.
D)an Expense on the Income Statement.

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account on the balance sheet that reduces the overall balance of Accounts Receivable to its net realizable value.

Question 7

When the allowance method of recognizing losses from uncollectible accounts is used, the entry to record the write-off of a particular customer's account includes a debit to Uncollectible Accounts Expense.

Accepted Answer

When using the allowance method, the entry to write off a customer's account includes a debit to Allowance for Doubtful Accounts, not to Uncollectible Accounts Expense.

Question 8

The adjusting entry to record estimated losses from uncollectible accounts consists of a
A)debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
B)debit to Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts.
C)debit to Uncollectible Accounts Expense and a credit to Accounts Receivable.
D)debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.

Accepted Answer

The correct adjusting entry for recording estimated losses from uncollectible accounts involves debiting Uncollectible Accounts Expense (or Bad Debt Expense) to recognize the expense in the income statement and crediting Allowance for Doubtful Accounts to increase the contra asset account that reduces the balance of Accounts Receivable on the balance sheet. This method follows the allowance method of accounting for bad debts.

Question 9

What is the type of account and normal balance of Allowance for Doubtful Accounts?
A)Contra asset, credit
B)Liability, credit
C)Asset, debit
D)Contra asset, debit

Accepted Answer

The answer of What is the type of account and...

Question 10

The balance of the Allowance for Doubtful Accounts account is reported as
A)a deduction from Sales on the income statement.
B)an addition to Accounts Receivable on the balance sheet.
C)a deduction from Accounts Receivable on the balance sheet.
D)an expense on the income statement.

Accepted Answer

The Allowance for Doubtful Accounts account is a contra-asset account, which means it has a credit balance. It is used to reduce the value of Accounts Receivable on the balance sheet to reflect the amount that the company does not expect to collect from customers. Therefore, the balance of the Allowance for Doubtful Accounts account is reported as a deduction from Accounts Receivable on the balance sheet.

Question 11

When there is a partial collection of a balance previously written off, the entry to record the reinstatement of the customer's account will be for the entire amount written off.

Accepted Answer

The entry to record the reinstatement of a customer's account for a partial collection of a balance previously written off typically involves debiting cash for the amount collected and debiting the allowance for doubtful accounts for the remaining balance, then crediting the accounts receivable for the total amount originally written off. This means the reinstatement is specifically for the amount collected, not the entire amount written off.

Question 12

When the allowance method of recognizing losses from uncollectible accounts is used, the net value of accounts receivable on the balance sheet will more nearly reflect the amount that will ultimately be collected than if the direct write-off method is used.

Accepted Answer

The allowance method is based on estimating the amount of uncollectible accounts and creating an allowance for those amounts on the balance sheet, which reduces the net value of accounts receivable to a more realistic amount that is expected to be collected. The direct write-off method, on the other hand, only recognizes bad debts when they are actually deemed uncollectible, which can lead to a mismatch between the true value of accounts receivable and what is reported on the balance sheet. Therefore, using the allowance method results in a more accurate reflection of the amount that will ultimately be collected.

Question 13

The allowance method may be used to record bad debt losses for income tax purposes.

Accepted Answer

The allowance method is not allowed for income tax purposes because the IRS requires businesses to use the specific charge-off method to claim bad debt losses, where debts must be specifically identified as bad.

Question 14

Uncollectible Accounts Expense can be called Loss from Uncollectible Accounts.

Accepted Answer

Uncollectible Accounts Expense and Loss from Uncollectible Accounts are two terms used interchangeably to refer to expenses incurred due to the inability of a company to collect payment from its customers.

Question 15

Which of the following statements is not correct?
A)The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to Accounts Receivable.
B)Losses from uncollectible accounts can be estimated by analyzing sales or accounts receivable.
C)The allowance method involves anticipating losses from uncollectible accounts by recognizing an expense for these losses before the actual accounts are written off.
D)The balance of Uncollectible Accounts Expense appears among the operating expenses on the income statement.

Accepted Answer

The adjusting entry to record the estimated loss from uncollectible accounts includes a debit to Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts, not a credit to Accounts Receivable.

Question 16

Allowance for Doubtful Accounts may be used for the valuation of all types of receivables.

Accepted Answer

Allowance for Doubtful Accounts is a contra-asset account that is used to estimate the amount of accounts receivables that may become uncollectible. It is applicable to all types of accounts receivables, therefore the statement is true.

Question 17

When using the allowance method, the collection of an account previously written off is recorded in the cash receipts journal only.

Accepted Answer

When using the allowance method, the collection of an account previously written off is recorded by reversing the entry made at the time of the write-off, which involves debiting accounts receivable and crediting the allowance for doubtful accounts. This is typically recorded in the general journal or a specialized journal for adjustments, not just in the cash receipts journal.

Question 18

The balance of Allowance for Doubtful Accounts is added to the balance of Accounts Receivable on the balance sheet.

Accepted Answer

The balance of Allowance for Doubtful Accounts is subtracted from the balance of Accounts Receivable on the balance sheet to present the net realizable value of the receivables.

Question 19

The experience of other firms in the same line of business may be used in estimating losses from uncollectible accounts for a new firm.

Accepted Answer

Other firms in the same line of business can provide insight into typical levels of uncollectible accounts, which can be used by a new firm to estimate its own expected losses in this area.

Question 20

Allowance for Doubtful Accounts may, at times, have a debit balance.

Accepted Answer

Allowance for Doubtful Accounts is a contra-asset account, which means it is used to reduce the balance of accounts receivable to their net realizable value. This means that if the balance in the allowance account is greater than the balance in the accounts receivable account, the allowance account will have a debit balance.

Quiz 15: Accounts Receivable and Uncollectible Accounts

Which of the following statements is not correct?