Question 1

When an uncollectible account receivable is written off, the amount of total assets is unchanged.

Accepted Answer

The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (decreases allowance for doubtful accounts).

Question 2

Using the allowance method of accounting for uncollectible receivables requires an estimate of the amount of receivables that will not be collected.

Accepted Answer

The estimate is made at the end of each accounting period.

Question 3

If a company uses the percent of receivables method to estimate uncollectible accounts, the company will first determine the required ending balance in Allowance for Doubtful Accounts, and Uncollectible Accounts Expense will be the difference between that amount and the current balance in the allowance.

Accepted Answer

This is the correct procedure for using percent of receivables to estimate uncollectible accounts.

Question 4

Willis Company had $200,000 in credit sales for Year 1, and it estimated that 2% of the credit sales would not be collected. The balance in Accounts Receivable at the end of the year was $38,000. Willis had never used the allowance method to account for its receivables till Year 1. The net realizable value of its accounts receivable at the end of the year was $34,000.

Accepted Answer

$200,000 × 2% = $4,000 uncollectible accounts expense (increase to allowance for doubtful accounts); $38,000 accounts receivable - $4,000 allowance for doubtful accounts = $34,000 net realizable value

Question 5

When a customer's account, previously written off as uncollectible, is reinstated, the net realizable value of Accounts Receivable increases.

Accepted Answer

Reinstating an account does not affect net realizable value because accounts receivable and allowance for doubtful accounts increase equally.

Question 6

For a company that uses the allowance method, the write-off of an uncollectible account receivable is an asset use transaction.

Accepted Answer

The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (decreases allowance for doubtful accounts).

Question 7

The longer an account receivable has been outstanding, the less likely it is to be collected.

Accepted Answer

This concept is the basis of aging receivables. The older receivables are assigned greater percentages of estimated uncollectibles.

Question 8

Making a loan to another party is considered an investing activity on the statement of cash flows.

Accepted Answer

Loaning cash is an investing activity.

Question 9

Collection of a credit card receivable is an asset source transaction.

Accepted Answer

Collection of a credit card receivable is an asset exchange transaction that increases cash and decreases the credit card receivable.

Question 10

When a company receives payment from a customer whose account was previously written off, the customer's account should be reinstated.

Accepted Answer

Reinstatement is necessary so that the receivable exists to match the payment to.

Question 11

The adjusting entry to recognize uncollectible accounts expense does not affect the net realizable value of receivables.

Accepted Answer

Recognizing uncollectible accounts expense decreases net realizable value because it increases allowance for doubtful accounts.

Question 12

The net realizable value of accounts receivable decreases when an account receivable is written off.

Accepted Answer

Net realizable value is unaffected by a write-off because both accounts receivable and allowance for doubtful accounts decrease equally.

Question 13

The adjusting entry to recognize uncollectible accounts expense is an asset use transaction.

Accepted Answer

Recognizing uncollectible accounts expense is an asset use transaction that increases the contra-asset allowance for doubtful accounts.

Question 14

Accepting credit cards is usually more costly to a business than offering credit directly to customers.

Accepted Answer

Accepting credit cards is usually less costly than offering credit directly because the credit card company assumes the risk of uncollectible accounts, and the company receives cash from the credit card company very soon after the transaction rather than having to wait for payment from the customer.

Question 15

The percent of revenue method for estimating uncollectible accounts expense is considered superior to the percent of receivables method because it is more conservative.

Accepted Answer

The percent of receivables method is considered to be superior to the percent of revenue method because it is based on aging of receivables.

Question 16

If a company estimates uncollectible accounts based on a percentage of receivables, the resulting estimate will be presented on the balance sheet as the ending balance in Allowance for Doubtful Accounts.

Accepted Answer

Percent of accounts receivable yields the estimated ending balance in allowance for doubtful accounts, and uncollectible accounts expense is the amount necessary to adjust the allowance to the estimated balance.

Question 17

On June 1, Year 2, Carolina Company collected a $24,000 note receivable that had been issued on June 1, Year 1. The note carried a 6% interest rate. The interest revenue recognized on the maturity date is $1,440.

Accepted Answer

Carolina will only recognize five months of interest revenue on June 1, Year 2. The other seven months of interest were recognized (accrued) in Year 1, $24,000 × 6% × 7/12 = $840.

Question 18

When a company accepts a credit card payment for a sale, the amount of sales revenue to be recorded is reduced by the amount of the credit card company's fee.

Accepted Answer

Revenue is recorded for the full amount of the sale, and the fee is recorded as a separate expense.

Question 19

One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports.

Accepted Answer

Managers can choose which costs to assign to cost of goods sold if specific identification is used.

Question 20

The year-end adjusting entry to accrue interest on a note receivable is an asset source transaction.

Accepted Answer

The entry increases assets (interest receivable) and increases equity (interest revenue).

Quiz 5: Accounting for Receivables and Inventory Cost Flow