Question 1

The main problem that exists in valuing accounts receivables is:

Accepted Answer

The main problem in valuing accounts receivables is estimating the amount of receivables that will become bad, also known as bad debt expense. This requires making assumptions and judgments about the likelihood of collection, which can be a challenging and subjective process. Keeping track of the amount owed by individual debtors, adjusting for goods returned, and reconciling control accounts with subsidiary ledgers are important aspects of managing accounts receivables, but they are not the main problem in valuing them.

Question 2

After writing off bad debts of $1400 the allowance for doubtful debts account balance was $800 credit. What is the correct general journal entry to record an adjustment to bring the allowance for doubtful debts to 10% of accounts receivable of $20 000?

Accepted Answer

To adjust the allowance for doubtful debts to 10% of accounts receivable ($20,000), the allowance needs to be $2,000 (10% of $20,000). Since the allowance is already at $800 credit after writing off bad debts, an additional $1,200 ($2,000 - $800) needs to be added to the allowance. This is done by debiting bad debts expense and crediting allowance for doubtful debts.

Question 3

Allowing customers to buy on credit is only profitable if the costs associated with granting credit are less than the profit on the increased sales generated. Which of the following is not one of the additional costs of selling on credit?

Accepted Answer

Sales commission is not directly related to the cost of selling on credit. It is a cost associated with the sales process regardless of whether the customer pays cash or buys on credit. The other three options (credit checks, record keeping, and debt collection) are all additional costs specifically associated with selling on credit.

Question 4

Which of these is not one of the ways in which the asset 'other receivables' could arise?

Accepted Answer

Other receivables represent amounts owed to the company by parties other than customers. A loan to a director (A) and sale of non-current asset on credit (B) are both examples of other receivables. Rent receivable (C) is also an example of other receivables, as it represents amounts owed by tenants. Accrued wages (D) represent amounts owed to employees, which would be classified as a current liability on the balance sheet, not an asset.

Question 5

Which statement regarding the direct write-off method of bad debts is untrue?

Accepted Answer

The statement "Bad debts are matched against the related sales revenue" is untrue for the direct write-off method. In this method, bad debts are expensed as soon as they are identified as uncollectible, regardless of their relationship to the associated sales revenue. This method does not provide an accurate matching of expenses with revenues, which is a key principle of accrual accounting.

Question 6

Under the income statement method of estimating debts likely to be bad:

Accepted Answer

The income statement method of estimating bad debts applies a percentage, based on past experience, to credit sales in order to estimate the amount of debts likely to be bad. This is based on the idea that a certain percentage of credit sales are historically uncollectible.

Question 7

When a credit sale involving GST is recorded, the sales account:

Accepted Answer

The sales account does not include the GST because GST is recorded separately in a GST liability account.

Question 8

Amaad Company calculated that this year's estimated bad debts expense will be $7500. When the necessary adjusting entry is made what effect will it have on the following accounts? Bad debts expense: allowance for doubtful debts: gross accounts receivable.

Accepted Answer

The adjusting entry for bad debts expense increases the Bad Debts Expense account and also increases the Allowance for Doubtful Debts account, but it has no effect on the Gross Accounts Receivable.

Question 9

Accepted Answer

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Question 10

Which statement is incorrect?

Accepted Answer

Just because a debtor fails to pay a receivable on its due date does not necessarily mean that the debt is bad. It may still be possible to recover the debt through follow-up actions such as reminders or negotiations. The debt only becomes bad when it is deemed uncollectible.

Question 11

When a credit sale involving GST is recorded the accounts receivable account:

Accepted Answer

When a credit sale involving GST is recorded, the accounts receivable account includes the GST. This is because the business collects the full amount of the sale price plus the GST from the customer and is required to remit the GST to the government. Therefore, the GST is considered a part of the sale and is included in the accounts receivable balance.

Question 12

The valuation of accounts receivables at gross receivables less anticipated future bad debts is known as:

Accepted Answer

Fair value refers to the valuation of assets or liabilities based on market value or the value that would be received in a current transaction between willing parties. In the case of accounts receivable, fair value is calculated by subtracting anticipated future bad debts from gross receivables. This reflects the amount that the company could reasonably expect to receive in exchange for the receivables if sold on the open market.

Question 13

How is accounts receivable usually valued in the balance sheet?

Accepted Answer

Accounts receivable is usually valued at the gross amount less allowance for expected bad debts in the balance sheet, as it reflects the amount the company expects to receive from its customers after accounting for potential bad debts. Options A, B, and D are not typically used to value accounts receivable in the balance sheet.

Question 14

Which of these would not be classified as 'other receivables'?

Accepted Answer

'Other receivables' typically include various forms of receivables other than trade receivables. Loans to directors, interest receivable, and amounts receivable from the sale of non-current assets fit into this category. However, income owing from a credit sale is considered a trade receivable, not 'other receivable', as it arises from the entity's primary operations of selling goods or services on credit.

Question 15

If no adjustment is made for doubtful debts, assets are:

Accepted Answer

If no adjustment is made for doubtful debts, assets (accounts receivable) are overstated because they include amounts that may not be collected. Profit is also overstated because expenses (bad debt expense) are not properly accounted for, leading to higher net income.

Question 16

Nugyen recorded sales of $280 000 during the year. Of these, $180 000 were on credit. Bad debts in the past have averaged 1% of credit sales. Using the income statement method, the amount to provide for estimated bad debt expense for the year is:

Accepted Answer

To calculate the estimated bad debt expense using the income statement method, we need to apply the % of credit sales that is expected to be uncollectible. In this case, the bad debt estimate is based on past experience and has averaged 1% of credit sales. Therefore, the estimated bad debt expense would be:
$180,000 (credit sales) x 1% (bad debt rate) = $1,800. 
Thus, the best choice is D.

Question 17

When the direct write off method is used, what is the general journal entry to write off bad debts?

Accepted Answer

The direct write off method requires recording the bad debt as an expense in the period it becomes uncollectible. Therefore, the general journal entry would be to debit bad debts expense and credit accounts receivable.

Question 18

The allowance for doubtful debts account had a balance of $2200 before bad debts of $1400 were written off and the allowance was adjusted to 10% of the accounts receivable balance of $20 000. The new amount of allowance for doubtful debts that is deducted from accounts receivable in the balance sheet is:

Accepted Answer

The new allowance for doubtful debts is calculated as 10% of the accounts receivable balance of $20,000, which equals $2,000. This is the amount that will be deducted from accounts receivable in the balance sheet.

Question 19

Christo uses the allowance method of accounting for bad and doubtful debts. When he received notice that Debtor 3459, who owed him $10 000, was in liquidation he decided to write off the debt as bad. What is the general journal entry to record the write off?

Accepted Answer

When using the allowance method, writing off a bad debt involves debiting the allowance for doubtful debts account and crediting the accounts receivable account. This reflects the removal of the receivable from the books, utilizing the previously established allowance.

Question 20

The text classifies accounts receivables into several broad types. What are they?

Accepted Answer

The correct classification includes accounts receivable, bills receivable, and other receivables, covering the various forms in which a company can hold amounts owed to it by customers or other parties.

Quiz 18: Receivables