Questions and Answers
What is classified as a Current Asset on the balance sheet?
Where are noncurrent receivables reported on the balance sheet?
What method do Generally Accepted Accounting Principles (GAAP) require for companies with a large amount of receivables?
The Allowance Method
The __________ records bad debt expense only when an account is determined to be worthless.
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What is included in the journal entry to write off an uncollectible account using the direct write-off method?
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What is included in the journal entry to reinstate a receivable that was previously written off?
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In the allowance method, what account is credited to estimate uncollectible accounts?
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What is included in the journal entry to record the write-off of an account under the allowance method?
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Which of the following accounts is used only with the allowance methods of accounting for uncollectible accounts receivable?
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Which method of accounting for uncollectible accounts receivable uses an estimate based on a percentage of sales?
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What is the interest on a $5,400, 3%, 45-day note?
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What is included in the journal entry to record accrued interest on a note receivable?
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Study Notes
Current Assets and Receivables
- Accounts receivable falls under current assets on the balance sheet, indicating its liquidity and expected collection within one year.
Investments and Noncurrent Receivables
- Noncurrent receivables appear under investments on the balance sheet, indicating they are expected to be collected over a period longer than one year.
Accounting Methods for Receivables
- Companies with high accounts receivable levels must employ the allowance method as per Generally Accepted Accounting Principles (GAAP), which anticipates potential uncollectible amounts.
Direct Write-Off Method
- This method records bad debt expense only once an account is deemed uncollectible, lacking estimation in advance.
Writing Off Accounts
- In a direct write-off scenario, recognizing a $2,000 uncollectible account incurs a debit to Bad Debt Expense, reflecting the loss.
Reinstating Receivables
- If an account previously written off (like J.P.Moore’s) is collected later, the journal entry requires a credit to Bad Debt Expense to reverse the previous entry.
Allowance Method for Uncollectible Accounts
- Under the allowance method, estimations for uncollectible accounts involve a credit to Allowance for Doubtful Accounts, preparing for anticipated losses.
Writing Off Receivables in the Allowance Method
- Recording the write-off of an account receivable requires a credit to Accounts Receivable, ensuring accurate tracking of potential losses.
Unique Accounts
- Allowance for Doubtful Accounts is exclusively utilized with the allowance method, differentiating it from direct write-off methods.
Estimation in Allowance Method
- The allowance method utilizes estimated percentages of sales to predict uncollectible accounts, allowing for proactive financial management.
Interest Calculation Example
- For a $5,400 note with a 3% interest rate over 45 days, the interest earned is calculated to be $20.25.
Journal Entries for Interest
- Recording accrued interest on a note receivable involves a credit to Interest Revenue in adjusting entries, reflecting earned income even if not yet received.
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Description
Explore the various accounting methods used for managing accounts receivable and noncurrent receivables. This quiz covers key concepts like current assets, the allowance method, and the direct write-off method, highlighting their implications on a company's financial health.
