Bad Debt Accounting Methods

Questions and Answers

When the direct write-off method is used, an entry for bad debt expense is required

When each sale is made.

When the account receivable is determined to be uncollectible. (correct)

Only when bad debts are recorded on the tax return.

At the end of the year.

Accounts receivable are typically classified as current assets because

They are a formal agreement to pay within a specific period of time.

They will be converted to cash within 1 year. (correct)

They are matched with accounts payable for the period.

They accrue interest at a specified interest rate.

A trade discount is

A percentage reduction from list price.

A rebate from the manufacturer.

A percentage reduction of the amount due for early payment. (correct)

An increase in the account receivable.

The account 'Allowance for Uncollectible Accounts' is classified as

A contra asset to accounts receivable. Signup and view all the answers

When a customer returns a product for a refund, in which account is the entry recorded?

Sales return Signup and view all the answers

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

Allowance method Signup and view all the answers

A(n) is the legal right to receive cash from a credit sale and represents an asset of the company.

accounts receivable Signup and view all the answers

The allowance method estimates

Uncollectible accounts. Signup and view all the answers

The direct write-off method is required for

Income tax purposes. Signup and view all the answers

A trade discount is a reduction from the list price, which is used to: (Select all that apply)

Disguise real prices from competitors Signup and view all the answers

The allowance method is required by ____

GAAP Signup and view all the answers

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

Account receivable Signup and view all the answers

Under the allowance method, companies estimate _ uncollectible amounts and report those estimates in the _ year.

Future; current Signup and view all the answers

The direct write-off method is used when

Uncollectible accounts are not anticipated or are immaterial. Signup and view all the answers

Receivables not expected to be collected should

Not be counted in assets of the company. Signup and view all the answers

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000 Signup and view all the answers

Allowance for Uncollectible Accounts has a credit balance because it is a(n)

Contra-asset Signup and view all the answers

The estimated expense for accounts that may not be collected is referred to as

Bad debt expense Signup and view all the answers

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

Decrease in Accounts Receivable Signup and view all the answers

Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write-off of the account will include which of the following entries?

Credit to Accounts Receivable Signup and view all the answers

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as

Accounts receivable Signup and view all the answers

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write-off will _____ net income.

Not affect Signup and view all the answers

Two entries are required when a previously written-off account is collected. These two entries include:

Record the collection on the account receivable Signup and view all the answers

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ____ method of accounts receivables.

aging method Signup and view all the answers

A formal credit arrangement between a creditor and debtor is called a(n)

Note receivable Signup and view all the answers

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate. Signup and view all the answers

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

Average collection period Signup and view all the answers

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)

Sales on account Signup and view all the answers

Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

False Signup and view all the answers

A sales allowance the amount owed by the customer for merchandise that is _ by the customer.

Decreases; returned Signup and view all the answers

A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as a(n) ____ discount.

sales discount Signup and view all the answers

The journal entry to record bad debt expense includes: (Select all that apply.)

Credit to allowance for uncollectible accounts Signup and view all the answers

What are the financial statement effects of recording bad debt expense using the allowance method?

Decrease assets Signup and view all the answers

Shannon Corp. uses the aging method to account for bad debt expense. Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write-off of the account will include

Debit Allowance for Uncollectible Accounts. Signup and view all the answers

Accounts receivable are typically classified as current assets because

They will be converted to cash within 1 year. Signup and view all the answers

A sales discount is recorded by the seller as a .

contra revenue Signup and view all the answers

On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25?

Debit Sales Discount for $10. Signup and view all the answers

The entry to record the estimate for uncollectible accounts includes:

A debit to Bad Debt Expense. Signup and view all the answers

Schmidt Company's Accounts Receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net amount of accounts receivable is:

$96,000. Signup and view all the answers

If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account:

Net accounts receivable do not change. Signup and view all the answers

The effect of writing off a specific account receivable is:

A reduction in the Allowance for Uncollectible Accounts. Signup and view all the answers

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a CREDIT of $500 and that the company estimates 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be:

$5,100. Signup and view all the answers

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a DEBIT of $500 and that the company estimates 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be:

$6,100. Signup and view all the answers

Assuming the balance of Allowance for Uncollectible Accounts is $3,000 (credit) before adjustment, which of the following would be recorded in the year-end adjusting entry?

Debit Bad Debt Expense for $14,000. Signup and view all the answers

Under the direct write-off method, uncollectible accounts are recorded:

In the period the account is determined actually uncollectible. Signup and view all the answers

On April 1, 20X1, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are due on March 31, 20X2 (one year later). Assuming Nelson Inc. has a December 31 year-end, on March 31, 20X2, Nelson Inc. will record interest revenue of:

$2,000. Signup and view all the answers

At the beginning of the year, Dawnetta Fashions has total accounts receivable of $300,000. By the end of the year, Dawnetta reports total credit sales of $1,500,000 and total accounts receivable of $200,000. What is the receivables turnover ratio for Dawnetta Fashions?

6.0. Signup and view all the answers

Accounts receivable are best described as

Assets of the company representing the amount owed by customers. Signup and view all the answers

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What is the amount of net revenues (sales minus sales discounts) as of March 23?

$11,760. Signup and view all the answers

Using the allowance method, the entry to record a write-off of accounts receivable will include:

A debit to Allowance for Uncollectible Accounts. Signup and view all the answers

Study Notes

Bad Debt Accounting and Methods

The direct write-off method records bad debt expense when an account receivable is confirmed as uncollectible.
The allowance method anticipates bad debts and estimates uncollectible accounts, impacting financial statements in the current year.
Recording bad debt expense affects assets by decreasing total receivables and increases expenses.

Accounts Receivable and Classification

Accounts receivable are classified as current assets since they convert to cash typically within one year.
The term 'accounts receivable' refers to the legal right to receive cash from credit sales, representing an asset.

Discounts and Allowances

A trade discount is a percentage reduction from list price used to incentivize early payment or offer quantity discounts.
Sales allowances decrease the amount owed when goods are retained after a customer returns them.

Financial Reporting and Accounting Practices

The allowance for uncollectible accounts functions as a contra asset account to accounts receivable, reducing total assets on the balance sheet.
Under the allowance method, uncollectible amounts are estimated, while the direct write-off method is required for income tax purposes.
Bad debt expense is recorded as a debit to Bad Debt Expense and credit to Allowance for Uncollectible Accounts.

Aging Method and Ratio Analysis

The aging method of accounts receivable evaluates the age of account balances to estimate uncollectible amounts.
Key ratios for assessing accounts receivable management include the receivable turnover ratio and average collection period.

Treatment of Write-offs

Writing off specific accounts does not alter net accounts receivable under the allowance method.
Upon collection of previously written-off accounts, entries must reinstate the account and record the cash collection.

Note Receivables and Assets

Notes receivable can be classified as either current or noncurrent assets, depending on maturity.
Cash discounts for early payments are categorized as sales discounts and recorded as contra revenue.

Important Calculations and Changes

Bad debt expense can significantly affect financials; for example, an estimated uncollectible percentage of AR can change the expense reported.
On writing off accounts, the allowance account is reduced, reflecting the non-collectibility of the receivable.
The net accounts receivable is calculated by deducting the allowance for uncollectible accounts from total receivables.

Final Notes

Accounts not expected to be collected should be excluded from asset calculations.
Sales discounts can provide financial benefits for cash sales made within specified periods.

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Description

This quiz covers the accounting methods used for bad debts, including the direct write-off and allowance methods. It explores the classification of accounts receivable, discounts, and allowances, along with their impacts on financial reporting. Test your knowledge on these key accounting concepts to ensure a solid understanding of financial practices.

Bad Debt Accounting Methods

Questions and Answers

When the direct write-off method is used, an entry for bad debt expense is required

Accounts receivable are typically classified as current assets because

A trade discount is

The account 'Allowance for Uncollectible Accounts' is classified as

When a customer returns a product for a refund, in which account is the entry recorded?

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

A(n) ____ ____ is the legal right to receive cash from a credit sale and represents an asset of the company.

The allowance method estimates

The direct write-off method is required for

A trade discount is a reduction from the list price, which is used to: (Select all that apply)

The allowance method is required by ____

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.

The direct write-off method is used when

Receivables not expected to be collected should

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

Allowance for Uncollectible Accounts has a credit balance because it is a(n)

The estimated expense for accounts that may not be collected is referred to as

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write-off of the account will include which of the following entries?

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write-off will _____ net income.

Two entries are required when a previously written-off account is collected. These two entries include:

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ____ method of accounts receivables.

A formal credit arrangement between a creditor and debtor is called a(n)

Where is a note receivable reported in the balance sheet?

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)

Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

A sales allowance ____ the amount owed by the customer for merchandise that is _____ by the customer.

A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as a(n) ____ discount.

The journal entry to record bad debt expense includes: (Select all that apply.)

What are the financial statement effects of recording bad debt expense using the allowance method?

Shannon Corp. uses the aging method to account for bad debt expense. Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write-off of the account will include

Accounts receivable are typically classified as current assets because

A sales discount is recorded by the seller as a ____ ____.

On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25?

The entry to record the estimate for uncollectible accounts includes:

Schmidt Company's Accounts Receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net amount of accounts receivable is:

If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account:

The effect of writing off a specific account receivable is:

Assuming the balance of Allowance for Uncollectible Accounts is $3,000 (credit) before adjustment, which of the following would be recorded in the year-end adjusting entry?

Under the direct write-off method, uncollectible accounts are recorded:

On April 1, 20X1, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are due on March 31, 20X2 (one year later). Assuming Nelson Inc. has a December 31 year-end, on March 31, 20X2, Nelson Inc. will record interest revenue of:

At the beginning of the year, Dawnetta Fashions has total accounts receivable of $300,000. By the end of the year, Dawnetta reports total credit sales of $1,500,000 and total accounts receivable of $200,000. What is the receivables turnover ratio for Dawnetta Fashions?

Accounts receivable are best described as

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What is the amount of net revenues (sales minus sales discounts) as of March 23?

Using the allowance method, the entry to record a write-off of accounts receivable will include:

Study Notes

Bad Debt Accounting and Methods

Accounts Receivable and Classification

Discounts and Allowances

Financial Reporting and Accounting Practices

Aging Method and Ratio Analysis

Treatment of Write-offs

Note Receivables and Assets

Important Calculations and Changes

Final Notes

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Description

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A(n) is the legal right to receive cash from a credit sale and represents an asset of the company.

Under the allowance method, companies estimate _ uncollectible amounts and report those estimates in the _ year.

A sales allowance the amount owed by the customer for merchandise that is _ by the customer.

A sales discount is recorded by the seller as a .