Test bank for horngrens financial managerial accounting 6th edition

Test Bank for Horngren’s Financial & Managerial Accounting, 6th Edition

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Horngren's Financial and Managerial Accounting, 6e (Miller-Nobles) Chapter 8 Receivables 8.1 Learning Objective 8-1 1) A receivable occurs when a business sells goods or services to another party on account.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

2) Each receivable transaction involves two parties - the one who takes on the obligation and the one who will collect the cash.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

3) A receivable is a monetary claim against a business or an individual.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

4) A receivable is a liability because it represents a right to receive cash in the future.

Answer: FALSE Explanation: A receivable is an asset because it represents a right to receive cash in the future.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

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5) A debtor is a party to a credit transaction who will receive the cash for the transaction at a later date.

Answer: FALSE Explanation: A debtor is a party to a credit transaction who takes on an obligation/payable.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

6) A receivable occurs when a business ________.

A) loans money to another party B) sells goods or services to another party on account C) has a monetary claim against a business or individual D) All of the statements are correct.

Answer: D Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

7) Which of the following statements regarding receivables is correct?

A) Each receivable transaction involves three parties.

B) Receivables occur when a business loans money to another party.

C) A receivable occurs when a business makes a cash sale of goods or services to another party.

D) A receivable is the right to pay cash in the future from a current receivable transaction.

Answer: B Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

8) The two major types of receivables are interest receivable and taxes receivable.

Answer: FALSE Explanation: The two major types of receivables are accounts receivable and notes receivable.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

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9) The three major types of receivables are accounts receivable, notes receivable, and other receivables.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

10) Accounts receivable are also called trade receivables.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

11) The collection period of accounts receivable is usually long, and therefore, it is classified as a longterm asset on the balance sheet.

Answer: FALSE Explanation: Accounts receivable are usually collected within a short period of time and are therefore reported as a current asset on the balance sheet.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

12) Accounts receivable are usually collected within a short period of time and are therefore reported as a current liability on the balance sheet.

Answer: FALSE Explanation: Accounts receivable are usually collected within a short period of time and are therefore reported as a current asset on the balance sheet.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

13) Notes receivable represent a written promise that a party will pay a fixed amount of principal plus interest on a stated maturity date.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables 3 Copyright © 2018 Pearson Education, Inc.

14) The payment terms for a note receivable are generally longer than that of an account receivable.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

15) Dividends receivable, interest receivable, and taxes receivable are generally categorized as other receivables.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

16) Notes receivable due within 12 months or within the normal operating cycle if the cycle is longer than a year are considered long-term assets.

Answer: FALSE Explanation: These are considered current assets.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

17) Which of the following is included in the category of other receivables?

A) interest receivable B) accounts receivable C) notes receivable D) investments Answer: A Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

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18) Which of the following statements is true?

A) Accounts receivable are more liquid than cash.

B) Notes receivable are always classified as current assets.

C) Notes receivable usually have longer collection terms than accounts receivable.

D) Accounts receivable are liabilities.

Answer: C Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

19) Which of the following statements, regarding notes receivable, is incorrect?

A) Notes receivable usually have longer terms than accounts receivable.

B) A notes receivable is a written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future.

C) All notes receivable are considered long-term assets.

D) Notes receivable are sometimes called promissory notes.

Answer: C Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Types of Receivables

20) Notes receivable ________.

A) represent an oral promise to pay a fixed amount of principal plus interest on the maturity date B) are included in a miscellaneous category called other receivables C) are due within 12 months or within the normal operating cycle if the cycle is longer than a year are considered long-term assets D) are supported by a promissory note Answer: D Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Types of Receivables

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21) Which of the following should be classified as a long-term asset?

A) Interest Receivable B) Accounts Receivable C) Notes Receivable, due in 5 years D) Cash Equivalents Answer: C Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Types of Receivables

22) Credit department employees must have access to cash in order to exercise effective internal control over receivables.

Answer: FALSE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Exercising Internal Control Over Receivables

23) Separation of cash-handling and cash-accounting duties is a critical element of internal control over receivables.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Exercising Internal Control Over Receivables

24) The employees who handle cash know how customers pay and thus are in the best position to grant credit to customers.

Answer: FALSE Explanation: The employees who handle cash should not be in a position to grant credit to customers.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Exercising Internal Control Over Receivables

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25) Which of the following is an example of exercising internal control over receivables?

A) separating cash collection and credit approval duties B) extending credit to all customers who apply for credit C) combining the duties of the credit and accounting departments D) allowing credit department employees to collect cash from customers Answer: A Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Exercising Internal Control Over Receivables

26) Which of the following is a weak internal control over cash collections from receivables?

A) The credit department should have no access to cash.

B) A credit department should evaluate customers' credit applications to determine whether they meet the company's approval standards.

C) A company should have written approval standards for processing customers' credit applications.

D) In order to avoid losing sales, all customers' credit applications should be approved.

Answer: D Diff: 2 LO: 8-1 AACSB: Analytical thinking AICPA Functional: Measurement PE Question Type: Critical thinking H2: Exercising Internal Control Over Receivables

27) The role of the credit department includes ________.

A) approving all credit applications in order to avoid losing sales B) evaluating customers' credit applications to determine whether they meet the company's approval standards C) following unwritten approval standards for processing customers' credit applications D) collecting cash from customers Answer: B Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Exercising Internal Control Over Receivables

28) Businesses must maintain a single Accounts Receivable control account regardless of the number of customers.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Sales on Credit

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29) Separate customer accounts receivable are called subsidiary accounts.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Sales on Credit

30) A business maintains a separate Accounts Receivable account for each customer in order to account for payments received from the customer and amounts still owed by the customer.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Sales on Credit

31) Because customers make payments on account throughout the period, the sum of all balances in subsidiary accounts receivable will not equal the control account balance.

Answer: FALSE Explanation: The sum of all balances in subsidiary accounts receivable equals a control account balance.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Sales on Credit

32) Specialty Foods, Inc. maintains a separate accounts receivable account for each customer. Regarding this accounting treatment, which of the following statements is incorrect?

A) The separate customer accounts receivable are called subsidiary accounts.

B) When a customer makes a payment on account, a debit is posted to the accounts receivable subsidiary account as well as to the accounts receivable control account.

C) The sum of all balances in the subsidiary accounts receivable equals a control account balance.

D) The purpose of this accounting treatment is to account for payments received from the customer and the amounts still owed.

Answer: B Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Sales on Credit

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33) Alltech Company maintains a separate accounts receivable account for each customer. On June 18, Alltech provides $6,300 of services on account to customer Anthony and $1,200 of services on account to customer Walker. How will these two transactions affect the control and subsidiary accounts?

A) The control account, Accounts Receivable, will be increased with a debit of $7,500.

B) The individual customer accounts in the subsidiary ledger will be increased with credits.

C) After posting these transactions, the sum of the balances in subsidiary accounts receivable will not equal the control account balance.

D) The control account will have a debit balance and the subsidiary accounts will have a credit balance.

This keeps the accounting equation in balance.

Answer: A Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Sales on Credit

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34) A business maintains subsidiary accounts for each of its customers. On May 15, the business provides services on account: $1,900 to customer J. Anthony ; $4,900 to customer A. Martin; and $1,300 to customer S. Lee. Which journal entry is needed to record these transactions?

A) May 15 Accounts Receivable Service Revenue

8,100 8,100

B) May 15 Accounts Receivable - J. Anthony Accounts Receivable - A. Martin Accounts Receivable - S. Lee Service Revenue

1,900 4,900 1,300 8,100

C) May 15 Service Revenue Accounts Receivable

8,100 8,100

D) May 15 Accounts Receivable Control Sales Revenue

8,100

May 15 Accounts Receivable - J. Anthony Accounts Receivable - A. Martin Accounts Receivable -S. Lee Accounts Receivable - Control

1,900 4,900 1,300

8,100

8,100

Answer: B Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Sales on Credit

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35) A business maintains subsidiary accounts for each of its customers. On April 7, the business provides $2,500 in services to Anne Hill on account. The business sells $4,000 (sales price) of merchandise inventory to Ron Wilson on account.

The full amount was collected from each customer on April 26.

Prepare the journal entries for April 7 and April 26. Ignore Cost of Goods Sold and omit explanations.

Date

Debit

Answer: Date 4/7 Accounts Receivable - Hill Service Revenue

Debit Credit 2,500 2,500

4/7

4/26

Accounts Receivable - Wilson Sales Revenue

4,000

Cash Accounts Receivable - Hill Accounts Receivable -Wilson

6,500

Credit

4,000

2,500 4,000

Diff: 3 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Sales on Credit

36) By accepting credit and debit cards, companies are able to attract more customers.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

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37) When businesses accept payment by credit and debit cards, there is almost always a fee to the purchaser to cover the processing costs charged by the card issuer.

Answer: FALSE Explanation: When businesses accept payment by credit and debit cards, there is almost always a fee to the purchaser to cover the processing costs charged by the card issuer.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

38) Sales through credit or debit cards transfer the risk of collection of receivables from the seller to the card issuer.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

39) When businesses accept payment by credit and debit cards, the costs of processing fees are greater than the benefits of transferring the risk of not being able to collect from the customer and avoiding the costs associated with credit customers.

Answer: FALSE Explanation: When businesses accept payment by credit and debit cards, the benefits of transferring the risk of not being able to collect from the customer and avoiding the costs associated with credit customers are greater than the costs of processing fees.

Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

40) Credit cards reduce the customer's bank account immediately but allow the customer to pay electronically instead of with currency or writing a check.

Answer: FALSE Explanation: Debit cards reduce the customer's bank account immediately but allow the customer to pay electronically instead of with currency or writing a check.

Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

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41) Factoring occurs when a business sells its receivables to a finance company or bank.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

42) When a business factors its receivables, it uses the receivables as security for a loan.

Answer: FALSE Explanation: When a business pledges its receivables, it uses the receivables as security for a loan.

Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

43) When a business factors its receivables, the factor collects cash on the receivables.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

44) Factoring is an option available to a business to reduce the risk of uncollectible accounts receivable.

Answer: TRUE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

45) When a business pledges its accounts receivable, it transfers the right to collect cash from customers to the bank.

Answer: FALSE Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

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46) When a business factors its accounts receivables, the business ________.

A) uses the receivables as security for a loan B) no longer has to deal with the collection of the receivables from the customers C) receives the total amount of the receivables from the factor D) receives cash, less an applicable fee, after the factor collects from the customers Answer: B Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Decreasing Collection Time and Credit Risk

47) Which of the following is a disadvantage when a business accepts credit cards or debit cards from customers?

A) The business bears the responsibility of collecting cash from the customer.

B) The business bears the risk of nonpayment by the customer.

C) The business pays a processing fee.

D) The business checks customers' credit ratings.

Answer: C Diff: 1 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Decreasing Collection Time and Credit Risk

48) A business that accepts payments by credit and debit cards ________.

A) is usually unable to attract more customers B) must check each customer's credit rating C) generally receives proceeds from credit and debit card transactions 30-45 days after the sale D) almost always pays a fee to the processor to cover the processing costs Answer: D Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Decreasing Collection Time and Credit Risk

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49) Provide a brief definition of each of the following terms.

Term Debtor

Brief Definition

Pledging Receivables

Accounts Receivable

Answer: Term Debtor Pledging Receivables

Accounts Receivable

Brief Definition The party to a transaction who takes on an obligation/payable.

Using receivables as security (collateral) for a loan.

The right to receive cash in the future from customers for goods sold or for services provided.

Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Decreasing Collection Time and Credit Risk

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50) Provide a brief definition of each of the following terms.

Term Factoring Receivables

Brief Definition

Receivable

Maturity Date

Answer: Term Factoring Receivables Receivable Maturity Date

Brief Definition Selling receivables to finance company or bank.

A monetary claim against a business or an individual.

The date when a note is due.

Diff: 2 LO: 8-1 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Decreasing Collection Time and Credit Risk

8.2 Learning Objective 8-2 1) The expense associated with the cost of uncollectible accounts receivable is called bad debts expense.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

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2) Accounts receivable that are uncollectible must remain on the books because the customer may eventually pay.

Answer: FALSE Explanation: Accounts receivable that are uncollectible must be written off because the company does not expect to receive cash in the future.

Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

3) Bad debt expense is a cost to the seller of extending credit.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

4) The two methods of accounting for uncollectible accounts receivable are ________.

A) the direct write-off method and the liability method B) the asset method and the sales method C) the allowance method and the liability method D) the allowance method and the direct write-off method Answer: D Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

5) The direct write-off method of accounting for uncollectible receivables is primarily used by small, nonpublic companies.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

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6) The following information is from the records of Mountainview Camera Shop: Accounts receivable, December 31, 2018 Net credit sales for 2018 Accounts written off as uncollectible during 2018 Cash sales during 2018

$80,000 (debit) 160,000 16,000 42,000

The company uses the direct write-off method for bad debts. What is the amount of bad debts expense?

A) $80,000 B) $42,000 C) $64,000 D) $16,000 Answer: D Diff: 2 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

7) Under the direct write-off method, the entry to write off an uncollectible account will include ________.

A) a debit to Bad Debts Expense account B) a debit to the customer's Account Receivable C) a credit to the Allowance for Bad Debts D) No entry is made to write off uncollectible accounts.

Answer: A Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

8) Under the direct write-off method, which of the following is included in the entry to write off an uncollectible account?

A) a credit to the Allowance for Bad Debts B) a credit to the customer's Account Receivable C) a debit to Allowance for Uncollectible Accounts D) No entry is made to write off uncollectible accounts.

Answer: B Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

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9) When a company is using the direct write-off method, and an account is written off, the journal entry consists of a ________.

A) debit to Accounts Receivable and a credit to Cash B) credit to Accounts Receivable and a debit to Bad Debts Expense C) debit to the Allowance for Bad Debts and a credit to Accounts Receivable D) credit to Accounts Receivable and a debit to Interest Expense Answer: B Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

10) Uptown, Inc. has determined that an account receivable of $125 is uncollectible. The company uses the direct write-off method. Which of the following entries is required to record the write-off?

A) Bad Debts Expense Accounts Receivable

125

B) Cash Accounts Receivable

125

C) Allowance for Bad Debts Accounts Receivable

125

D) Accounts Receivable Bad Debts Expense

125

125

125

125

125

Answer: A Diff: 2 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

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11) On January 1, Five Star Services has the following balances: Accounts Receivable $24,000 (debit) Bad Debts Expense $0 Five Star Services has the following transactions during January: Credit sales of $120,000, collections of credit sales of $86,000, and write-offs of $20,000. Five Star Services uses the direct write-off method. At the end of January, the balance of Accounts Receivable is ________.

A) $14,333 B) $38,000 C) $27,907 D) $58,000 Answer: B Explanation: B) Beginning balance $24,000 + Credit Sales $120,000 - Collections $86,000 - Write-offs $20,000 = $38,000 Diff: 2 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

12) On January 1, All City Services has the following balances: Accounts Receivable $25,000 Bad Debts Expense $0 All City has the following transactions during January: Credit sales of $120,000, collections of credit sales of $81,000, and write-offs of $18,000. All City uses the direct write-off method. The amount of Bad Debts Expense for January is ________.

A) $25,000 B) $26,667 C) $12,150 D) $18,000 Answer: D Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

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13) A company with significant amounts of accounts receivable experiences uncollectible accounts from time to time. If the company uses the direct write-off method, the effect of writing off an uncollectible receivable will be ________.

A) a reduction in net income B) negligible on net income C) an increase in total assets D) a generation of positive cash flow Answer: A Diff: 2 LO: 8-2 AACSB: Analytical thinking AICPA Functional: Measurement PE Question Type: Critical thinking H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

14) Once an accounts receivable is written off ________.

A) the account must be turned over to a collection agency B) the company continues to pursue the collection C) the company still expects to be paid D) the customer's accounts receivable is removed from the books Answer: D Diff: 2 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

15) Prepare the journal entry to record an uncollectible accounts receivable of $10,000, using the direct write-off method. Omit explanation.

Answer: Bad Debts Expense 10,000 Accounts Receivable 10,000 Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

16) In order to keep accurate records about the collection of cash for a previously written off account, a business should re-establish the Accounts Receivable by crediting the receivable account.

Answer: FALSE Explanation: The receivable account is debited.

Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method 21 Copyright © 2018 Pearson Education, Inc.

17) In order to keep accurate records about the collection of cash for a previously written off account, a business should re-establish the Accounts Receivable by debiting the receivable account.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method

18) Customer G. Smith owed Stonehollow Electronics $425. On April 27, 2018, Stonehollow determined this account receivable to be uncollectible and wrote off the account. The company uses the direct writeoff method. On July 15, 2018, Stonehollow received a check for $425 from the customer. How should the July 15, 2018 transaction be recorded?

A) July 15 Cash 425 Accounts Receivable - G. Smith 425 B) July 15

July 15

C) July 15

D) July 15

July 15

Accounts Receivable - G. Smith Bad Debt Revenue

425

Cash Accounts Receivable - G. Smith

425

Cash Bad Debt Expense

425

Accounts Receivable - G. Smith Bad Debt Expense

425

Cash Accounts Receivable - G. Smith

425

425

425

425

425

425

Answer: D Diff: 2 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method

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19) Moonlight, Inc. wrote off the account of one of its customers, X, in 2018 for $500. On January 21, 2019, X unexpectedly repaid his account in full. The company uses the direct write-off method to account for uncollectible receivables. Journalize the entries required for Moonlight, Inc. on January 21, 2019. Omit explanations.

Answer: Accounts Receivable—X 500 Bad Debts Expense 500 Cash Accounts Receivable— X

500 500

Diff: 2 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method

20) Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts receivable.

Answer: FALSE Explanation: The allowance method is required by GAAP. Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Limitations of the Direct Write-Off Method

21) The direct write-off method is only acceptable for companies that have very few uncollectible receivables.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Limitations of the Direct Write-Off Method

22) The direct write-off method for uncollectible accounts violates the matching principle.

Answer: TRUE Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Limitations of the Direct Write-Off Method

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23) For a company with significant uncollectible receivables, the direct write-off method is unsuitable because ________.

A) it overstates liabilities on the balance sheet B) it violates the matching principle C) it uses estimates for determining the bad debt expense D) companies are not able to track customer payment histories Answer: B Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Limitations of the Direct Write-Off Method

24) Which of the following statements is true of the direct write-off method?

A) GAAP requires public companies to follow the direct write-off method.

B) It provides better matching of revenues with expenses.

C) It results in more accurate net income than any other method.

D) It is only suitable for small companies that have very few uncollectible receivables.

Answer: D Diff: 1 LO: 8-2 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Limitations of the Direct Write-Off Method

8.3 Learning Objective 8-3 1) The use of the allowance method to record bad debts expense violates the matching principle.

Answer: FALSE Explanation: The use of the allowance method to record bad debts expense is based on the matching principle.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

2) A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see from which customers the company will not be able to collect is known as the allowance method.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1) 24 Copyright © 2018 Pearson Education, Inc.

3) Under both the allowance method and the direct-write off method of accounting for uncollectible accounts, the amount of bad debts expense is estimated at the end of each accounting period.

Answer: FALSE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

4) The Allowance for Bad Debts is a contra account to Accounts Receivable.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

5) The allowance method of accounting for uncollectible receivables ________.

A) is used to measure bad debts B) violates the matching principle C) records bad debt expense in the period the accounts receivable is written off D) requires the use of a contra liability account.

Answer: A Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

6) Which of the following statements regarding the allowance method of accounting for uncollectible receivables is incorrect?

A) Bad debt expense is not estimated.

B) The Allowance for Bad Debts is used to hold the pool of "unknown" uncollectible accounts.

C) The business does not wait to see which customers will not pay when estimating the allowance for bad debts.

D) The allowance method is based on the matching principle.

Answer: A Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

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7) The Allowance for Bad Debts account ________.

A) is a liability account B) holds the pool of "unknown" uncollectible accounts C) increases with a debit D) is added to accounts receivable Answer: B Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

8) The net realizable value of Accounts Receivable is calculated by subtracting Bad Debts Expense from Accounts Receivable.

Answer: FALSE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Bad Debt Expense - Allowance Method

9) When accounting for uncollectible accounts under IFRS, the allowance method is used to accomplish the matching of bad debt expense to the sales of the period but not to report receivables at net realizable value.

Answer: FALSE Explanation: When accounting for uncollectible accounts under IFRS, the allowance method is used to accomplish the matching of bad debt expense to the sales of the period and to report receivables at net realizable value.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Bad Debt Expense - Allowance Method

10) To report accounts receivable at the appropriate amount on the balance sheet, a company determines an accurate estimate of uncollectible accounts and recognizes the associated bad debt expense.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Bad Debt Expense - Allowance Method

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11) When using the allowance method to account for uncollectible accounts receivable, companies estimate bad debt expense at the end of the period and then record an adjusting entry.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recording Bad Debt Expense - Allowance Method

12) When a company uses the allowance method to measure bad debts, ________.

A) the Bad Debts Expense account is debited when an account is written off B) the amount of bad debts expense is estimated at the end of the accounting period C) the normal balance in the Allowance for Bad Debts account is a debit D) the amount of bad debts expense is not estimated at the end of the accounting period Answer: B Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

13) Which of the following is true of the balance sheet presentation of the Allowance for Bad Debts?

A) It is reported as a current liability.

B) It is reported as an operating expense.

C) It is reported as a separate, independent line item under current assets.

D) It is shown as a contra account related to accounts receivable.

Answer: D Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

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14) Accounts Receivable has a balance of $32,000, and the Allowance for Bad Debts has a credit balance of $3,000. The allowance method is used. What is the net realizable value of Accounts Receivable before and after a $2,100 account receivable is written off?

A) $29,000; $29,000 B) $26,900; $26,900 C) $29,000; $26,900 D) $26,900; $31,100 Answer: A Explanation: A)

Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

15) Accounts Receivable has a balance of $8,000, and the Allowance for Bad Debts has a credit balance of $450. The allowance method is used. What is the net realizable value of Accounts Receivable after a $160 account receivable is written off?

A) $7,390 B) $7,710 C) $7,550 D) $8,000 Answer: C Explanation: C) After write-off Accounts Receivable $7,840 Less: Allowance for Bad Debts (290) Net Realizable Value $7,550 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

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16) A company reports net accounts receivable of $152,000 on its December 31, 2019 balance sheet. The Allowance for Bad Debts has a credit balance of $19,000. What is the balance of Accounts Receivable?

A) $157,000 B) $152,000 C) $171,000 D) $133,000 Answer: C Explanation: C) $152,000 + $19,000 = $171,000 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

17) After the December 31, 2019 adjusting journal entries have been posted, Sinclair Enterprises has the following account balances (all accounts have normal balances) are: Account Title Accounts Receivable Allowance for Bad Debts Bad Debts Expense

Account Balance $159,000 $4,600 $8,200

What is the net realizable value as of December 21, 2019?

A) $163,600 B) $150,800 C) $146,200 D) $154,400 Answer: D Explanation: D) Accounts Receivable - Allowance for Bad Debts = Net Realizable Value $159,000 - $4,600 = $154,400 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

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18) After the December 31, 2019 adjusting journal entries have been posted, Tri-State Distributors has the following account balances (all accounts have normal balances) are: Account Title Account Balance Accounts Receivable $240,000 Allowance for Bad Debts $12,500 Bad Debts Expense $14,500 Use this information to prepare, in good form, the Balance Sheet (partial) on December, 31, 2019. Include a proper heading.

Answer: Tri-State Distributors Balance Sheet (partial) December 31, 2019 Assets Current Assets: Account Receivable Less: Allowance for Bad Debts

$240,000 2,500

$227,500

Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recording Bad Debt Expense - Allowance Method

19) Bad Debt Expense is not debited when a company writes off an account receivable when using the allowance method because the company has already recorded the Bad Debt Expense as an adjusting entry.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

20) The entry to write off an account under the allowance method affects net income at the time of entry.

Answer: FALSE Explanation: The entry to write off an account under the allowance method has no effect on net income at the time of entry.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

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21) When using the allowance method, Allowance for Bad Debts is debited when an account receivable is written off.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

22) Under the allowance method, the entry to write off a receivable increases the amount of the Allowance for Bad Debts account.

Answer: FALSE Explanation: The entry to write off a receivable decreases the amount of the Allowance for Bad Debts account.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

23) The entry to write off an account receivable under the allowance method will ________.

A) reduce net income B) have no effect on net income C) increase total assets D) increase net income Answer: B Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

24) Jayson Enterprises uses the allowance method to account for uncollectible receivables. When an uncollectible account is written off, ________.

A) the Bad Debt Expense account is debited B) no entry is required because bad debt expense is estimated at the end of the accounting period C) the write off has no effect on net income D) the Allowance for Bad Debts account is credited Answer: C Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

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25) When using the allowance method, the write-off of a receivable ________.

A) involves a contra-revenue account B) reduces the amount of the Allowance for Bad Debts account C) decreases net income D) affects the net realizable value of accounts receivable Answer: B Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Writing Off Uncollectible Accounts - Allowance Method

26) On January 16, Half Circle, Inc. sold $5,000 of merchandise to Arnold, on account. Half Circle could not collect cash from Arnold and wrote off the account. Prepare a journal entry to record the write-off, assuming Half Circle uses the allowance method. Omit explanation.

Answer: Allowance for Bad Debts 5,000 Accounts Receivable—Arnold 5,000 Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Writing Off Uncollectible Accounts - Allowance Method

27) Define net realizable value. How is net realizable value affected when a receivable is written off under the allowance method?

Answer: Net realizable value is the net value a company expects to collect from its accounts receivable.

Accounts Receivable less Allowance for Bad Debts equals net realizable value. The entry to write off a receivable reduces the amounts of the Allowance for Bad Debts and Accounts Receivable accounts, but does not affect the net realizable value shown on the balance sheet. This is because both accounts are reduced by the amount of the write-off.

Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Writing Off Uncollectible Accounts - Allowance Method

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28) After a company has written off an account, the company continues to attempt to collect on the receivable.

Answer: FALSE Explanation: After a company has written off an account, the company stops attempting to collect on the receivable.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Allowance Method

29) Under the allowance method, if a customer makes payment on a receivable that has already been written off, the company needs to reverse the write-off to the Allowance for Bad Debts account.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Allowance Method

30) If a customer makes payment on a receivable that has already been written off, the receivable account is reestablished.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Allowance Method

31) When using the allowance method, the receipt of a payment on receivables that have been written-off requires an entry to reverse the write-off to the Allowance for Bad Debts account and an entry to record the receipt of cash.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Allowance Method

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32) When using the allowance method, after a company has previously written off an account, ________.

A) the company continues to send monthly statements to the customers whose accounts have been written off B) the company cannot collect from these customers because their accounts have been written off C) when a customer pays on an account that has been written off, the company needs to reverse the write-off to the Allowance for Bad Debts account and then record the receipt of cash D) the company does not need to re-establish the receivable account Answer: C Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Recovery of Accounts Previously Written Off - Allowance Method

33) On June 16, 2018, Evergreen Inc. wrote off the $200 receivable from customer M. Simmons. On October 14, 2018, Evergreen unexpectedly receives $200 cash from M.Simmons. How should Evergreen record the $200 payment from M. Simmons? Evergreen uses the allowance method.

A) debit Cash and credit Bad Debts Expense B) debit Accounts Receivable - M. Simmons and credit Allowance for Bad Debts; debit Cash and credit Accounts Receivable - M. Simmons C) debit Accounts Receivable - M. Simmons and credit Bad Debts Expense; debit Cash and credit Accounts Receivable - M. Simmons D) debit Cash and credit Allowance for Bad Debts Answer: B Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recovery of Accounts Previously Written Off - Allowance Method

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34) During July 2019, Midtown Catering recorded the following: Catering services of $86,400 were provided ($64,500 on account, $21,900 for cash) Collections on account, $58,950 Write-offs of uncollectible receivables, $2,560 Recovery of receivable previously written off, $1,000 Journalize Midtown's transactions during July, assuming Midtown uses the allowance method. Omit explanations.

Answer: Date

Accounts and Explanation

Debit

Credit

2019 July

Accounts Receivable

64,500

Cash Service Revenue

21,900

Cash

58,950

86,400

Accounts Receivable

58,950

Allowance for Bad Debts

2,560

Accounts Receivable

2,560

Accounts Receivable

1,000

Allowance for Bad Debts

1,000

Cash

1,000

Accounts Receivable

1,000

Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recovery of Accounts Previously Written Off - Allowance Method

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35) On July 15, 2018, Ellison Brothers Oil, Inc. sold $5,000 of merchandise to S & G Company, on account.

Ignore cost of goods sold. Ellison could not collect cash from S & G and wrote off the account on December 31, 2018. On November 4, 2019, S & G unexpectedly paid $5,000. Journalize the transactions on December 31, 2018 and November 4, 2019. (Ellison uses the allowance method.) Omit explanations.

Answer: Dec. 31 2018

Allowance for Bad Debts Accounts Receivable — S & G

5,000

Nov. 4 2019

Accounts Receivable — S & G Allowance for Bad Debts

5,000

Nov. 4 2019

Cash Accounts Receivable — S & G

5,000

5,000

5,000

5,000

Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Recovery of Accounts Previously Written Off - Allowance Method

36) The percent-of-sales method calculates bad debts expense based on a percentage of net cash sales.

Answer: FALSE Explanation: The percent-of-sales method calculates bad debts expense based on a percentage of net credit sales.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Estimating and Recording Bad Debt Expense - Allowance Method

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37) The percent-of-sales method, used to compute bad debt expense, is also known as the balance sheet approach.

Answer: FALSE Explanation: The percent-of-sales method, used to compute bad debt expense, is also known as the income-statement approach.

Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Estimating and Recording Bad Debt Expense - Allowance Method

38) The percent-of-sales method calculates bad debts expense as a percentage of net credit sales.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Estimating and Recording Bad Debt Expense - Allowance Method

39) The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts.

Answer: TRUE Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Estimating and Recording Bad Debt Expense - Allowance Method

40) Two methods of estimating uncollectible receivables are ________.

A) the allowance method and the amortization method B) the aging-of-accounts-receivable method and the percent-of-sales method C) the gross-up method and the direct write-off method D) the direct write-off method and the percent-of-completion method Answer: B Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Concept H2: Estimating and Recording Bad Debt Expense - Allowance Method

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41) The following information is from the records of Chicago Photography: Accounts Receivable, December 31, 2019 Allowance for Bad Debts, December 31, 2019 prior to adjustment Net credit sales for 2019 Accounts written off as uncollectible during 2019

$22,000 (debit) 800 (debit) 95,000 450

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $2,850 of accounts receivable will be uncollectible. Calculate the amount of net accounts receivable after the adjustment for bad debts.

A) $19,950 B) $19,150 C) $18,350 D) $17,900 Answer: B Explanation: B) $22,000 - $2,850 = $19,150 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

42) The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad debts expense. The company's management estimates that 4% of net credit sales will be uncollectible for the year 2019. Net credit sales for the year amounted to $250,000. What is the amount of Bad Debts Expense reported on the income statement for 2019?

A) $10,000 B) $12,000 C) $5,000 D) $8,000 Answer: A Explanation: A) $250,000 × 0.04 = $10,000 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

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43) The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad debts expense. The company's management estimates that 2% of net credit sales will be uncollectible for the year 2019. Net credit sales for the year amounted to $270,000. What will be the balance of Allowance for Bad Debts on the December 31, 2019 balance sheet?

A) $5,400 B) $2,000 C) $7,400 D) $5,360 Answer: C Explanation: C) Beginning balance of the Allowance for Bad Debts (Credit) + Adjusting entry = $2,000 + $5,400 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

44) The Allowance for Bad Debts has a credit balance of $8,000 before the adjusting entry for bad debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging-ofreceivables method, the company's management estimates that uncollectible accounts will be $17,000.

What will be the amount of Bad Debts Expense reported on the income statement?

A) $25,000 B) $9,000 C) $17,000 D) $8,000 Answer: B Explanation: B) Estimate of uncollectible accounts - Credit balance of the Allowance for Bad Debts = $17,000 - $8,000 = $9,000 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

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45) The Allowance for Bad Debts account has a credit balance of $8,300 before the adjusting entry for bad debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the agingof-receivables method, the company's management estimates that uncollectible accounts will be $14,700.

What will be the balance of the Allowance for Bad Debts reported on the balance sheet?

A) $14,700 B) $6,400 C) $23,000 D) $13,230 Answer: A Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

46) The Allowance for Bad Debts account has a debit balance of $9,000 before the adjusting entry for bad debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the agingof-receivables method, the company's management estimates that uncollectible accounts will be $11,000.

What amount of bad debts expense will be reported on the income statement?

A) $8,000 B) $20,000 C) $2,000 D) $11,000 Answer: B Explanation: B) $11,000 + $9,000 = $20,000 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

47) The Allowance for Bad Debts account has a debit balance of $8,000 before the adjusting entry for bad debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger, the company's management estimates that uncollectible accounts will be $12,000. What will be the amount of the adjustment in the Allowance for Bad Debts account?

A) $19,250 B) $12,000 C) $18,900 D) $20,000 Answer: D Explanation: D) Beginning balance of the Allowance for Bad Debts (Credit) + Estimate for uncollectible accounts = $8,000 + $12,000 = $20,000 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method 40 Copyright © 2018 Pearson Education, Inc.

48) The following information is from the 2020 records of R & S Commercial Plumbing Company: Accounts receivable, December 31, 2020 Allowance for Bad Debts, December 31, 2020 prior to adjustment Net credit sales for 2020 Accounts written off as uncollectible during 2017 Cash sales during 2020

$45,000 (debit) 1,300 (debit) 180,000 14,000 26,000

Bad debts expense is estimated by the percent-of-sales method. Management estimates that 3% of net credit sales will be uncollectible. Calculate the amount of bad debts expense for 2020.

A) $5,400 B) $4,050 C) $6,180 D) $4,100 Answer: A Explanation: A) Calculations: $180,000 × 0.03 = $5,400 Diff: 1 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

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49) The following information is from the 2019 records of Albert Book Shop: Accounts receivable, December 31, 2019 Allowance for Bad Debts, December 31, 2019 prior to adjustment Net credit sales for 2019 Accounts written off as uncollectible during 2017 Cash sales during 2019

$48,000 (debit) 2,000 (debit) 179,000 17,000 29,000

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $5,100 of accounts receivable will be uncollectible. Calculate the amount of bad debts expense for 2019.

A) $6,900 B) $7,100 C) $3,100 D) $5,350 Answer: B Explanation: B) Adjustment = Estimate based on aging + Allowance balance (debit) = $5,100 + $2,000 = $7,100 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

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50) The following information is from the 2019 records of Uptown Antique Shop: Accounts receivable, December 31, 2019 Allowance for Bad Debts, December 31, 2019 prior to adjustment Net credit sales for 2019 Accounts written off as uncollectible during 2019 Cash sales during 2019

$43,000 (debit) 1,500 (debit) 180,000 11,000 28,000

Bad debts expense is estimated by the percent-of-sales method. Management estimates that 3% of net credit sales will be uncollectible. The ending balance of the Allowance for Bad Debts account after adjustment will be ________.

A) $6,900 B) $4,740 C) $7,740 D) $3,900 Answer: D Explanation: D) Estimated Bad Debt Expense - Allowance account balance (Debit) = $5,400 - $1,500 = $3,900 Diff: 2 LO: 8-3 AACSB: Application of knowledge AICPA Functional: Measurement PE Question Type: Application H2: Estimating and Recording Bad Debt Expense - Allowance Method

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