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ACT
Accounts Receivables and Estimating Bad Debts
- The category "trade receivables" includes a. advances to officers and employees. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. None of these answer choices are correct.
- Which of the following should be recorded in Accounts Receivable? a. Receivables from officers b. Receivables from subsidiaries c. Dividends receivable d. None of these answer choices are correct. S45. What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a statement of financial position? a. As offsets to equity b. By means of footnotes only c. As assets but separately from other receivables d. As trade notes and accounts receivable if they otherwise qualify as current assets
- Which of the following statement is incorrect regarding receivables on the statement of financial position? a. Receivables are a financial asset. b. Receivables are financial instruments. c. Non-trade receivables are generally reported as separate items in the statement of financial position. d. Accounts receivable are written promises of the purchaser to pay for goods or services. S47. When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount. b. nominal discount. c. enhancement discount. d. cash discount. P48. Trade discounts are a. not recorded in the accounts; rather they are a means of computing a price. b. used to avoid frequent changes in catalogues. c. used to quote different prices for different quantities purchased. d. All of these answer choices are correct.
- If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as a. a deduction from sales in the income statement. b. an item of "other income and expense" in the income statement. c. a deduction from accounts receivable in determining the net realizable value of accounts receivable. d. sales discounts forfeited in the cost of goods sold section of the income statement.
- Why do companies provide trade discounts? a. To avoid frequent changes in catalogs only b. To induce prompt payment c. To easily alter prices for different customers only d. To avoid frequent changes in catalogs and to easily alter prices
- Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct? a. Net approach b. Gross approach c. Allowance approach d. All three approaches are theoretically correct.
- All of the following are problems associated with the valuation of accounts receivable except for a. uncollectible accounts. b. returns. c. cash discounts under the net method. d. allowances granted.
- Why is the allowance method preferred over the direct write-off method of accounting for bad debts? a. Allowance method is used for tax purposes b. Estimates are used c. Determining worthless accounts under direct write-off method is difficult to do d. Improved matching of bad debt expense with revenue
- Which of the following concepts relates to using the allowance method in accounting for accounts receivable? a. Bad debt expense is an estimate that is based on historical and prospective information. b. Bad debt expense is based on the actual amounts determined to be uncollectible. c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging. d. Bad debt expense is management’s determination of which accounts will be sent to the attorney for collection.
- How can accounting for bad debts be used for earnings management? a. Determining which accounts to write-off b. Changing the percentage of sales recorded as bad debt expense c. Using an aging of the accounts receivable balance to determine bad debt expense d. Reversing previous write-offs
- What is the normal journal entry for recording bad debt expense under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts
- What is the normal journal entry when writing-off an account as uncollectible under the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts
- Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method? a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts
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- d 1 On December 31, 2015, the “Receivables” account of AA. Company show a debit balance of P5,950,000 Subsidiary details show the following: Accounts receivable, P725,000; Loans receivable, P100,000; Instalments receivable, normally due 1 year to two years, P300,000; Customers’ accounts reporting credit balances arising from sales returns, P30,000; Advance payments for purchase of merchandise, P150,000; Customers’ accounts reporting credit balances arising from advance payments, P20,000; Cash advances to subsidiary, P400,000; Claim from insurance company, P15,000; Subscription receivable due in 60 days, P300,000; Accrued interest receivable, P10,000, Deposit on contract bids, P3,000,000 and Advances to shareholders (collectible in 2018), P1,000,000. How much is the amount to be presented as “loans and receivables” under current assets section of the balance sheet? 2 ,600, 2 On December 31, 2013, the accounts receivable control account of A Company had shown the following elements: Trade receivables from officers due currently 34, Trade accounts receivable from customer X 465, Other trade accounts receivable 467, Customer’s accounts reporting credit balances arising from sales return 212, Advance payments to creditors on purchase orders 174, Trade accounts on which post – dated checks are held (no entries were made on receipts of checks) 89, Trade installment receivable due 1 – 18 months including unearned finance charges of P55,000) 355, Subscriptions receivable due in 45 days 654, Interest receivable on bonds 123, Advances to affiliated companies 375, Accounts known to be worthless 54, The trade accounts receivable as of December 31, 2013 is Answer: P1,357,
The corporation uses the direct write-off method in accounting for uncollectible accounts receivable. What are the gross sales for the month of December? 120, 7 The financial statements of Katherine Company included the following information: Dec 31, 2013 Dec 31, 2014 Account receivable 1,200, Allowance for doubtful accounts 20, Sales 8,000, Cash collected from customers 7,600, Among the cash collections was a recovery of P14,000 from a customer whose account had been written off as worthless in 2013. During 2014, it was necessary to recognize doubtful accounts expense of P50,000 and write off worthless customers’ accounts of P26,000. On December 1, 2014, a customer settled an account by issuing a 12% six-month note for P400,000. What is the net realizable value of accounts receivable on December 31, 2014? 1,130, 8 Based on its past collection experience, Ace Company provides for bad debts at the rate of 2 percent of net credit sales. On January 1, 2014, the allowance for doubtful accounts credit balance was P10,000. During 2014, Ace wrote off P18,000 of uncollectible receivables and recovered P5,000 on accounts written off in prior years. If net credit sales for 2014 totaled P1,000,000, the doubtful accounts expense for 2014 should be 20, FOR THE NEXT 3 REQUIREMENTS: From inception of operations to June 30, 2015, Pascal Ltd provided for uncollectible accounts receivable under the allowance method – provisions were made monthly at 2% of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Pascal’s usual credit terms are net 30 days. The balance in the allowance for doubtful debts account was P154,000 at July 1, 2014. During 2014-15, credit sales totalled P9,000,000, interim provisions for doubtful debts were made at 2% of credit sales, P95,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P15,000. Pascal installed a computer in May 2015, and an aging of accounts receivable was prepared for the first time as of June 30, 2015. The summary of aging is as follows: Classification Balance/ category Estimated doubtful May – June 15 1,080,000 2% Jan – April 15 650,000 10% July – Dec 15 420,000 25% Before July 2014 150,000 70% Based on the review of collectability of the account balances in the “before July 2014” aging category, additional receivables totalling P60, were written off as of June 30, 2015. The 70% uncollectable estimate applies to the remaining P90,000 in the category. Effective with the year ended June 30, 2015, Pascal adopted a new accounting method for estimating the allowance for doubtful debts at the amount indicated by the year – end aging analysis of account receivable. 9 How much is the bad debts expense for 2015? 240, 10 Determine the balance of the allowance account as of June 2015. 254, 11 Determine the net realizable value of accounts receivable as of June 2015. 1,985,
- On the December 31, 2015 statement of financial position of Vanoy Co., the current receivables consisted of the following: Trade accounts receivable $ 75, Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (November 2015) 3, Selling price of unsold goods sent by Vanoy on consignment at 130% of cost (not included in Vanoy ‘s ending inventory) 26, Security deposit on lease of warehouse used for storing some inventories 30, Total $132, At December 31, 2015, the correct total of Vanoy’s current net receivables was $76,000.
- Ace Co. prepared an aging of its accounts receivable at December 31, 2015 and determined that the net realizable value of the receivables was $300,000. Additional information is available as follows:
Allowance for uncollectible accounts at 1/1/15—credit balance $ 34, Accounts written off as uncollectible during 2015 23, Accounts receivable at 12/31/15 325, Uncollectible accounts recovered during 2015 5, For the year ended December 31, 2015, Ace’s bad debt expense would be $9,000.
- For the year ended December 31, 2015, Dent Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available: Allowance for uncollectible accounts, 1/1/15 €56, Provision for uncollectible accounts during 2015 (2% on credit sales of €2,000,000) 40, Uncollectible accounts written off, 11/30/15 46, Estimated uncollectible accounts per aging, 12/31/15 69, After year-end adjustment, the uncollectible accounts expense for 2015 should be €59,000.
- Nenn Co.’s allowance for uncollectible accounts was $95,000 at the end of 2015 and $90,000 at the end of 2014. For the year ended December 31, 2015, Nenn reported bad debt expense of $13,000 in its income statement. What amount did Nenn debit to the appropriate account in 2015 to write off actual bad debts? $8,
- Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account a. increases the allowance for uncollectible accounts. b. has no effect on the allowance for uncollectible accounts. c. has no effect on net income. d. decreases net income. C
- The following accounts were abstracted from Starr Co.’s unadjusted trial balance at December 31, 2015: Debit Credit Accounts receivable €750, Allowance for uncollectible accounts 8, Net credit sales $3,000, Starr estimates that 2% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2015, the allowance for uncollectible accounts should have a credit balance of €15,000.
- AG Inc. made a €10,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as sales revenue? a. € 9, b. € 9, c. €10, d. €10,
- AG Inc. made a €10,000 sale on account with the following terms: 1/15, n/30. If the company uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale? a. Debit Accounts Receivable for €9, b. Debit Accounts Receivable for €9,900 and Sales Discounts for € 100 c. Debit Accounts Receivable for €10, d. Debit Accounts Receivable for €10,000 and Sales Discounts for € 100
- AG Inc. made a €10,000 sale on account with the following terms: 2/10, n/30. If the company uses the net method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale? a. Debit Accounts Receivable for €9, b. Debit Accounts Receivable for €9,800 and Sales Discounts for € 200 c. Debit Accounts Receivable for €10,
Wave Crest determines that the Warren House receivable is impaired by $160,000 and the Hallmark Hotels receivable is impaired by $200,000. The receivable from the Stephanie Inn is not considered impaired. Wave Crest determines that a composite rate of 5% is appropriate to measure impairment on all other receivables. What is the total impairment of receivables for Wave Crest for 2015? a. $382, b. $314, c. $406, d. $360,
- Wellington Corp. has outstanding accounts receivable totaling €2.54 million as of December 31 and sales on credit during the year of €12.8 million. There is also a debit balance of €6,000 in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense? a. € 25, b. € 31 , c. €122, d. €134,
- Wellington Corp. has outstanding accounts receivable totaling €6.5 million as of December 31 and sales on credit during the year of €24 million. There is also a credit balance of €12,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year? a. € 532, b. € 520, c. €1,920, d. € 508,
- Wellington Corp. has outstanding accounts receivable totaling € 3 million as of December 31 and sales on credit during the year of €15 million. There is also a debit balance of €12, in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense? a. €1,200, b. € 228, c. € 240, d. € 252,
- At the close of its first year of operations, December 31, 2015, Ming Company had accounts receivable of $540,000, after deducting the related allowance for doubtful accounts. During 2015, the company had charges to bad debt expense of $90,000 and wrote off, as uncollectible, accounts receivable of $40,000. What should the company report on its statement of financial position at December 31, 2015, as accounts receivable before the allowance for doubtful accounts? a. $670, b. $590, c. $490, d. $440,
- Before year-end adjusting entries, Dunn Company’s account balances at December 31, 2015, for accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000, respectively. An aging of accounts receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible. The cash realizable value of accounts receivable after adjustment is a. $582,500. b. $537,500. c. $492,500. d. $555,000.
- During the year, Kiner Company made an entry to write off a €4,000 uncollectible account. Before this entry was made, the balance in accounts receivable was €50,000 and the balance in the allowance account was €4,500. The cash realizable value of accounts receivable after the write-off entry was a. €50,000. b. €49,500. c. €41,500. d. €45,500.
- The following information is available for Murphy Company: Allowance for doubtful accounts at December 31, 2014 $ 8, Credit sales during 2015 400, Accounts receivable deemed worthless and written off during 2015 9, As a result of a review and aging of accounts receivable in early January 2016, however, it has been determined that an allowance for doubtful accounts of $5,500 is needed at December 31, 2015. What amount should Murphy record as "bad debt expense" for the year ended December 31, 2015? a. $4, b. $5, c. $6, d. $13, Use the following information for questions 109 and 110. A trial balance before adjustments included the following: Debit Credit Sales €425, Sales returns and allowance €14, Accounts receivable 43, Allowance for doubtful accounts 760
- If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is a. €6,700. b. €8,220. c. €8,500. d. €9,740.
- If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is a. €3,540. b. €4,300. c. €4,224. d. €5,060.
- Lankton Company has the following account balances at year-end: Accounts receivable $60, Allowance for doubtful accounts 3, Sales discounts 2, Lankton should report accounts receivable at a net amount of a. $54,000. b. $56,400. c. $57,600. d. $60,000.
Allowance for doubtful accounts. When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method. Instructions (a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense. (b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with IFRS. Solution (a) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2) allowance. The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any bad debt expense is recognized. At the time a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of bad debt expense is recognized. The allowance method requires an estimate of bad debt expense for a period of time by reference to the composition of the accounts receivable balance at a specific point in time (aging) or to the overall experience with credit sales over a period of time. Thus, total bad debt expense expected to arise as a result of operations for a specific period is estimated, the valuation account (allowance for doubtful accounts) is appropriately adjusted, and a corresponding amount of bad debt expense is recognized. As specific accounts are identified as uncollectible, the account is written off. It is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for doubtful accounts). Net accounts receivable do not change, and there is no charge to bad debt expense when specific accounts are identified as uncollectible and written off using the allowance method. (b) The allowance method is preferable because it matches the cost of making a credit sale with the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period. Since the direct write-off method does not recognize the bad debt expense until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the expense recognition principle and does not achieve a proper carrying value for accounts receivable at the end of a period. Entries for bad debt expense. A trial balance before adjustment included the following: Debit Credit Accounts receivable €80, Allowance for doubtful accounts 730 Sales €340, Sales returns and allowances 8, Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales. Solution (1) Bad Debt Expense ................................................................ 3, Allowance for Doubtful Accounts .............................. 3, Gross receivables €80, Rate 5% Total allowance needed 4, Present allowance (730) Adjustment needed € 3,
(2) Bad Debt Expense ................................................................ 3, Allowance for Doubtful Accounts .............................. 3, Sales €340, Sales returns and allowances 8, Net sales 332, Rate 1% Bad debt expense € 3, Entries for bad debt expense. The trial balance before adjustment of Risen Company reports the following balances: Dr. Cr. Accounts receivable $100, Allowance for doubtful accounts $ 2, Sales (all on credit) 750, Sales returns and allowances 40, (a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales. (b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)? Solution (a) (1) Bad Debt Expense ........................................................... 3, Allowance for Doubtful Accounts ......................... 3, Gross receivables $100, Rate 6% Total allowance needed 6, Present allowance (2,500) Bad debt expense $ 3, (2) Bad Debt Expense ........................................................... 7, Allowance for Doubtful Accounts ......................... 7, Sales $750, Sales returns and allowances (40,000) Net sales 710, Rate 1% Bad debt expense $ 7, (b) The percentage of receivables approach would be affected as follows: Gross receivables $100, Rate 6% Total allowance needed 6, Present allowance 2, Additional amount required $ 8, The journal entry is therefore as follows: Bad Debt Expense ........................................................... 8, Allowance for Doubtful Accounts ......................... 8, The entry would not change under the percentage of sales method.
