ACCT 220 Smart Book 7 Questions SIUC Fall 2022

Why would a company debit Interest Receivable? It paid interest for amounts incurred in an earlier accounting period. It received an interest payment for amounts accrued in an earlier accounting period. It generated interest on its notes receivable which will be collected in a later accounting period. It owes interest on its notes payable which will be paid in a later accounting period.

It generated interest on its notes receivable which will be collected in a later accounting period. An adjusting entry is recorded at the end of the accounting period for amounts generated and not yet collected with a debit to Interest Receivable (+A) and a credit to Interest Revenue (+SE).

Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______. interest earned on the payment date with a debit to Cash and credit to Interest Revenue for the 6 months of interest generated an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December a daily entry with a debit to Interest Receivable and credit to Interest Revenue for each day's interest generated

an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December

The revenue recognition principle requires an adjusting entry to accrue interest earned and includes a debit to Interest Receivable and a credit to Interest Revenue. What effect does this adjusting entry have on the accounting equation? liabilities decrease and stockholders' equity increase assets and stockholders' equity increase liabilities increase and stockholders' equity decreases No effect because interest revenue should not be recorded until the interest payment is collected.

assets and stockholders' equity increase

Place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually.

1. Debit Notes Receivable and credit Cash 2. Debit Interest Receivable and credit Interest Revenue 3. Debit Cash and credit Interest Receivable 4. Debit Cash and credit Notes Receivable, Interest Revenue and Interest Receivable

Which of the following statements is true? Bad Debt Expense is a permanent account. Allowance for Doubtful Accounts is a permanent account. Bad Debt Expense on the income statement will always equal the Allowance for Doubtful Accounts on the balance sheet. An adjusting entry to record the estimated bad debt requires a debit to Allowance for Doubtful Accounts and a credit to Bad Debt Expense.

Allowance for Doubtful Accounts is a permanent account.

true or false

Allowance for Doubtful Accounts is a permanent account.

Murphy's Paw, Inc. has credit sales of $100,000 for the month ended May 31. The Accounts Receivable balance is $8,000. Management estimates that 1% of its credit sales will be uncollectible. This adjusting entry includes a debit to ______. Bad Debt Expense and credit to Accounts Receivable for $1,000 Bad Debt Expense and credit to Sales for $1,000 Bad Debt Expense and credit to Allowance for Doubtful Accounts for $80 Bad Debt Expense and credit to Allowance for Doubtful Accounts for $1,000 Bad Debt Expense and credit to Sales for $80

Bad Debt Expense and credit to Allowance for Doubtful Accounts for $1,000 The adjusting entry using the percentage of credit sales will be for $1,000 (=$100,000 credit sales x 1%). The debit is to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A).

The allowance method requires that ______. Bad Debt Expense be recorded in the same period as the related credit sales Allowance for Doubtful Accounts be netted against Accounts Receivable Bad Debt Expense be recorded in the period a specific customer's account is written off (removed)

Bad Debt Expense be recorded in the same period as the related credit sales Allowance for Doubtful Accounts be netted against Accounts Receivable

What is the entry a company records at the time it issues a $1,000, 6% note to one of its employees that the employee needs to repay in 6 months? Debit Cash Debit Notes Payable Credit Interest Revenue Credit Cash Debit Notes Receivable Credit Notes Payable

Credit Cash Debit Notes Payable

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings? Depreciation Expense Accounts Receivable Bad Debt Expense Sales Revenue Allowance for Doubtful Accounts Accumulated Depreciation

Depreciation Expense Bad Debt Expense Sales Revenue

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings? Accounts Receivable Depreciation Expense Sales Revenue Bad Debt Expense Accumulated Depreciation Allowance for Doubtful Accounts

Depreciation Expense Sales Revenue Bad Debt Expense

Why would a company debit Interest Receivable? It paid interest for amounts incurred in an earlier accounting period. It owes interest on its notes payable which will be paid in a later accounting period. It generated interest on its notes receivable which will be collected in a later accounting period. It received an interest payment for amounts accrued in an earlier accounting period.

It generated interest on its notes receivable which will be collected in a later accounting period.

What is occurring if a company is debiting Cash and crediting Notes Receivable? It is paying amounts owed on amounts borrowed earlier. It is lending money. It is borrowing money. It is collecting the principal on amounts lent earlier.

It is collecting the principal on amounts lent earlier.

When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make? Make an adjusting entry at the end of the next period to accrue interest generated. Make an adjusting entry at the end of the current period to accrue the interest earned. Make no adjusting entry at the end of the period because interest has not been earned yet. No adjustment is necessary until the cash is collected.

Make an adjusting entry at the end of the current period to accrue the interest earned. The revenue recognition principle requires an adjusting entry to accrue interest earned and includes a debit to Interest Receivable (+A) and a credit to Interest Revenue (+SE).

An adjusting entry to accrue for interest earned is often needed when a company has ______. Notes Payable Notes Receivable Accounts Receivable

Notes Receivable

Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet? The both will always be the same amounts on the income statement and balance sheet. The Allowance for Doubtful Accounts had an unadjusted debit balance. The Allowance for Doubtful Accounts had an unadjusted credit balance.

The Allowance for Doubtful Accounts had an unadjusted credit balance.

Which of the following is recorded with a debit to Interest Receivable and a credit to Interest Revenue? The establishment of a note The receipt of the principal payment The adjusting entry to record interest earned but not yet received The receipt of an interest payment

The adjusting entry to record interest earned but not yet received

Which of the following is recorded with a debit to Notes Receivable and a credit to Cash? The receipt of an interest payment The receipt of the principal payment The establishment of a note The adjusting entry to record interest owed

The establishment of a note

Which of the following is recorded with a debit to Cash and a credit to Notes Receivable? The receipt of the principal payment The receipt of an interest payment Establishing a note The adjusting entry to record interest owed

The receipt of the principal payment

What is the effect on the accounting equation if a company does not write off specific, non-paying customers' accounts receivable? Liabilities will be understated and stockholders' equity will be overstated. Assets and stockholders' equity will be overstated. Assets and stockholders' equity will be understated. There is no effect.

There is no effect. The write off of a specific customer's account debits Allowance for Doubtful Accounts (-xA,+A) and credits Accounts Receivable (-A); thus, there is no effect on total assets whether an account is written off or not. The adjusting entry, debit Bad Debt Expense (+E,-SE) and credit Allowance for Doubtful Accounts (+xA,-A), is when assets and stockholders' equity are reduced. The adjusting entry is recorded in the same period as the related credit sales in accordance with the expense recognition principle.

What effect does the collection of a note receivable, excluding interest, have on the accounting equation? Total assets remain the same. Assets are reduced and stockholders' equity is reduced. Assets are increased and stockholders' equity is increased.

Total assets remain the same.

Accounts Receivable represent ______. amounts owed by a business to its suppliers cash sales made by the business over the period amounts owed to a business by its customers

amounts owed to a business by its customers

Using the allowance method, Bad Debt Expense is recorded _____. as an estimate in the period of the related credit sales when the company defaults on its Notes Payable when a company writes off its uncollectible receivables when the specific customer is known to be uncollectible

as an estimate in the period of the related credit sales In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to ______. marketing costs increased sales bad debt expense increased notes receivable

bad debt expense

Allowance for Doubtful Accounts is a(n) ______ asset account and has a normal ________ balance.

contra credit

The adjusting entry to record the allowance for doubtful accounts includes a ______. credit to Bad Debt Expense debit to Accounts Receivable credit to Allowance for Doubtful Accounts debit to Bad Debt Expense debit to Sales Revenue credit to Sales Revenue credit to Accounts Receivable debit to Allowance for Doubtful Accounts

credit to Allowance for Doubtful Accounts debit to Bad Debt Expense Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

The entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a ______. credit to Cash of $1,000 credit to Interest Revenue of $1,000 debit to Notes Receivable of $1,000 debit to Cash of $1,000 credit to Notes Receivable of $1,000

credit to Cash of $1,000 debit to Notes Receivable of $1,000

The entry to record the issuance of a note receivable is ______. debit Cash and credit Notes Receivable debit Cash and credit Notes Receivable and Interest Revenue debit Cash and Interest Receivable and credit Notes Receivable debit Notes Receivable and credit Cash debit Notes Receivable and credit Cash and Interest Revenue

debit Notes Receivable and credit Cash

Using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______. credit to Allowance for Doubtful Accounts of $1,100 debit to Bad Debt Expense of $1,000 debit to Bad Debt Expense of $900 credit to Allowance for Doubtful Accounts of $900 debit to Bad Debt Expense of $1,100 credit to Allowance for Doubtful Accounts of $1,000

debit to Bad Debt Expense of $900 credit to Allowance for Doubtful Accounts of $900

Given the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the amount of receivables written off was ______ than the amount estimated in the prior period. Thus, bad debt expense will be ______ in the current period than had the unadjusted balance been a credit balance. less; greater less; less greater; less greater; greater

greater; greater A debit balance remaining in the Allowance account indicates that more was written off than was allowed for in the prior period. Thus, in the current period more will need to be expensed in order to compensate for not expensing enough in the prior period.

The entry to record the write-off of a specific customer's account ______ when using the allowance method. increases liabilities and decreases stockholders' equity decreases assets and stockholders' equity decreases assets and liabilities has no net effect on total assets, liabilities or stockholders' equity

has no net effect on total assets, liabilities or stockholders' equity

When accounting for accounts receivable, a primary objective is to ______. not understate liabilities and overstate stockholders' equity for the amounts not yet collected understate stockholders' equity for estimated uncollectible receivables not overstate assets and stockholders' equity by the estimated amount of bad debt understate assets and stockholders' equity for sales that have been collected

not overstate assets and stockholders' equity by the estimated amount of bad debt The expense recognition principle requires an estimated amount of bad debt expense be recorded in the same period as the related credit sales in order to match the expense with the related sale. The objective is not to overstate net income in the period the bad sales were made.

A receivable write-off removes a non-paying customer's account receivable and ______. removes the same amount from Allowance for Doubtful Accounts reduces Net Income by the same amount increases assets and stockholders' equity decreases assets and stockholders' equity

removes the same amount from Allowance for Doubtful Accounts

When accounting for accounts receivable and bad debts, the objectives are to ______. report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect. increase both accounts receivable and net income by the amount of credit sales that are unlikely to be collected as cash match the cost of bad debts to the accounting period in which the related credit sales are made

report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect. match the cost of bad debts to the accounting period in which the related credit sales are made

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______. wage expense to increase sales to decrease bad debt expense to decrease sales to increase

sales to decrease bad debt expense to decrease

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on estimates, financial statements are ______. susceptible to management manipulation. free from errors. reliable, but not relevant.

susceptible to management manipulation.

aging of accounts receivable

uses more detailed data and is more accurate

Which method of allowing for estimated uncollectible accounts is generally more accurate? Neither is more accurate than the other Aging of accounts receivable method Percentage of credit sales method

Aging of accounts receivable method The aging of accounts receivable is more accurate in estimating the amount of uncollectibles because the estimate is based on management reviewing the age of each amount in Accounts Receivable and adjusting accordingly. The percentage of sales method simply applies a percentage to all credit sales (both collected and uncollected).

Which of the following statements is true? Bad Debt Expense is a permanent account. Bad Debt Expense on the income statement will always equal the Allowance for Doubtful Accounts on the balance sheet. Allowance for Doubtful Accounts is a permanent account. An adjusting entry to record the estimated bad debt requires a debit to Allowance for Doubtful Accounts and a credit to Bad Debt Expense.

Allowance for Doubtful Accounts is a permanent account.

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______. Bad Debt Expense of $1,000 Allowance for Doubtful Accounts of $1,050 Allowance for Doubtful Accounts of $950 Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $950

Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $950

The adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to 1) _______ 2) _______ 3) _______ 4) _______

Allowance for Doubtful Accounts.

T or F: GAAP require end-of-period adjustments for the estimated bad debts in the period of the credit sale even though the specific, non-paying customers have not yet been identified.

True The expense recognition principle requires an estimated expense be reported in the same period as the related credit sale rather than later when the customer is identified.

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take? Write off the uncollectible account and its corresponding allowance from the accounting records. Nothing, as Bad Debt Expense has already been recorded. Increase Bad Debt Expense.

Write off the uncollectible account and its corresponding allowance from the accounting records. The adjusting entry credits Allowance for Doubtful Accounts (+xA,-A) instead of Accounts Receivable because it is an estimate. Accounts Receivable cannot be reduced until it is known which specific customer's account should be credited. Later when a non-paying customer is identified, it is written off and the specific customer's Accounts Receivable (-A) can be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

Ima Broke is a customer that owes the company for credit sales and has declared bankruptcy. As a result, Ima Broke's subsidiary account receivable will be eliminated when ______. an adjusting entry is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable a sale is made on account

a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable

The journal entry to record $5.6 million in sales on account includes a ______. debit to Allowance for Doubtful Accounts of $5.6 million credit to Accounts Payable for $5.6 million debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million debit to Cash of $5.6 million

debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million Sales on account are recorded with a debit to Accounts Receivable (+A) and a credit to Sales Revenue (+SE). The revenue recognition principle allows companies to record the revenue if they have delivered the goods/services even if the cash has not yet been collected.

On March 1, Scents, Inc. lent $1,000 to an employee at a rate of 6% for 3 months. Scents' entry to record the loan of $1,000 to its employee includes a ______. debit to Cash of $1,000 debit to Interest Revenue of $15 debit to Notes Receivable of $1,000 credit to Interest Revenue of $15 credit to Cash of $1,000 credit to Notes Receivable of $1,000

debit to Notes Receivable of $1,000 credit to Cash of $1,000

direct write off

not considered an acceptable method under GAAP

Which of the following is recorded at the end of an accounting period when accounting for receivables using the allowance method? An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale. The write off of specific customer accounts is recorded by debiting Accounts Receivable and crediting Allowance for Doubtful Accounts. The write off of specific customer accounts is recorded by debiting Allowance for Doubtful Accounts and crediting Bad Debt Expense. The write off of specific customer accounts is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable.

An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale.

Percentage of credit sales

Estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

Aging of accounts receivable

Estimates the allowance for doubtful accounts based on the age of each account receivable

percentage of credit sales

Simpler to apply but less accurate

The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period? The period after credit sales are made The period before credit sales are made The same period as credit sales

The same period as credit sales The expense is recorded in the same period in order to match the expense with the related sale so as not to overstate net income in the period the bad sales were made.

Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______. . an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December interest earned on the payment date with a debit to Cash and credit to Interest Revenue for the 6 months of interest generated a daily entry with a debit to Interest Receivable and credit to Interest Revenue for each day's interest generated

an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December

The adjusting entry to record the allowance for doubtful accounts causes total ______. liabilities to decrease assets to decrease stockholders' equity to decrease liabilities to increase assets to increase stockholders' equity to increase

assets to decrease stockholders' equity to decrease Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

The challenge businesses face when estimating the allowance for previously recorded sales is that ______. past default rates are not a good predictor of future default rates at the time of the sale, it is not known which particular customer will be a "bad" customer in bad economic times, fewer customers will have problems with their payments

at the time of the sale, it is not known which particular customer will be a "bad" customer In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______. debit; decrease credit; decrease credit; increase debit; increase

credit; decrease A contra-asset account has normal balance of a credit and cause assets to decrease.

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with ______. debits credits

credits

If the Allowance for Doubtful Accounts has a credit balance prior to recording the adjusting entry for the current period's uncollectible accounts, then the ______. Bad Debt Expense on the income statement will be greater than the Allowance for Doubtful Accounts on the balance sheet accountant must have made an error because the Allowance account should have a $0 balance just like the Bad Debt Expense estimated amount of uncollectibles was greater than the amounts actually written off amounts actually written off were greater than the estimated amount of uncollectibles

estimated amount of uncollectibles was greater than the amounts actually written off The Allowance account is credited for the estimated amount of bad debts at the end of the accounting period and later is debited for the write-offs of the actual bad receivables. Thus, there will be a credit balance in the Allowance when the estimate is greater than the actual amounts written off.

Sales made on account are recorded with a debit to Accounts Receivable and credit to Sales Revenue for the price times the quantity. Management knows that some of those accounts will not be collected but is unsure which specific customers it will be. Thus, management estimates the amount and records an adjusting entry. Later, when the specific non-paying customer is identified, it writes off the account. The effect of the write off on the accounting equation is to _____. increase liabilities and decrease stockholders' equity increase assets and stockholders' equity increase one asset and decrease another reduce assets and stockholders' equity

increase one asset and decrease another write-offs only affect the Allowance for Doubtful Account ADA (+xA) and Accounts Receivable (-A)

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet. the same amount as $100 more than $100 less than

$100 less than To arrive at the desired Allowance for Doubtful Accounts balance of $1,000 (=$10,000 x 10%), only $900 (=$1,000 minus the $100 credit unadjusted balance) needs to be credited to the Allowance account since there is already a $100 credit unadjusted balance in it. Thus the entry needed is a debit to Bad Debt Expense (+E,-SE) of $900 and a credit to Allowance for Doubtful Accounts (+xA,-A) of $900. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's uncollectible credit sales. The expense is a temporary account and reports only the expense on the current period's uncollectible credit sales.

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______. Bad Debt Expense of $2,050 Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance Allowance for Doubtful Accounts of $2,000 credit balance

Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance This is the credit sales method and requires an adjusting entry that debits Bad Debt Expense and credits Allowance for Doubtful Accounts for $2,000 (=$100,000 x 2%). The unadjusted $50 credit balance plus the credit of $2,000 results in a $2,050 credit balance in the Allowance account.

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a credit balance when the amount of write offs recorded during the period is ______ the amount allowed in the prior accounting period. less than greater than same as

less than

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is ______. the company would lose track of which customers still owe money the amounts are estimates and no one knows which particular customers will not pay subsidiary accounts are unable to be reduced the write-offs were previously recorded so customers' accounts would be reduced twice

the company would lose track of which customers still owe money the amounts are estimates and no one knows which particular customers will not pay The adjusting entry credits Allowance for Doubtful Accounts (+xA,-A) instead of Accounts Receivable in the subsidiary accounts because it is an estimate. Accounts Receivable cannot be reduced until it is know which specific customer's account should be credited. Later when a non-paying customer is identified, the specific customer's Accounts Receivable (-A) can be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, the ______. Allowance for Doubtful Accounts will have a $91,000 credit balance Allowance for Doubtful Accounts will have a $90,000 credit balance Bad Debt Expense will equal $90,000 Allowance for Doubtful Accounts will have an $89,000 credit balance

Allowance for Doubtful Accounts will have a $90,000 credit balance The aging method specifies the desired ending balance in the Allowance account which is $90,000. The $1,000 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $89,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $89,000.

Why is Bad Debt Expense an estimate? GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay. The revenue recognition principle requires sales on account be recorded when the amounts are collected. Bad Debt Expense is not an estimate. It is recorded when a customer's Accounts Receivable is deemed uncollectible.

GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay. In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______. credit to Allowance for Doubtful Accounts of $1,100 debit to Bad Debt Expense of $1,000 debit to Bad Debt Expense of $1,100 credit to Allowance for Doubtful Accounts of $1,000 debit to Bad Debt Expense of $900 credit to Allowance for Doubtful Accounts of $900

debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000

Allowance for Doubtful Accounts is a ______. temporary account so its balance carries forward to the next accounting period permanent account so its balance is closed (zeroed out) at the end of the accounting period temporary account so its balance is closed (zeroed out) at the end of the accounting period permanent account so its balance carries forward to the next accounting period

permanent account so its balance carries forward to the next accounting period

Sales made on account are recorded with a debit to Accounts Receivable and credit to Sales Revenue for the price times the quantity. Management knows that some of those accounts will not be collected but is unsure which specific customers it will be. Thus, management estimates the amount and records an adjusting entry. Later, when the specific non-paying customer is identified, it writes off the account. The effect of this process on the accounting equation is to _____. increase assets and stockholders' equity when the adjusting entry is recorded reduce assets and stockholders' equity when the adjusting entry is recorded reduce assets and stockholders' equity when the specific customer's account is written off increase assets and stockholders' equity when the specific customer's account is written off

reduce assets and stockholders' equity when the adjusting entry is recorded