Chapter 8 learnsmarts

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. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

$100 less than

Which of the following are contra-asset accounts?

- accumulated depreciation - allowance for doubtful accounts

Why is Allowance for Doubtful Accounts credited, instead of Accounts Receivable, when recording the adjusting entry for bad debts?

Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay.

Assuming the allowance method, the entry to record the write-off of a specific, non-paying customer is recorded with a debit to

Allowance for Doubtful Accounts and credit to Accounts Receivable

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 Allowance for Doubtful Accounts for $1,000

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

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.

A sale on account is recorded with a debit to ______ _______ and a credit to ______ _______

accounts receivable; sales revenue

Which of the following statements is true?

allowance for doubtful accounts is a permanent account

accounts receivable represent

amounts owed to a business by its customers

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

credit; decrease

The Allowance for Doubtful Accounts, a contra-asset account, is ______ when specific uncollectible accounts are written-off.

debited

the allowance method is a method of accounting that ______ for estimated bad debts

decreases net accounts receivable

A company's bad debt expense reports the

estimated amount of this period's credit sales that customers will fail to pay

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a debit balance when the amount of write offs recorded during the period is ______ the amount estimated to uncollectible in the prior accounting period.

greater than

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.

greater; greater

When the allowance method is used, the entry to record the write-off of an uncollectible account

has no effect on net income

The entry to record the write-off of a specific customer's account ______ when using the allowance method.

has no effect on total assets, liabilities, or stockholder's equity

A receivable write-off removes a non-paying customer's account receivable and

removes the same amount from allowance for doubtful accounts

Bad Debt Expense

temporary account so its balance is closed (zeroed out) at the end of the accounting period

In a financial statement, sales on account will cause an increase in

- sales revenue on the income statement - accounts receivable on the balance sheet

In financial statements, Sales on account will cause an increase in

- sales revenue on the income statement - accounts receivable on the balance sheet

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.

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

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

When will a bankrupt customer's accounts receivable be eliminated? When the company records

a write-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 this process on the accounting equation is to

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

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

the same period as credit sales

Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet?

The Allowance for Doubtful Accounts had an unadjusted credit balance.

Removing an uncollectible account and its corresponding allowance from the accounting records is called

a write-up

The entry to record the write-off of a specific customer's account requires a

debit to allowance for doubtful accounts and credit to accounts receivable

allowance for doubtful accounts is a

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

the allowance method requires that

- allowance for doubtful accounts be netted against accounts receivable - bad debt expense be recorded in the same period as the related credit sales

The 2 steps required using the allowance method, are to

- first make an end-of-period adjustment to record the estimated bad debts - later write-off specific customer balances when they are known to be uncollectible

Bad debt expense

- is a cost of extending credit to customers - is an estimate

When accounting for accounts receivable and bad debts, the objectives are to

- 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.

Which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance?

percentage of credit sales