Chapter 8 SmartBook

What is the typical sequence of accounting for sales made on account using the allowance method?

1. Accounts Receivable are debited in the period the revenue is recognized 2. Bad Debt Expense is estimated and recorded with an adjusted entry 3. Specific customer balances are written off

Methods for estimating bad debts

1. Percentage of credit sales estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses 2. Aging of accounts receivable estimates the allowance for doubtful accounts based on the age of each account receivable

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

1. Report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect 2. Match the cost of bad debts to the accounting period in which the related credit sales are made

Removing an uncollectible account and it's corresponding allowance from the accounting records is called:

A write-off

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 is is known which specific customer is not going to pay

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

Accounts Receivable on the balance sheet and Sales Revenue on the income statement

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

Accounts Receivable; Sales Revenue

The adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to _______.

Allowance for Doubtful Accounts

What statement is true?

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. Delectables financial statements will show ______.

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

Using the allowance method, bad debt expense is recorded ______.

As an estimate in the period of the related credit sales

The challenge businesses face when estimating the allowance for previously recorded sales is that:

At the time of the sale, it is not known which particular customer will be a "bad" customer

The adjusting entry to record the estimated amount of bad credit sales is a debit to _______ and a credit to Allowance for Doubtful Accounts

Bad Debt Expense

ABC Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging of accounts receivable method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABCs financial statements will report:

Bad Debt Expense of $7,250 on the income statement and Allowance for Doubtful Accounts of $8,000 on the balance sheet

The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the sellers revenue. The disadvantage of extending credit are cost related to

Bad debt expense

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 is a contra-asset account. Increases to the account are recorded with:

Credits

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 debt includes a:

Debit to Bad Debt Expense of $1,000 and Credit to Allowance for Doubtful Accounts of $1,000

A disadvantage of extending credit to customers is that the cost may ______ the additional sales revenue received through credit transactions

Exceed

To be in accordance with GAAP, companies are required to estimate the amount of uncollectible receivables and make an adjusting entry. The effect of the adjusting entry is to:

Reduce Net Income by debiting Bad Debt Expense and reduce net accounts receivable by crediting Allowance for Doubtful Accounts

The adjusting entry to record the allowance for doubtful accounts causes total ______.

Stockholders equity to decrease and assets to decrease

Bad debt expense is a _____.

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

T/F: GAAP requires 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

When will a bankrupt customers accounts receivable be eliminated?

When the company records a write-off

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

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 and 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

An objective of the expense recognition (matching) principle is to have bad debt expense debited in ______.

The same period the related credit sales are recorded