Chapter 6 Theory Quiz

If accounts receivable are material, GAAP requires that the expense resulting from the failure of credit customers to pay their bills should

Be estimated and recorded in the period in which sales are made so that expenses are with revenues

If a company uses the allowance method to account for bad debts, when will the company's stockholders equity decrease?

At the end of the accounting period when an adjusting entry for bad debts is recorded

Bad Debts Expense is a contra-account that is used to reduce accounts receivable to its net realizable value

False

If a company is basing their bad debt expense on an aging schedule of accounts receivable they are using the income statement method to estimate bad debt expense

False

When recording an adjusting entry for bad debt, a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts will affect the balance sheet, but not the income statement

False

If a company uses the direct write off method of accounting for bad debts

It will record bad debt expense only when an account is determined to be uncollectable

Accounts receivable are shown on the balance sheet at their net realizable value

True

An entry to write-off an uncollectible account does not change the net realizable value of accounts receivable

True

Recording the collection of a previously written off account will not affect the income statement

True

Sales Returns and Allowances should not be included as a selling expense

True

The balance sheet approach of estimating uncollectible accounts takes into account the existing balance in the Allowance for Doubtful Accounts account

True

The direct write off method of accounting for bad debt is allowed under GAAP if the company's accounts receivable are immaterial

True

The direct write off method of accounting for bad debts is allowed under GAAP, but only if the company's account receivables are immaterial

True

The normal balance of the Allowance for Doubtful Accounts account is a credit

True