Chapter 8 LearnSmarts

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $11,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of

$1,000 debit

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.

$100 less than

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

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

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

-Assets to decrease -Stockholders' equity to decrease

Ima Broke is a customer that owes the company for credit sales and and has declared bankruptcy. As a result, Ima Broke's subsidiary account is receivable will be eliminated when

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

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

A write-off

Which method of allowing for estimated uncollectible accounts is generally more accurate?

Aging of accounts receivable method

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.

Using the allowance method, Bad Debt Expense is recorded ____.

As an estimate in the period of related credit sales

What would be the effect of forgetting to record the adjusting entry for estimated bad debts?

Assets and stockholders' equity would be overstated

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

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

Failing to record bad debt expense in the same period as the related revenue violates which principle?

Expense recognition (matching) principle

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 debit balance of $1,000. After the adjustment, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

Greater than

Why would a company debit Interest Receivable?

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

Allowance for Doubtful Accounts is a

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

Which account is used to reduce assets for the amount of estimated bad debts?

The contra-asset account called Allowance for Doubtful Accounts

Which of the following is recorded with a debit to Notes Receivable and a credit to Cash?

The establishment of a note

True or false: 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

When a company lends money to employees at a rate of 4%, the company will record

an asset called Notes Receivable

The allowance method is a method of accounting that ____ for estimated bad debts.

decreases net accounts receivable

Notes Receivable differ from Accounts Receivable in that Notes Receivable

generally charge the borrowers interest from the day they are signed to the day they are collected

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 $2,000 -Allowance for Doubtful Accounts of $2,050 credit balance

The journal entry to record $5.6 million in sales on account includes a

-Debit to Accounts Receivable of $5.6 million -Credit to Sales Revenue of $5.6 million

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

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

Which of the following are advantages to extending credit to customers?

-Increased sales -Increased demand

Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance?

Aging of accounts receivable method

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 $90,000 credit balance

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

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

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

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n)

Write-off of a specific customer's account

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

bad debt expense

Allowance for Doubtful Accounts is a(n) _____ -asset account and has a normal ____ balance.

contra; credit

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

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, ABC's financial statements will report

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

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

-Debit to Bad Debt Expense of $900 -Credit to Allowance for Doubtful Accounts of $900

Bad Debt Expense _____.

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

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings?

-Sales Revenue -Depreciation Expense -Bad Debt Expense

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is

-The amounts are estimates and no one knows which particular customers will not pay -The company would lose track of which customers still owe money

In which situations does a company issue a note receivable?

-The company converts an existing account receivable to grant the customer an extended payment period for the amount owed plus interest -The company lends money to employees or businesses

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 employees includes a

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

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

A. Allowance for Doubtful Accounts is a permanent account