Allowance - Income Statement and Balance Sheet Approach Flashcards
On March 31, 2005, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for uncollectible accounts. An analysis of Vale’s trade accounts receivable on that date revealed the following:
Age Amount Estimated uncollectible
0 − 30 days $60,000 5%
31 − 60 days 4,000 10%
Over 60 days 2,000 $1,400
What amount should Vale report as allowance for uncollectible accounts in its March 31, 2005, balance sheet?
A) $4,800
B) $4,000
C) $3,800
D) $3,000
The sum of the products of the AR amounts and uncollectible percentages yield the required ending allowance balance (the third AR category’s estimated uncollectible has already been computed):
$60,000(5%) + $4,000(10%) + $1,400 = $4,800.
Answer = A
For the year ending December 31, 2005, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:
Allowance for uncollectible
accounts, 1/1/05 $42,000
Provision for uncollectible
accounts during 2005 (2% on
credit sales of $2,000,000) 40,000
Uncollectible accounts written
off, 11/30/05 46,000
Estimated uncollectible accounts
per aging, 12/31/05 52,000
After year-end adjustment, the uncollectible accounts expense for 2005 should be:
A) $46,000
B) $48,000
C) $52,000
D) $56,000
The balance in the allowance for uncollectible accounts before the 2005 adjustment is:
$42,000 beginning balance − $46,000 write-offs = -$4,000 (debit balance)
The desired ending balance under aging is $52,000.
Therefore, the required increase to the account is $56,000, and this amount is uncollectible accounts expense. The aging method first determines the required ending balance in the allowance account based on the age of receivables, and THEN adjusts the allowance account to that balance.
The $40,000 provision is based on credit sales, and is thus to be ignored in the question.
Answer = D
Inge Co. determined that the net value of its accounts receivable on December 31, 2005, based on an aging of the receivables, was $325,000. Additional information is as follows:
Allowance for uncollectible
accounts - 1/1/05 $ 30,000
Uncollectible accounts written
off during 2005 18,000
Uncollectible accounts recovered
during 2005 2,000
Accounts receivable at 12/31/05 350,000
For 2005, what would be Inge’s uncollectible accounts expense?
A) $5,000
B) $11,000
C) $15,000
D) $21,000
This question requires a determination of the pre-adjustment balance in the allowance account, and the ending balance. The difference between these two amounts is the increase in the account needed, which is also the amount recognized as bad debt expense. The aging method first determines the required ending balance in the allowance account, and then places the amount needed to increase the account to this required balance into the allowance account.
The pre-adjustment allowance balance =
Beginning balance - Write-offs + Recoveries =
$30,000 − $18,000 + $2,000 = $14,000
The ending allowance balance =
$350,000 ending gross AR − $325,000 ending net value of AR = $25,000
Therefore, bad debt expense is the amount needed to bring the allowance balance up to the ending balance of $25,000. The increase needed is $11,000 ($25,000 − $14,000).
Answer = B
Hall Co.’s allowance for uncollectible accounts had a credit balance of $24,000 on December 31, 2003. During 2004, Hall wrote off uncollectible accounts of $96,000. The aging of accounts receivable indicated that a $100,000 allowance for doubtful accounts was required on December 31, 2004. What amount of uncollectible accounts expense should Hall report for 2004?
A) $172,000
B) $120,000
C) $100,000
D) $96,000
Beginning allowance balance $24,000
Less write-off (96,000)
Equals pre-adjustment
allowance balance (72,000) (debit)
The allowance balance normally is a credit. For the ending balance in the account after adjustment to be $100,000 credit, the account must be increased $172,000 by recognizing uncollectible accounts expense.
Under the aging method, uncollectible accounts expense equals the amount required to increase the allowance balance to the indicated total based on the aging of receivables.
Answer = A
Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward’s credit sales for 2004 were $1,000,000. During 2004, Ward wrote off $18,000 of uncollectible accounts. Ward’s allowance for uncollectible accounts had a $15,000 balance on January 1, 2004. In its December 31, 2004 income statement, what amount should Ward report as uncollectible accounts expense?
A) $23,000
B) $20,000
C) $18,000
D) $17,000
The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% × $1,000,000 = $20,000.
Answer = B
Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year end:
Credit sales $10,000,000
Accounts receivable 3,000,000
Allowance for uncollectible
accounts (debit balance) 50,000
Marr uses 3% of accounts receivable to determine its allowance for uncollectible accounts at year end. By what amount should Marr adjust its allowance for uncollectible accounts at year end?
A) $0
B) $40,000
C) $90,000
D) $140,000
The amount of the adjustment to get the $50,000 debit balance to a $90,000 (3% × $3,000,000) credit balance is $140,000.
Answer = D
The following accounts were abstracted from Roxy Co.’s unadjusted trial balance on December 31, 2005:
Debit Credit Accounts receivable $1,000,000 Allowance for uncollectible accounts 8,000 Net credit sales $3,000,000
Roxy estimates that 3% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2005, the allowance for uncollectible accounts should have a credit balance of
A) $90,000
B) $82,000
C) $38,000
D) $30,000
The correct answer, $30,000, is the ending balance in the allowance account and equals: .03($1,000,000) = $30,000. The firm is basing its estimate on receivables. Therefore, the $30,000 is the target ending allowance balance.
The firm will recognize an amount of bad debt expense at the end of 2005 such that, after considering the beginning allowance balance and any write-offs during the year, the ending allowance balance will be $30,000.
The bad debt expense amount recognized will be affected by the $8,000 beginning balance, but the ending allowance balance will not.
Answer = D
