FAR 10.01 - RECEIVABLES Flashcards
FAR 10.01 - RECEIVABLES
Gibbs Co. uses the allowance method for recognizing uncollectible accounts. Ignoring deferred taxes, the entry to record the write-off of a specific uncollectible account
Decreases both net income and working capital.
Affects neither net income nor accounts receivable.
Decreases both net income and account receivable.
Affects neither net income nor working capital.
Affects neither net income nor working capital.
EXPLANATION:
The journal entry to write off an uncollectible account includes a debit or decrease to the allowance for doubtful accounts and a credit or decrease to accounts receivable. Since both accounts are included in net accounts receivable, current assets and working capital remain unchanged.
FAR 10.01 - RECEIVABLES
At January 1, 20X7, Gear Co. had a credit balance of $180,000 in its allowance for uncollectible accounts. Based on past experience, 3% of Gear’s credit sales have been uncollectible. During 20X7, Gear wrote off $210,000 of uncollectible accounts. Credit sales for 20X7 were $4,500,000.
In its December 31, 20X7 balance sheet, what amount should Gear report as allowance for uncollectible accounts?
$105,000
$135,000
$210,000
$320,000
$105,000
EXPLANATION:
The allowance for doubtful accounts is increased when bad debt expense is recognized and decreased when an account is written off. Bad debt expense is 3% of $4,500,000 or $135,000.
If $210,000 in accounts receivable were written off, the balance would be $180,000 + $135,000 -$210,000 = $105,000.
FAR 10.01 - RECEIVABLES
At January 1, 20X4, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2% of Jamin’s credit sales have been uncollectible. During 20X4, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 20X4 were $9,000,000.
In its December 31, 20X4, balance sheet, what amount should Jamin report as allowance for uncollectible accounts?
$115,000
$180,000
$245,000
$440,000
$115,000
EXPLANATION:
The credit balance of $260,000 in the allowance would be increased by bad debts expense equal to 2% of credit sales of $9,000,000, or $180,000, and decreased by accounts written off of $325,000.
As a result, the ending balance will be $115,00
FAR 10.01 - RECEIVABLES
Zeta Co. reported sales revenue of $4,600,000 in its income statement for the year ended December 31, 20X1.
Additional information is as follows:
12/31/X0 12/31/X1 A/R $1,000,000 $1,300,000 AUA (60,000) (110,000)
Zeta wrote off uncollectible accounts totaling $20,000 during 20X1. Under the cash basis of accounting, Zeta would have reported 20X1 sales of…
$4,900,000
$4,280,000
$4,350,000
$4,300,000
$4,280,000
EXPLANATION:
The beginning balance in accounts receivable of $1,000,000 would have been increased by sales of $4,600,000 and
decreased by accounts written off of $20,000. The resulting balance would then be $5,580,000.
Since the ending balance was actually $1,300,000, the difference of $4,280,000 must represent collections which would be the amount reported as sales undeR
the cash basis of accounting
FAR 10.01 - RECEIVABLES
Cook Co. determined that the net value of its accounts receivable at December 31, 20X4, based on an aging of the receivables, was $235,000. Additional information is as follows:
AUA @ 1/1/X4 - $40,000
UA written off in 20X4-$22,000
UA recovered in 20X4 -$8,000
A/R at 12/31/X4 - $270,000
How much was recognized as bad debt expense?
$22,000
$26,000
$14,000
$9,000
$9,000
EXPLANATION:
With accounts receivable of $270,000 and a net value of $235,000, there should be an allowance for uncollectible
accounts of $35,000.
The allowance for doubtful accounts is increased by bad debt expense and decreased by write offs, net of recoveries.
If the beginning allowance was $40,000 and net write offs were $14,000 ($22,000 -$8,000), the balance in the allowance would be $26,000 ($40,000 - $14,000) before recognizing bad debts expense.
It would require bad debt expense of
$9,000 to increase the unadjusted balance $26,000 to the proper balance of $35,000 ($35,000 -$26,000 = $9,000).
FAR 10.01 - RECEIVABLES
Choose the correct statement(s) below regarding the direct write-off method for calculating bad debt expense.
I. It is not normally consistent with GAAP and accrual accounting.
II. Its use tends to result in an overstatement of accounts receivable on the balance sheet.
III. Under this method, bad debt expense is recognized when a specific account is determined to be uncollectible.
II only
I, II, and III
III only
I and III only
I, II, and III
EXPLANATION:
Under the direct write-off method, accounts receivable is reported at its gross amount and bad debts expense is
recognized when a specific account has been identified as uncollectible and is written off.
As a result, accounts receivable is overstated on the balance sheet since it ignores the fact that some of the reported receivables will not be collectible.
It is also not consistent with accrual accounting and GAAP, which require that bad debt expense be recognized, on an estimated basis, in the same period as the sale is reported.
FAR 10.01 - RECEIVABLES
Hall Co.’s allowance for uncollectible accounts had a credit balance of $24,000 at December 31, 20X1. During 20X2, Hall wrote off uncollectible accounts of $96,000. The aging of accounts receivable indicated that a $100,000 allowance for doubtful accounts was required at December 31, 20X2.
What amount of uncollectible accounts expense should Hall report for 20X2?
$96,000
$120,000
$172,000
$100,000
$172,000
EXPLANATION:
With a credit balance of $24,000 and the write-off of $96,000 in accounts receivable, the allowance for doubtful
accounts would have a debit balance of $72,000 prior to the recognition of bad debts expense.
In order to end up with a credit balance of $100,000, Hall would have to record an increase to the allowance and a provision for bad debts of $172,000.
FAR 10.01 - RECEIVABLES
Which method of recording uncollectible accounts expense is consistent with accrual accounting?
Neither allowance nor direct write-off.
Both allowance and direct write-off.
Allowance, not direct write-off.
Direct write-off only, not allowance.
Allowance, not direct write-off.
EXPLANATION:
The allowance method of recognizing bad debt expense is consistent with accrual accounting since bad debt expense is recognized in the period in which sales are recognized.
The direct write-off method is not consistent with accrual accounting since bad debt expense is not recognized until it is determined that a specific account will be uncollectible, not necessarily the
same period in which the sales revenue was recognized.
FAR 10.01 - RECEIVABLES
During the year, Carter Co. wrote o
a customer’s account receivable using the allowance method for uncollectible accounts. Which statement is true about the impact the write-off had on Carter’s net income and total assets?
Net income decreased and net assets did not change.
Net income did not change and net assets decreased.
Net income decreased and net assets decreased.
Net income did not change and net assets did not change.
Net income did not change and net assets did not change.
EXPLANATION:
A customer’s account is written off with a debit, or decrease, to the allowance for uncollectible accounts, and a credit,
or decrease, to accounts receivable.
Since net accounts receivable is equal to accounts receivable minus the allowance, and since both are reduced by the same amount, net accounts receivable is not changed and financial position is not affected.
In addition, since no income statement accounts are involved, net income remains the same as well.
