FAR Cash 3/16/2016

Question 1

Uncollectible - Direct write-off method

Answer 1

Under the direct write-off method, write-offs are credited directly to accounts receivable (AR). No allowance account is used. Under the terms of the question, accounts receivable increased during the year.

Increase in AR = sales - cash collections - write-offs
cash collections = sales - increase in AR - write-offs.

Question 2

Uncollectible - allowance method

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account

Answer 2

Decreases both accounts receivable and the allowance for uncollectible accounts.

The entry is:
Allowance for uncollectible accounts XXXX
Accounts receivable XXXX
Both accounts are decreased.

The entry identifies the specific accounts receivable written off. That reduction takes the place of the earlier estimate, which created the allowance account in the first place.

Question 3

the objective of estimating uncollectible account is to

Answer 3

Match bad debt expense with revenues

State the account receivable on the balance sheet at net realizable value

Question 4

the allowance account is a contra account to

Answer 4

AR

Question 5

Direct write-off method

Answer 5

rarely used, doesn’t conform to GAAP

does not match expenses with revenue

Question 6

when the account becomes uncollectible, it is written off to bad debt expense

Answer 6

DR: bad debt expense
CR: account receivable

Question 7

allowance method

Answer 7

the allowance method is a contra account to AR.

Utilizes the matching principles and valuation of AR at NRV

Question 8

Income statement approach

Answer 8

estimates as a % of sales
Directly calculates the amount of bad debt expense
Credit sales x % sales uncollectible = bad debt expense

Question 9

balance sheet approach

Answer 9

estimates as a % of AR balance outstanding
Directly calculates the ending balance of the allowance account

AR x % of uncollectible = balance needed in the allowance account

Question 10

Write-offs

Answer 10

if an account becomes uncollectible, the write-off entry is
DR: allowance
CR: Account Receivable

*** A write-off does not change the amount of NET AR! Nor does it affect the income statement.

Question 11

Under the cash basis of accounting, AR formula

Answer 11

AR beginning + sales - write-off - customer collections = AR ending

Question 12

uncollectible accounts expense would be

Answer 12

Beginning allowance balance + uncollectible accounts expense - write-offs + recoveries = ending allowance balance

under the aging method, the ending allowance balance equals the difference between gross accounts receivable ($270,000) and net realizable value of accounts receivable ($250,000).

Write-offs decrease the allowance balance, and uncollectible accounts expense increases the allowance.

Recoveries also increase the allowance because the amount by which the allowance was decreased when the account was written off is reinstated on recovery.

Question 13

the cash basis revenue in the tax return is the amount of rent collected for tax purposes

Answer 13

beg. rent receivable + accrual revenue - collectible - write-offs = end. rent receivable

Question 14

under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account

Answer 14

has no effect on net income.

This entry decreases the allowance because the purpose for which the account was created has now been realized (an uncollectible account). The entry has no effect on income because neither account in the entry is an income account.

Question 15

an equation to analyze the allowance account

Answer 15

beg. balance - write-off + uncollectible accounts expense = end. balance

Question 16

when the allowance method of recognizing bad debt expense is used, the allowance would decrease when (a) an

Answer 16

specific uncollectible account is write off.

• the allowance account in increased when estimated uncollectible accounts expense is recognized. The allowance records the expected reduction in net accounts receivable until accounts are written off.

Then, when accounts actually become uncollectible and are written off, the allowance is decreased because it is no longer needed. The identify of the specific uncollectible account is known and that account is also decreased.