Modules 7 & 8

Question 1

What Is a Bad Debt Expense?

Answer 1

A bad debt expense is recognized when a receivable is no longer collectible because a customer is unable to fulfill their obligation to pay an outstanding debt due to bankruptcy or other financial problems.

Question 2

Creditor:

Answer 2

Has the receivable & will collect cash from the customer/borrower.

Question 3

Debtor:

Answer 3

The party who takes on the liability & will pay cash later

Question 4

What are the 3 major types of receivables?

Answer 4

• Accounts Receivable
• Notes Receivable
• Other Receivables (Dividends Receivable, Interest Receivables, Taxes Receivable)

Question 5

Accounts Receivable:

Answer 5

The right to receive cash in the future from customers for goods sold or for services performed.

Question 6

Notes Receivable:

Answer 6

A written promise that a customer or borrower will pay a fixed amount of principal plus interest by a certain date in the future (the maturity date). Usually have longer terms than accounts receivable.

Question 7

Direct write-off method:

Answer 7

A method of accounting for uncollectible receivables in which the company records bad debts expense when a customer‘s accounts receivable is uncollectible.

Only used in small, non-public companies.

Question 8

Allowance method:

Answer 8

A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see which customers the company will not collect from.

Question 9

Allowance method:

Answer 9

• A method of estimating uncollectible receivables that calculates bad debts expense based on a percentage of net credit sales.
• An income statement approach

Question 10

Capitalized Cost:

Answer 10

The cost of the asset.

Question 11

Estimated Useful Time:

Answer 11

Length of service period expected from an asset

Time – Years or Usage – Hours

Question 12

Estimated Residual Value:

Answer 12

Expected value of a depreciable asset at the end of
its useful life („Salvage Value“) – not depreciated
because the business expects to receive this amount
at the end of its useful life

Question 13

Depreciable cost =

Answer 13

Capitalized Cost – Estimated residual value

Question 14

What are the main types of depreciation methods?

Answer 14

• Straight-line method
• Units-of-production method
• Double-declining-balance method
• Yearly depreciation method

Question 15

What do the following depreciation methods have in common?

• Straight-line method
• Units-of-production method
• Double-declining-balance method

Answer 15

All 3 methods result in the exact same total depreciation for an asset.

Question 16

Straight-Line Depreciation Method:

Answer 16

Allocates an equal amount of depreciation each year.

Question 17

Book Value:

Answer 17

A depreciable asset‘s cost minus accumulated depreciation.

Question 18

Units-of-Production Method:

Answer 18

Allocates a varying amount of depreciation each year based on an asset‘s usage (e.g. miles driven, hours used, output produced).

Question 19

Accelerated Depreciation Method:

Answer 19

A method that expenses more of an asset‘s cost near the start of its useful life and less at the end of its useful life.