Uncollectible - Direct Write-Off and Allowance Flashcards
The following information relates to Jay Co.’s accounts receivable for 2004:
Accounts receivable, 1/1/04 $ 650,000
Credit sales for 2004 2,700,000
Sales returns for 2004 75,000
Accounts written off during 2004 40,000
Collections from customers
during 2004 2,150,000
Estimated future sales returns
at 12/31/04 50,000
Estimated uncollectible accounts
at 12/31/04 110,000
What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, on December 31, 2004?
A) $1,200,000
B) $1,125,000
C) $1,085,000
D) $925,000
The question is asking for the gross accounts receivable balance, before allowances for future sales returns, allowances, and uncollectible accounts:
AR 1/1 + Credit sales - Sales returns - Write-offs - Collections = AR 12/31
$650,000 + $2,700,000 − $75,000 − $40,000 − $2,150,000 = $1,085,000
Answer = C
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
A) Affects neither net income nor working capital.
B) Affects neither net income nor accounts receivable.
C) Decreases both net income and accounts
receivable.
D) Decreases both net income and working capital.
The entry is:
Allowance for uncollectible accounts xxxx
Accounts receivable xxxx
The allowance is contra to accounts receivable and thus the entry does not affect net accounts receivable. The entry does not affect current assets, working capital, or income. However, the entry does reduce gross accounts receivable. Thus, the answer “affects neither net income nor working capital” is the only possible correct answer. The answer “affects neither net income nor accounts receivable” is incorrect if “accounts receivable” is interpreted as gross accounts receivable.
Answer = A
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, 2004. Additional information is as follows:
Rents receivable - November 30, 2004 $1,060,000
Rents receivable - November 30, 2003 800,000
Uncollectible rents written off during
the fiscal year 30,000
Under the accrual basis, Marr should report rental revenue of
A) $1,920,000
B) $1,980,000
C) $2,440,000
D) $2,500,000
The cash basis revenue in the tax return is the amount of rent collected for tax purposes.
beg. rent receivable + accrual revenue - collections - write-offs = end. rent receivable
$800,000 + accrual revenue - $2,210,000 - $30,000
= $1,060,000
accrual revenue = $2,500,000
Answer = D
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets?
Net Income Total Assets
A) Decrease Decrease
B) Decrease No effect
C) No effect Decrease
D) No effect No effect
Under the allowance method for uncollectible accounts there is no impact on the balance sheet or net income when the receivable is written off. The estimated uncollectible is recognized at the time of the sale; therefore, when the account is written, off the allowance and the accounts receivable are both reduced resulting in no effect on the income statement or balance sheet.
Answer = D
Adam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, 2005. Additional information was as follows:
12/31/04 12/31/05
Accounts receivable $500,000 $650,000
Allowance for uncollectible
accounts (30,000) (55,000)
Uncollectible accounts totaling $10,000 were written off during 2005. Under the cash basis of accounting, Adam would have reported 2005 sales of
A) $2,140,000
B) $2,150,000
C) $2,175,000
D) $2,450,000
Under the cash basis of accounting, sales equals cash collected from customers. An equation or T account may be used to determine this amount:
AR, beginning + Sales - Write-offs - customer collections = AR, ending
$500,000 + $2,300,000 - $10,000 - customer collections = $650,000
Solving for the unknown (?) amount, customer collections equals $2,140,000.
This is the amount collected from customers, and is the amount that would be reported as sales under the cash basis method of accounting.
Answer = A
Bee Co. uses the direct write-off method to account for uncollectible accounts receivable.
During an accounting period, Bee’s cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:
Accounts written off Increase in AR balance
A) Deduction Deduction
B) Addition Deduction
C) Deduction Addition
D) Addition Addition
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.
Answer = A
Orr Co. prepared an aging of its accounts receivable at December 31, 2005 and determined that the net realizable value of the receivables was $250,000. Additional information is available as follows:
Allowance for uncollectible
accounts at 1/1/05 - credit balance $28,000
Accounts written off as
uncollectible during 2005 23,000
Accounts receivable at 12/31/05 270,000
Uncollectible accounts recovery
during 2005 5,000
For the year ended December 31, 2005, Orr’s uncollectible accounts expense would be
A) $23,000
B) $20,000
C) $15,000
D) $10,000
Beginning allowance balance + uncollectible accounts expense - write-offs + recoveries = ending allowance balance
$28,000 + uncollectible accounts expense − $23,000 + $5,000 = ($270,000 − $250,000)
Uncollectible accounts expense = $10,000
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
Answer = D.
On the December 31, 2005 balance sheet of Mann Co., the current receivables consisted of the following:
Trade accounts receivable $ 93,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods
lost in transit (Nov. 2005) 3,000
Selling price of unsold goods sent
by Mann on consignment at 130%
of cost (not included in Mann’s
ending inventory) 26,000
Security deposit on lease of
warehouse used for storing some
inventories 30,000
Total $150,000
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On December 31, 2005, the correct total of Mann’s current net receivables was
A) $94,000
B) $120,000
C) $124,000
D) $150,000
Only the first three items are included in net receivables:
Trade accounts receivable $93,000
Allowance for uncollectible
accounts (2,000)
Claim against shipper for
goods lost in transit (Nov. 2005) 3,000
Net receivables $94,000
The claim for lost goods is a definite receivable. The firm has a current claim on another entity. The goods on consignment should be included in Mann’s inventory at cost, not in accounts receivable at sales value. They have not been sold. The security deposit is not included in current receivables because the firm will likely not receive this deposit back during the next fiscal year.
Answer = A
The following information pertains to Tara Co.’s accounts receivable on December 31, 2004:
Days outstanding Amount Estimated % uncollectible
0-60 $120,000 1%
61-120 90,000 2%
Over 120 100,000 6%
$310,000
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During 2004, Tara wrote off $7,000 in receivables and recovered $4,000 that had been written off in prior years. Tara’s December 31, 2003, allowance for uncollectible accounts was $22,000. Under the aging method, what amount of allowance for uncollectible accounts should Tara report on December 31, 2004?
A) $9,000
B) $10,000
C) $13,000
D) $19,000
The data on write-offs and recoveries is not relevant. The aging method computes a required ending allowance balance based on the aging schedule. That required ending balance is the sum of the products of the receivables in each age category and the uncollectible percentage: $120,000(.01) + $90,000(.02) + $100,000(.06) = $9,000.
The write-offs and recoveries do affect the preadjustment allowance balance and therefore the amount of uncollectible accounts expense to recognize. In this case, the preadjustment balance is $19,000 ($22,000 − $7,000 + $4,000), which means no uncollectible accounts expense would be recognized in 2004 because the preadjustment balance is more than sufficient (exceeds the $9,000 required balance).
Answer = A
