Receivables

3/11/23, 12:49 AM Part_1 - Dashboard - Receivables
Study Guide
Receivables
I. Generally, when organizations sell to customers without collecting cash at the time of sale, an account receivable is created. The customer is expected to pay
the organization at some point in the future.
II. When non-cash sales are made, accounts receivable are recorded at the time revenue is recognized in accordance with revenue recognition under U.S. GAAP.
[See the lesson Revenue Recognition in Part 1, Section A, Topic 2.3 for a review of revenue recognition and special considerations for when the typical pattern
of recognition is disrupted.]
A. Following is the standard accounts receivable entry for a $100 sale made on account. Note that if the sale was for inventory, a corresponding entry to cost
of goods sold and inventory would also be required.
Accounts Receivable 100
Revenue 100
To record a sale on account.

B. When the $100 cash is collected, the entity records the following entry.
Cash 100
To record cash collected on account.

III. Credit risk, also known as default risk, measures the risk that a customer will not ultimately pay the organization as promised at the time of sale.
A. A customer failing to pay an accounts receivable results in an uncollectible account, or bad debt, to the selling entity.
B. Organizations must balance the desire for increased sales from selling on credit with the risk of incurring credit losses related to its customers
uncollectible accounts.
IV. Organizations account for credit losses, or bad debts, in one of two ways.
A. Allowance method—The organization estimates the amount of bad debt it will incur and records the expense in the same period as the related sales
using an allowance account called Allowance for Credit Losses, or Allowance for Uncollectible Accounts.
Bad Debt Expense 1,000
Allowance for Uncollectible Accts 1,000
To record estimated bad debt expense and allowance for uncollectible accounts.
1. Recording an allowance helps an organization match expenses associated with uncollectible accounts to related revenues.
2. The organization assumes some amount of receivables will not be collected for purposes of estimating bad debt expense.
3. Under the allowance method, the organization is reducing accounts receivable without knowing which specific customers will not pay their debts
in the future. The use of a separate account for the estimate of uncollectible receivables will allow the sum of the subsidiary (individual customer)
ledgers to reconcile to the account receivable balance.
4. The allowance for uncollectible accounts is subtracted from accounts receivable when preparing the balance sheet. The financial statements,
therefore, will reflect only the amount that is expected to be collected, or Net Realizable Value (NRV) of Accounts Receivable. This amount is
commonly referred to as Net Accounts Receivable.
Accounts Receivable $100,000
Less: Allowance for Uncollectible Accounts ($10,000)
Equals: Net Accounts Receivable $90,000

5. When a specific customer account is identified as uncollectible, the organization can write off the amount by reducing both the allowance for
uncollectible accounts and accounts receivable. This adjustment does not change the amount of Net Accounts Receivable reflected on the balance
sheet. The entry to write off the sale noted above would be:
Allowance for Uncollectible Accts 100
To write off a specific customer account as uncollectible.

6. Organizations use two approaches for estimating uncollectible receivables under the allowance method.
a. Percentage of receivables or balance sheet approach—The organization assumes a percentage of existing accounts receivable will not be
collectible and adjusts the allowance account to reflect that percentage each time the financial statements are prepared.
i. Because this method is based on a percentage of accounts receivable, a balance sheet account, it is often referred to as the balance
sheet approach.
ii. The accounts receivable aging is often used to estimate the total amount of uncollectible accounts at the end of the period. The
estimated amount is compared to the amount remaining in the allowance account and the necessary adjustment is recorded.
• If the allowance for uncollectible accounts is too small, bad debt expense is increased and income goes down.
• If the allowance for uncollectible accounts is too large, bad debt expense is decreased and income goes up.
b. Illustration: An organization has the following accounts receivable aging and estimates for expected uncollectible percentages at the end of
Year 1.
0–30 days 31–60 days 61–90 days > 90 days Total
Amount $295,000 $87,000 $15,000 $3,000 $400,000
% Uncollectible 3% 5% 10% 60%
https://app.efficientlearning.com/pv5/v8/5/app/cma/cma_part_1.html?#lesson 1/61

Allowance needed $8,850 $4,350 $1,500 $1,800 $16,500
If the current balance in the allowance account is $15,000, the organization makes the following entry:
Allowance for Uncollectible Accounts 1,500
To adjust allowance for uncollectible accounts at end of Year 1.

If, on the other hand, the current balance in the allowance account is $17,000, the organization makes the following entry:
Allowance for Uncollectible Accounts 500
Bad Debt Expense 500
To adjust allowance for uncollectible accounts at end of Year 1.

c. Percentage of revenues or income statement approach—The organization assumes a certain percentage of sales are uncollectible and
records bad debt expense based on that percentage of revenue in a given period.
i. Because this method is based on a percentage of revenue, an income statement account, this is often referred to as the income
statement approach.
ii. Periodically, an organization will review its allowance for uncollectible accounts to ensure that it is sufficient to cover uncollectible
amounts and adjust the balance as needed. Regular large adjustments to the allowance would indicate that the percentage of sales
being used for the estimate should be adjusted going forward.
d. Illustration: An organization has $100,000 of revenues each month and assumes 1% of all revenues are uncollectible. The organization makes
the following entry each month:
Allowance for Uncollectible Accounts 1,000
To record monthly bad debt expense.

If, at the end of the year, the balance in the allowance account is $10,500 (after write-offs during the year), and a review of the accounts
receivable aging indicates the need for a $16,500 allowance, the organization would adjust the allowance by recording an additional $6,000
in bad debt expense. In addition, the organization would likely increase its percentage of sales used for recording bad debt expense from 1%
to 1.5% going forward.
B. Direct write-off method—The organization waits until a specific account is identified as not collectible and removes the accounts receivable with an
offsetting entry to bad debt expense.
Bad Debt Expense 100
To write off an uncollectible account receivable.

1. Under U.S. tax laws, bad debts are only recorded using the direct write-off method.
2. The direct write-off method is the simplest method to use.
3. A disadvantage of using the direct write-off method is that the expense for bad debt is not matched to the revenue associated with the sale.
4. Generally, the direct write-off method is not acceptable for U.S. GAAP reporting purposes unless the uncollectible amounts are clearly immaterial
or there is no reasonable basis for estimating bad debts.
Practice Question
Company X has the following accounts receivable aging and estimates for expected uncollectible percentages at the end of Year 1.
Amount $398,000 $187,000 $55,000 $10,000 $650,000
% Uncollectible 2% 4% 8% 50%
Company X has a current credit balance in its allowance for uncollectible accounts of $22,000 and bad debt expense of $62,000 before adjusting
entries.
1. What is the necessary amount of the adjustment to bad debt expense?
2. What is the Net Accounts Receivable that will be reflected in the balance sheet after the adjustment is made?
Answer
1. Allowance for uncollectible accounts needs to be adjusted by $2,840 and bad debt expense will increase by that amount:
Amount Percentage Estimate
0–30 days 398,000 × .02 = 7,960
31–60 days 187,000 × .04 = 7,480
61–90 days 55,000 × .08 = 4,400
> 90 days 10,000 × .50 = 5,000
24,840
Current credit balance in the allowance for uncollectible accounts before adjustment is $22,000 so it must increase by $2,840 to bring the
allowance to the required balance of $24,840.
2. After the adjustment, the Net Accounts receivable balance shown in the balance sheet is $625,160, calculated as follows:
Accounts Receivable $650,000
Less: Allowance for Uncollectible Accounts ($24,840)
Equals: Net Accounts Receivable $625,160
V. Organizations can sell, or factor, accounts receivable to third parties and receive a percentage of the receivables immediately as cash.
A. There are several advantages and disadvantages to factoring receivables.
1. Advantages
a. It is a quick source of cash.
b. Fees are usually based on the credit quality of the organization's customers, not the organization itself.
c. The organization can raise cash without incurring any additional debt.
d. The organization does not have to secure financing with existing assets.
2. Disadvantages
a. It is a short-term cash solution.
b. Investors and creditors could perceive factoring as a sign of financial difficulty.
c. Fees and expenses can be very high.
B. Factoring can be done either with recourse or without recourse.
1. With recourse means the organization selling accounts receivable bears the risk of loss relative to collecting the customers’ balances.
a. Fees are generally lower when factoring with recourse than without recourse.
b. If the customer does not pay its accounts receivable, the selling organization is required to compensate the factor for the loss.
c. The selling organization must estimate the amount of the recourse obligation and record it at the time of the factoring.
d. Illustration: Company A sells $100,000 of accounts receivable to Company B with recourse. Company B, the factor, assesses a 2% finance
charge and withholds an additional 5% to cover possible uncollectible amounts. Company A estimates the recourse obligation to be $3,500.
Company A makes the following entry to record the factoring:
Cash 93,000
Due from Factor 5,000
Loss on Factoring 5,500
Accounts Receivable 100,000
Recourse Obligation 3,500
To record factoring of receivables and recognition of recourse obligation.

The loss on the factoring transaction is the sum of the 2% finance charge and the estimated recourse obligation ($2,000 + $3,500). The Due
from Factor and Recourse Obligation accounts will be settled once both parties agree that all collection efforts have been exhausted and the
amount of uncollectible accounts is known.
2. Without recourse means the factor (the organization purchasing the accounts receivable from the selling organization) bears the risk of loss
relative to collecting the customers’ balances.
a. The organization selling the accounts receivable will generally receive less cash when factoring without recourse to compensate for the
increased risk to the factor.
b. If the customer does not pay its accounts receivable, the selling organization is not impacted by this nonpayment.
c. Illustration: Company A sells $100,000 of accounts receivable to Company B without recourse. Company B, the factor, assesses a 5% finance
charge and withholds an additional 4% to cover late-paying customers. Company A makes the following entry to record the factoring:
Cash 91,000
Due from Factor 4,000
Loss on Factoring 5,000
To record factoring of receivables without recourse.

In this case, the loss on the factoring transaction is simply the 5% finance charge as there is no estimated recourse obligation. The Due from
Factor will be settled once all money has been collected from customers or both parties agree that all collection efforts have been exhausted.
Practice Question
Company Y sells $150,000 of accounts receivable to Company Z with recourse. Company Z, the factor, assesses a 4% finance charge and withholds an additional
3% to cover possible uncollectible amounts. Company Y estimates the recourse obligation to be $7,000.
1. What is the amount of the loss on factoring that Company Y will record upon the sale of these receivables to Company Z?
2. Assume Company Y wishes to renegotiate the sale of receivables to be without recourse instead. Is the amount of the finance charge likely to be greater than
or less than 4%? Why?
Answer
1. The loss on factoring will include both the finance charge and the amount of the recourse obligation:
Finance Charge ($150,000 × .04) $ 6,000
Recourse Obligation 7.000
Total Loss on Factoring $13.000

2. The finance charge is likely to be greater than 4% as Company Z will want compensation for taking on the risk of loss associated with collectability of the
accounts if the sale is without recourse.
Summary
According to revenue recognition principles under U.S. GAAP, when non-cash sales are made, accounts receivable are recorded at the time revenue is recognized.
Credit risk, or default risk, is the risk that a customer will ultimately not pay the organization as promised. There are two methods of accounting for credit losses,
also known as bad debts. The first is the allowance method, which is when the organization estimates the amount of bad debt it will incur and records the expense
in the same period as the related sales using an allowance account. The second method is the direct write-off method, which is when an organization waits until a
specific account is identified as not collectible to remove the account receivable using an offsetting entry to bad debt expense. Organizations sometimes factor, or
sell, their accounts receivable to a third party in order to receive a percentage of the receivables immediately as cash.
Flashcards
Receivables
1
FC.rec.FC001_1802
What is credit risk? Credit risk is also known as default risk. It measures the risk that a
customer will not ultimately pay the organization what they promised
at the time of sale.
2
FC.rec.FC002_1802
Difficulty: N/A
1. Allowance method: The organization estimates the amount of

Briefly describe the two ways organizations account for credit losses,
bad debt it will incur and records the expense in the same period
or bad debts.
as the related sales using an allowance account. This method is
based on accrual accounting and is used for GAAP purposes.
2. Direct write-off method: The organization waits until a specific
account is identified as not collectible and removes the accounts
receivable with an offsetting entry to bad debt expense. This
method is more like a cash basis and is used for tax purposes.
3
FC.rec.FC003_1802
Difficulty: N/A
What are the two approaches for estimating uncollectible receivables 1. Percentage of receivables or balance sheet approach: The
under the allowance method of accounting for bad debts? organization assumes a percentage of existing accounts
receivable will not be collectible and adjusts the allowance
account to reflect that.
2. Percentage of revenues or income statement approach: The
organization assumes a certain percentage of sales are
uncollectible and records bad debt expense based on that.
4
FC.rec.FC004_1802
What is factoring a receivable? When receivables are factored, they are sold for cash immediately,
rather than waiting for the cash to be collected from customers. This
usually involves a discount from the recorded value of the receivables
to cover the risk of non-payment by customers.
5
FC.rec.FC005_1802
What does it mean to factor receivables with recourse? The organization selling accounts receivable bears the risk of loss
relative to collecting the customers’ balances. One advantage to
factoring with recourse is that the fees are typically lower than
factoring without recourse. The selling organization is required to
compensate the factor for any loss so they estimate the amount of the
resulting recourse obligation and record it at the time of the factoring.
6
FC.rec.FC006_1802
What does it mean to factor receivables without recourse? This means that the factor (the organization purchasing the accounts
receivable from the selling organization) bears the risk of loss relative
to collecting the customers’ balances. The selling organization
typically receives less cash on the sale because the buyer has
increased risk. If the customer does not ultimately pay the factor, the
selling organization is not impacted.
Notes
Receivables
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Test Bank Questions
Receivables
Question 1
1.A.2.a
1A2-W002_0820
Claire Enterprises has $150,000 in accounts receivable at the end of the current year, and it estimates its bad debts to be 5% of the receivables. Hence, the
accountant reports $7,500 as the allowance for doubtful accounts and the net realizable value as $142,500. Under which of the following circumstances will the
amount of bad debt expense reported for the year most likely be less than the allowance for doubtful accounts at the end of the year?
If the company shortened the credit period allowed.
If the company lengthened the credit period allowed.
If the allowance for doubtful accounts had a credit balance of $1,500 before the year end adjustments.
If the allowance for doubtful accounts had a debit balance of $1,500 before the year end adjustments.
Question 2
1.A.2.a
1A2-W015_0820
A customer of Irving Gemstones owed $20,000 on account. Due to nonreceipt of payments after 5 months of the due date, the amount was written off as doubtful
using the direct write-off method. After 2 years, the customer paid the full amount due. How should this transaction be journalized?
The amount received should be debited to Cash and credited to the Accounts Receivable account.
The amount received should be debited to Accounts Receivable and credited to the Allowance for Doubtful accounts.
The amount received should be debited to Cash and credited to an income statement account, such as Uncollectible Accounts Recovered.
The amount received should be debited to the Allowance for Doubtful accounts and credited to Accounts Receivable.
Question 3
1.A.2.b
1A2-W016_0820
How is factoring of receivables different from securitization of receivables?
While factoring is appropriate for long-term term accounts receivable, benefits of securitization can be received only on short-term accounts receivables.
In factoring, factors buy receivables and take on the billing and collection functions, whereas securitization is the process of converting illiquid assets into
liquid assets by bundling similar receivables into an investment fund.
Companies that use factoring receive cash after the recovery of principal and interest, whereas in securitization, cash is received immediately.
In factoring, sellers of the receivables continue to service the receivables, whereas under securitization, the company ceases to continue any operational
activities with the customers.
Question 4
1.A.2.b
1A2-W017_0820
The management accountant of Tillboard Inc. has recognized a sale of receivables (factoring) in the books for the current year. In support of the decision to record
this transaction as a sale, management points to the ability of the buyer to sell the receivables and the surrender of control over the receivables to the buyer.
Which of the following contract terms for the transfer of the receivables to the buyer may prohibit Tillboard from recording the transaction as a sale?
The buyer may use the asset as collateral.
The asset is outside the reach of the creditors of Tillboard.
Tillboard agrees to repurchase the asset before its maturity.
Tillboard is liable for any loss realized on the receivables.
Question 5
1.A.2.a
tb.recv.001_0820
When a company collects on an account after writing it off as uncollectible (under the allowance method), it makes one journal entry:
Reversing the entry made when writing off the account
Reversing the entry made when writing off the account, and another entry recording the collection in the usual manner
Recording the collection in the usual manner
Charging the amount to Bad Debt Expense, and other entry recording the collection in the usual manner
Question 6
1.A.2.a
tb.recv.002_0820
The allowance method of accounting for bad debts is an application of which of the following?
Consistency characteristic
Materiality quality
Revenue recognition principle
Expense recognition principle
Question 7
1.A.2.a
tb.recv.003_0820
When should a typical merchandiser recognize an account receivable?
At the point of sale
When cash is received
When the transaction price is determined
When the contract is signed
Question 8
1.A.2.a
tb.recv.004_1805
When a sale is made on account, what impact does a sales discount have on the amount of cash eventually received?
It decreases the amount of cash received.
It increases the amount of cash received.
It neither increases nor decreases the amount of cash received.
It either increases or decreases the amount of cash received in unpredictable ways.
Question 9
1.A.2.a
tb.recv.005_0820
Because the ________ method violates the ________, it is unacceptable for financial reporting.
direct write-off; expense recognition principle
direct write-off; going-concern principle
allowance; expense recognition principle
allowance; relevance criteria
Question 10
1.A.2.a
tb.recv.006_0820
Unlike the allowance method, the direct write-off method:
Is forbidden by GAAP because it incorporates the expense recognition principle.
Is forbidden by GAAP because it does not incorporate the expense recognition principle.
Is required by GAAP because it does not incorporate the expense recognition principle.
Is required by GAAP because it incorporates the expense recognition principle.
Question 11
1.A.2.a
tb.recv.007_1805
When recording bad debt expense under the allowance method, ________ is credited, and ________ is debited at the end of the accounting period.
allowance for doubtful accounts; bad debt expense
bad debt expense; allowance for doubtful accounts
allowance for doubtful accounts; accounts receivable
accounts receivable; bad debt expense
Question 12
1.A.2.a
tb.recv.008_0820
How does the allowance method of accounting for bad debts satisfy the expense recognition principle?
By recording the exact amount of uncollectible accounts at the end of each period
By writing off uncollectible accounts at the end of each period
By estimating uncollectible accounts at the end of each period
By pursuing uncollectible accounts at the end of each period
Question 13
1.A.2.a
tb.recv.009_0820
What happens if a company fails to record estimated bad debt expense?
Net realizable value of accounts receivable is understated.
Revenues are understated.
Gross receivables are understated.
Expenses are understated.
Question 14
1.A.2.a
tb.recv.010_1805
What will happen if the amount of bad debt expense is understated at year-end?
Net income will be understated.
Net accounts receivable will be overstated.
Stockholders’ equity will be understated.
Allowance for Doubtful Accounts will be overstated.
Question 15
1.A.2.a
tb.recv.011_0820
Which of the following statements is true about accounting for uncollectible accounts under the allowance method of accounting?
The net realizable value of accounts receivable is greater before an account is written off than after it is written off.
Bad Debt Expense is debited when a specific account is written off as doubtful.
The net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
Allowance for Doubtful Accounts is closed each year to Retained Earnings.
Question 16
1.A.2.a
tb.recv.012_0820
Under the allowance method, what happens when a specific account is written off?
Total assets will be unchanged.
Net income will decrease.
Total assets will decrease.
Total assets will increase.
Question 17
1.A.2.a
tb.recv.013_0820
O'Brien Brewery and Delgado Vintage Wines both decided to write off a specific customer's uncollectible account as a bad debt expense. To record this transaction,
O'Brien Brewery recorded a debit to Bad Debt Expense, whereas Delgado Vintage Wines recorded a debit to Allowance for Doubtful Accounts. What is the difference
between these two companies?
O'Brien Brewery uses the direct write-off method for uncollectible accounts, whereas Delgado Vintage Wines uses the allowance method for uncollectible
accounts.
O'Brien Brewery uses the allowance method for uncollectible accounts, whereas Delgado Vintage Wines uses the direct write-off method for uncollectible
accounts.
O'Brien Brewery uses the factor write-off method for uncollectible accounts, whereas Delgado Vintage Wines uses the direct write-off method for uncollectible
accounts.
O'Brien Brewery uses the allowance method for uncollectible accounts, whereas Delgado Vintage Wines uses the factor write-off method for uncollectible
accounts.
Question 18
1.A.2.a
tb.recv.014_0820
Newman Shoes and Bowman Footwear both decided to write off a specific customer's uncollectible account as a bad debt expense. If Newman Shoes uses the direct
write-off method and Bowman Footwear uses the allowance method for uncollectible accounts, what will be the difference in the journal entries for these two
companies?
Newman Shoes will record a credit to Bad Debt Expense, whereas Bowman Footwear will record a credit to Allowance for Doubtful Accounts.
Newman Shoes will record a debit to Allowance for Doubtful Accounts, whereas Bowman Footwear will record a debit to Bad Debt Expense.
Newman Shoes will record a debit to Bad Debt Expense, whereas Bowman Footwear will record a debit to Allowance for Doubtful Accounts.
Newman Shoes will record a credit to Allowance for Doubtful Accounts, whereas Bowman Footwear will record a credit to Bad Debt Expense.
Question 19
1.A.2.a
tb.recv.015_0820
Both Fowler Landscaping and Stanley Cleaning Services have estimated their uncollectible accounts as of the end of 20X7 to be $3,500. In addition, both companies
use the allowance method for uncollectible accounts. If Stanley Cleaning Services has to record a larger adjusting entry for their Allowance for Doubtful Accounts
account at the end of 20X7, which of the following could be true about the balance of the Allowance for Doubtful Accounts account for each company?
Stanley Cleaning Services has a credit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a debit balance.
Stanley Cleaning Services has a zero balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a debit balance.
Stanley Cleaning Services has a debit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a credit balance.
Stanley Cleaning Services has a credit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a zero balance.
Question 20
1.A.2.a
tb.recv.016_0820
When using the allowance method, what should a firm do to record bad debt expense?
Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at the end of each
accounting period.
Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Question 21
1.A.2.b
tb.recv.017_0820
Lynch Company reports the following information for its most recent fiscal year, before adjustments:
Sales $821,500
Beginning Accounts Receivable Balance $72,500
Sales Returns and Allowances $12,200
Ending Accounts Receivable Balance $68,845
Allowance for Doubtful Accounts $4,100 (debit balance)
A review of the accounts receivable aging schedule results in $7,100 of estimated bad debts. If Lynch uses the percentage-of-receivables basis to estimate bad debts,
journalize the appropriate year-end adjusting entry.

Allowance for Doubtful Accounts 7,100
Question 22
1.A.2.b
tb.recv.018_0820
Using the percentage-of-receivables basis, Continental Industries estimates it will have total bad debts of $25,150 in the existing receivables balance. If Continental's
trial balance shows an Allowance for Doubtful Accounts with a debit balance of $8,750, which of the following adjusting entries should the firm include on its balance
sheet?
Bad Debt Expense = Debit of $16,400; Allowance for Doubtful Accounts = Credit of $16,400
Allowance for Doubtful Accounts = Debit of $16,400; Bad Debt Expense = Credit of $16,400
Question 23
1.A.2.b
tb.recv.019_0820
Laser Company reports the following information for its most recent fiscal year, before adjustments:
Sales: $581,500
Beginning Accounts Receivable Balance: $32,500
Sales Returns and Allowances: $9,500
Ending Accounts Receivable Balance: $34,400
Allowance for Doubtful Accounts: $2,100 (credit balance)
A review of the accounts receivable aging schedule results in $4,800 of estimated bad debts. If Laser uses the percentage-of-receivables basis to estimate bad debts,

Question 24
1.A.2.b
tb.recv.020_0820
Using the percentage-of-receivables basis, First Manufacturing estimates it will have total bad debts of $8,235 in the existing receivables balance. If First's trial
balance shows an Allowance for Doubtful Accounts with a credit balance of $750, which of the following adjusting entries should the firm include on its balance
sheet?
Bad Debt Expense =Debit of $8,985; Allowance for Doubtful Accounts = Credit of $8,985
Question 25
1.A.2.b
tb.recv.021_1805
Four companies are trying to estimate their bad debt expense using the percentage-of-receivables basis. Assuming each company has a similar total Account
Receivables balance and a similar estimated percentage collectible for the number of days past due, which company should record the HIGHEST amount of Bad Debt
Expense? The table reports the company's percentage of total Accounts Receivable in each category.
Not Due 1–30 days past due 31–60 days past due Over 60 days past due
Company 1 45% 30% 10% 15%
Company 2 25% 25% 25% 25%
Company 3 15% 5% 20% 60%
Company 4 20% 15% 35% 30%
Company 2
Company 1
Company 3
Company 4
Question 26
1.A.2.b
tb.recv.022_1805
Four companies each have a similar total Account Receivables balance and a similar estimated percentage collectible for the number of days past due. If the
companies are trying to estimate their bad debt expense using the percentage-of-receivables basis, which company should record the LOWEST amount of Bad Debt
Company 1 65% 20% 10% 5%
Company 2 40% 30% 15% 15%
Company 3 10% 20% 35% 35%
Company 4 35% 30% 20% 15%
Company 1
Company 2
Company 3
Company 4
Question 27
1.A.2.b
tb.recv.024_1805
If the allowance method is used to account for uncollectible accounts, when is bad debt expense debited?
When a sale is made
When management estimates the amount of uncollectibles
When an account becomes bad and is written off
When a customer's account becomes past due
Answered Question 1
1.A.2.a
1A2-W002_0820
Claire Enterprises has $150,000 in accounts receivable at the end of the current year, and it estimates its bad debts to be 5% of the receivables. Hence, the
accountant reports $7,500 as the allowance for doubtful accounts and the net realizable value as $142,500. Under which of the following circumstances will the
amount of bad debt expense reported for the year most likely be less than the allowance for doubtful accounts at the end of the year?
If the company shortened the credit period allowed.
If the company lengthened the credit period allowed.
If the allowance for doubtful accounts had a credit balance of $1,500 before the year end adjustments.
If the allowance for doubtful accounts had a debit balance of $1,500 before the year end adjustments.
If there is an existing credit balance in the allowance for doubtful accounts, then the bad debt expense
should be adjusted downward from $7,500, as it is necessary to adjust the balance in the allowance
account only to the desired level when estimating bad debts as a percentage of receivables. Therefore,
the bad debt expense will be $7,500 − $1,500 = $6,000.
Answered Question 2
1.A.2.a
1A2-W015_0820
A customer of Irving Gemstones owed $20,000 on account. Due to nonreceipt of payments after 5 months of the due date, the amount was written off as doubtful
using the direct write-off method. After 2 years, the customer paid the full amount due. How should this transaction be journalized?
The amount received should be debited to Cash and credited to the Accounts Receivable account.
The amount received should be debited to Accounts Receivable and credited to the Allowance for Doubtful accounts.
The amount received should be debited to Cash and credited to an income statement account, such as Uncollectible Accounts Recovered.
The amount received should be debited to the Allowance for Doubtful accounts and credited to Accounts Receivable.
If an account written off using the direct write-off method is subsequently collected, the amount is
debited to Cash and credited to an income statement account, such as Uncollectible Accounts
Recovered.
Answered Question 3
1.A.2.b
1A2-W016_0820
How is factoring of receivables different from securitization of receivables?
While factoring is appropriate for long-term term accounts receivable, benefits of securitization can be received only on short-term accounts receivables.
In factoring, factors buy receivables and take on the billing and collection functions, whereas securitization is the process of converting illiquid assets into
liquid assets by bundling similar receivables into an investment fund.
Companies that use factoring receive cash after the recovery of principal and interest, whereas in securitization, cash is received immediately.
In factoring, sellers of the receivables continue to service the receivables, whereas under securitization, the company ceases to continue any operational
activities with the customers.
In factoring, factors buy receivables and take on the billing and collection functions, whereas
securitization is the process of converting illiquid assets into liquid assets by bundling similar securities
into an investment fund.
Answered Question 4
1.A.2.b
1A2-W017_0820
The management accountant of Tillboard Inc. has recognized a sale of receivables (factoring) in the books for the current year. In support of the decision to record
this transaction as a sale, management points to the ability of the buyer to sell the receivables and the surrender of control over the receivables to the buyer.
Which of the following contract terms for the transfer of the receivables to the buyer may prohibit Tillboard from recording the transaction as a sale?
The buyer may use the asset as collateral.
The asset is outside the reach of the creditors of Tillboard.
Tillboard agrees to repurchase the asset before its maturity.
Tillboard is liable for any loss realized on the receivables.
To be a sale, the transferor must surrender control over the transferred asset. An agreement to
repurchase the asset is prohibited for the surrender of control condition to be met.
Answered Question 5
1.A.2.a
tb.recv.001_0820
When a company collects on an account after writing it off as uncollectible (under the allowance method), it makes one journal entry:
Reversing the entry made when writing off the account
Reversing the entry made when writing off the account, and another entry recording the collection in the usual manner
Recording the collection in the usual manner
Charging the amount to Bad Debt Expense, and other entry recording the collection in the usual manner
Writing off an accounts receivable requires a journal entry to remove the receivable (credit) and decrease
the allowance for doubtful accounts (debit). When an account that was previously written off is collected,
a journal entry reinstating the account must be made. This is a reverse of the entry to write off the
account. A second entry recording the collection in the usual manner is also made. Therefore, this is the
correct answer.
Answered Question 6
1.A.2.a
tb.recv.002_0820
The allowance method of accounting for bad debts is an application of which of the following?
Consistency characteristic
Materiality quality
Revenue recognition principle
Expense recognition principle
Allowance for doubtful accounts is the off-setting credit when bad debt expense is debited. This journal
entry is based on an estimate of the amount of uncollectible accounts, not actual uncollectible accounts.
An estimate is used in order to be consistent with the expense recognition principle, which states that
expenses should be recognized in the period incurred or when the associated revenue is recorded.
Therefore, this is the correct answer.
Answered Question 7
1.A.2.a
tb.recv.003_0820
When should a typical merchandiser recognize an account receivable?
At the point of sale
When cash is received
When the transaction price is determined
When the contract is signed
Revenue is recognized when performance obligations are satisfied. For a merchandiser this typically
happens at the point of sale as the seller provides the goods and receives cash or a claim to cash and
records a receivable. Therefore, this is the correct answer.
Answered Question 8
1.A.2.a
tb.recv.004_1805
When a sale is made on account, what impact does a sales discount have on the amount of cash eventually received?
It decreases the amount of cash received.
It increases the amount of cash received.
It neither increases nor decreases the amount of cash received.
It either increases or decreases the amount of cash received in unpredictable ways.
A sales discount is an incentive offered to encourage early payment. It is typically stated as a percentage
of the gross amount of the receivable. Since it is a discount on the gross amount owed, when debtors pay
within the discount period, the creditor receives less cash. Therefore, this is the correct answer.
Answered Question 9
1.A.2.a
tb.recv.005_0820
Because the ________ method violates the ________, it is unacceptable for financial reporting.
direct write-off; expense recognition principle
direct write-off; going-concern principle
allowance; expense recognition principle
allowance; relevance criteria
Under the direct write-off method bad debt expense is recorded and accounts receivable written off
when a company learns that a specific receivable will not be paid. This method violates the expense
recognition principle because bad debt is not recorded at the same time the associated revenue is
recorded. This makes it unacceptable for financial reporting, unless the uncollectible amounts are clearly
immaterial or there is no reasonable basis for estimating bad debts. Therefore, this is the correct answer.
Answered Question 10
1.A.2.a
tb.recv.006_0820
Unlike the allowance method, the direct write-off method:
Is forbidden by GAAP because it incorporates the expense recognition principle.
Is forbidden by GAAP because it does not incorporate the expense recognition principle.
Is required by GAAP because it does not incorporate the expense recognition principle.
Is required by GAAP because it incorporates the expense recognition principle.
Under the direct write-off method bad debt expense is recorded and accounts receivable written off
when a company learns that a specific receivable will not be paid. This method violates the expense
recognition principle because bad debt is not recorded at the same time the associated revenue is
recorded. This makes it unacceptable for financial reporting. Therefore, this is the correct answer.
1.A.2.a
tb.recv.007_1805
When recording bad debt expense under the allowance method, ________ is credited, and ________ is debited at the end of the accounting period.
allowance for doubtful accounts; bad debt expense
bad debt expense; allowance for doubtful accounts
allowance for doubtful accounts; accounts receivable
accounts receivable; bad debt expense
Under the allowance method an estimate is made of the dollar value of accounts receivable that will not
be collected. This amount is used to calculate bad debt expense for a period. The journal entry is a debit
to bad debt expense and a credit to allowance for doubtful accounts. This increases expenses and
decreases assets. Therefore, this is the correct answer.
1.A.2.a
tb.recv.008_0820
How does the allowance method of accounting for bad debts satisfy the expense recognition principle?
By recording the exact amount of uncollectible accounts at the end of each period
By writing off uncollectible accounts at the end of each period
By estimating uncollectible accounts at the end of each period
By pursuing uncollectible accounts at the end of each period
be collected. This amount is the basis of bad debt expense. Since bad debt expense is recorded in the
same period as the related revenue is recognized, this satisfies the expense recognition princple better
than simply recording bad debt expense when accounts become uncollectible (direct write-off method).
1.A.2.a
tb.recv.009_0820
What happens if a company fails to record estimated bad debt expense?
Net realizable value of accounts receivable is understated.
Revenues are understated.
Gross receivables are understated.
Expenses are understated.
If bad debt expense is not recorded, total expenses are understated. Therefore, this is the correct answer.
1.A.2.a
tb.recv.010_1805
What will happen if the amount of bad debt expense is understated at year-end?
Net income will be understated.
Net accounts receivable will be overstated.
Stockholders’ equity will be understated.
Allowance for Doubtful Accounts will be overstated.
When bad debt expense is recorded the off-setting credit is to allowance for doubtful accounts. The
allowance is needed to reduce the net realizable value of accounts receivable to the amount expected to
be collected. If bad debt expense is understated, the allowance for doubtful is understated. This results in
the net accounts receivable being overstated. Therefore, this is the correct answer.
1.A.2.a
tb.recv.011_0820
Which of the following statements is true about accounting for uncollectible accounts under the allowance method of accounting?
The net realizable value of accounts receivable is greater before an account is written off than after it is written off.
Bad Debt Expense is debited when a specific account is written off as doubtful.
The net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
Allowance for Doubtful Accounts is closed each year to Retained Earnings.
be collected. This amount is the basis of bad debt expense. When an account is written off, the allowance
for doubtful accounts is reduced (debited) and gross accounts receivable is reduced (credited) by the
same amount. This means the net realizable value is the same after the account is written off as it is
before it is written off. Therefore, this is the correct answer.
1.A.2.a
tb.recv.012_0820
Under the allowance method, what happens when a specific account is written off?
Total assets will be unchanged.
Net income will decrease.
Total assets will decrease.
Total assets will increase.
be collected. This amount is the basis of bad debt expense. When an account is written off, the allowance
for doubtful accounts is reduced (debited) and gross accounts receivable is reduced (credited) by the
same amount. This means the net realizable value of accounts receivable is the same after the account is
written off as it is before it is written off. This means total assets will be unchanged when a specific
account is written off. Therefore, this is the correct answer.
1.A.2.a
tb.recv.013_0820
O'Brien Brewery and Delgado Vintage Wines both decided to write off a specific customer's uncollectible account as a bad debt expense. To record this transaction,
O'Brien Brewery recorded a debit to Bad Debt Expense, whereas Delgado Vintage Wines recorded a debit to Allowance for Doubtful Accounts. What is the difference
between these two companies?
O'Brien Brewery uses the direct write-off method for uncollectible accounts, whereas Delgado Vintage Wines uses the allowance method for uncollectible
accounts.
O'Brien Brewery uses the allowance method for uncollectible accounts, whereas Delgado Vintage Wines uses the direct write-off method for uncollectible
accounts.
O'Brien Brewery uses the factor write-off method for uncollectible accounts, whereas Delgado Vintage Wines uses the direct write-off method for uncollectible
accounts.
O'Brien Brewery uses the allowance method for uncollectible accounts, whereas Delgado Vintage Wines uses the factor write-off method for uncollectible
accounts.
be collected. This allowance account reduces the net realizable value of accounts receivable. When an
account is written off, the allowance for doubtful accounts is reduced (debited) and gross accounts
receivable is reduced (credited) by the same amount. Under the direct write-off method, bad debt
expense is only recorded when a specific account is written off. The journal entry consists of a debit to
bad debt expense and a credit to accounts receivable. O'Brien is using the direct write-off method since it
is debiting bad debt expense and Delgado is using the allowance method since it is debiting allowance
for doubtful accounts when a specific account is written off. Therefore, this is the correct answer.
1.A.2.a
tb.recv.014_0820
Newman Shoes and Bowman Footwear both decided to write off a specific customer's uncollectible account as a bad debt expense. If Newman Shoes uses the direct
write-off method and Bowman Footwear uses the allowance method for uncollectible accounts, what will be the difference in the journal entries for these two
companies?
Newman Shoes will record a credit to Bad Debt Expense, whereas Bowman Footwear will record a credit to Allowance for Doubtful Accounts.
Newman Shoes will record a debit to Allowance for Doubtful Accounts, whereas Bowman Footwear will record a debit to Bad Debt Expense.
Newman Shoes will record a debit to Bad Debt Expense, whereas Bowman Footwear will record a debit to Allowance for Doubtful Accounts.
Newman Shoes will record a credit to Allowance for Doubtful Accounts, whereas Bowman Footwear will record a credit to Bad Debt Expense.
be collected. This allowance account reduces the net realizable value of accounts receivable. When an
account is written off, the allowance for doubtful accounts is reduced (debited) and gross accounts
receivable is reduced (credited) by the same amount. Under the direct write-off method, bad debt
expense is only recorded when a specific account is written off. The journal entry consists of a debit to
bad debt expense and a credit to accounts receivable. If Newman is using the direct write-off method it
would debit bad debt expense and Bowman would debit allowance for doubtful accounts when a specific
account is written off. Therefore, this is the correct answer.
1.A.2.a
tb.recv.015_0820
Both Fowler Landscaping and Stanley Cleaning Services have estimated their uncollectible accounts as of the end of 20X7 to be $3,500. In addition, both companies
use the allowance method for uncollectible accounts. If Stanley Cleaning Services has to record a larger adjusting entry for their Allowance for Doubtful Accounts
account at the end of 20X7, which of the following could be true about the balance of the Allowance for Doubtful Accounts account for each company?
Stanley Cleaning Services has a credit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a debit balance.
Stanley Cleaning Services has a zero balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a debit balance.
Stanley Cleaning Services has a debit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a credit balance.
Stanley Cleaning Services has a credit balance in Allowance for Doubtful Accounts at the end of 20X7, whereas Fowler Landscaping has a zero balance.
be collected. Bad debt expense is the amount needed to make the balance in the allowance for doubtful
accounts equal to the estimate of the dollar value of accounts receivable that will not be collected. The
“normal” balance in the allowance for doubtful accounts is a credit balance. A larger entry for Stanley to
reach an ending balance of $3,500 means its allowance balance prior to adjustment is a smaller credit
balance than Fowler's, a debit balance, while Fowler's is a credit balance, or a larger debit balance than
Fowler's debit balance. Therefore, this is the correct answer.
1.A.2.a
tb.recv.016_0820
When using the allowance method, what should a firm do to record bad debt expense?
Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at the end of each
accounting period.
Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful accounts through an adjusting entry at the end of each period.
Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts through an adjusting entry at the end of each period.
to bad debt expense and a credit to allowance for doubtful accounts. Therefore, this is the correct
answer.
1.A.2.b
tb.recv.017_0820
Lynch Company reports the following information for its most recent fiscal year, before adjustments:
Sales $821,500
Beginning Accounts Receivable Balance $72,500
Sales Returns and Allowances $12,200
Ending Accounts Receivable Balance $68,845
Allowance for Doubtful Accounts $4,100 (debit balance)
A review of the accounts receivable aging schedule results in $7,100 of estimated bad debts. If Lynch uses the percentage-of-receivables basis to estimate bad debts,

be collected. An aging of receivables analysis is one way to determine this amount. The result of the
analysis is the credit balance needed in allowance for doubtful accounts after bad debt is recorded. Since
there is a debit balance of $4,100 in allowance for doubtful accounts prior to recording bad debt expense,
$11,200 must be added to allowance for doubtful accounts to make the balance a credit of $7,100 ($4,100
+ 7,100). The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts.
1.A.2.b
tb.recv.018_0820
Using the percentage-of-receivables basis, Continental Industries estimates it will have total bad debts of $25,150 in the existing receivables balance. If Continental's
trial balance shows an Allowance for Doubtful Accounts with a debit balance of $8,750, which of the following adjusting entries should the firm include on its balance
sheet?
there is a debit balance of $8,750 in allowance for doubtful accounts prior to recording bad debt expense,
$33,900 must be added to allowance for doubtful accounts to make the balance a credit of $25,150. The
journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Therefore,
this is the correct answer.
1.A.2.b
tb.recv.019_0820
Laser Company reports the following information for its most recent fiscal year, before adjustments:
Sales: $581,500
Beginning Accounts Receivable Balance: $32,500
Sales Returns and Allowances: $9,500
Ending Accounts Receivable Balance: $34,400
Allowance for Doubtful Accounts: $2,100 (credit balance)
A review of the accounts receivable aging schedule results in $4,800 of estimated bad debts. If Laser uses the percentage-of-receivables basis to estimate bad debts,

there is a credit balance of $2,100 in allowance for doubtful accounts prior to recording bad debt
expense, $2,700 must be added to allowance for doubtful accounts to make the balance a credit of
$4,800. The journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts.
1.A.2.b
tb.recv.020_0820
Using the percentage-of-receivables basis, First Manufacturing estimates it will have total bad debts of $8,235 in the existing receivables balance. If First's trial
balance shows an Allowance for Doubtful Accounts with a credit balance of $750, which of the following adjusting entries should the firm include on its balance
sheet?
Bad Debt Expense =Debit of $8,985; Allowance for Doubtful Accounts = Credit of $8,985
there is a credit balance of $750 in allowance for doubtful accounts prior to recording bad debt expense,
$7,485 must be added to allowance for doubtful accounts to make the balance a credit of $8,235. The
journal entry is a debit to bad debt expense and a credit to allowance for doubtful accounts. Therefore,
this is the correct answer.
1.A.2.b
tb.recv.021_1805
Four companies are trying to estimate their bad debt expense using the percentage-of-receivables basis. Assuming each company has a similar total Account
Receivables balance and a similar estimated percentage collectible for the number of days past due, which company should record the HIGHEST amount of Bad Debt
Company 1 45% 30% 10% 15%
Company 2 25% 25% 25% 25%
Company 3 15% 5% 20% 60%
Company 4 20% 15% 35% 30%
Company 2
Company 1
Company 3
Company 4
In general, the “older” a receivable is, the less likely it will be collected. Company 3 has the highest
percentage of receivables in the “over 60 days past due” category and the highest combined percentage
in the “over 60 days past due” and “31–60 days past due” categories. This implies that it will have the
highest amount of uncollectible accounts and the highest bad debt expense. Therefore, this is the correct
answer.
1.A.2.b
tb.recv.022_1805
Four companies each have a similar total Account Receivables balance and a similar estimated percentage collectible for the number of days past due. If the
companies are trying to estimate their bad debt expense using the percentage-of-receivables basis, which company should record the LOWEST amount of Bad Debt
Company 1 65% 20% 10% 5%
Company 2 40% 30% 15% 15%
Company 3 10% 20% 35% 35%
Company 4 35% 30% 20% 15%
Company 1
Company 2
Company 3
Company 4
In general, the “older” a receivable is, the less likely it will be collected. Company 1 has the highest
percentage of receivables in the “not due” category and the lowest combined percentage in the “over 60
days past due” and “31–60 days past due” categories. This implies that it will have the lowest amount of
uncollectible accounts and the lowest bad debt expense. Therefore, this is the correct answer.
1.A.2.b
tb.recv.024_1805
If the allowance method is used to account for uncollectible accounts, when is bad debt expense debited?
When a sale is made
When management estimates the amount of uncollectibles
When an account becomes bad and is written off
When a customer's account becomes past due
to bad debt expense and a credit to allowance for doubtful accounts. Therefore, this is the correct
answer.

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3/11/23, 12:49 AM Part_1 - Dashboard - Receivables

To record a sale on account.

To record cash collected on account.

Equals: Net Accounts Receivable $90,000

To write off a specific customer account as uncollectible.

0–30 days 31–60 days 61–90 days > 90 days Total

To adjust allowance for uncollectible accounts at end of Year 1.

To adjust allowance for uncollectible accounts at end of Year 1.

To record monthly bad debt expense.

To write off an uncollectible account receivable.

Equals: Net Accounts Receivable $625,160

To record factoring of receivables and recognition of recourse obligation.

To record factoring of receivables without recourse.

Recourse Obligation 7.000

Total Loss on Factoring $13.000

1. Allowance method: The organization estimates the amount of

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Test Bank Questions

If the company lengthened the credit period allowed.

The buyer may use the asset as collateral.

The asset is outside the reach of the creditors of Tillboard.

Tillboard agrees to repurchase the asset before its maturity.

Tillboard is liable for any loss realized on the receivables.

Recording the collection in the usual manner

Revenue recognition principle

Expense recognition principle

When cash is received

When the transaction price is determined

When the contract is signed

It increases the amount of cash received.

It neither increases nor decreases the amount of cash received.

It either increases or decreases the amount of cash received in unpredictable ways.

direct write-off; going-concern principle

allowance; expense recognition principle

allowance; relevance criteria

Is required by GAAP because it incorporates the expense recognition principle.

bad debt expense; allowance for doubtful accounts

allowance for doubtful accounts; accounts receivable

accounts receivable; bad debt expense

By writing off uncollectible accounts at the end of each period

By estimating uncollectible accounts at the end of each period

By pursuing uncollectible accounts at the end of each period

Revenues are understated.

Gross receivables are understated.

Expenses are understated.

Net accounts receivable will be overstated.

Stockholders’ equity will be understated.

Allowance for Doubtful Accounts will be overstated.

Allowance for Doubtful Accounts is closed each year to Retained Earnings.

Net income will decrease.

Total assets will decrease.

Total assets will increase.

Bad Debt Expense 7,100

Bad Debt Expense 4,800

When management estimates the amount of uncollectibles

When an account becomes bad and is written off

When a customer's account becomes past due

If the company lengthened the credit period allowed.

The buyer may use the asset as collateral.