Chapter 5 Practice Questions
Rina Dhillon
Practice Questions
- Which one of the following is an accurate description of the allowance for bad debts?
a. Contra account b. Liability account c. Revenue account d. Expense account - United Pty Ltd uses the direct write-off method to account for bad debts. What are the effects on the accounting equation of the entry to record the write-off of a customer’s account balance?
a. Assets and liabilities decrease b. Assets and shareholders’ equity decrease c. Shareholders’ equity and liabilities decrease d. Assets increase and shareholders’ equity decrease - If a business uses the allowance method of accounting for bad debts:
a. it uses a liability account called the allowance for doubtful accounts b. it will record bad debts only when an account is determined to be uncollected c. it does not have to reduce accounts receivable when the account is written off d. it will report accounts receivable in the balance sheet at their net realisable value - Which one of the approaches for the allowance procedure emphasises matching bad debts expense with revenue on the income statement?
a. The percentage-of-receivables approach b. The percentage-of-sales approach c. The percentage of accounts written off approach d. The direct write off method - Coral Ltd’s accounts receivable balance after posting net collections from customers for 2022 is $150 000. Management feels that uncollected accounts should be based on the following ageing of accounts receivable and uncollected percentages. There is $100 000 that is 1 to 30 days past due at 2 per cent and $50 000 that is 31 to 60 days past due at 10 per cent. The net realisable value of the accounts receivable is:
a. $147 500 b. $148 000 c. $150 000 d. $143 000 - Data for the Traffic Management Company for the year ended 30 June 2022, are presented below.
Sales (credit) $2 500 000 Sales returns and allowances 50 000 Accounts receivable (30 June 2022) 640 000 Allowance for bad debts (Before adjustment at 30 June 2022) 20 000 Estimated amount of uncollected accounts based on ageing analysis 45 000
If Traffic Management estimates its bad debts at 2 per cent of net credit sales, what amount will be reported as bad debt expense for the financial year ended 30 June 2022?
a. $50 000 b. $49 000 c. $29 000 d. $25 000 - Data for the Traffic Management Company for the year ended 30 June 2022, are presented below.
Sales (credit) $2 500 000 Sales returns and allowances 50 000 Accounts receivable (30 June 2022) 640 000 Allowance for bad debts (Before adjustment at 30 June 2022) 20 000 Estimated amount of uncollected accounts based on ageing analysis 45 000
If Traffic Management uses the ageing of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for the financial year ended 30 June 2022?
a. $25 000 b. $45 000 c. $20 000 d. $49 000 - Which of the following statements is true regarding the two allowance approaches used to estimate bad debts?
a. The percentage-of-sales approach takes into account the existing balance in the allowance for bad debts account b. The direct write-off method takes into account the existing balance in the allowance for bad debts account c. The percentage-of-receivables approach takes into account the existing balance in the allowance for bad debts account d. The direct write-off method does a better job of matching revenues and expenses - The following data concern Tech Corporation for the 2022 financial year.
Credit sales during the year $2 400 000 Accounts receivable 30 June 2022 410 000 Allowance for bad debts 30 June 2022 55 000 Bad debt expense for the year 70 000
What amount will Tech Corporation show on its year-end balance sheet for the net realisable value of its accounts receivable?
a. $410 000 b. $285 000 c. $340 000 d. $355 000 - On 1 June 2022, Warehouse Chemists concluded that a customer’s $325 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on Warehouse Chemist’s 2022 profits and balance sheet totals assuming the allowance method is used to account for bad debts?
a. Decrease in income; decrease in total assets b. Increase in income; no effect on total assets c. No effect on income; decrease in total assets d. No effect on income; no effect on total assets - One of the weaknesses of the direct write-off method is that it:
a. understates accounts receivable on the balance sheet b. violates the matching principle c. is too difficult to use for many businesses d. is based on estimates - If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer’s account as uncollectible?
a. Uncollectible accounts expense b. Accounts receivable c. Allowance for bad debts d. Bad debt expense - Bathing Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $300 000 and credit sales are $1 000 000. An ageing of accounts receivable shows that five per cent will be uncollectible. What adjusting entry will Bathing Company make if the allowance for doubtful accounts has a credit balance of $2000 before adjustment?
a. Bad debts expense 13 000 Allowance for bad debts 13 000
b. Bad debts expense 15 000 Allowance for bad debts 15 000
c. Bad debts expense 13 000 Accounts receivable 13 000
d. Bad debts expense 15 000 Accounts receivable 15 000
- Excel Department Store’s accounts receivable balance after posting net collections from customers for 2022 is $180000. The customers took advantage of sales discounts of $15000. Management aged the accounts receivable and estimate for uncollected account percentages as follows:
$90 000 Current at 2 per cent $50 000 1–30 days past due at 5 per cent $30 000 31–60 days past due at 10 per cent $10 000 60+ days past due at 25 per cent
The net realisable value of the accounts receivable is:
a. $173 200 b. $170 200 c. $172 700 d. $180 000 - The following information was presented in Dhillon Company’s balance sheet as of 30 June 2022:
Trade accounts receivable, net of allowance for doubtful accounts of $255 000 is $1 700 000
Which one of the following statements is true?
a. Dhillon expects that $1 955 000 of accounts receivable will be collected after year end b. The balance in the accounts receivable account in Dhillon’s general ledger is $1 700 000 c. The net realisable value of Dhillon’s accounts receivable is $1 700 000 d. Dhillon expects to collect only $1 445 000 from its customers
Solutions: (1) a; (2) b; (3) d; (4) b; (5) d; (6) b; (7) a; (8) c; (9) d; (10) d; (11) b; (12) b; (13) a; (14) b; (15) c