Learning Questions and Answers for Financial Accounting, Lesson 7.2 – Mastery Level

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1

To begin, read each of these questions. See how many you already know. After going through the textbook material, you might well be able to answer many if not all. However, as you move through the cards with the answers, focus on any question where your understanding is even a bit uncertain. Once, you have read the answers, go back to the beginning and start over. This second time you go through these questions focus on getting them all correct.

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(1) - In Year One, Ace Company ends the year with sales of $500,000 and accounts receivable of $200,000. At the end of the year, without worrying about the dollar amount, what adjusting entry is recorded for bad debts?

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(2) – In Year One, Ace Company ends the year with sales of $500,000 and accounts receivable of $200,000. At the end of the year, the company makes an adjusting entry to record the estimated amount of bad debts. A few months into Year Two, the company discovers that a customer has left the area without paying a $1,200 debt. This account is written off as uncollectible. On that day, what is the journal entry the company makes for this purpose?

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(3) – In Year One, Ace Company ends the year with sales on account of $500,000 and accounts receivable of $200,000. At the end of the year, the company makes an adjusting entry to record its bad debts. The balance must be estimated. What are the two methods used to determine that amount?

(4) – Bad debts can be estimated by either the percentage of receivables method or the percentage of sales method. Is either method preferred?

(5) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. In simplest terms, why does a $1,000 credit remain in the allowance for doubtful accounts?

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(6) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company adopts the percentage of receivables method. Past history (adjusted for any recent economic or company changes) shows that 4 percent of receivables are most likely to prove uncollectible. What is the company estimating?

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(7) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company adopts the percentage of receivables method. Past history (adjusted for any recent changes) shows that 4 percent of receivables or $8,000 are most likely to prove uncollectible. Because the company is estimating the allowance for doubtful accounts, what amount should be recognized in the year-end adjusting entry?

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(8) – In (7), what is reported on the financial statements for bad debts after the adjusting entry has been made?

(9) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful ends the year (before any adjustment) with a $1,000 debit balance in its allowance for doubtful accounts. The company is using the percentage of receivables method. Past history (adjusted for any recent changes) shows that 4 percent of receivables are most likely to prove uncollectible or $8,000. Because the company is estimating the allowance for doubtful accounts, what amount should be recognized in the year-end adjusting entry?

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(10) – In (9), what is reported on the financial statements for bad debts after the adjusting entry has been made?

(11) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company is using the percentage of sales method. Past history (adjusted for any recent changes) shows that 1 percent of credit sales are most likely to prove uncollectible. What is the company estimating?

...

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(12) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. Why does the company have no balance in its bad debt expense account?

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(13) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company adopts the percentage of sales method. Past history (adjusted for any recent changes) shows that 1 percent of all credit sales is most likely to prove uncollectible. What is the year-end adjusting entry?

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(14) – In (13), what is reported on the financial statements for bad debts after the adjusting entry has been made?

(15) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 debit balance. The company is using the percentage of sales method. Past history (adjusted for any recent changes) shows that 1 percent of credit sales is most likely to prove uncollectible. What is the year-end adjusting entry?

(16) – In (15), what is reported on the financial statements for bad debts after the adjusting entry has been made?

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(16-Comment) – If you will practice enough times that you can do all of the above questions, you should make the grade of 100 on any similar questions concerning bad accounts. These examples cover all the possibilities.

(17) – Ace Company keeps all of its records in digital files on its computer system. One tab is labeled “General Ledger” and another tab is labeled “Subsidiary Ledger for Accounts Receivable.” You click on “General Ledger.” What will you find?

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13

(18) – Ace Company keeps all of its records on its computer system. One tab is labeled “General Ledger” and another tab is labeled “Subsidiary Ledger for Accounts Receivable.” You click on “Subsidiary Ledger for Accounts Receivable.” What will you find?

(19) – How many subsidiary ledgers will a company have?

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The key here is to practice the percentage of receivables method and the percentage of sales method until you have a complete understanding of each. Remember, the company makes an estimation of bad debts at the end of each year and then records that information. This section of the chapter is about the estimated amount and how it is recorded.

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(1) - In Year One, Ace Company ends the year with sales of $500,000 and accounts receivable of $200,000. At the end of the year, without worrying about the dollar amount, what adjusting entry is recorded for bad debts?

As we learned in the previous section of the textbook, the year-end adjusting entry is a debit to bad debt expense and a credit to the allowance for doubtful accounts. The allowance account is a contra account used to reduce the reported balance of accounts receivable until the company determines the actual accounts that are uncollectible.

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(2) – In Year One, Ace Company ends the year with sales of $500,000 and accounts receivable of $200,000. At the end of the year, the company makes an adjusting entry to record the estimated amount of bad debts. A few months into Year Two, the company discovers that a customer has left the area without paying a $1,200 debt. This account is written off as uncollectible. On that day, what is the journal entry the company makes for this purpose?

No matter what method of estimating bad accounts is applied, the write off of an actual account is a debit to the allowance for doubtful accounts (to remove the earlier negative balance) and a credit to accounts receivable (to reduce the receivable balance due to the uncollectible account). The bad account is no longer unknown.

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(3) – In Year One, Ace Company ends the year with sales on account of $500,000 and accounts receivable of $200,000. At the end of the year, the company makes an adjusting entry to record its bad debts. The balance must be estimated. What are the two methods used to determine that amount?

One method focuses on the proper reporting of the balance sheet. It is the percentage of receivables method. One version of that method is the aging method which separates the receivables and evaluates them based on their age. The other method focuses on the reporting of the income statement. It is the percentage of sales method.

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(4) – Bad debts can be estimated by either the percentage of receivables method or the percentage of sales method. Is either method preferred?

For many decades, companies were free to use either method to determine bad debts to be reported. Recently, FASB expressed a preference for a balance sheet approach which means that the percentage of receivables method is now favored. The percentage of sales method can still be used but only if it does not provide a distorted view of the amount of cash the company expects to get from its accounts receivable.

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(5) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. In simplest terms, why does a $1,000 credit remain in the allowance for doubtful accounts?

There could be a number of reasons why a credit balance remains in the allowance account at year-end. The simplest reason is that the company overestimated the allowance in the previous year. Actual bad accounts were less than expected. Conversely, if the remaining allowance balance had been a debit, that would indicate that the company wrote off more bad accounts than expected. The original year-end recording is never more than an estimate. It is highly likely that these estimates will be somewhat incorrect and either a debit or credit balance will remain in the allowance for doubtful accounts.

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(6) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company adopts the percentage of receivables method. Past history (adjusted for any recent economic or company changes) shows that 4 percent of receivables are most likely to prove uncollectible. What is the company estimating?

In using a balance sheet approach (the percentage of receivables method), the company estimates the ending allowance for doubtful accounts. Here, that contra asset account is judged to be $200,000 times 4 percent or $8,000. The allowance needs to report an $8,000 credit balance.

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(7) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company adopts the percentage of receivables method. Past history (adjusted for any recent changes) shows that 4 percent of receivables or $8,000 are most likely to prove uncollectible. Because the company is estimating the allowance for doubtful accounts, what amount should be recognized in the year-end adjusting entry?

In this method, the company needs to increase the allowance balance from a $1,000 credit to an $8,000 credit. The company recognizes $7,000. The adjusting entry is a debit to bad debt expense for $7,000 and a credit to the allowance for doubtful accounts for $7,000. Bad debt expense is reported as $7,000 while the allowance is raised by this entry from the $1,000 credit balance to the appropriate $8,000 credit balance.

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(8) – In (7), what is reported on the financial statements for bad debts after the adjusting entry has been made?

Bad debt expense is $7,000 (see discussion of the adjusting entry in [7]) and the allowance for doubtful accounts goes up $7,000 from a $1,000 credit to an $8,000 credit. Accounts receivable is still $200,000 so the reported balance for the net accounts receivable is $200,000 less $8,000 or $192,000.

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(9) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful ends the year (before any adjustment) with a $1,000 debit balance in its allowance for doubtful accounts. The company is using the percentage of receivables method. Past history (adjusted for any recent changes) shows that 4 percent of receivables are most likely to prove uncollectible or $8,000. Because the company is estimating the allowance for doubtful accounts, what amount should be recognized in the year-end adjusting entry?

The company needs to increase the allowance balance from a $1,000 debit to an $8,000 credit. To do this, the company needs to recognize $9,000. The adjusting entry is a debit to bad debt expense for $9,000 and a credit to the allowance for doubtful accounts for $9,000. The allowance is raised from the $1,000 debit balance to the appropriate $8,000 credit.

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(10) – In (9), what is reported on the financial statements for bad debts after the adjusting entry has been made?

Bad debt expense is $9,000 (see the adjusting entry) and the allowance for doubtful accounts goes up $9,000 from a $1,000 debit to an $8,000 credit. The $8,000 credit in the allowance account is the number determined at the beginning of this adjusting process ($200,000 times 4 percent).

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(11) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company is using the percentage of sales method. Past history (adjusted for any recent changes) shows that 1 percent of credit sales are most likely to prove uncollectible. What is the company estimating?

The percentage of sales method is an income statement approach. It tries to get the income statement balances properly stated. The number being determined by estimation is bad debt expense.

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(12) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. Why does the company have no balance in its bad debt expense account?

Bad debt expense is an income statement account so its balance is closed out to zero at the end of each year (with the balance moving to retained earnings). The bad debt expense balance remains at zero until financial statements are to be prepared and a new estimation is made for the current year.

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(13) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 credit balance. The company adopts the percentage of sales method. Past history (adjusted for any recent changes) shows that 1 percent of all credit sales is most likely to prove uncollectible. What is the year-end adjusting entry?

The estimate is 1 percent of credit sales or $5,000. The bad debt expense account has a zero balance so the entire $5,000 is simply recognized to arrive at the correct figure. Bad debt expense is debited for $5,000 and the allowance for doubtful accounts is credited for $5,000.

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(14) – In (13), what is reported on the financial statements for bad debts after the adjusting entry has been made?

Bad debt expense is $5,000 (see the adjusting entry) on the income statement and the allowance for doubtful accounts goes up $5,000 from a $1,000 credit to a $6,000 credit as a contra asset account on the balance sheet.

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(15) – Ace Company ends the current year with credit sales of $500,000 and accounts receivable of $200,000. The allowance for doubtful accounts ends the year (before any adjustment) with a $1,000 debit balance. The company is using the percentage of sales method. Past history (adjusted for any recent changes) shows that 1 percent of credit sales is most likely to prove uncollectible. What is the year-end adjusting entry?

The estimate is 1 percent of sales or $5,000. The bad debt expense account has a zero balance so the entire $5,000 is simply recognized. Bad debt expense is debited for $5,000 and the allowance for doubtful accounts is credited $5,000.

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(16) – In (15), what is reported on the financial statements for bad debts after the adjusting entry has been made?

Bad debt expense is $5,000 (see the adjusting entry) and the allowance for doubtful accounts goes up $5,000 from a $1,000 debit to a $4,000 credit balance.

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(16-Comment) – If you will practice enough times that you can do all of the above questions, you should make the grade of 100 on any similar questions concerning bad accounts. These examples cover all the possibilities.

...

32

(17) – Ace Company keeps all of its records in digital files on its computer system. One tab is labeled “General Ledger” and another tab is labeled “Subsidiary Ledger for Accounts Receivable.” You click on “General Ledger.” What will you find?

The General Ledger will hold all of the T-accounts and their current monetary balances. T-accounts should appear for cash, accounts receivable, salary payable, sales revenue, rent expense, and the like. The General Ledger is the holding spot for such information.

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(18) – Ace Company keeps all of its records on its computer system. One tab is labeled “General Ledger” and another tab is labeled “Subsidiary Ledger for Accounts Receivable.” You click on “Subsidiary Ledger for Accounts Receivable.” What will you find?

You will find a listing of every customer and the amount of money each owes Ace Company at the present time. The summation of all those subsidiary ledger balances should equal the single total in the accounts receivable T-account found in the general ledger.

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(19) – How many subsidiary ledgers will a company have?

A company will maintain a separate subsidiary ledger for any general ledger account where the individual balances are considered important enough to warrant the time and trouble to keep track of them individually in a subsidiary ledger. For example, smaller companies might keep one subsidiary ledger for accounts receivable and another for inventory. Larger companies will likely have subsidiary ledgers for virtually every T-account in their general ledger.