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Exam 8: Receivables, bad Debt Expense, and Interest Revenue

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Question 31

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Direct write-off method violates the matching principle.

A) True
B) False

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Question 32

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Which of the following methods is required by Canada Revenue Agency for accounting for bad debt for tax purposes:

A) Direct write-off method
B) Allowance method
C) Percentage of sales method
D) Aging of accounts method

E) B) and C)
F) A) and B)

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Question 33

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A company lends a major client $90,000 for one year at a 7% annual interest rate.Interest payments are to be made twice a year but the company wants to recognize interest earned on a monthly basis.In a month in which the company does not receive any interest payments,interest is recorded with:

Over the past five years,a company had average annual credit sales of $320,000 and an average annual net write-offs of $2,000.Credit sales in the current year are $300,000.Using the percentage of credit sales method,what should the company record as an estimate of bad debt expense?

The days-to-collect measure indicates:

A company lends a major client $90,000 for one year at a 7% annual interest rate.Interest payments are to be made twice a year.In July,the company receives an interest payment for January through June.The company would record receipt of the interest payment in which of the following ways?

The direct write-off method is acceptable under IFRS,but not under ASPE.

A non-GAAP alternative to the allowance method of accounting for uncollectible accounts refers to the

Your company lent a customer $5,000 to satisfy the customer's overdue accounts receivable.The loan is for one year at an annual interest rate of 5%.Six months later the customer repays the principal and interest.The principal part of the repayment should be recorded as a:

Your company has $3,000,000 in credit sales during 2017 and historically is unable to collect 1% of credit sales.The beginning balance of the allowance for doubtful accounts is $3,000 and the company writes off $700 in bad debts during the year. a.Calculate the estimated bad debt expense using the percentage of credit sales method and prepare the journal entry. b.Calculate the estimated doubtful accounts using the aging of accounts receivable method given that $1,600,000 of the credit sales are not yet due (estimated that 0.5% are uncollectible),$349,000 are 1-60 days late (estimated that 1.25% are uncollectible)and $12,000 are over 60 days late (estimated that 30% are uncollectible). c.Using the assumptions in the initial problem statement,and using the aging of accounts method,calculate the bad debt expense.Show your calculation in a T-account for Allowance for Bad Debts and present the journal entry to record bad debt expense. $\begin{array} { | l | l | r | r } \hline \text { a. } & \text { Estirnated Bad Debt Expense } & = & \text { Credit Sales } \times \text { the Bad Debt Loss Rate } \\\hline & & = & \$ 3,000,000 \times 1 \% = \$ 30,000 \\\hline & d r \text { Bad Debt Expense } && 30,000 \\\hline & c r \text { Allowance for Doubtful Accounts } & & \mathbf { 3 0 } , 000 \\\hline\end{array}$

In normal circumstances,the allowance for doubtful accounts for a company should be a fairly consistent percentage of gross accounts receivable.

Which of the following is true?

The direct write-off method:

Allowance for Doubtful Accounts is a contra-asset account.

Bad Debt Expense is a temporary account.

Momentum Products Inc.,just recorded an adjusting journal entry for the current year's estimate of bad debts.Assuming all else is equal,this adjusting journal entry will cause:

If the receivables turnover ratio rises significantly,the increase may be a signal that the company is extending credit to high-risk borrowers or allowing an overly generous repayment schedule.

Under the aging of accounts receivable method,bad debt expense is calculated and then added to the beginning balance in the allowance for doubtful accounts.

The amount of uncollectible accounts at the end of the year is estimated,using the aging of receivables method,to be $25,000.The balance in the Allowance for Doubtful Accounts account is an $8,000 credit before adjustment.What should the balance in the Allowance for Doubtful Accounts account be after adjustment?

Your company has averaged about 26% of its accounts receivable in the "over 90 days past due" category and now forecasts 18% in this category.You use the aging of accounts receivable method of estimating bad debt expense.If the total of credit sales remains unchanged from previous months and no write offs are made,the estimate of bad expense based on the new forecast will: