Question

The general ledger shows Accounts Receivable $100,000 and the Allowance for Doubtful Accounts $ 5,000. Sales were $1,000,000 which included credit sales of $800,000. The following three questions are independent of each other:

______32. If the company wrote off an account as uncollectible for $500, the accounts receivable net realizable value after the write-off would be:

                                      a. $94,500.

                                           b. $95,000.

                                           c. $99,500.

                                           d. Some other amount.

______33. If the determination of bad debts was based on 1% of credit sales, the bad debt expense for the year would be:

                                            a. $10,000.

                                   b. $ 8,000.

                                            c. $ 1,000.

                                  d. Some other amount.

______34. If the determination of bad debts was based on 10% of accounts receivable, the bad debt expense for the year would be:

                                  a. $10,500.

                                     b. $10,000.

                                 c.   $ 5,000.

                             d. Some other amount.

______35. A company records a charge to warranty expense in the year it makes the sale. This is in accordance with:

                   a. The cost principle.

                          b. The matching principle.

                               c. The disclosure principle.

                     d. All of the above.

Answer 1

Solution with explanation

32. If the company wrote off an account as uncollectible for $500, the accounts receivable net realizable value after the write-off would be: 99,500 (option C)

Explanation: We can understand the concept of Bad Debts and Doubtful Account in a better way by passing Journal Entries (JE)

Sr No	Particulars	Debit Amount	Credit Amount
	When we create a provision for Doubtful Account
	Profit & Loss Account A/c Dr	5,000
	To Provision for Doubtful Account A/c		5,000
	When we Actually Record Bad Debts
	Bad Debts A/c Dr	500
	To Accounts Receivable		500

From the above Journal Entry we can understand that the Accounts Receivable is reduced on account of Bad Debts by $ 500

Therefore the Account Receivable Net realizable value will be $ 99,500

33. If the determination of bad debts was based on 1% of credit sales, the bad debt expense for the year would be: Some Other Amount i.e $ 3000 (Option D)

Explanation: It is explicitly mentioned in the question that bad debts is 1% of credit sales i.e $ 800,000, Therefore Bad Debts will be $ 8,000. but we have already created a provision for doubtful debts of $ 5,000 therefore the bad debt expense would be $ 3,000

34. If the determination of bad debts was based on 10% of accounts receivable, the bad debt expense for the year would be: $ 5000 (Option C)

Explanation : Total Bad Debts for the year is 10% of Accounts Receivable ($ 100,000) i.e $ 10,000 , we have already created a provision of $ 5,000. Therefore, bad debts expense for the year will be $ 5,000.

35. A company records a charge to warranty expense in the year it makes the sale. This is in accordance with: The Matching Concept (Option B)

Explanation : Matching Concept: Expenses incurred in an accounting period should be matched with the revenues recognized in that period.

This concept is considering accrual basis and therefore considers all adjustments of prepaid expenses, outstanding expenses, accrued revenues and unaccrued revenues. Matching does not mean that expenses must be identifiable with revenues, Expenses charges of a period may or may not be related to the revenue recognized in that period. The appropriate cost have to be matched against the appropriate revenues for that accounting period.