Question

Bad Debt Practice Exercises 26. The percentage of receivables method for estimating uncollectible accounts focuses on a net realizable value b. the relationship between accounts receivable and bad debts expense c. income statement relationships d. the relationship between sales and accounts receivable 27. Holman Company uses the percentage of credit sales method. Cash sales are $1,000,000 and credit sales are $4,000,000. Management estimates that 1% of sales will be bad. What adjusting entry will Homan Company make to record the bad debts expense? a Bad Debts Expense ..................... 50.000 Allowance for Doubtful Accounts... 50,000 b. Bad Debts Expense ...................... 40,000 Allowance for Doubtful Accounts... 40,000 c. Bad Debts Expense. 40,000 Accounts Receivable .......... d. Bad Debts Expense ..................... Accounts Receivable... 50,000 29. The direct write-off method a. uses an allowance account. b. uses a contra-asset account c. does not require estimates of bad debt losses. d. is the preferred method under GAAP. 40,000 50,000 30. Under the direct write-off method a. the allowance account is increased for the amount of the bad debt. b. a specific account receivable is decreased for the amount of bad debt. c. the matching principle is the focus. d. bad debt expense is always recorded when the revenue was recorded. 31. The sale of receivables by a business a. means that the business has some financial problems. b. is usually the major revenue item on its income statement. C. indicates that the business is owned by a foreign company. d. can be a quick way to generate cash. 35. When using the allowance method, the entry to write off an uncollectible account only involves balance sheet accounts. 36. The percentage of receivables method focuses on the income statement relationships. 37. Under the direct write-off method, no attempt is made to match bad debt expense to sales revenues 38. Allowance for Doubtful Accounts is sometimes debited under the direct write-off method 39. Allowance for Doubtful Accounts is a contra asset account. 40. Net realizable value is calculated by subtracting Allowance for Doubtful Accounts from Net Sales 41. Generally accepted accounting principles require that the direct write-off method be used for finar reporting purposes if it is also used for tax purposes. 5.44

Answer 1

First 5 questions are being answered here.

1. Option (b) is correct

Percentage of receivables method for estimating uncollectible accounts focuses on the relationship between accounts receivable and bad debt expense. The percentage of receivables that will be regarded as uncollectible will be shown as bad debt expense.

2. Option (b) is correct

Estimated uncollectible accounts or bad debts = 1% * $4000000 = $40000

Required journal entry:

Debit Bad debt expense $40000

Credit Allowance for uncollectible accounts $40000

3. Option (c) is correct

Direct write off method does not require estimates of bad debt losses. Rather it writes off the actual bad debts directly in the income statement.

4. Option (b) is correct

Under the direct write off method a specific account receivable is decreased for the amount of bad debt.

5. Option (d) is correct

Sale of receivables by a business can be a quick way to generate cash, because the business sells its receivables to another or company and gets cash immediately upon paying certain charges or fees.