LO 7-1 Use the percent of revenue method to account for uncollectible accounts expense.

False

Most companies expect to collect the full balance of all of their accounts receivable. This statement is

True or False

True

The balance in the allowance for doubtful accounts provides an estimate of the amount of the accounts receivable that is expected to be uncollectible. This statement is

True or False

True

The net realizable value of accounts receivable represents an estimate of the amount of the accounts receivable that a company realistically expects to collect. This statement is

True or False

Option B

On December 31, Year 1, Kardashian Company recorded an adjusting entry to recognize $5,470 of uncollectible accounts expense. Which of the following shows how this entry will affect Kardashian’s financial statements? The letters “NA”, “OA” and “FA” indicate that the component of the equation is “Not Affected”, “Operating Activities” and “Financing Activities” respectively.

	Balance Sheet					Income Statement					Statement of Cash Flows
	Assets	=	Liabilities	+	Equity	Revenues	−	Expenses	=	Net Income
A.	$ (5,470)	=	NA	+	$ (5,470)	NA	−	$ 5,470	=	$ (5,470)	$ (5,470) OA
B.	$ (5,470)	=	NA	+	$ (5,470)	NA	−	$ 5,470	=	$ (5,470)	NA
C.	$ (5,470)	=	NA	+	$ (5,470)	NA	−	$ 5,470	=	$ (5,470)	$ (5,470) FA
D.	$ (5,470)	=	$ (5,470)	+	NA	NA	−	$ 5,470	=	$ (5,470)	NA

Multiple Choice

• Option A

• Option B

• Option C

• Option D

Account Titles	Debit	Credit
Uncollectible Accounts Expense	5,470
Allowance for Doubtful Accounts		5,470

On December 31, Year 1, Kardashian Company recorded an adjusting entry to recognize uncollectible accounts expense. Kardashian had credit sales of $547,000 and estimates uncollectible accounts expense to be one percent of credit sales. Which of the following journal entries shows how this event would be recorded under the allowance method?

Multiple Choice

Account Titles	Debit	Credit
Uncollectible Accounts Expense	5,470
Accounts Receivable		5,470

Account Titles	Debit	Credit
Accounts Receivable	5,470
Allowance for Doubtful Accounts		5,470

Account Titles	Debit	Credit
Uncollectible Accounts Expense	5,470
Allowance for Doubtful Accounts		5,470

Correct

Account Titles	Debit	Credit
Allowance for doubtful Accounts	5,470
Uncollectible Accounts Expense		5,470

$4,000

Explanation

The net realizable value of accounts receivable is determined by subtracting the balance in the allowance for doubtful accounts from the balance in the accounts receivable account ($4,500 − $500 = $4,000). The net realizable value of receivables represents an estimate of the portion of accounts receivable that Anderson realistically expects to collect.

At the end of the accounting period, Anderson Company had $4,500 in accounts receivable and $500 in its allowance for doubtful accounts account. Based on this information the net realizable value of accounts receivable is:

Multiple Choice

• $4,000.

  Correct

• $4,500.

• $5,000.

• The answer cannot be determined with the information provided.

Option C

Hope Company determined that an $8,000 account receivable was uncollectible. Which of the following shows how the write-off of this receivable will affect Hope’s financial statements? The letters “NA” and “OA” indicate that the component of the equation is “Not Affected” and “Operating Activities” respectively.

	Balance Sheet					Income Statement					Statement of Cash Flows
	Assets	=	Liabilities	+	Equity	Revenues	−	Expenses	=	Net Income
A.	NA	=	NA	+	NA	NA	−	$ 8,000	=	($ 8,000)	($ 8,000) OA
B.	($ 8,000)	=	NA	+	($ 8,000)	NA	−	$ 8,000	=	($ 8,000)	NA
C.	NA	=	NA	+	NA	NA	−	NA	=	NA	NA
D.	($ 8,000)	=	($ 8,000)	+	NA	NA	−	$ 8,000	=	($ 8,000)	NA

Multiple Choice

• Option A

• Option B

• Option C

• Option D

not affect total assets.

The recovery and collection of an account receivable that had previously been written off will:

Multiple Choice

• increase total assets.

• decrease total assets.

• not affect total assets.

• not affect cash flow.

Account Titles	Debit	Credit
Accounts Receivable	500
Allowance for Doubtful Accounts		500

Which of the following journal entries would be required to recognize the recovery of a $500 account receivable that was previously written-off? (Ignore the recognition of the cash receipt.)

Multiple Choice

Account Titles	Debit	Credit
Accounts Receivable	500
Uncollectible Accounts Expense		500

Account Titles	Debit	Credit
Uncollectible Accounts Expense	500
Allowance for Doubtful Accounts		500

Account Titles	Debit	Credit
Allowance for doubtful Accounts	500
Uncollectible Accounts Expense		500

Account Titles	Debit	Credit
Accounts Receivable	500
Allowance for Doubtful Accounts		500

$34,000.

Explanation

Uncollectible accounts expense = $700,000 Revenue × 0.01 Estimate = $7,000.

Balance in Accounts Receivable:

Beginning balance	$ 60,000
Plus: Revenue earned on account	700,000
Less: Collections of accounts receivable	(710,000)
Less: Write-off of uncollectible receivable	(8,000)
Ending balance	$ 42,000

Balance in allowance for doubtful accounts:

Beginning balance	$ 9,000
Less: Write-off	(8,000)
Plus: Adjustment to recognize uncollectible accounts expense	7,000
Ending balance	$ 8,000

Net realizable value of receivables:

Accounts receivable balance	$ 42,000
Less: Allowance for doubtful accounts	(8,000)
Net realizable value of receivables	$ 34,000

The following balances were drawn from the accounts of Stripling Company as of December 31, Year 1.

Accounts Receivable	$ 60,000
Allowance for Doubtful Accounts	$ 9,000

During Year 2, Stripling earned $700,000 of revenue on account and collected $710,000 cash from accounts receivable. Also, the company wrote off $8,000 of accounts receivable that were classified as uncollectible during Year 2. If Stripling estimates uncollectible accounts expense to be 1% of revenue, the net realizable value of receivables as of December 31, Year 2 will be:

Multiple Choice

• $50,000.

• $32,000.

• $34,000.

• $42,000.