8.1 Receivables - Allowance Method

Question 1

Nonbank Credit Cards and bank credit cards

Answer 1

Nonbank credit card sales are treated as sales on account (ex: retail company credit card)

Unlike bank credit card sales - treated as cash sales

Question 2

Some receivables will become uncollectible

Answer 2

Not reported as assets → no future benefit

Net realizable value = the collectible amount

Question 3

Receivables are written down to their collectible amount

Answer 3

By recording bad debt expense

In the same period as related revenues are recorded

Question 4

the allowance method

Answer 4

is to estimate the amount that will not be collected

Question 5

Three features of allowance method:

Answer 5

Amount of uncollectible receivables is estimated and recorded at end of period

Actual uncollectibles are written off against the allowance when it is determined the specified account is uncollectible

If an account previously written off is recovered the write off is reversed and the collection recorded

Question 6

Allowance for Doubtful Accounts

Answer 6

Deducted from Accounts Receivable in the current assets section of BS

Question 7

How to calculate NRV

Answer 7

Net realizable value = Accounts Receivable - Allowance for Doubtful Accounts

Question 8

Recording Estimated Uncollectibles

(Estimated amount of uncollectible accounts is:…)

Answer 8

Debited to an expense account – bad debts expense

Credited to a contra asset account – allowance for doubtful accounts

Question 9

Recording Write-Off of Uncollectible Accounts

Answer 9

Amount written-off is debited to the allowance account

Bad debt expense is not increased

Expense previously recognized when allowance initially recorded

Question 10

3. Recovery of an Uncollectible Account
   (If cash is collected from a customer after the account has been written off:…)

Answer 10

1. Reverse write-off entry to restore customer’s account
2. Record collection of the account receivable in the usual way

Question 11

Percentage of Receivables Basis

Answer 11

Established percentage based on experience

Aging schedule is used to determine required balance in the allowance account.

Question 12

Aging Schedule

Answer 12

Figure out how much is outstanding for the various time periods, then multiple by the % to estimate your uncollectible.

Question 13

Determining Bad Debt Expense
(adjusting required)

Answer 13

Difference between the required balance and the existing balance in the allowance account.