CPA Financial Accounting and Reporting (FAR) : Allowance Method for Doubtful Accounts
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Allowance Method For Doubtful Accounts
A company estimates that its bad debt expense each year will be 2% of credit sales. In the current period, one customer balance of $6,000 is determined to be uncollectible. Which of the following is true?
The write off will reduce the net amount reported for trade receivables for the period
The write off will reduce the allowance for doubtful accounts in the current period but not net income
The write off will increase bad debt expense for the current period
The write off will increase bad debt expense for the current period and reduce the allowance for doubtful accounts
The write off will reduce the allowance for doubtful accounts in the current period but not net income
When bad debt expense is based off of an estimate each year, actual accounts written off will reduce the customer balance while also reducing the allowance for doubtful accounts. Actual written off accounts have no impact on bad debt expense and therefore no impact on net income.
Example Question #2 : Allowance Method For Doubtful Accounts
The Wells Corporation ends Year 4 with accounts receivable of $540,000 and credit sales for the year of $1.3 million. The ending balance in allowance for doubtful accounts is a $5,000 debit balance as a result of accounts being written off during the year. The company has a choice between estimating bad debts as 4% of outstanding receivables or 3% of current sales. Which of the following statements is true?
If the percentage-of-sales method is elected, net income will be $12,400 less than under the ending receivables method
If the percentage-of-sales method is elected, net income will be $34,600 higher than under the ending receivables method
Bad debt expense will be the same under either method
If the percentage-of-sales method is elected, net income will be $17,400 less than under the ending receivables method
If the percentage-of-sales method is elected, net income will be $12,400 less than under the ending receivables method
If the company uses the percent of sales method, bad debt expense will be $39K ($1.3M x 3%). If it uses the ending receivables method, bad debt expense will be $26,600 ($540K x 4% + $5K debit balance). Thus under the percent of sales method, bad debt expense will be $12,400 higher and net income will be lower by that amount.
Example Question #3 : Allowance Method For Doubtful Accounts
At the beginning of Year 4, Omar Company had a credit balance of $150,000 in its allowance for doubtful accounts. Based on past experience, Omar expects 2% of its credit sales to become uncollectible. During Year 4, Omar wrote off $75,000 in uncollectible accounts and made credit sales of $2 million. What amount should Omar report in its allowance for doubtful accounts at the end of Year 4?
$75,000
$190,000
$40,000
$115,000
$115,000
The ending balance in allowance for doubtful accounts is calculated by taking the beginning balance of $150K + $40K for current year bad debt ($2M in credit sales x 2%) - $75K for accounts written off.
Example Question #4 : Allowance Method For Doubtful Accounts
Which of the following statements correctly describes the proper accounting treatment for nonmonetary exchanges that are deemed to have commercial substance?
Recognizes gains and losses immediately
Defers any gains and losses
Defers gains and recognizes losses immediately
Defers losses to the extent of any gains
Recognizes gains and losses immediately
For nonmonetary exchanges with commercial substance, gains and losses are recognized immediately.
Example Question #5 : Allowance Method For Doubtful Accounts
There was a nonmonetary exchange of assets reported. Under which following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered? When:
The entity's future cash flows are expected to change as a result of the exchange
The transaction lacks commercial substance
The transaction has commercial substance
The timing of future cash flows of the asset received differs significantly from the configuration of the future cash flows of the asset transferred
The transaction lacks commercial substance
When a transaction involving a nonmonetary exchange lacks commercial substance, the reported amount of the nonmonetary asset surrendered is used to record the newly acquired asset. If there is commercial substance, the fair value approach is used.
Example Question #6 : Allowance Method For Doubtful Accounts
A collection of a previously written off A/R would increase the ______ account.
Expense
Uncollectible
Write off
Allowance
Allowance
The allowance for doubtful accounts account is an account essentially used for a budget of funds expected to not be received.
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