Accounts Receivable and Bad Debts Expense MCQ Accounting

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About Accounts Receivable and Bad Debts Expense

Accounts receivable (AR) is the amount of money owed to a company by customers who have yet to pay for the goods or services they have received or utilized. This asset is shown as a current asset on the balance sheet. If a consumer owes you money because you gave them credit, you have an AR.

Bad Debt

In the event that a client fails to pay back the credit they were given, a firm is liable for the cost of that debt as a charge-off.

A firm must account for the possibility that clients would not pay for its goods or services since there is always a risk that payment will not be collected.

Bad Debt Expense

When a receivable is no longer recoverable owing to a customer's inability to pay an existing debt because of bankruptcy or other financial troubles, a bad debt charge is recorded. For companies that lend money, bad debts are included in the balance sheet as an allowance for doubtful accounts or a credit loss provision.

The link between Receivables and Bad Debt is known as "Allowance for Bad Debt."

The amount of a company's receivables that may be uncollectible is estimated using a valuation account known as an allowance for bad debt. It is sometimes referred to as a provision for speculative or suspect accounts. Bad debt allowances and loan receivable balances are both lowered to their book value when a borrower defaults on a loan.

In addition, it's related to 'Bad Debt Expense!'

This allowance account will be debited when a business incurs bad debt. A contra-asset account, the allowance for doubtful accounts, affects the overall value of receivables on the balance sheet when both amounts are shown.

Following are some of the multiple choice questions on the Accounts Receivable and Bad Debts Expense with answers that will help the students in developing their knowledge.

Accounts Receivable and Bad Debts Expense MCQ

1. The direct write-off method of accounting for bad debts

  • uses an allowance account.
  • uses a contra-asset account.
  • does not require estimates of bad debt losses.
  • is the preferred method under generally accepted accounting principles.

2. The journal entry for recording accounts receivable is:

  • Dr. Sales; Cr. Accounts Receivable
  • Dr. Accounts Receivable: Cr. Sales
  • Dr. Cash; Cr. Sales
  • Dr. Sales; Cr. Accounts Payable

3. The cash discount (also known as purchase discount or sale discount) is given to customers for:

  • early payments
  • bulk purchase
  • frequent purchases
  • good business relations

4. Under allowance method, the journal entry to record uncollectible accounts expense is:

  • Allowance for Doubtful Debt Accounts Dr. & Bad Debts Accounts Cr.
  • Bad Debts Accounts Dr. & Allowance for Doubtful Debt Accounts Cr.
  • Bad Debts Accounts Dr. & Accounts Receivable Cr.
  • Accounts Receivable Dr. & Bad Debts Accounts Cr.

5. Under allowance method, the correct journal entry to reinstate a previously written off account is:

  • Allowance for Doubtful Accounts Dr.; Bad Debts Expense Cr.
  • Accounts Receivable Dr.; Allowance for Doubtful Accounts Cr.
  • Allowance for Doubtful Accounts Dr.; Accounts Receivable Cr.
  • Accounts Receivable Dr.; Sales Cr.

6. The correct journal entry for collection of accounts receivable is:

  • Cash Dr.; Accounts Receivable Cr.
  • Cash Dr.; Sales Cr.
  • Cash Dr.; Accounts Payable Cr.
  • Accounts Receivable Dr.; Cash Cr.

7. When the Allowance for Doubtful Accounts appears on a company's financial statements, its balance will be a __________ balance.

  • debit
  • credit

8. On which financial statement would you expect to find Allowance for Doubtful Accounts?

  • statement of financial position
  • statement of comprehensive income

9. Which of the following is not a reason why a business would provide credit?

  • To increase the amount of sales
  • To compete with other businesses who are also offering credit
  • Allows for separation of duties in large business
  • To enable the use of subsidiary ledgers and control accounts

10. What effect does bad debts have on debtors?

  • it increases debtors
  • it decreases debtors
  • it has no effect on debtors
  • none of the above

11. Under the allowance method, writing off an uncollectible account

  • affects only Statement of Financial Position accounts.
  • affects both Statement of Financial Position and income statement accounts.
  • affects only income statement accounts.
  • is not acceptable practice.

12. The Allowance for Doubtful Debts Accounts is increased by a debit.

  • TRUE
  • FALSE

13. Which of the following transactions would take place in the general journal when a customer pays for a good or service which has been invoiced?

  • A cash account is debited; a sales account is credited
  • Bad debts account is debited; sales return account is credited
  • A cash account is debited; accounts receivable account is credited
  • Accounts receivable account is debited; cash account is credited

14. Which of the following is a report which lists all amounts owed by customers?

  • Schedule of accounts payable
  • Schedule of accounts receivable
  • Schedule of allowances
  • Schedule of bad debts

15. Which of the following is a term used when a credit sale is returned by the customer?

  • credit limit
  • sales allowance
  • sales return
  • invoice

16. Which of the following accounts defines the general ledger account which contains the grand totals of individual subsidiary journal transactions?

  • Sales account
  • Control Account
  • Allowance Account
  • Accounts receivable account

17. Which of the following terms defines when a customer buys a good or service on credit and agrees to pay at a later date?

  • Subsidiary ledger
  • operating activities
  • Accounts receivable
  • Direct write- off approach

18. Which of the following transactions would take place in the journal when a customer buys a good or service on credit?

  • Sales account is debited; cash account is credited
  • Accounts receivable account is debited; cash account is credited
  • Accounts receivable account is debited; sales return account is credited
  • Accounts receivable account is debited; sales account is credited

19. Which of the following terms describes a financial statement which shows how the balance sheet and income statement changes affect the flow of cash?

  • Income statement
  • Invoice statement
  • Balance Statement
  • Cash Flow Statement

20. Which of the following is a balance sheet account which reduces the reported amount of accounts receivable?

  • Allowance for doubtful accounts
  • Allowance for tax credits
  • Schedule of bad debts
  • Schedule of accounts receivable

21. Which of the following transactions would take place when an account becomes uncollectible and is written off under the allowance method?

  • Bad debts account is debited; accounts receivable is credited
  • Accounts receivable account is debited; sales return account is credited
  • Accounts receivable account is debited; an allowance for doubtful accounts is credited
  • Allowance of doubtful accounts is debited; accounts receivable is credited

22. When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when

  • a sale is made.
  • an account becomes bad and is written off.
  • management estimates the amount of uncollectibles.
  • a customer's account becomes past-due.

23. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited

  • when a credit sale is past due.
  • when an account is determined to be uncollectible.
  • at the end of each accounting period.
  • whenever a pre-determined amount of credit sales have been made.

24. Two methods of accounting for uncollectible accounts are the

  • allowance method and the accrual method.
  • direct write-off method and the accrual method.
  • direct write-off method and the allowance method.
  • allowance method and the net realizable method.

25. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a

  • debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
  • debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
  • debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
  • debit to Loss on Credit Sales Revenue and a credit to Accounts Receivable.

26. Two bases for estimating uncollectible accounts are:

  • percentage of current assets and percentage of sales.
  • percentage of assets and percentage of sales.
  • percentage of receivables and percentage of sales.
  • percentage of receivables and percentage of total revenue.

27. Valli Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $700,000 and credit sales are $2,500,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Valli Company make to record the bad debts expense?

  • Bad Debt Expense 32,000 Allowance for Doubtful Accounts 32,000
  • Bad Debt Expense 25,000 Accounts Receivable 25,000
  • Bad Debt Expense 25,000 Allowance for Doubtful Accounts 25,000
  • Bad Debt Expense 32,000 Accounts Receivable 32,000

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