Accounts Receivable

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j

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Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. A receivable is recorded because

a. revenues are recognized when cash is collected
b. revenues are recognized when earned
c. the customer pays before the service is provided
d. expenses are incurred before cash is paid

Answer
B. A receivable occurs when revenue is earned when the customer receives goods/services and pays in a later period. Revenues are always recognized when earned regardless of when the cash is received. (c.) is an unearned revenue. (d.) is a payable. With (a.) no receivable occurs.
2. Sales Returns should be recorded in the period

a. the return is received
b. the return is expected
c. the sale occurs
d. both b. and c.

Answer
D. Sales returns must be recorded in the same period as the sale when the company has a history of returns. The amount of returns is estimated and recorded in the period of the sale.
3. The account “allowance for sales returns” is reported

a. as a decrease to sales
b. as an increase to accounts receivable
c. as a decrease to accounts receivable
d. as other revenue

Answer
C. “Allowance for sales returns” is reported as a reduction to accounts receivable. The customer is not expected to pay the receivable because they are expected to return the goods. This account is initially recorded as a credit and is reduced (debited) when the return is received from the customer.
4. Net accounts receivable reported on the balance sheet is always

a. net of the allowance for uncollectible accounts
b. net of sales discounts
c. the gross amount customers owe the company
d. the total amount of current period sales

Answer
A. Accounts receivable is always reported net of the allowance for uncollectible accounts. Accounts receivable is what is owed the company, the allowance is what is not expected to be collected, and the net balance that is reported is the amount the company expects to collect. (c) is the balance in the accounts receivable account only. Accounts receivable is a cumulative account which includes amounts owed from all periods (d).
5. The balance in the “allowance for uncollectible accounts” account represents

a. only sales in the current period not expected to be collected
b. only the bad debt expense for the current period
c. the amount the company does expect to collect from customers
d. the amount the company does not expect to collect from customers

Answer
D. The allowance account represents amounts the company does not expect to collect from customers even though they owe the company. It is a cumulative balance related to all current and prior year sales.
6. A write-off of accounts receivable is recorded when

a. the bad debt expense is estimated
b. the company determines which customer won’t pay and how much won’t be collected
c. the company expects some of its customers will not pay
d. the bad debt expense exceeds the company estimate

Answer
B. Write-offs occur when the company determines which customers won’t pay and exactly how much wont be collected. (a.) & (c.) is the estimate for bad debt expense that is recorded in the period sales occur (matching). (d.) requires additional bad debt expense to be recorded and the allowance account to be increased. A write-off decreases the allowance account and decrease account receivable. 
7. Estimated bad debt expense recorded during the period is based on

a. the historical experience of the company
b. the amount not collected last period
c. what is not collected on this period’s sales
d. the amount the company determines will be collected this period

Answer
A. Bad debt expense is an estimate. It is based on past experiences of the company. Bad debt is estimated using the % of sales method or the % of accounts receivable (aging) method.
8. Which transaction is recorded with a credit to accounts receivable

a. sales on credit this period
b. collections this period
c. write-offs this period
d. both b. and c.

Answer
D. A credit to accounts receivable is a decrease. Accounts receivable decreases when cash is collected from a customer and an account is written off. Credit sales for this period increase accounts receivable (debit).
9. “Allowance for uncollectible accounts”

a. decreases when estimating bad debt expense using % sales method
b. Increases or decreases when estimating bad debt expense using % of accounts receivable method
c. Increases when an account is written off
d. Increases when goods are provided to customers

Answer
B. The allowance for uncollectible accounts changes with two things: 1) when bad debt expense is estimated (it increases or decreases when using the % of accounts receivable method and increases only when using the % sales method (a) or 2) it decreases when an account is written off (c). The allowance account does not change when goods are provided to customers (d).
10. The allowance account represents

a. the exact amount the company knows it will not collect
b. the estimated amount the company does not expect to collect
c. the amount of confirmation of non-collection this period
d. always 5% of accounts receivable

Answer
B. The allowance account balance is the estimated amount the company does not expect to collect, however, the company does not know who will not pay or exactly how much won’t be paid. (a. & c.) will cause a write-off to be recorded. The balance will vary with collection experience (d.).
11. Bad debt expense is recorded when

a. an account is written off
b. an estimate of uncollectible amounts is made
c. in the period before the sales occur
d. a customer pays after the due date

Answer
B. Bad debt expense is estimated in the same period the sale occurs (matching). The expense represents the amount that is not expected to be collected. Accounts are written off much later than the period of sale (c.) A customer who pays is not a bad debt expense. (d.)
12. Accounts receivable

a. increases with sales and decreases with bad debt expense
b. increases with write-offs and decreases with collections
c. increases with sales and decreases with write-offs and collections
d. increases with collections and decreases with write-offs

Answer
C. Accounts receivable will change with three transactions: 1) increases with credit sales and 2) decreases when the customer pays and 3) decreases when a write-off occurs.
13. The account bad debt expense can be credited if

a. credit sales are higher than expected this period
b. payments from customers are received before expected
c. the company overestimated bad debt expense in prior periods
d. write-offs are higher than expected

Answer
C. The only time an expense can be credited (decreased) is when the company overestimated the expense in a prior period. This is also true for bad debt expense. A credit to bad debt expense can occur using the % of accounts receivable method which is based on cumulative amounts in accounts receivable. When write-offs are higher than expected bad debt expense must be debited, increased (d). Higher credit sales will most likely lead to higher bad debt expense, a debit (a).
14. A company that assigns or pledges accounts receivable has

a. sold the accounts receivable
b. borrowed using accounts receivable as collateral
c. traded accounts receivable for another asset
d. none of the above

Answer
B. A company that borrows funds may assign or pledge accounts receivable as collateral for the borrowing. This gives the lender more comfort that the loan will be repaid and the borrower will typically incur a lower interest cost.
15. The difference in recording a sale of receivables with recourse compared to selling receivables without recourse is

a. the buyer must pay the receivable if the customer does not when the sale of the receivable is done with recourse.
b. the seller records a liability when the sale occurs with recourse
c. the seller records a liability when the sale occurs without recourse
d. there is no difference

Answer
B. The seller has a liability for uncollectible accounts and must reimburse the buyer when the customer does not pay when the sale occurs with recourse. No liability is recorded when there is no recourse.