Page 398 - Accounting Principles (A Business Perspective)

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Trade receivables Amounts customers owe a company for goods sold or services rendered on account.
Also called accounts receivable or trade accounts receivable.
Uncollectible accounts expense An operating expense that a business incurs when it sells on credit; also
called doubtful accounts expense or bad debts expense.
Self test
True-false
Indicate whether each of the following statements is true or false.
The percentage-of-sales method estimates the uncollectible accounts from the ending balance in Accounts
Receivable.

Under the allowance method, uncollectible accounts expense is recognized when a specific customer's account is
written off.
Bank credit card sales are treated as cash sales because the receipt of cash is certain.
Liabilities result from some future transaction.
Current liabilities are classified as clearly determinable, estimated, and contingent.
A dishonored note is removed from Notes Receivable, and the total amount due is recorded in Accounts
Receivable.
When an interest-bearing note is given to a bank when taking out a loan, the difference between the cash
proceeds and the maturity amount is debited to Discount on Notes Payable.

Multiple-choice
Select the best answer for each of the following questions.
Which of the following statements is false?
a. Any existing balance in the Allowance for Uncollectible Accounts is ignored in calculating the uncollectible
accounts expense under the percentage-of-sales method except that the allowance account must have a credit
balance after adjustment.
b. The percentage-of-receivables method may use either an overall rate or a different rate for each age category.

c. The Allowance for Uncollectible Accounts reduces accounts receivable to their net realizable value.
d. A write-off of an account reduces the net amount shown for accounts receivable on the balance sheet.
e. None of the above.
Hunt Company estimates uncollectible accounts using the percentage-of-receivables method and expects that 5
per cent of outstanding receivables will be uncollectible for 2010. The balance in Accounts Receivable is USD
200,000, and the allowance account has a USD 3,000 credit balance before adjustment at year-end. The
uncollectible accounts expense for 2010 will be:
a. USD 7,000.
b. USD 10,000.

c. USD 13,000.
d. USD 9,850.
e. None of the above.
Which type of company typically has the longest operating cycle?
a. Service company.
b. Merchandising company.
c. Manufacturing company.

Accounting Principles: A Business Perspective 399 A Global Text