- Sterling Company uses the allowance method. On March 10, they wrote off a $6,200 account from Wilson Inc. On August 22, Wilson Inc. paid $4,000, stating this was partial payment on their old debt with a promise to pay the remaining $2,200 within 60 days. How should Sterling treat Wilson's account status after the August 22 payment?
Answer: Reinstate the full $6,200 receivable and show Wilson owing $2,200
When a customer makes partial payment on a written-off account with a credible promise to pay the remainder, best practice is to reinstate the full original receivable amount and then record the partial collection. This provides better control and tracking of the remaining balance. The entries would be: (1) Dr. Accounts Receivable $6,200, Cr. Allowance for Doubtful Accounts $6,200 to reinstate, then (2) Dr. Cash $4,000, Cr. Accounts Receivable $4,000 for the payment, leaving Wilson with a $2,200 balance. Choice B treats this as a final settlement when Wilson promised more. Choice C only reinstates the amount received, losing track of the promised payment. Choice D delays recognition of a recovery that has already occurred.
- An internal auditor finds that a staff accountant made the following journal entry to write off a $500 customer balance:
Debit: Bad Debt Expense $500
Credit: Accounts Receivable $500
The company's official accounting policy requires the use of the allowance method. The staff accountant's entry most directly violates which of the following accounting principles?
Answer: Matching principle
The allowance method is designed to adhere to the matching principle by estimating and recording bad debt expense in the same period that the related sales revenue is recognized. The entry made by the staff accountant is the one used for the direct write-off method, which expenses the bad debt only when the account is deemed uncollectible. This may occur in a different period from the original sale, thus failing to properly match expenses with revenues.
- Gridlock Inc. uses the direct write-off method of accounting for bad debts. In 20X3, Gridlock recovered $1,200 from a customer whose account was written off in 20X1. Which of the following sets of journal entries is the most appropriate way to record this recovery?
Answer: Dr. Accounts Receivable $1,200; Cr. Bad Debt Expense $1,200; and then Dr. Cash $1,200; Cr. Accounts Receivable $1,200.
Under the direct write-off method, there is no allowance account. When an account is recovered, the entry should reverse the original write-off's effect on expenses. The proper two-step procedure is to first reinstate the receivable by debiting Accounts Receivable and crediting Bad Debt Expense (or a recovery revenue account). This increases the current period's income. The second step is to record the cash collection by debiting Cash and crediting Accounts Receivable. This maintains a clear customer history.
- A company had previously written off a $5,000 account from customer Zee. Later, the company received a partial payment of $2,000 from Zee. The company uses the allowance method. After properly accounting for the reinstatement of the portion of Zee's account that was recovered, which journal entry correctly records the cash collection?
Answer: Debit Cash $2,000; Credit Accounts Receivable—Zee $2,000
The recovery process has two steps. The stem states that the first step, reinstatement, has already been accounted for. The reinstatement entry would have been: Debit Accounts Receivable—Zee $2,000 and Credit Allowance for Doubtful Accounts $2,000. The second step is to record the cash receipt, which is a standard collection entry: Debit Cash and Credit Accounts Receivable. Therefore, the correct entry for the collection is Debit Cash $2,000 and Credit Accounts Receivable—Zee $2,000.
- In 20X2, Vella Corp. recovers $7,500 in cash from a customer whose account had been written off as uncollectible in 20X1. Vella uses the allowance method for uncollectible accounts. How does this recovery affect Vella Corp.'s reported net income for 20X2?
Answer: It has no effect on net income.
Under the allowance method, the recovery of a previously written-off account involves two entries: 1) Dr. Accounts Receivable, Cr. Allowance for Doubtful Accounts; and 2) Dr. Cash, Cr. Accounts Receivable. Neither of these entries involves an income statement account. Bad Debt Expense is not affected, and no revenue or gain is recognized. Therefore, the recovery has no effect on net income for 20X2.
- Based on the information provided for Sterling Co., what was the total amount of accounts receivable written off during the year?
* Accounts Receivable, beginning balance: $150,000
* Accounts Receivable, ending balance: $200,000
* Credit Sales: $800,000
* Cash Collections from customers: $732,000
* Allowance for Doubtful Accounts, beginning balance: $12,000
* Allowance for Doubtful Accounts, ending balance: $10,000
* Bad Debt Expense recognized: $16,000
Answer: $18,000
The amount of write-offs can be determined by analyzing the changes in either the Accounts Receivable or the Allowance for Doubtful Accounts T-account. Using the Allowance account is often more direct.
Allowance for Doubtful Accounts T-account analysis:
Beginning Balance (credit) + Bad Debt Expense (credit) - Write-offs (debit) = Ending Balance (credit)
$12,000 + $16,000 - Write-offs = $10,000
$28,000 - Write-offs = $10,000
Write-offs = $28,000 - $10,000 = $18,000.
- At the beginning of the year, a company's Allowance for Doubtful Accounts had a credit balance of $40,000. During the year, the company wrote off $32,000 in uncollectible accounts and recovered $5,000 from accounts written off in prior years. At year-end, an aging of accounts receivable indicates that the required ending balance in the allowance account should be $45,000. What amount of Bad Debt Expense should be recorded for the year?
Answer: $32,000
This requires a two-step calculation:
1. Determine the pre-adjustment balance of the Allowance account:
Beginning Balance: $40,000
Less: Write-offs: ($32,000)
Plus: Recoveries: $5,000
Pre-adjustment Balance = $40,000 - $32,000 + $5,000 = $13,000 credit.
2. Calculate the required adjustment (Bad Debt Expense):
Required Ending Balance: $45,000
Current Pre-adjustment Balance: $13,000
Required Adjustment = $45,000 - $13,000 = $32,000.
The journal entry would be to debit Bad Debt Expense for $32,000 and credit Allowance for Doubtful Accounts for $32,000.
- Hartwell Company uses the allowance method for bad debts. On March 15, they wrote off a $3,200 account receivable from customer Johnson. On September 8, Johnson unexpectedly paid $2,400 of the previously written-off amount. What is the net effect on Hartwell's total assets from these two transactions combined?
Answer: Decrease of $800
Under the allowance method, the March write-off (Dr. Allowance $3,200, Cr. Accounts Receivable $3,200) has no effect on total assets since both the gross receivable and contra-allowance decrease equally. The September recovery requires two entries: (1) reinstate the receivable (Dr. Accounts Receivable $2,400, Cr. Allowance $2,400) with no asset effect, and (2) record collection (Dr. Cash $2,400, Cr. Accounts Receivable $2,400) increasing assets by $2,400. However, since only $2,400 of the original $3,200 was recovered, the net effect is that $800 remains permanently written off, representing a decrease in total assets of $800. Choice B ignores that part of the original receivable remains uncollected. Choice C incorrectly assumes full recovery. Choice D describes the gross effects rather than the net effect.
- Assuming Fairfield uses the allowance method, what is the net impact on Bad Debt Expense from all write-off and recovery transactions during 2024?
Answer: No impact on Bad Debt Expense
Under the allowance method, write-offs do not affect Bad Debt Expense because they only transfer amounts from the allowance account to reduce receivables (Dr. Allowance, Cr. Accounts Receivable). Similarly, recoveries are recorded by reinstating receivables through the allowance account (Dr. Accounts Receivable, Cr. Allowance) followed by cash collection (Dr. Cash, Cr. Accounts Receivable). Neither write-offs nor recoveries impact the expense account under the allowance method; Bad Debt Expense is only recorded during period-end adjusting entries. Choice A incorrectly calculates net unrecovered amounts as expense. Choice B shows only Chen's unrecovered portion. Choice D would apply if recoveries were credited directly to Bad Debt Expense, which is incorrect under the allowance method.
- A company determines that a customer's $1,000 account receivable is uncollectible and writes it off. If the company uses the allowance method, the effect on net income at the time of the write-off is zero. If the company had used the direct write-off method instead, what would have been the effect on net income at the time of the write-off?
Answer: A decrease of $1,000
Under the direct write-off method, an uncollectible account is expensed at the time it is determined to be uncollectible. The journal entry is a debit to Bad Debt Expense and a credit to Accounts Receivable. A debit to an expense account decreases net income. Therefore, net income would decrease by the amount of the write-off, which is $1,000.
- Metro Corp. uses the direct write-off method and wrote off a $4,500 account from Taylor Industries on June 15. On December 10, Taylor Industries was acquired by a larger company that immediately paid all of Taylor's outstanding debts, including the $4,500 to Metro Corp. What is the effect on Metro Corp's current year net income from these two transactions?
Answer: No net effect on income
When you encounter questions about the direct write-off method, focus on tracking the complete cycle of bad debt transactions and their timing effects on income.
Under the direct write-off method, Metro Corp. recorded two separate transactions that directly affected net income. On June 15, writing off the $4,500 account required this journal entry: debit Bad Debt Expense $4,500, credit Accounts Receivable $4,500. This decreased net income by $4,500. On December 10, when Taylor's debt was unexpectedly collected, Metro recorded: debit Cash $4,500, credit Bad Debt Recovery (or Other Income) $4,500. This recovery income increased net income by $4,500.
Since both transactions occurred within the same fiscal year, the $4,500 expense and $4,500 recovery income offset each other completely, resulting in no net effect on current year income.
Answer choice A) incorrectly considers only the write-off without accounting for the subsequent recovery. Answer choice B) suggests fiscal year timing matters, but since the problem states both events happened in the current year (June and December), timing within that year is irrelevant. Answer choice C) incorrectly considers only the recovery income while ignoring the initial write-off expense.
The key study point here is that under the direct write-off method, bad debt recoveries create income in the period collected, not when originally written off. Always track both sides of the transaction cycle, and remember that if both the write-off and recovery occur in the same accounting period, they completely offset each other.
- Upon recovering a $2,000 account previously written off, a company's bookkeeper made the following entries:
1. Dr. Accounts Receivable $2,000; Cr. Sales Revenue $2,000
2. Dr. Cash $2,000; Cr. Accounts Receivable $2,000
The company uses the allowance method. What is the net effect of this error on the company's total working capital at the end of the period, compared to the correct accounting treatment?
Answer: Working capital is overstated by $2,000.
Let's analyze the effect on current assets (CA).
Correct Treatment: The net effect of the two correct entries (Dr A/R, Cr Allow; Dr Cash, Cr A/R) is Dr. Cash $2,000, Cr. Allowance $2,000. The change in CA is (increase in Cash) - (increase in Allowance) = $2,000 - $2,000 = $0. Correctly handled, a recovery has no impact on working capital.
Erroneous Treatment: The net effect of the bookkeeper's entries is Dr. Cash $2,000, Cr. Sales Revenue $2,000. This increases Cash (a current asset) by $2,000 and increases Sales Revenue (which increases retained earnings, not a current liability). Thus, total current assets increase by $2,000, and working capital (CA - CL) is overstated by $2,000.
- A company uses the allowance method for uncollectible accounts. At the start of the month, its Accounts Receivable balance was $500,000 and the Allowance for Doubtful Accounts had a credit balance of $25,000. During the month, the company wrote off a specific customer's $10,000 account as uncollectible. What is the net realizable value of accounts receivable immediately after the write-off?
Answer: $475,000
The net realizable value (NRV) is calculated as Accounts Receivable minus the Allowance for Doubtful Accounts.
Before the write-off: NRV = $500,000 - $25,000 = $475,000.
The journal entry to write off an account under the allowance method is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
Journal Entry:
Dr. Allowance for Doubtful Accounts $10,000
Cr. Accounts Receivable $10,000
After the write-off:
New Accounts Receivable = $500,000 - $10,000 = $490,000
New Allowance for Doubtful Accounts = $25,000 - $10,000 = $15,000
New NRV = $490,000 - $15,000 = $475,000.
The write-off of a specific account under the allowance method has no effect on the net realizable value of accounts receivable.
- At the end of the year, Meeker Co. had a $2,000 credit balance in its Allowance for Doubtful Accounts before making its annual adjusting entry. During the year, the company's write-offs of uncollectible accounts totaled $10,000, and recoveries of accounts previously written off totaled $3,000. What was the credit balance in the Allowance for Doubtful Accounts at the beginning of the year?
Answer: $9,000
We can solve for the beginning balance by setting up the formula for the change in the allowance account and working backwards.
Formula: Beginning Balance - Write-offs + Recoveries = Pre-adjustment Ending Balance
Let 'X' be the beginning balance:
X - $10,000 + $3,000 = $2,000
X - $7,000 = $2,000
X = $2,000 + $7,000
X = $9,000
The beginning balance was a $9,000 credit.
- Ambit Corp. began the year with an $18,000 credit balance in its Allowance for Doubtful Accounts. During the year, Ambit wrote off $9,000 of uncollectible accounts and recovered $5,000 of accounts that were written off in previous years. At the end of the year, Ambit's management determined that the allowance account should have a final credit balance of $20,000. What is the bad debt expense Ambit should record for the year?
Answer: $6,000
The calculation requires finding the pre-adjustment balance in the allowance account and then determining the adjustment needed to reach the target balance.
1. Calculate the pre-adjustment balance:
Beginning Balance: $18,000
Less: Write-offs: ($9,000)
Plus: Recoveries: $5,000
Pre-adjustment Balance = $18,000 - $9,000 + $5,000 = $14,000.
2. Calculate the required bad debt expense:
Required Ending Balance: $20,000
Pre-adjustment Balance: $14,000
Bad Debt Expense = Required Balance - Pre-adjustment Balance = $20,000 - $14,000 = $6,000.
- After Riverside writes off all three accounts, what will be the net realizable value of accounts receivable?
Answer: $168,000
Net realizable value equals gross accounts receivable minus the allowance for doubtful accounts. The write-offs will reduce both accounts receivable and the allowance by the same total amount ($3,500 + $2,800 + $1,700 = $8,000). After write-offs: Accounts Receivable = $180,000 - $8,000 = $172,000; Allowance = $12,000 - $8,000 = $4,000. Net realizable value = $172,000 - $4,000 = $168,000. Choice A incorrectly subtracts the full original allowance from the reduced receivables balance. Choice C shows the gross receivables after write-off but ignores the remaining allowance. Choice D subtracts only the write-off amount from the original gross balance.
- At the beginning of the year, Pascal Co. had a credit balance of $30,000 in its Allowance for Doubtful Accounts. During the year, the company wrote off $22,000 of specific uncollectible receivables and recovered $5,000 from an account that had been written off in a prior year. What is the balance in the Allowance for Doubtful Accounts before the company records its year-end adjusting entry for bad debt expense?
Answer: $13,000 credit
To find the pre-adjustment balance, start with the beginning balance, subtract write-offs (which are debits to the account), and add recoveries (which are credits to the account).
Calculation:
Beginning Balance: $30,000
Less: Write-offs ($22,000)
Plus: Recoveries $5,000
Ending pre-adjustment balance = $30,000 - $22,000 + $5,000 = $13,000 credit.
- In March, Apex Corporation wrote off a $4,000 account receivable from a bankrupt customer. In July, Apex unexpectedly received a $1,500 payment from a different customer whose account had been written off two years prior. Assuming Apex uses the allowance method, what is the combined net effect of these two transactions on the balance of the Allowance for Doubtful Accounts?
Answer: A net decrease of $2,500
A write-off decreases the Allowance for Doubtful Accounts, while a recovery increases it.
1. The write-off in March is recorded with a debit to the Allowance account, decreasing its balance by $4,000.
2. The recovery in July is recorded by reinstating the receivable (Dr. A/R, Cr. Allowance), which increases the Allowance account's balance by $1,500.
Net effect = -$4,000 (write-off) + $1,500 (recovery) = -$2,500. This represents a net decrease of $2,500 in the allowance balance.
- Thompson Industries uses the direct write-off method. They wrote off a $2,700 account from Customer A on August 15. On December 3, Customer A paid $1,800 of the previously written-off amount. What journal entry should Thompson record on December 3 to properly account for this partial recovery?
Answer: Dr. Cash $1,800, Cr. Bad Debt Expense $1,800
Under the direct write-off method, recoveries of previously written-off amounts are recorded by crediting Bad Debt Expense (or a recovery account), effectively reversing part of the original expense recognition. The entry is Dr. Cash $1,800, Cr. Bad Debt Expense $1,800. Choice A is incorrect because there's no accounts receivable to credit since it was written off. Choice C applies allowance method procedures to a direct write-off situation. Choice D is wrong because the direct write-off method doesn't use an allowance account.
- Given that Frontier Corp. uses the allowance method, what is the correct journal entry to write off the Smith account?
Answer: Dr. Allowance for Doubtful Accounts $4,000; Cr. Accounts Receivable $4,000.
When using the allowance method, the write-off of a specific uncollectible account is recorded by debiting the Allowance for Doubtful Accounts and crediting the specific Accounts Receivable account. This removes the uncollectible amount from the books. The bad debt expense was already estimated and recorded in a prior period. The other financial data provided is extraneous to this specific transaction.
