Financial Accounting Quiz: Write Offs And Recoveries
20 questions · exam conditions
0:00
Write Offs And RecoveriesQuestion 1 of 20

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?

Debit Cash $2,000; Credit Bad Debt Expense $2,000
Debit Cash $2,000; Credit Allowance for Doubtful Accounts $2,000
Debit Cash $2,000; Credit Accounts Receivable—Zee $2,000
Debit Cash $2,000; Credit Other Income $2,000
← Back to quizzes

Financial Accounting Quiz

Financial Accounting Quiz: Write Offs And Recoveries

Practice Write Offs And Recoveries in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Write Offs And Recoveries, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

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?

  1. Debit Cash $2,000; Credit Bad Debt Expense $2,000
  2. Debit Cash $2,000; Credit Allowance for Doubtful Accounts $2,000
  3. Debit Cash $2,000; Credit Accounts Receivable—Zee $2,000 (correct answer)
  4. Debit Cash $2,000; Credit Other Income $2,000
Explanation: 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.

Question 2

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?

  1. It increases net income by $7,500.
  2. It has no effect on net income. (correct answer)
  3. It decreases net income by $7,500.
  4. It increases the prior period adjustment to retained earnings by $7,500.
Explanation: 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.

Question 3

The following information pertains to Sterling Co. for the year:

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
  1. $10,000
  2. $16,000
  3. $18,000 (correct answer)
  4. $28,000
Explanation: 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.

Question 4

When a previously written-off account is recovered under the allowance method, accounting procedures typically require two separate journal entries: one to reinstate the receivable and a second to record the cash collection. What is the primary underlying reason for this two-step process?

  1. To ensure the net realizable value of accounts receivable is not affected by the transaction.
  2. To reverse the bad debt expense that was recognized in a prior period.
  3. To maintain a complete and accurate credit history for the customer in the accounting system. (correct answer)
  4. To separate the impact on the income statement from the impact on the balance sheet.
Explanation: The primary reason for the two-step process is to maintain a complete record of transactions for the customer. Reinstating the Accounts Receivable (Step 1) and then showing the collection of that receivable (Step 2) creates a full audit trail. This information is valuable for making future credit decisions regarding this customer, as it shows they eventually paid off a debt that was once considered uncollectible.

Question 5

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?

  1. An increase of $1,000
  2. A decrease of $1,000 (correct answer)
  3. No effect
  4. A decrease of an amount dependent on the company's tax rate
Explanation: 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.

Question 6

Fairfield Services has the following write-off and recovery activity during 2024:

• January: Wrote off Peterson account ($2,400) • March: Wrote off Rodriguez account ($3,600) • May: Peterson paid $1,800 of written-off amount • July: Wrote off Chen account ($2,100) • September: Rodriguez paid full written-off amount ($3,600) • November: Chen paid $900 of written-off amount

Assuming Fairfield uses the allowance method, what is the net impact on Bad Debt Expense from all write-off and recovery transactions during 2024?

  1. $1,800 increase in expense
  2. $2,100 increase in expense
  3. No impact on Bad Debt Expense (correct answer)
  4. $6,300 decrease in expense
Explanation: 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.

Question 7

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?

  1. $3,000 credit
  2. $8,000 credit
  3. $13,000 credit (correct answer)
  4. $37,000 credit
Explanation: 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.

Question 8

Frontier Corp. reported the following selected balances at year-end: Sales Revenue $2,500,000; Accounts Receivable $350,000; Inventory $400,000; Allowance for Doubtful Accounts $15,000 (credit). During the year, Frontier determined that the $4,000 account for customer J. Smith was uncollectible.

Given that Frontier Corp. uses the allowance method, what is the correct journal entry to write off the Smith account?

  1. Dr. Allowance for Doubtful Accounts $4,000; Cr. Accounts Receivable $4,000. (correct answer)
  2. Dr. Bad Debt Expense $4,000; Cr. Accounts Receivable $4,000.
  3. Dr. Sales Revenue $4,000; Cr. Accounts Receivable $4,000.
  4. Dr. Retained Earnings $4,000; Cr. Accounts Receivable $4,000.
Explanation: 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.

Question 9

A company using the allowance method recovered $4,000 from a customer account that was previously written off. The bookkeeper made an erroneous entry by debiting Cash and crediting Bad Debt Expense for $4,000. The company's correct procedure involves reinstating the receivable and then crediting the Allowance for Doubtful Accounts. Compared to the correct accounting treatment, what is the effect of this error on the period's financial statements?

  1. Net income is overstated, and the ending Allowance for Doubtful Accounts is understated. (correct answer)
  2. Net income is understated, and total assets are understated.
  3. There is no effect on net income, but the Allowance for Doubtful Accounts is overstated.
  4. Both net income and the ending balance of Accounts Receivable are overstated.
Explanation: The incorrect entry (crediting Bad Debt Expense) reduces a current-period expense, which causes Net Income to be overstated by $4,000. The correct procedure would have credited the Allowance for Doubtful Accounts. Because the incorrect entry failed to credit the allowance account, the ending balance of the Allowance for Doubtful Accounts will be understated by $4,000. An understated allowance leads to an overstatement of the net realizable value of receivables.

Question 10

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?

  1. Dr. Cash $1,200; Cr. Allowance for Doubtful Accounts $1,200.
  2. Dr. Accounts Receivable $1,200; Cr. Retained Earnings $1,200; and then Dr. Cash $1,200; Cr. Accounts Receivable $1,200.
  3. Dr. Cash $1,200; Cr. Sales Revenue $1,200.
  4. Dr. Accounts Receivable $1,200; Cr. Bad Debt Expense $1,200; and then Dr. Cash $1,200; Cr. Accounts Receivable $1,200. (correct answer)
Explanation: 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.

Question 11

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?

  1. $4,000
  2. $6,000 (correct answer)
  3. $11,000
  4. $20,000
Explanation: 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.

Question 12

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?

  1. Revenue recognition principle
  2. Full disclosure principle
  3. Matching principle (correct answer)
  4. Historical cost principle
Explanation: 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.

Question 13

After Noria Co. announced it was writing off a major $2 million receivable from a bankrupt client, a financial analyst stated, "This $2 million write-off will directly reduce Noria's net assets and reported profits for the quarter." Noria Co. uses the allowance method and had an adequate allowance for doubtful accounts. Which statement best evaluates the analyst's claim regarding the accounting impact of the write-off itself?

  1. The analyst is correct; both net assets and profits will decrease by $2 million.
  2. The analyst is partially correct; net assets will decrease, but profits will be unaffected.
  3. The analyst is partially correct; profits will decrease, but net assets will be unaffected.
  4. The analyst is incorrect; neither net assets nor profits for the quarter are affected by the write-off itself. (correct answer)
Explanation: The analyst's claim is incorrect. Under the allowance method, the entry to write off an account is Dr. Allowance for Doubtful Accounts, Cr. Accounts Receivable. This transaction affects two balance sheet accounts, an asset (A/R) and a contra-asset (Allowance). The net realizable value of receivables, and therefore total assets, remains unchanged. Since no expense is recorded at the time of write-off (the expense was recognized earlier when the allowance was created), there is no effect on profits for the quarter. Because both assets and profits are unaffected, net assets (equity) are also unaffected by the write-off.

Question 14

A company uses the allowance method for uncollectible accounts. Immediately before writing off a $5,000 account receivable, the company had current assets of $200,000 and current liabilities of $100,000. What is the effect of this write-off on the company's working capital and current ratio?

  1. Working capital decreases, and the current ratio decreases.
  2. Working capital is unchanged, but the current ratio increases.
  3. Working capital decreases, but the current ratio is unchanged.
  4. Both working capital and the current ratio remain unchanged. (correct answer)
Explanation: The journal entry for a write-off under the allowance method is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. Both of these are balance sheet accounts within current assets. Accounts Receivable is an asset, and the Allowance is a contra-asset. When a write-off occurs, both accounts decrease by the same amount. As a result, the net carrying value of receivables (A/R - Allowance) does not change, and total current assets do not change. Since current assets and current liabilities are both unaffected, neither working capital (Current Assets - Current Liabilities) nor the current ratio (Current Assets / Current Liabilities) will change.

Question 15

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?

  1. $465,000
  2. $475,000 (correct answer)
  3. $485,000
  4. $490,000
Explanation: 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.

Question 16

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?

  1. $5,000
  2. $7,000
  3. $9,000 (correct answer)
  4. $15,000
Explanation: 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.

Question 17

Data for a company using the allowance method is as follows:

  • Accounts Receivable, Jan 1: $90,000
  • Allowance for Doubtful Accounts, Jan 1: $7,000 (credit)
  • Credit Sales for the year: $500,000
  • Collections on credit sales: $460,000
  • Accounts written off during the year: $8,000
  • Recoveries of accounts written off in prior years: $2,000
  • Bad debt expense is estimated at 2% of credit sales.

Based on the provided data, what is the net realizable value of accounts receivable at December 31?

  1. $103,000
  2. $111,000 (correct answer)
  3. $113,000
  4. $119,000
Explanation: This is a multi-step problem:
  1. Calculate ending Accounts Receivable: $90,000 (Beg. A/R) + $500,000 (Sales) - $460,000 (Collections) - $8,000 (Write-offs) = $122,000.
  2. Calculate Bad Debt Expense for the year: $500,000 (Credit Sales) * 2% = $10,000.
  3. Calculate ending Allowance for Doubtful Accounts: $7,000 (Beg. Allow.) - $8,000 (Write-offs) + $2,000 (Recoveries) + $10,000 (Expense) = $11,000.
  4. Calculate ending Net Realizable Value (NRV): $122,000 (End. A/R) - $11,000 (End. Allow.) = $111,000.

Question 18

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?

  1. $27,000
  2. $32,000 (correct answer)
  3. $37,000
  4. $45,000
Explanation: 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.

Question 19

A company that uses the allowance method recently received a $3,000 payment from a customer whose account had been previously written off. The first step in accounting for this recovery is to reinstate the customer's account. What is the effect of this reinstatement entry?

  1. An increase in the company's bad debt expense for the period.
  2. A decrease in the net realizable value of accounts receivable.
  3. An increase in the balance of the Allowance for Doubtful Accounts. (correct answer)
  4. A decrease in the gross Accounts Receivable balance.
Explanation: The journal entry to reinstate a previously written-off account is to debit Accounts Receivable and credit Allowance for Doubtful Accounts. Journal Entry: Dr. Accounts Receivable $3,000 Cr. Allowance for Doubtful Accounts $3,000 This entry directly increases (credits) the balance of the Allowance for Doubtful Accounts. It also increases the gross Accounts Receivable balance, but since both A/R and the Allowance increase by the same amount, the net realizable value is unchanged. The entry has no effect on bad debt expense.

Question 20

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?

  1. A net decrease of $2,500 (correct answer)
  2. A net decrease of $5,500
  3. A net increase of $2,500
  4. A net decrease of $4,000
Explanation: 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)=−1,500 (recovery) = -2,500. This represents a net decrease of $2,500 in the allowance balance.