Question

Hello, Please answer these 4 questions as I am reviewing for an Exam and would like to learn thoroughly!

1) If the direct write-off method is used to account for uncollectible accounts, which of the following statements is true?

	a.	An allowance for uncollectible accounts is established for the estimate of future bad debts.
	b.	Bad debt expense is recorded at the time of actual bad debts.
	c.	Actual bad debts are not recorded.
	d.	Only cash sales to customers are recorded.

2)

Using the allowance method to account for uncollectible accounts, the write off of an actual bad debt results in:

	a.	Two of the other answers are correct.
	b.	An increase in total assets.
	c.	A decrease in total assets.
	d.	An increase in total expenses.
	e.	No change to the accounting equation.

3)

When a company earns revenue from current operations but has not received cash for that revenue in the current period, the accounting equation would be affected as follows:

	a.	Liabilities decrease and stockholders’ equity increases.
	b.	The accounting equation would not be affected.
	c.	Assets decrease and liabilities increase.
	d.	Liabilities increase and stockholders' equity decreases.
	e.	Assets increase and stockholders’ equity increase.

4)

On January 23, a company purchases inventory for $100. On February 12, the inventory is sold for $150 on account. Which of the following is recorded on February 12?

	a.	Debit sales revenue for $150.
	b.	Debit cost of goods sold for $100.
	c.	Debit accounts receivable for $100.
	d.	Credit inventory for $150.
	e.	Two of the other answers are correct.

Answer 1

Solution 1:

If the direct write-off method is used to account for uncollectible accounts "Bad debt expense is recorded at the time of actual bad debts". this statement is true.

hence option "b" is correct.

Solution 2:

Using the allowance method to account for uncollectible accounts, the write off of an actual bad debt results in "no change to the accounting equation".

This is because write is done from accounts receivale and allowance account. Net effect will be zero.

Hence option "e" is correct.

Solution 3:

When a company earns revenue from current operations but has not received cash for that revenue in the current period, the accounting equation would be affected as follows "Assets increase and stockholders’ equity increase."

Assets increase by Accounts receivable and stockholders’ equity increase by Sales revenue.

Hence option "e" is correct.

Solution 4:

Recording on February 12 will include Cost of goods sold Debit by $100.

Hence option "b" is correct.