Select the BEST answer for each of the following questions.
1. At December 31, 2020, Gale Company had a $4,300 debit balance in the Allowance for Doubtful Accounts account ( before adjustment ). An aging of accounts receivable indicated that the amount estimated to be uncollectible was $3,900. Under these circumstances, the adjusting entry at December 31, 2020 to record bad debt expense would include a:
a) Debit to Allowance for Doubtful Accounts for $400
b) Credit to Allowance for Doubtful Accounts for $400
c) Debit to Bad Debt Expense for $3,900
d) Debit to Bad Debt Expense for $8,200
e) None of the Above
2. On January 1, 2020, Ames Company had a $1,200 credit balance in the Allowance for Doubtful Accounts account. Net credit sales for the year were $400,000 and $7,400 of accounts receivable were written off as worthless. No recoveries of accounts receivable previously written off were made during the year. Ames estimates that 2% of net credit sales for the year are uncollectible. The year-end financial statements at December 31, 2020 would show:
a) Bad Debt Expense with a debit balance of $15,400
b) Allowance for Doubtful Accounts with a credit balance of $1,800
c) Allowance for Doubtful Accounts with a credit balance of $8,600
d) Bad Debt Expense with a debit balance of $7,400
e) None of the Above
3. A 2-month, 10% note receivable is acquired from a customer in settlement of their existing account receivable of $6,000. The entry to record the acquisition of the note will include a:
a) Debit to Notes Receivable for $6,000
b) Debit to Notes Receivable for $6,100
c) Credit to Interest Revenue for $100
d) Debit to Notes Receivable for $6,600
e) None of the Above
4. Pap Company purchased a used factory building. Prior to placing the building in use, Pap replaced some broken windows, painted some rooms, and replaced some damaged flooring. These expenditures should be recorded by debiting:
a) Repairs Expense
d) Land Improvements
5. On January 1, 2020, LaPierre Company purchased a delivery truck for $18,000. The truck was estimated to have a five-year useful life and a residual (salvage) value of $3,000. Assuming that LaPierre uses the double diminishing-balance method of depreciation, the depreciation expense that would be recorded for the second calendar year (i.e. at December 31, 2021) is:
6. A company purchased machinery for $40,000 on January 1, 2010. The machinery was estimated to have a useful life of 10 years and a residual (salvage) value of $10,000. Straight-line depreciation was used. On January 1, 2016, after six full years of use, management decided that the machinery would be retired on January 1, 2018 (i.e. at the end of 8 years of use). Under this revised estimate of useful life, the depreciation expense for the seventh year of use would be:
7. The journal entry to record the sale or disposal of a depreciable plant asset always includes:
a) Recording of a gain
b) A debit to the Accumulated Depreciation account for the plant asset
c) Recording of a loss
d) A debit to the plant asset account for the carrying amount of the plant asset
8. Which of the following is an example of a contingent liability?
a) A lawsuit against a restaurant for improper storage of perishable food items
b) The liability for future warranty repairs on computers sold during the current year
c) A company’s long-term employment contract with its CEO
d) A liability for notes payable (due in three years)
9. Sontag Company sells stoves carrying a three-year warranty. The liability for repairs on the stoves during the warranty period should be recorded:
a) In the same accounting period when the stoves are sold
b) Three years after the stoves are sold when the warranty expires
c) In the same accounting period when customers bring stoves in for repairs under warranty
d) In an equal amount each year over the three-year warranty period
10. Which of the following is not a current liability at year-end?
a) Management fees collected in advance
b) The portion of long-term debt due within the next year
c) Warranty liability for products sold during the current year with a three-year warranty
d) A lawsuit against a company where the outcome is not determinable
QUESTION # 1
Wilson Shoes is a new online business which was opened by Tanya Wilson on January 1, 2018.
During her second year of business (2019), she had total credit sales (there are no cash sales or sales returns) for the fiscal year ended December 31, 2019 of $875,000. Tanya realizes that some of her customers will not pay. However, she is not sure how to calculate bad debts expense. She has come to you to ask for advice on how to deal with this issue. You have reviewed her accounting records and come up with the following information:
1. Accounts Receivable balance at December 31, 2018 is $50,000 Dr.
2. Allowance for Doubtful Accounts balance at December 31, 2018 is $2,000 Cr.
3. Collections on Accounts Receivable during 2019 is $870,000
4. Write-Offs of Accounts Receivable during 2019 is $3,500
5. Recovery of Write-Offs of Accounts Receivable during 2019 is $400
6. You recommend that the Balance Sheet approach of estimating bad debts should be used at the year ended December 31, 2019. You estimate that 5% of the outstanding Accounts Receivable would be uncollectible.
a) Prepare all the necessary journal entries to record the above information for 2019. (9 Marks)
b) Tanya has heard that an alternative method to account for uncollectible Accounts Receivable is called the Direct Write-Off method. Identify two (2) main differences between the Allowance method and the Direct Write-Off method of accounting for uncollectible Accounts Receivable. (2 Marks)