Question

What is the key point of revenue recognition?

When cash changes hands between the buyer and seller

When control of the good or service passes to the customer

When customer agrees to acquire the good or service

When control of the good or service has passed to the customer and payment is complete

Accounts Receivable should be reported in the balance sheet at which of the following?

Lower-of-cost-or-market

Historical cost

Fair market value

Net realizable value

At December 31, the balance in Newton Company’s allowance for uncollectible accounts had a debit balance, before adjustment, of $1,400. Newton uses the balance statement approach to estimate bad debts expense and determined that the balance of the allowance at year end should be $3.400. What adjusting entry does Newton need to make to record bad debts expense for the year?

Allowance for Uncollectible Accounts $3,400 Accounts Receivable $3,400

Bad Debts Expense $3,600 Allowance for Uncollectible Accounts $3,600

Bad Debts Expense $4,800 Allowance for Uncollectible Accounts $4,800

Bad Debts Expense $2,000 Accounts Receivable $2,000

When the LIFO method of costing inventory is in use, the seller:

Assumes that the oldest units in inventory are sold first

Assumes that the most recently acquired units in inventory are sold first

Must sell the most recently acquired units in inventory first

Must sell the oldest unit in inventory first

Answer 1

1. Answer: When control of the good or service passes to the customer.

When the title/ownership/ risks and rewards/control passes to the customer, revenue is recognized by the seller.

2. Answer: Net realizable value

Accounts receivable should be reported in the balance sheet net of the allowance for uncollectible accounts. This is the net realizable value of the accounts receivable.

3. Answer:

Bad debts expense	$       4,800
Allowance for uncollectible accounts		$       4,800

The balance of allowance at year end should be $3400 credit while the current balance is $1400 debit. Hence, the adjusting entry required should credit the allowance account for $1400 + $3400 = $4800 which will make the balance in the allowance account $3400 credit.

4. Answer: Assumes that the most recently acquired units in inventory are sold first.

Under LIFO, the most recent purchase is assumed to be issued/sold first while the older units are assumed to be in the ending inventory.