Question

____5. According to the text which of the following can be used to estimate the credit to Allowance for Uncollectible Accounts for a given time period?

      

       A. Net Sales

       B. Average Inventory

       C. Aged Accounts Receivable

       D. Operating Income

E. Both A and C

____6. The book value of a depreciable asset is

       A. The original cost of the asset.

       B. The original cost of the asset less its accumulated                        

          depreciation.

       C. The original cost of the asset less its salvage value.

       D. The accumulated depreciation on the asset.

       E. None of these.

____7. A major shortcoming of the direct write-off method is that credit losses are:

Not matched with sales.

Never recognized.

Not shown in the subsidiary ledger.

Sometimes collected at a future date.

E. None of these

____8. Federal Unemployment Tax Act taxes are

        A. Levied on both employer and employee

        B. Levied on employee only

        C. Levied on employer only

        D. Levied only on the firm's executives

        E. None of the above

Answer 1

E. Both A and C

Estimating uncollectible accounts Accountants use two basic methods to estimate uncollectible accounts for a period. The first method—percentage-of-sales method—focuses on the income statement and the relationship of uncollectible accounts to sales. The second method—percentage-of-receivables method—focuses on the balance sheet and the relationship of the allowance for uncollectible accounts to accounts receivable.

Percentage-of-sales method The percentage-of-sales method estimates uncollectible accounts from the credit sales of a given period. In theory, the method is based on a percentage of prior years’ actual uncollectible accounts to prior years’ credit sales. When cash sales are small or make up a fairly constant percentage of total sales, firms base the calculation on total net sales. Since at least one of these conditions is usually met, companies commonly use total net sales rather than credit sales. The formula to determine the amount of the ending estimated bad debts entry is:

Bad Debt Expense = Net sales (total or credit) x Percentage estimated as uncollectible.

(6)  The original cost of the asset less its salvage value.

(7)Not matched with sales.

(8) Levied on both employer and employee.

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