Question

1a.A customer charges a treadmill at Annie's Sport Shop. The price is $4,000 and the financing charge is 6% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a monthly finance charge is added to the customer's account.

What is the amount of the finance charge?

a $8

b $20

c $80

d $240

1b.If a company fails to record estimated bad debts expense,

a cash realizable value is understated.

b expenses are understated.

c revenues are understated.

d receivables are understated.

1c.An aging of a company's accounts receivable indicates that $14,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a

a. debit to Bad Debt Expense for $14,000.

b debit to Allowance for Doubtful Accounts for $12,900.

c debit to Bad Debt Expense for $12,900.

d credit to Allowance for Doubtful Accounts for $14,000.

1dWhen the allowance method of accounting for uncollectible accounts is used, Bad Debt

Expense is recorded

a in the year after the credit sale is made.

b in the same year as the credit sale.

c as each credit sale is made.

d when an account is written off as uncollectible.

Ortiz Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $600,000 and credit sales are $2,700,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Ortiz Company make to record the bad debts expense?

a Bad Debt Expense ...........................................................            33,000

                               Allowance for Doubtful Accounts .........................                               33,000

b Bad Debt Expense ...........................................................            27,000

                               Allowance for Doubtful Accounts .........................                               27,000

c Bad Debt Expense ...........................................................            27,000

                               Accounts Receivable ..............................................                               27,000

d Bad Debt Expense ...........................................................            33,000

                               Accounts Receivable ..............................................                               33,000

Answer 1

1.a.

Ans - b

$4000 x 6% x 1/12 = $20

1.b.

Ans - b

If company fails to record estimated bad debts expense, that means expenses are understated and assets are overstated.

1.c.

Ans. - c

Debit to Bad Debt Expense for ($14000 - $1100) = $12900

1.d

Ans. - b

When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded when management estimates the amount of uncollectible in the same year as the credit sale.

In the books of Ortiz Company

Journal

Ans. - b. Bad Debt Expense ...........................................................            27,000

                               Allowance for Doubtful Accounts .........................                               27,000

(2700000 x 1%) = $27000