Question

Use the following data for the next 4 questions. At the end of January, the unadjusted trial balance of Vernon, Inc., included the following accounts:                                                                               Debit                 Credit Sales (75% represent credit sales) ……………….                                   $600,000 Accounts Receivable …………………………….           $200,000 Allowance for Doubtful Accounts ………………                  2,000              1.Refer to the above data. Vernon estimates bad debts expense to be 2% of credit sales. What is the amount of Bad Debts expense recognized in Vernon’s income statement for January? 2.Refer to the above data. Vernon estimates bad debts expense to be 2% of credit sales. After the adjusting entry is made, the net realizable value of Vernon’s accounts receivable in the January 31 balance sheet is: 3.Refer to the above data. Vernon ages the accounts receivable and determines the estimated uncollectible portion to be 4% of gross accounts receivable. What is the amount of Bad Debts expense recognized in Vernon’s income statement for January? 4.Refer to the above data. Vernon ages the accounts receivable and determines the estimated uncollectible portion to be 4% of gross accounts receivable. After the adjusting entry is made, the net realizable value of Vernon’s accounts receivable in the January 31 balance sheet is:

5.A company which uses the direct write-off method recognizes bad debts expense:

a.As indicated by aging the accounts receivable at the end of the period

b.As a percentage of net sales during the period

c.As a percentage of net credit sales during the period

d.As specific accounts receivable are determined to be worthless

e.None of the above

6.A conceptual shortcoming in the direct write-off method of accounting for bad debts is that this method violates the:

a.Cost principle

b.Going-concern assumption

c.Matching principle

d.Realization principle

e.None of the above

The account “Allowance for Bad Debts” is an example of what type of account?

An owners equity account on the balance sheet.

An expense account included in the “other expenses” section of the income statement.

A contra-asset account on the balance sheet.

A contra-liability account on the balance sheet.

e.

8.At the start of the current year, Belmonde Company had a credit balance in the Allowance for Doubtful Accounts of $10,000. During the year, a provision of 2% of sales was made for uncollectible accounts. Sales for the year were $1,000,000 and $8,000 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the year. The year-end financial statements should show:

a.Bad Debts expense of $8,000

b.Bad Debts expense of $30,000

c.Allowance for Doubtful Accounts with a balance of $22,000

d.Allowance for Doubtful Accounts with a balance of $38,000

e.None of the above

Answer 1

1)	Vernon
	Bad debts = (600,000*75%)*2%
		9000
2)	Net realizable value
	Accounts receivable				200,000
	less:Allowance for doubtful accounts				7,000
	Net realizable value				193,000
3)	Bad debts = 200,000*4% +2000
		10000
4)	Net realizable value
	Accounts receivable				200,000
	less:Allowance for doubtful accounts				10,000
	Net realizable value				190,000
5)	option d
	As specific accounts receivable are determined to be worthless
6)	option c
	Matching Principle
7)	A contra asset account on the balance sheet
8)	Bad debts = 1,000,000*2%
		20000
	allowance for doubtful accounts
	write off	8,000	opening	10,000
			Adjust	20,000
			End bal	22,000
	option c)
	Allowance for Doubtful accounts with a balance
	of $22,000