Download Chapter 14 Test

Chapter 14 Test
True or False
#1 and #7
The allowance method of accounting for
uncollectible accounts does not comply with
generally accepted accounting principles.
FALSE
Allowance method is the only method
allowed by GAAP
#2 and #12
When a customer account is written off
under the allowance method, the book
value of accounts receivable decreases.
FALSE
Book value = Gross AR – Allowance for
Uncollectible accounts
#3 and 16
A note provides a business with legal
evidence of a debt in the event it becomes
necessary to go to court to collect
TRUE
#4 and 10
Total assets are reduced when a business
accepts a note receivable from a customer
needing an extension of time to pay an
account receivable
FALSE
The asset class is changed from an Accounts
Receivable to a Notes Receivable
#5 and #11
The book value of accounts receivable must
be a reasonable and unbiased estimate of
the money the business expects to collect in
the future.
TRUE
#6 and #1
The accounting concept Neutrality is applied
when the process of making accounting
estimates is free from bias.
TRUE
#7 and #2
The expense of an uncollectible account should
be recorded in the accounting period that the
account becomes uncollectible.
FALSE
The reason for doing the allowance method for
uncollectible accounts is to try to match
revenue with expenses. The expense is
estimated and matched with the revenue in the
same period the revenue was earned.
#8 and 18
The account Allowance for Uncollectible
Accounts has a natural credit balance.
TRUE
It is a contra asset account. An asset
account has a natural debit balance;
therefore, this account would have a credit
balance
#9 and #8
A business usually knows at the end
of the fiscal year which customer
accounts will become uncollectible.
FALSE
If the business had a crystal ball that would tell
them this information, they wouldn’t have
extended credit to those customers to start with
#10 and #9
The account Allowance for Uncollectible
Accounts is reported on the income
statement.
FALSE
This is a contra asset account which is
reported on the Balance Sheet
#11 and 3
The percent of each age group of an
accounts receivable aging that is expected
to become uncollectible is determined by
generally accepted accounting principles.
FALSE
It is determined by historical data
#12 and #4
The adjusting entry for uncollectible accounts
reduces the balance of the Accounts
Receivable account.
FALSE
The Accounts Receivable balance stays the
same. The adjustment is made as a debit
(increasing) to the Uncollectible Accounts
Expense and a credit (increase) to Allowance
for Uncollectible Accounts (contra asset)
#13 and #5
A business having a $400.00 debit balance in
Allowance for Uncollectible Accounts and
estimating its uncollectible accounts using
accounts receivable aging to be $5,000
would record a $5,400 credit to Allowance
for Uncollectible Accounts
TRUE
The account is a normal credit balance; it
currently has a debit balance of $400. $5,000
+ $400 would be $5,400.
#14 and #6
Interest rates are stated as a percentage of
the principal.
TRUE
#15 and #17
Interest income is classified as revenue from
normal operations
FALSE
It is classified as other income.
#16 and #13
When using the allowance method, writing off
an uncollectible account does not change the
net realizable value of account receivable.
TRUE
Net realizable value = Gross Accounts
Receivable – Allowance for Uncollectible
Accounts. Just a reclassification of the account.
#17 and #14
The direct write off method complies with
Generally Accepted Accounting Principles
FALSE
The only method that is GAAP approved is
the allowance method
#18 and #15
The direct write-off method matches the
expense of uncollectible accounts to the
revenue that is earned in the same period.
FALSE
This is why it is not GAAP approved. The direct
write-off method records the expense only after
the account has been determined to be
uncollectible. This could be weeks after the
revenue has already been recorded.