As time passes, the loan goes unpaid. Adjusting entries are necessary to ensure that the expense recognition principle is followed. Bad debt negatively affects accounts receivable (see Figure 9.2). (b) consistency. Experience shows that warranty expenses average about 5% of the selling price. To compute the most accurate estimation possible, a company may use one of three methods for bad debt expense recognition: the income statement method, balance sheet method, or balance sheet aging of receivables method. The future event is remote "Responsibility accounting" is a concept under which managers are held accountable for transactions and events (beyond/under) their direct influence and control. D) $9720 b. have low amounts of debt. B) Standardize accounting procedures. You are considering switching to the balance sheet aging of receivables method. There are two methods a company may use to recognize bad debt: the direct write-off method and the allowance method. GAAP says we should use direct, but the easier one to use is the indirect. As sales of a givne month can be declared uncollectible after several month using a direct method we are putting the burden of the uncollectible in another accounting period while leaving the one which did that sale untouched. Under the new guidance, the bad debt amount may only be recorded if there is an unexpected circumstance that prevented the patient from paying the bill, and it may only be calculated from the amount that the providing entity anticipated collecting. The reports should be stated in simple terms. Question: The expense recognition principle, as applied to bad debts: Multiple Choice Requires that expenses be ignored if their effect on the financial statements is unimportant to users' business decisions. Minnesota had the highest turnout rate of any state for the 2012 presidential election. are not subject to the Creative Commons license and may not be reproduced without the prior and express written The use of the allowance method of accounting for bad debts. What accounts will you pick, and why, and how do they make you money? b. Economic entity assumption 2. c. optional. The use of the allowance method of accounting for bad debts. This journal entry takes into account a credit balance of $23,000 and subtracts the prior periods balance from the estimated balance in the current period of $48,727.50. Question: The expense recognition (matching) principle, as applied to bad debts, requires: Multiple Choice That expenses be ignored if their effect on the financial statements is unimportant to users' business decisions. Requires that expenses be ignored if their effect on the Determine whether the following statement regarding management accounting's role in assigning decision-making authority is true or false: The syllabus for a college course is a type of report that outlines students' decision-making responsibilities. Assertion(s): Balance Sheet Effect: Income Statement Effect: Your first step in learning to audit is to understand and be able to identify management assertions for events and transactions. THINK IT THROUGH Bad Debt Estimation Bad debts are uncollectible amounts from customer accounts. Using the straight line method, how much depreciation expense should the company recognize on December 31, Year 1? Which of the following is not true about the Allowance for Doubtful Accounts? What are the features of a CVP income statement that make it more useful for management decision-making than the traditional income statement prepared for external users? Identify the accounting assumption principle or constraint that describes the situation above. A: Bad debts expense account contains the amount of receivables that will not be collected. Then all of the category estimates are added together to get one total estimated uncollectible balance for the period. C. Favors the use of the direct write-off method for bad debts. The entry for bad debt would be as follows, if there was no carryover balance from the prior period. You set the preliminary judgment about materiality at $70,000. Get access to this video and our entire Q&A library, Uncollectible Accounts, the Allowance Method & Bad Debt, The materiality principle: a. states that an amount can be ignored if its effect on financial statements is unimportant to the user's business decisions. a. Answer the following questions using this information. In the first year, 15,000 bolts were produced. a. Predictability to pay debts b. Discuss the differences between positive and negative confirmation, including when one might be more appropriate than the other and how results of either should be i. However, the risk is elevated for companies that: a. are heavily regulated. Management faces pressure to meet revenue expectations. Indicate the key benefits and drawbacks to financial statement users of U.S GAAP and IFRS. All liabilities have been included and none have been left out. debts: Requires that expenses be ignored if their effect on the BWW believes that $58,097 will be uncollectible debt. An account that is 90 days overdue is more likely to be unpaid than an account that is 30 days past due. Do you have a responsibility to the public to change methods if you know one is a better estimation? d.Predict, Identify the impact of poor accounts receivable management can have on an organization. Estimate the effects of falsifying records, diverting cash to ghost employees, and duplicating expenses on a small, midsize, and large business. What is the likely source of these huge pools of savings? A routine audit in December 2011 by an accounting firm revealed that one of the bookkeepers had embezzled$20,000 over a three-month period in 2009. The expense recognition (matching) principle, as applied to bad debts, requires: Multiple Choice That bad debts not be written off. financial statements is unimportant to users' business You'll get a detailed solution from a subject matter expert that helps you learn core concepts. Recent Uncollectible customer accounts produce bad debt. That journal entry assumed a zero balance in Allowance for Doubtful Accounts from the prior period. Prepare the journal entry for the income statement method of bad debt estimation. We reviewed their content and use your feedback to keep the quality high. This entry assumes a zero balance in Allowance for Doubtful Accounts from the prior period. The balance sheet aging of receivables method estimates bad debt expenses based on the balance in accounts receivable, but it also considers the uncollectible time period for each account. The expense recognition (matching) principle, as applied to bad debts, requires: Multiple Choice That bad debts not be written off. 1. Evaluate managers' decisions. Billies end-of-year credit sales totaled $458,230. The expense recognition principle, a component of the matching principle, dictates that expenses be recognized in the same accounting period as the revenue it is associated with. Question 13 (5 points) Saved The expense recognition principle, as applied to bad debts: Question 13 options: Requires that expenses be ignored if their effect on the financial statements is unimportant to users' busine Favors the use of the direct write-off method for bad debts. are licensed under a, Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches, Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting, Identify Users of Accounting Information and How They Apply Information, Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities, Explain Why Accounting Is Important to Business Stakeholders, Describe the Varied Career Paths Open to Individuals with an Accounting Education, Describe the Income Statement, Statement of Owners Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate, Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses, Prepare an Income Statement, Statement of Owners Equity, and Balance Sheet, Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements, Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions, Define and Describe the Initial Steps in the Accounting Cycle, Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements, Use Journal Entries to Record Transactions and Post to T-Accounts, Explain the Concepts and Guidelines Affecting Adjusting Entries, Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries, Record and Post the Common Types of Adjusting Entries, Use the Ledger Balances to Prepare an Adjusted Trial Balance, Prepare Financial Statements Using the Adjusted Trial Balance, Describe and Prepare Closing Entries for a Business, Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity, Appendix: Complete a Comprehensive Accounting Cycle for a Business, Compare and Contrast Merchandising versus Service Activities and Transactions, Compare and Contrast Perpetual versus Periodic Inventory Systems, Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System, Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System, Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods, Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies, Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System, Define and Describe the Components of an Accounting Information System, Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders, Analyze and Journalize Transactions Using Special Journals, Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems, Analyze Fraud in the Accounting Workplace, Define and Explain Internal Controls and Their Purpose within an Organization, Describe Internal Controls within an Organization, Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries, Discuss Management Responsibilities for Maintaining Internal Controls within an Organization, Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries, Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements, Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions, Determine the Efficiency of Receivables Management Using Financial Ratios, Discuss the Role of Accounting for Receivables in Earnings Management, Apply Revenue Recognition Principles to Long-Term Projects, Explain How Notes Receivable and Accounts Receivable Differ, Appendix: Comprehensive Example of Bad Debt Estimation, Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions, Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method, Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method, Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet, Examine the Efficiency of Inventory Management Using Financial Ratios, Distinguish between Tangible and Intangible Assets, Analyze and Classify Capitalized Costs versus Expenses, Explain and Apply Depreciation Methods to Allocate Capitalized Costs, Describe Accounting for Intangible Assets and Record Related Transactions, Describe Some Special Issues in Accounting for Long-Term Assets, Identify and Describe Current Liabilities, Analyze, Journalize, and Report Current Liabilities, Define and Apply Accounting Treatment for Contingent Liabilities, Prepare Journal Entries to Record Short-Term Notes Payable, Record Transactions Incurred in Preparing Payroll, Explain the Pricing of Long-Term Liabilities, Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method, Prepare Journal Entries to Reflect the Life Cycle of Bonds, Appendix: Special Topics Related to Long-Term Liabilities, Explain the Process of Securing Equity Financing through the Issuance of Stock, Analyze and Record Transactions for the Issuance and Repurchase of Stock, Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits, Compare and Contrast Owners Equity versus Retained Earnings, Discuss the Applicability of Earnings per Share as a Method to Measure Performance, Describe the Advantages and Disadvantages of Organizing as a Partnership, Describe How a Partnership Is Created, Including the Associated Journal Entries, Compute and Allocate Partners Share of Income and Loss, Prepare Journal Entries to Record the Admission and Withdrawal of a Partner, Discuss and Record Entries for the Dissolution of a Partnership, Explain the Purpose of the Statement of Cash Flows, Differentiate between Operating, Investing, and Financing Activities, Prepare the Statement of Cash Flows Using the Indirect Method, Prepare the Completed Statement of Cash Flows Using the Indirect Method, Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency, Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method, Bad Debt Expenses. 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