24-25 Bad Debt Lesson

24-25 Allowance for Uncollectibles

Allowance for Uncollectible Accounts - Contra Asset
Accounts Receivable - These are involved
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Intro Uncollectible Accounts

Accounts that are receivables but cannot be collected
often called Bad Debt

These represent a loss that impacts income.

Multiple Choice

What is an uncollectible account?

• A type of asset

• A loss on receivables

• A payable expense

• An inventory item

Direct Write-Off Method

Not supported by GAAP - Violates the concept of the matching principle.

This method records bad debt only when an account is deemed uncollectible.

Not aligned with GAAP

Multiple Choice

When does the Direct Write-Off Method recognize bad debt?

• At the time of sale

• When accounts are deemed uncollectible

• Annually

• At year-end only

Multiple Choice

Why isn’t the Direct Write-Off Method GAAP-compliant?

• It estimates expenses in advance.

• It overstates income.

• It does not match expenses with revenues.

• It adjusts monthly.

Journal Entries Direct Write-Off

Accounts Receivable Removed Directly

Account Bad Debt Expense (classified as an expense DR normal balance)

When you determine a customer will not pay, you simply remove the receivable and expense it as bad debt.

Debit Bad Debt Expense
Credit Accounts Receivable

Multiple Choice

In the Direct Write-Off Method, when writing off an uncollectible account, which account is debited?

• Sales Revenue

• Allowance for Doubtful Accounts

• Cash

• Bad Debt Expense

Multiple Choice

ABC Corp sells $5,000 worth of goods on credit to a customer. Months later, the customer declares bankruptcy, and it becomes clear that ABC Corp will not be able to collect this amount. What is the journal entry used to record this if the company recognized bad debt with the direct-write off method?

• DR Allowance for Uncollectible Accounts;

  CR Accounts Receivable

• DR Allowance for Uncollectible Accounts; CR. Accounts Payable

• Debit Bad Debt Expense; Credit Accounts Payable

• Debit Bad Debt Expense; Credit Accounts Receivable

Multiple Choice

ABC Corp sells $5,000 worth of goods on credit to a customer. Months later, the customer declares bankruptcy, and it becomes clear that ABC Corp will not be able to collect this amount. What is the $5,000 classified as for ABC Corp?

• Cash Asset

• Loss on receivables

• Accounts payable

• Inventory

Multiple Choice

Alpha Inc. sold $2,000 worth of goods on credit. After the customer declared bankruptcy, Alpha wrote off the $2,000. What is the correct journal entry to record this?

• Debit Accounts Receivable, Credit Bad Debt Expense

• Debit Sales, Credit Bad Debt Expense

• Debit Bad Debt Expense, Credit Accounts Receivable

• Debit Cash, Credit Accounts Receivable

Allowance Method -GAAP

Estimates Uncollectible Accounts in Advance

This is compliant with GAAP because it matches expenses with revenues.
Account:
Allowance for Doubtful Accounts (contra Asset, reduces receivables CR NB) some companies call it Allowance for Uncollectible Accounts I will use these accounts interchangeably

ESTABLISHING ALLOWANCE:
Example: A company estimates 3% of 60,000 credit sales will not be collected.
Debit Bad Debt Expense $1,800
Credit Allowance for Doubtful Accounts

Multiple Choice

Delta Corp. estimates that 3% of its $60,000 credit sales will not be collected. How should Delta record this estimate?

• Debit Sales $1,800; Credit Accounts Receivable $1,800

• Debit Bad Debt Expense $1,800; Credit Allowance for Doubtful Accounts $1,800

• Debit Accounts Receivable $1,800; Credit Bad Debt Expense $1,800

• Debit Bad Debt Expense;

  Credit Accounts Receivable $1,800

Multiple Choice

Gamma LLC estimates that 5% of its $50,000 credit sales will be uncollectible. Which entry records this estimate?

• A. Debit Bad Debt Expense $2,500; Credit Accounts Receivable $2,500

• B. Debit Allowance for Doubtful Accounts $2,500; Credit Accounts Receivable $2,500

• C. Debit Bad Debt Expense $2,500; Credit Allowance for Doubtful Accounts $2,500

• D. Debit Accounts Receivable $2,500; Credit Bad Debt Expense $2,500

Multiple Choice

Pacific Enterprises estimates that 4% of its $80,000 credit sales for the period will be uncollectible. What is the appropriate adjusting journal entry to record this under the Allowance Method?

• Debit Bad Debt Expense $3,200; Credit Accounts Receivable $3,200

• Debit Allowance for Doubtful Accounts $3,200; Credit Accounts Receivable $3,200

• Debit Bad Debt Expense $3,200; Credit Allowance for Doubtful Accounts $3,200

• Debit Accounts Receivable $3,200; Credit Bad Debt Expense $3,200

Allowance Method Write Off

Reduces Receivables and Reduces the Allowance you made for Doubtful Accounts

Example: Apex Company has a balance of $1,200 that a customer has had aging in receivables for over a year. The company decides this amount in uncollectible. What journal entry will they use if the company uses GAAP practices?
Debit Allowance for Uncollectible Accounts $1,200
Credit Accounts Receivable $1,200

Multiple Choice

Skyline LLC uses the Allowance Method and has an Allowance for Doubtful Accounts balance of $5,000. A specific customer account worth $700 is deemed uncollectible. What journal entry should Skyline make to write off this account?

• Debit Bad Debt Expense $700; Credit Accounts Receivable $700

• Debit Accounts Receivable $700; Credit Allowance for Doubtful Accounts $700

• Debit Allowance for Doubtful Accounts $700; Credit Accounts Receivable $700

• Debit Bad Debt Expense $700; Credit Allowance for Doubtful Accounts $700

Greenwave Enterprises wrote off a customer's $300 account using the Allowance Method. The customer makes a full payment of $300 this month. How should Greenwave Enterprises record the journal entry for the payment after the account was written off?

First: Reestablish the Receivable:
Debit Accounts Receivable $300

Credit Allowance for Doubtful Accounts $300

Next: Accept Payment
Debit Cash $500
Credit Accounts Receivable $500

Allowance Method

Elite Corp. wrote off a customer's $500 account as uncollectible last month. This month, the customer unexpectedly made a full payment of $500. How should Elite Corp. record the journal entry for the payment after the account was written off using the Direct Write-Off Method?

First: Reestablish the Receivable:
Debit Accounts Receivable $500
Credit Bad Debt Expense $500

Next: Accept Payment
Debit Cash $500
Credit Accounts Receivable $500

Write-Off Method

What if they PAY?
(after you wrote them off)

Multiple Choice

Mountain Retailers wrote off a $400 account as uncollectible. Two months later, the customer unexpectedly pays the full $400. Which of the following is the correct journal entry to record the reestablishment of this debt?

(using Allowance method)

• Debit Accounts Receivable $400; Credit Cash $400

• Debit Allowance for doubtful Accounts $400; Credit Accounts Receivable $400

• Debit Accounts Receivable $400; Credit Allowance for Doubtful Accounts $400

• Debit Cash $400; Credit Bad Debt Expense $400

Multiple Choice

Luna Enterprises wrote off a customer's $500 account last month. This month, the customer unexpectedly pays $500. What journal entry should Luna record for the payment? (using direct-write-off method)

• .Debit Accounts Receivable $500; Credit Cash $500

• Debit Cash $500; Credit Accounts Payable $500

• Debit Allowance for Doubtful Accounts $500; Credit Accounts Receivable $500

• Debit Cash $500; Credit Accounts Receivable $500

Multiple Choice

Luna Enterprises wrote off a customer's $500 account last month. This month, the customer unexpectedly pays $500. What journal entry should Luna record the reestablishment of the receivable? (using direct-write-off method)

• .Debit Accounts Receivable $500; Credit Cash $500

• Debit Bad Debt Expense $500; Credit Accounts Receivable $500

• Debit Accounts Receivable $500; Credit Bad Debt $500

• Debit Cash $500; Credit Accounts Receivable $500

Allowance Method:

~Bad Debt Expense (Expense account): Debit (NB)

~Allowance for Doubtful Accounts (Contra-asset): Credit (NB)

~Accounts Receivable (Asset account): Debit (Normal Balance)

~Cash (Asset account): Debit (Normal Balance)

Summary: Under the Allowance Method, bad debt is estimated and recognized as an expense in the period in which the sales occur. The Allowance for Doubtful Accounts is used to offset the Accounts Receivable. When an account is written off, the Allowance for Doubtful Accounts is debited, and when a payment is received on a written-off account, the Allowance for Doubtful Accounts is credited.e $500

Allowance Method

Bad Debt Expense (Expense account): Debit (Normal Balance)

• Accounts Receivable (Asset account): Debit (NB)

• Cash (Asset account): Debit (NB)

• Bad Debt Expense (Expense): Debit(NB)

Summary: Under the Direct Write-Off Method, bad debt is recognized only when a specific account is determined to be uncollectible. The write-off is recorded directly to Bad Debt Expense at the time of the uncollectible account determination.

Write-Off Method

Summary of Accounts for Both Methods

Multiple Choice

Sparkle Inc. has a $700 receivable from a customer that has been outstanding for 18 months. After assessing the account, Sparkle determines that the debt is uncollectible. What is the journal entry to write off this account?

(using direct-write-off method)

• Debit Bad Debt Expense $700; Credit Accounts Receivable $700

• Debit Accounts Receivable $700; Credit Bad Debt Expense $700

• Debit Allowance for Doubtful Accounts $700; Credit Accounts Receivable $700

• Debit Bad Debt Expense $700; Credit Allowance for Doubtful Accounts $700

Multiple Choice

Mango Corp. sold merchandise worth $1,200 on credit. After 9 months, Mango determines the customer will not be able to pay and writes off the receivable. What is the journal entry? (using Allowance method)

• Debit Bad Debt Expense $1,200; Credit Accounts Receivable $1,200

• Debit Accounts Receivable $1,200; Credit Bad Debt Expense $1,200

• Debit Allowance for Doubtful Accounts $1,200; Credit Accounts Receivable $1,200

• Debit Bad Debt Expense $1,200; Credit Allowance for Doubtful Accounts $1,200