Accounting 2010 Practice Exam Questions with Correct Answers and Explanations

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During the year Kincaid reported $72,500 of credit sales. Kincaid wrote off $550 of receivables as uncollectible in Year 2. Cash collections of receivables amounted to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Kincaid's entry to recognize the write-off of the uncollectible accounts will: not affect total assets or stockholders' equity. Explanation: This is an asset exchange transaction. Writing off an uncollectible account decreases assets (accounts receivable) and increases assets (by decreasing the contra asset allowance for doubtful accounts). Therefore, total assets and stockholders' equity are not affected. On January 1, Year 2, Grande Company had a $16,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During Year 2, Grande provided $104,000 recognized service revenue on account. The company collected $97,000 cash from accounts receivable. Uncollectible accounts are estimated to be 2% of sales on account. The amount of uncollectible accounts expense recognized on the Year 2 income statement is: $2,080 Explanation: $104,000 sales on account × 2% = $2,080 uncollectible accounts expense A company that uses the allowance method to account for uncollectible accounts: reports the net realizable value of its accounts receivable on the balance sheet. Explanation: A company that uses the allowance method estimates uncollectible accounts expense before they actually become uncollectible, using a contra asset account known as an allowance for doubtful accounts, and reports the net realizable value of accounts receivable on the balance sheet. How would accountants estimate the amount of a company's uncollectible accounts expense? - Consider new circumstances that are anticipated to be experienced in the future. - Compute as a percentage of credit sales. - Consult with trade association and business associates. Explanation: Accountants use a variety of methods to estimate uncollectible accounts expense. There is no requirement that they use a particular approach