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A company estimates that its bad debt expense each year will be 2% of credit sales. In the current period, one customer balance of $6,000 is determined to be uncollectible. Which of the following is true?
When bad debt expense is based off of an estimate each year, actual accounts written off will reduce the customer balance while also reducing the allowance for doubtful accounts. Actual written off accounts have no impact on bad debt expense and therefore no impact on net income.
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The Wells Corporation ends Year 4 with accounts receivable of $540,000 and credit sales for the year of $1.3 million. The ending balance in allowance for doubtful accounts is a $5,000 debit balance as a result of accounts being written off during the year. The company has a choice between estimating bad debts as 4% of outstanding receivables or 3% of current sales. Which of the following statements is true?
If the company uses the percent of sales method, bad debt expense will be $39K ($1.3M x 3%). If it uses the ending receivables method, bad debt expense will be $26,600 ($540K x 4% + $5K debit balance). Thus under the percent of sales method, bad debt expense will be $12,400 higher and net income will be lower by that amount.
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At the beginning of Year 4, Omar Company had a credit balance of $150,000 in its allowance for doubtful accounts. Based on past experience, Omar expects 2% of its credit sales to become uncollectible. During Year 4, Omar wrote off $75,000 in uncollectible accounts and made credit sales of $2 million. What amount should Omar report in its allowance for doubtful accounts at the end of Year 4?
The ending balance in allowance for doubtful accounts is calculated by taking the beginning balance of $150K + $40K for current year bad debt ($2M in credit sales x 2%) - $75K for accounts written off.
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Which of the following statements correctly describes the proper accounting treatment for nonmonetary exchanges that are deemed to have commercial substance?
For nonmonetary exchanges with commercial substance, gains and losses are recognized immediately.
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There was a nonmonetary exchange of assets reported. Under which following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered? When:
When a transaction involving a nonmonetary exchange lacks commercial substance, the reported amount of the nonmonetary asset surrendered is used to record the newly acquired asset. If there is commercial substance, the fair value approach is used.
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A collection of a previously written off A/R would increase the ______ account.
The allowance for doubtful accounts account is an account essentially used for a budget of funds expected to not be received.
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