ACC 250 · Chapter 8 Review Name: ______________________

ACC 250 · Introduction to Financial Accounting

Chapter 8 — Review Questions

Six questions on selling on credit, net accounts receivable, the two ways to account for bad debts and the percentage of credit sales method,
then the lecture’s credit sale, bad debt estimate and write-off to record, and what they add up to.

Fall 2026

Selling on credit

Q1

A store that used to sell only for cash starts selling to customers on account, with 30 days to pay. Which statement is NOT correct?

  1. AIts sales volume may increase.✘
  2. BIt takes on the cost of collecting from customers and keeping their accounts.✘
  3. CSome customers may never pay, so it faces bad debt losses.✘
  4. DIt records the revenue from a credit sale only when the customer pays.✔
  5. EThe cash from a credit sale arrives later than the revenue is recorded.✘

D. Revenue is recognized when the goods are delivered, regardless of when cash is received, so a credit sale is revenue on the day of the sale: Accounts Receivable goes up, not Cash. A, B, C and E are the benefits and costs of selling on credit; E is the delay that D gets backwards.

Net accounts receivable

Q2

At December 31 a company has Accounts Receivable of $48,000 and an Allowance for Doubtful Accounts of $3,000. Its Bad Debt Expense for the year was $2,000. What Net Accounts Receivable does it report?

  1. A$43,000✘
  2. B$45,000✔
  3. C$46,000✘
  4. D$48,000✘
  5. E$51,000✘

B. Net A/R is the amount the company expects to collect: Gross A/R less the Allowance, $48,000 − $3,000 = $45,000. Bad Debt Expense is the year’s income statement figure, so subtracting it as well (A) or instead (C) mixes the two statements.

Direct write-off method

Q3

A company that uses the direct write-off method sold $2,000 of goods on account in December 2026. In March 2027 the customer declared bankruptcy, and the company wrote off the $2,000. Which statement is correct?

  1. AThe expense is recorded in March 2027, a later year than the revenue, so the method breaks the matching principle and is not allowed under GAAP.✔
  2. BThe expense is recorded in December 2026, the same year as the revenue, so the method follows the matching principle.✘
  3. CThe expense is recorded in March 2027, and GAAP requires the method because it records only actual losses.✘
  4. DNo expense is ever recorded; the write-off only reduces Accounts Receivable.✘
  5. EThe expense is estimated at the end of December 2026 and credited to the Allowance for Doubtful Accounts.✘

A. Direct write-off records Bad Debt Expense only when a specific account is found uncollectible, so 2026 shows the revenue with no expense and 2027 shows the expense with no revenue. That breaks the matching principle, so GAAP does not allow it for financial reporting; it is used for tax. E describes the allowance method.

Allowance for Doubtful Accounts

Q4

Which statement describes the Allowance for Doubtful Accounts?

  1. AAn expense account reported on the income statement, with a debit balance.✘
  2. BA liability, because the company may have to absorb the loss.✘
  3. CA contra-asset account reported on the balance sheet, with a credit balance.✔
  4. DCash the company sets aside to cover customers who do not pay.✘
  5. EAn asset account with a debit balance, added to Accounts Receivable.✘

C. The allowance is the estimated amount of uncollectible A/R. It sits under Accounts Receivable with a credit balance and is subtracted from it: Net A/R = Gross A/R − ADA. The expense in A is Bad Debt Expense, a different account, and no cash is set aside anywhere (D).

Percentage of credit sales

Q5

Ridgeline Supply has lost 2% of its credit sales to bad debts in past years. In March it made $250,000 of credit sales and $40,000 of cash sales. The Allowance for Doubtful Accounts had a $1,500 credit balance at the start of March, and $1,000 of accounts were written off during March. Using the percentage of credit sales method, what is Bad Debt Expense for March?

  1. A$1,000✘
  2. B$3,500✘
  3. C$5,000✔
  4. D$5,500✘
  5. E$5,800✘

C. The method multiplies the historical percentage by the period’s credit sales: $250,000 × 2% = $5,000. Including the cash sales gives $5,800 (E), and the allowance’s balance and the write-offs do not enter the estimate.

Where bad debt expense lands

Q6

A company records $4,000 more Bad Debt Expense this year, as part of its SG&A expenses. Which amount does NOT change?

  1. AOperating income✘
  2. BNet income✘
  3. CRetained Earnings✘
  4. DNet Accounts Receivable✘
  5. EGross profit✔

E. Bad Debt Expense sits in SG&A, below gross profit, so gross profit is untouched. It lowers operating income and net income, and so Retained Earnings; the credit to the allowance lowers Net A/R by the same $4,000.

Questions 7–13 · A credit sale, the estimate, a write-off

Set-up

A company uses the allowance method and estimates bad debts at 5% of credit sales. It had no Accounts Receivable and no Allowance for Doubtful Accounts before the three transactions below, and nothing else happened. Questions 7 to 10 record them, and Questions 11 to 13 add them up.

  1. AOn January 1 the company sold goods to customers on account for $10,000. The goods had cost the company $6,000.
  2. BOn January 31, the end of the month, the company records an adjusting entry for its estimate of bad debts, 5% of January’s $10,000 of credit sales.
  3. COn February 10 the company decided that $300 owed by one customer will never be collected, and wrote off that customer’s account.

Questions 7–10 · The accounts

Set-up

Write the number of the account that belongs on each line of the journal entry. Every entry draws on the ten accounts below, and an account may be used more than once, or not at all.

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Accumulated Depreciation
  4. 4Allowance for Doubtful Accounts
  5. 5Bad Debt Expense
  6. 6Cash
  7. 7Cost of Goods Sold
  8. 8Inventory
  9. 9Retained Earnings
  10. 10Sales Revenue

Q7 · Transaction A — Credit sale — the revenue

Q7

Transaction A. On January 1 the company sold goods to customers on account for $10,000. The goods had cost the company $6,000. Record the selling price of transaction A.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Accumulated Depreciation
  4. 4Allowance for Doubtful Accounts
  5. 5Bad Debt Expense
  6. 6Cash
  7. 7Cost of Goods Sold
  8. 8Inventory
  9. 9Retained Earnings
  10. 10Sales Revenue
AccountDebitCredit
2. Accounts Receivable (+A)10,000
10. Sales Revenue (+R, +SHE)10,000

2, then 10. The goods were delivered, so the $10,000 is revenue now. The customers have not paid, so Accounts Receivable records what they owe; Cash (6) is the trap.

Q8 · Transaction A — Credit sale — the cost

Q8

Transaction A. On January 1 the company sold goods to customers on account for $10,000. The goods had cost the company $6,000. Record the cost of the goods sold in transaction A.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Accumulated Depreciation
  4. 4Allowance for Doubtful Accounts
  5. 5Bad Debt Expense
  6. 6Cash
  7. 7Cost of Goods Sold
  8. 8Inventory
  9. 9Retained Earnings
  10. 10Sales Revenue
AccountDebitCredit
7. Cost of Goods Sold (+E, −SHE)6,000
8. Inventory (−A)6,000

7, then 8. The goods that left cost $6,000, so Inventory goes down by their cost and Cost of Goods Sold goes up by the same amount, as in Chapter 6.

Q9 · Transaction B — Bad debts estimated

Q9

Transaction B. On January 31, the end of the month, the company records an adjusting entry for its estimate of bad debts, 5% of January’s $10,000 of credit sales. Record the adjusting entry on January 31.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Accumulated Depreciation
  4. 4Allowance for Doubtful Accounts
  5. 5Bad Debt Expense
  6. 6Cash
  7. 7Cost of Goods Sold
  8. 8Inventory
  9. 9Retained Earnings
  10. 10Sales Revenue
AccountDebitCredit
5. Bad Debt Expense (+E, −SHE)500
4. Allowance for Doubtful Accounts (+xA, −A)500

5, then 4. $10,000 × 5% = $500. No customer has failed to pay yet, so the credit goes to the allowance, not to Accounts Receivable; Accumulated Depreciation (3) is the other contra-asset in the list.

The point Bad debt expense is recorded in January, with the sale, before anyone knows which customer will not pay.

Q10 · Transaction C — Account written off

Q10

Transaction C. On February 10 the company decided that $300 owed by one customer will never be collected, and wrote off that customer’s account. Record transaction C.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Accumulated Depreciation
  4. 4Allowance for Doubtful Accounts
  5. 5Bad Debt Expense
  6. 6Cash
  7. 7Cost of Goods Sold
  8. 8Inventory
  9. 9Retained Earnings
  10. 10Sales Revenue
AccountDebitCredit
4. Allowance for Doubtful Accounts (−xA, +A)300
2. Accounts Receivable (−A)300

4, then 2. The customer’s $300 comes out of Accounts Receivable, and the allowance set up in B absorbs it. No expense is recorded: it was recognized in January.

Q11 · January net income

Q11

What is the company’s net income for January?

The three transactions

  • A — Jan 1: sold goods that cost $6,000 for $10,000 on account.
  • B — Jan 31: adjusting entry for bad debts at 5% of the $10,000 of credit sales.
  • C — Feb 10: wrote off a $300 customer account.

Net income — January

Amount: $3500

$3,500. Sales Revenue $10,000 − Cost of Goods Sold $6,000 − Bad Debt Expense $500 = $3,500. The February write-off is not an expense.

Q12 · The allowance after the write-off

Q12

What is the balance of the allowance after transaction C?

The three transactions

  • A — Jan 1: sold goods that cost $6,000 for $10,000 on account.
  • B — Jan 31: adjusting entry for bad debts at 5% of the $10,000 of credit sales.
  • C — Feb 10: wrote off a $300 customer account.

Allowance for Doubtful Accounts — balance

Amount: $200

$200. The allowance went up by B’s $500 and down by C’s $300 write-off: $500 − $300 = $200, a credit balance.

Q13 · Net A/R after the write-off

Q13

What is Net Accounts Receivable after transaction C?

The three transactions

  • A — Jan 1: sold goods that cost $6,000 for $10,000 on account.
  • B — Jan 31: adjusting entry for bad debts at 5% of the $10,000 of credit sales.
  • C — Feb 10: wrote off a $300 customer account.

Net Accounts Receivable

Amount: $9500

$9,500. Gross A/R is $10,000 − $300 = $9,700, less the $200 allowance: $9,500. That is the same Net A/R as on January 31, $10,000 − $500.

The point A write-off lowers Accounts Receivable and the allowance by the same amount, so Net A/R does not change and no expense is recorded.
click right / ← → / Space · Ctrl+← → jumps a whole slide · F fullscreen · N hides the rail · K answer key for printing · Ctrl+P two-page handout