Activation Exercise 9-1: Allowance Method

Terms and Definitions

Revenues are increases in owner's equity that a business generates by selling goods or providing services. When a business agrees to accept payment in the future for goods and services provided today, the claim against the customer is called an - Select your answer -account payableaccount receivableCorrect 1 of Item 1 and is recorded as a(n) - Select your answer -assetliabilityequityCorrect 2 of Item 1 on the balance sheet.

Understanding the Business Transaction

No matter how careful a company is in granting credit, some customers will not pay their accounts. That is, some accounts receivable will become uncollectible. The specific accounts receivable that will become uncollectible are - Select your answer -knownunknownCorrect 1 of Item 2 when credit is granted. At the end of the accounting period, the company must estimate the - Select your answer -total amount of accounts receivablespecific accounts receivableCorrect 2 of Item 2 that will become uncollectible.

Recording in the Accounting System

The operating expense used to record uncollectible accounts receivable is called - Select your answer -accounts receivable expensebad debt expenserevenue expenseCorrect 1 of Item 3.

The allowance method estimates the uncollectible accounts receivable at the end of the period, and records Bad Debt Expense - Select your answer -when a specific accounts receivable is determined to be worthlessas an adjusting entry at the end of the accounting periodCorrect 2 of Item 3. On the date the bad debt expense is recorded, the company - Select your answer -does not knowknowsCorrect 3 of Item 3 which customer accounts will be uncollectible. Therefore, the specific customer accounts - Select your answer -cancannotCorrect 4 of Item 3 be decreased. The estimate of uncollectible accounts is recorded as a - Select your answer -debitcreditCorrect 5 of Item 3 to Allowance for Doubtful Accounts.

Teddy Company began operations on January 1, 20X1. The company has an accounts receivable balance of $377,100 at the end of its accounting period on December 31, 20X1. This balance includes some past due accounts. Based on industry averages, Teddy estimates that $15,830 of the December 31 accounts receivable will become uncollectible. At this time, Teddy Company - Select your answer -knowsdoes not knowCorrect 6 of Item 3 which customer accounts will become uncollectible.

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The adjusting entry that Teddy Company should record for bad debt expense on December 31, 20X1 is:

12/31/X1