ABA Accounts Payable & Receivable Management 3

Question 1

Which entry correctly records the write-off of a $500 uncollectible account under the allowance method?

Accepted Answer

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

Answer

Under the allowance method, writing off a specific account debits Allowance for Doubtful Accounts and credits Accounts Receivable—bad debt expense was already recorded when the allowance was established.

Question 2

How does a Notes Receivable differ from Accounts Receivable?

Accepted Answer

Notes receivable are supported by a formal written promise and typically bear interest

Answer

Notes Receivable involve a formal promissory note signed by the debtor and usually carry an interest rate, whereas Accounts Receivable arise from ordinary trade credit with no separate interest agreement.

Question 3

A company's Days Payable Outstanding (DPO) increases significantly. Which interpretation is most accurate?

Accepted Answer

The company is taking longer to pay its suppliers

Answer

DPO measures the average number of days a company takes to pay invoices; a rising DPO means the company is extending the time before paying suppliers.

Question 4

When a previously written-off account is unexpectedly collected under the allowance method, the first step is to:

Accepted Answer

Reinstate the receivable by reversing the original write-off entry

Answer

Best practice requires first reinstating the receivable (debit AR, credit Allowance) and then recording the cash receipt (debit Cash, credit AR), providing a full audit trail.

Question 5

Which method of estimating bad debt expense is based on the balance in Accounts Receivable categorized by age?

Accepted Answer

Aging-of-receivables method

Answer

The aging-of-receivables method applies different uncollectibility percentages to AR grouped by how long the balances have been outstanding, producing a target balance for the allowance account.

(ABA) Accredited Business Accountant Practice Test

(ABA) Accredited Business Accountant Practice Test

ABA Accounts Payable & Receivable Management 3