Why is Bad Debt Expense an estimate?Multiple choice question.The revenue recognition principle requires sales on account be recorded when the amounts are collected.Bad Debt Expense is not an estimate. It is recorded when a customer's Accounts Receivable is deemed uncollectible.GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay.
Question
Why is Bad Debt Expense an estimate?Multiple choice question.The revenue recognition principle requires sales on account be recorded when the amounts are collected.Bad Debt Expense is not an estimate. It is recorded when a customer's Accounts Receivable is deemed uncollectible.GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay.
Solution
The correct answer is: "GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay."
This is because the Generally Accepted Accounting Principles (GAAP) require that expenses be matched with revenues in the period they are incurred, not when payment is made or received. This is known as the matching principle. Therefore, when a company makes a credit sale, they must estimate the amount that will not be collected and record it as Bad Debt Expense in the same period as the sale. This is done before knowing specifically which customers will not pay, making Bad Debt Expense an estimate.
Similar Questions
In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals ______.Multiple choice question.$0, because Bad Debt Expense is recorded later when the customers do not pay$760$750$160
True or false: GAAP require end-of-period adjustments for the estimated bad debts in the period of the credit sale even though the specific, non-paying customers have not yet been identified.
The following selected amounts are reported on the year-end unadjusted trial balance report for a company that uses the percent of sales method to determine its bad debts expense. Accounts receivable $ 440,000 DebitNet Sales 2,150,000 Credit All sales are made on credit. Based on past experience, the company estimates 3.0% of sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?Multiple ChoiceDebit Bad Debts Expense $63,200; credit Allowance for Doubtful Accounts $63,200.Debit Bad Debts Expense $13,200; credit Allowance for Doubtful Accounts $13,200.Debit Bad Debts Expense $64,500; credit Allowance for Doubtful Accounts $64,500.Debit Bad Debts Expense $65,800; credit Allowance for Doubtful Accounts $65,800.Debit Bad Debts Expense $14,500; credit Allowance for Doubtful Accounts $14,500.
The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?Multiple choice question.The period after credit sales are madeThe same period as credit salesThe period before credit sales are made
Bad Debt Expense ______. (Check all that apply.)Multiple select question.is a cost of extending credit to customersis based on actual events and does not require estimationis an estimateshould exceed the revenue generated from incurring the cost
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