 In this presentation, we will take a look at multiple choice questions related to receivables. First question. Which practice reports estimated bad debts expense during the period the sales are recorded? A. Bad debt method B. Accounts receivable aging C. Adjusting bad debt expense method D. Allowance method E. Cash basis method So we'll go through these again, go through the process of elimination. Which practice reports estimated bad debts expense during the period the sales are recorded? A. Bad debt method I'll keep that one for now. B. Accounts receivable aging That's not really a method. That's more like a report that we might use. So I'm going to say that one's not. C. Adjusting bad debt expense method D. Allowance method E. Cash basis method That's a method, but it's a method for normal accrual versus a cash basis method. So it's not a method for this particular item that we're looking at for bad debts. We're left then with A, C, and D. Let's read through this again. Which practice reports estimated bad debts expense during the period the sales are recorded? So A says bad debts method. Now if you look through this, you probably might say, hmm, that doesn't really ring a bell. It sounds like it could be a method. Bad debt method. But it's not really a method, actually. I don't think that's one of the methods. The two methods we should kind of know if we're going through a chapter, basically, or review of material on this type of stuff are going to be the direct write-off method and the allowance method. So that doesn't look like it. C says the adjusted bad debt expense method. Adjusting bad debt expense method. And again, that's kind of what we're doing, but it's not really the name of the method, typically. So that's not it. D, I know sounds familiar. That's the allowance method. And if we go through these questions or these types of questions, we should be able to recognize that the allowance method is going to be the preferred method. And that should, so the answer is often going to be the allowance method when the question is, you know, basically what's the method we should be using? The allowance method. Now why? Because this is basically explaining that the matching principle up here, that we're going to record the expense at the same time the sale was made. That's what the allowance method attempts to do or one of the things it attempts to do, which is to try to match up the bad debt expense that we have in the same time period that the related sales are made. Next question. The entry to record the write-off against the allowance account results in. So let's read through that one more time. The entry to record write-off against the allowance account results in. So we're recording a write-off, A, an increase in the expenses, B, a reduction in current assets, C, a reduction in net income, D, an increase in equity, and E, no effect on the expenses. So let's read through that one more time. The entry to record the write-off against the allowance account results in. Now anytime it says there's an entry, like we're talking about a journal entry, even if it doesn't give us a number as we don't have here, it's best to write down the entry. What are the debits and credits? What are the accounts that would be affected if we want to make up a number to write the number in for the debit and or credit? That's fine too. So if we're going to record an entry to write off the allowance, typically what we're saying is that an AR and accounts receivable became uncollectible and we're going to write it off. Accounts receivables and assets, and so we're going to write it off by doing the opposite thing to it to make it go down, have a debit balance. We're going to credit it. So I'm going to credit the accounts receivable by whatever, the $100. And then we're going to debit something, and what are we going to debit? Now under the direct write-off method would be bad debt. Under the allowance method, it would be allowance for doubtful accounts and for doubtful, I won't write this out because that's looking terrible already. But that's the debit. So here's the debit. So here's the debit and the credit in any case, the allowance for doubtful accounts and the credit to accounts receivable. So once we know that, this will be a lot easier hopefully to think through. So an increase in the expenses. Now note here that neither of these are expense type or income statement accounts here. They're not income statement accounts at all. They're really right next to each other. They're both asset accounts, one asset going up, the other asset going down. So when we look at the accounting equation, assets equal liabilities plus equity. We know that one asset went up and the other asset went down. And so there's no net effect when we write it off under the allowance method unlike the direct write-off method. So B says reduce current assets. And again, you might think that would seem reasonable because we're reducing accounts receivable, but we're also increasing or we're also recording the other side to the allowance method, which is a contra asset account where we're reducing the accounts receivable and we're reducing the allowance for doubtful accounts. We're reducing the debit balance account of accounts receivable and reducing the credit balance account of allowance in any case where we're having the assets go up and down. No net effect. C says a reduction in net income. And again, there's no, there's no effect on that income. And note here too that if we looked at C and A and increasing the expenses in a reduction in net income, they seem similar because if we were to write off the expense, the bad debt expense, then it would be increasing the expenses, which would reduce net income. And because they cannot both be correct, we're going to say those two actually kind of cancel each other out. C says no increase in equity and increase in equity. And again, if there's no, there's no increase in equity because the accounting equation effect is really no, there's no effect on it. And then E says no effect on expenses. So he's got to be the correct answer. And that's really the point here. When we write off the bad debt expense using the allowance method, we're not recording anything to the income statement and therefore nothing to expenses at that point in time. So correct answer. The entry to record the write off against the allowance accounts results in E, no effect on the expenses. Next question. Honoring a note receivable indicates that the maker has A, signed the note, B, made a promise should be C, guaranteed to pay, D, notarized the note signing, E, paid interest and principal. So let's go through this again, process of elimination. When a note receivable indicates that the maker has signed the note, you might think if you don't really know what the honoring process is, you might say, that kind of seals the deal of signing it. So I'll keep that for now. B says made a promise. And that's kind of what the note is doing. C says guaranteed to pay. And again, that's kind of what the note is doing. D says notarized the note. That would be someone else kind of usually a third party that would give some more verification as to the formal process and the signature process of the note. It's actually not, we'll cross that one out, it's not D. And E says paid interest and principal. And so that happens at the end of the note. So all of these things kind of take place in the note. If we don't really know what honoring means, we might say, hmm, all of those look pretty good. Just one more time, honoring a note receivable indicates that the maker has. Now the honoring of it doesn't have to do with the promising side of it at the making of the note. It has to do with what happens at the end. And we might be able to use the process of elimination to get to that, right? The honoring the note has to do with signing the note to make a promise, made a promise, and guaranteed to pay. Now all of those things happen basically when we make the note. So we might say, you know, if all of those things happen when we make the note, maybe they can kind of cancel each other out. Whereas this one happens at the end of the note when we pay the note. So we might be able to say, well, you know, maybe these are kind of all the same type of thing happening at the signing. And therefore E through the processes of elimination might be more correct in that sense. And E is correct because of the fact that honoring it means that we have made a promise at the beginning. E is the promise. When we sign the note, when we make a promise, that's what the note is basically doing, a guaranteed payment, a promise to pay in the future. E means we have honored that promise by typically paying the principal and interest that we promised to pay. So E is going to be the correct answer. Once again, honoring a note receivable indicates that the maker has E paid interest and principal.