Bad debt expense is reported on the income statement as

1. Bad Debts Expense is reported on the income statement as A. Part of cost of goods sold. B. Reducing gross profit. C. An operating expense. D. A contra-revenue account. 2. When the allowance method of accounting for uncollectible accounts is used, Bad Debts Expense is recorded a. In the year after the credit sale is made. B. In the same year as the credit sale. C. As each credit sale is made. D. When an account is written off as uncollectible. 3. If a company fails to record estimated bad debts expense, A. Cash realizable value is understated. B. Expenses are understated. C. Revenues are understated. D. Receivables are understated. 4. A gain or loss on disposal of a plant asset is determined by comparing the A. Replacement cost of the asset with the asset’s original cost. b. Book value of the asset with the asset’s original cost. C. Original cost of the asset with the proceeds received from its sale. D. Book value of the asset with the proceeds received from its sale. 5. The book value of a plant asset is the difference between the A. Replacement cost of the asset and its historical cost. B. Cost of the asset and the amount of depreciation expense for the year. C. Cost of the asset and the accumulated depreciation to date. D. Proceeds received from the sale of the asset and its original cost

Answer

1. Option C: An operating expense Though bad-debts arises as a result non-receipt of of sale made, it is not a contra-revenue account. It is normally considered as an expense under selling and administrative expenses. 2. Option B: In the same year as the credit sale. Under allowance method, an estimate of uncollectible amounts for the current year sales is calculated and then provision/allowance is made usually on a percentage of credit sales made. Hence it is recorded as an expense in the same year as the credit sale. The entry is:- Bad-debt expense Dr To Allowance for doubtful debts 3. Option B: Expenses are understated. Bad-debts is an operating expense and hence if it is not recorded, it would be an understatement of expenses. 4. Option D: Book value of the asset with the proceeds received from its sale. If the sale proceeds is more than the book value, there is a gain and if it is lesser than the book value, there is a loss. 5. Option C: Cost of the asset and the accumulated depreciation to date. An asset is depreciated each year for the decrease in its value due to wear and tear over time.

So, the book value at any point of time would be the Original cost of the asset less the depreciation charged till date,i.e, the accumulated depreciation.

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