ABA ABA Credit & Collections Management 2 — Questions and Answers
Question 1: Under the allowance method, how is bad debt expense recorded?
- Debit Bad Debt Expense, Credit Accounts Receivable
- Debit Allowance for Doubtful Accounts, Credit Bad Debt Expense
- Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts (Correct answer)
- Debit Accounts Receivable, Credit Bad Debt Expense
Correct answer: Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
Under the allowance method, bad debt expense is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.
Question 2: What is a promissory note in credit management?
- A customer's verbal agreement to pay
- A written promise to pay a specific amount at a specific time (Correct answer)
- A credit card authorization form
- A bank statement showing past payments
Correct answer: A written promise to pay a specific amount at a specific time
A promissory note is a written, legally binding agreement in which one party promises to pay a specific amount to another party at a defined future date.
Question 3: Which collection letter sequence is typically followed when a customer becomes delinquent?
- Legal action, final notice, reminder
- Reminder, demand letter, final notice, legal action (Correct answer)
- Final notice, reminder, demand letter
- Legal action, reminder, demand letter
Correct answer: Reminder, demand letter, final notice, legal action
The standard collection sequence progresses from a gentle reminder to a demand letter, then a final notice, and ultimately legal action if payment is not received.
Question 4: What is the 'net 30' payment term?
- Payment is due 30 days before the invoice date
- Payment is due within 30 days of the invoice date (Correct answer)
- A 30% discount is applied to the invoice
- The customer has 30 months to pay
Correct answer: Payment is due within 30 days of the invoice date
'Net 30' means the full invoice amount is due within 30 days of the invoice date with no discount applied.
Question 5: What does '2/10 net 30' mean on an invoice?
- Pay 2% of the invoice within 10 days, rest due in 30 days
- 2% discount if paid within 10 days, full amount due in 30 days (Correct answer)
- Pay in 10 equal installments over 30 days
- A 20% surcharge applies after 30 days
Correct answer: 2% discount if paid within 10 days, full amount due in 30 days
'2/10 net 30' means the customer can take a 2% discount if they pay within 10 days; otherwise, the full amount is due within 30 days.
Question 6: When should a business write off an uncollectible account under the direct write-off method?
- At the end of each accounting period as an estimate
- When the account is determined to be uncollectible (Correct answer)
- When the customer files for bankruptcy only
- At the beginning of the fiscal year
Correct answer: When the account is determined to be uncollectible
Under the direct write-off method, an account is written off when it is specifically determined to be uncollectible, not based on estimates.
ABA ABA Credit & Collections Management 2
Under the allowance method, how is bad debt expense recorded?