ACC 201 Learnsmarts Chapter 8

If a company is debiting Interest Receivable and crediting Interest Revenue, what must be the case?

It is the end of the of the accounting period and it is adjusting entry for interest generated but not yet collected.

If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then _____. a. assets, net income, and stockholders' equity are understated by $1,000 b. assets, net income, and stockholders' equity are overstated by $1,000 c. assets are overstated, net income is understated, and stockholders' equity is understated d. liabilities are understated by $1,000, net income is overstated by $1,000, and stockholders' equity is overstated by $1,000

a

On November 1, 2020, ABC, Inc., received a 3-month, $1,500 note receivable with the 8% annual interest and principal to be collected on February 1. What is the amount of interest revenue that should be recorded for the year ended December 31, 2020? Multiple choice question.

$20

Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer?

Additional sales revenue

Which method of allowing for estimated uncollectible accounts is generally more accurate? Multiple choice question.

Aging of accounts receivable method

What effect does the collection of a note receivable, excluding interest, have on the accounting equation? a. Total assets remain the same b. Assets are reduced and stockholders' equity is reduced c. Assets are increased and stockholders' equity is increased

a

The allowance method requires that _____. (Check all that apply.) a. allowance for doubtful accounts be netted against accounts receivable b. bad debt expense be recorded in the period a specific customer's account is written off (removed) c. bad debt expense be recorded in the same period as the related credit sales

a & c

The entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a _____. (Check all that apply.) a. debit to Notes Receivable of $1000 b. credit to Interest Revenue of $1,000 c. credit to Cash of $1,000 d. debit to Cash of $1,000 e. credit to Notes Receivable of $1,000

a & c

The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to ______.

bad debt expense

The days to collect ratio is computed as ______

365 divided by the Receivable Turnover Ratio

Which of the following is an interest-bearing current asset?

Notes Receivable due in 3 months

What is the effect on the accounting equation if a company does not write off specific, non-paying customers' accounts receivable?

There is no effect.

By comparing the number of days to collect with the length of the credit policy, companies can determine whether its customers ______.

are paying in accordance with the credit policy

The adjusting entry to record the allowance for doubtful accounts causes total ______. (Check all that apply.)

stockholders' equity to decrease assets to decrease

Why is Allowance for Doubtful Accounts credited, instead of Accounts Receivable, when recording the adjusting entry for bad debts? Multiple choice question.

Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay.

If the Allowance for Doubtful Accounts has a credit balance prior to recording the adjusting entry for the current period's uncollectible accounts, then the ______.

estimated amount of uncollectibles was greater than the amounts actually written off

he accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the ______.

expense recognition (matching) principle

Collection of a previously written-off account is called a(n) _____.

recovery

Based on an aging of accounts receivables, management assigned 1% to the $100,000 of receivables 0-30 days outstanding, 5% to the $10,000 receivables 31-60 days and 20% to the $1,000 of receivables over 60 days. After making the adjusting entry the balance in the Allowance for Doubtful Accounts will equal _____.

(1% x $100,000) + (5% x $10,000) + (20% x $1,000) = $1,700

Sales on account ______. (Check all that apply.)

-increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement -increase assets and stockholders' equity

Which of the following is contra-asset account?

Allowance for Doubtful Accounts

What is the entry a company records at the time it issues a $1,000, 6% note to one of its employees that the employee needs to repay in 6 months? (Select all that apply.)

Debit Notes Receivable Credit Cash

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with _____. a. credits b. debits

a

The allowance method is a method of accounting that _____ net accounts receivable (as well as net income) for estimated bad debts. a. decreases b. increases

a

What effect does the adjusting entry for interest earned but not yet received have on the accounting equation? a. it results in an increase in assets and stockholders' equity b. It results in an increase in assets and liabilities c. It results in an increase in assets and decrease in stockholders' equity

a

The 3 variables needed to calculate interests are the _____. (Check all that apply.) a. time period covered in the interest calculation b. principal c. agent d. annual interest rate e. interest payment

a, b, & d

A(n) _____ of accounts receivables method is based on the amount of days the receivables have been unpaid. When determining the desired amount of Allowance for Doubtful Accounts, the older receivables are assigned a higher percent than newer ones.

aging

True or False: notes receivable have the same characteristics as accounts receivable and are interchangeable. a. true b. false

b

Net sales are $730,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the days to collect. a. 23 days b. 43 days c. 30 days d. 32 days

c

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a credit balance when the amount of write offs recorded during the period is _____ the amount allowed in the prior accounting period. a. greater than b. same as c. less than

c

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______.

credit to Allowance for Doubtful Accounts of $1,000 debit to Bad Debt Expense of $1,000

The Allowance for Doubtful Accounts, a contra-asset account, is ______ when specific uncollectible accounts are written-off.

debited

A high receivables turnover ratio is a sign of a company's ______. Multiple choice question.

effectiveness in granting and collecting credit

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

less than

When accounting for accounts receivable, a primary objective is to ______.

not overstate assets and stockholders' equity by the estimated amount of bad debt

The 3 variables needed to calculate interest are the ______.

principal time period covered in the interest calculation annual interest rate

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______. (Check all that apply.)

Allowance for Doubtful Accounts of $2,050 credit balance Bad Debt Expense of $2,000

When a company receives the interest payment for a note that was issued in mid-November of the prior accounting period, the entry includes a debit to ______.

Cash and credit to Interest Receivable and Interest Revenue

In an aging of accounts receivables, the accounts that are overdue will be assigned ______ percent than accounts that are not yet due.

a higher

Ima Broke is a customer that owes the company for credit sales and has declared bankruptcy. As a result, Ima Broke's subsidiary account receivable will be eliminated when _____. a. a sale is made on account b. a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable c. an adjusting entry is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts

b

Removing an uncollectible account and its corresponding allowance for the accounting records is called _____. a. a write-up b. a write-off c. double entry accounting

b

ABC Corp. received a 3-month, at 8% per year, $1,500 note receivable on November 1. The adjusting entry on December 31 will include a ______. Multiple choice question.

credit to Interest Revenue of $20

The _____ write-off method is not allowed under GAAP.

direct

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause _____. (Check all that apply.) a. sales to increase b. wage expense to increase c. bad debt expense to decrease d. sales to decrease

c & d

Which of the following are advantages of using national credit card? (Check all that apply.) a. no fees other than the cost of bad checks b. allows for an increase in the selling price c. reduction of bad debt expense d. avoid lengthy cash collection periods

c & d

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $11,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of _____. a. $10,000 credit b. $1,000 credit c. $9,000 debit d. $1,000 debit

d

In the 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 _____. a. $160 b. $750 c. $0, because Bad Debt Expense is recorded later when the customers do not pay d. $760

d

Which of the following are disadvantages to extending credit to customers?

Delayed receipts of cash Increased bad debt costs Increased wage costs

True or false: Notes receivable have the same characteristics as accounts receivable and are interchangeable.

False

Allowance for Doubtful Accounts is a _____. a. permanent account so its balance carries forward to the next accounting period b. temporary account so its balance carries forward to the next accounting period c. permanent account so its balance is closed (zeroed out) at the end of the accounting period d. temporary account so its balance is closed (zeroed out) at the end of the accounting period

a

What information is provided by the receivables turnover ratio? (Check all that apply.) a. That a higher ratio means faster (better) turnover b. The average number of days it takes to make a sale on account c. That a higher ratio means slower (worse) turnover d. The number of times receivables turn over during the period

a & d

The objectives when accounting for accounts receivable and bad debts are to _____. (Check all that apply.) a. increase both accounts receivable and net income by the amount of credit sales that are unlikely to be collected as cash b. report accounts receivable net of the amount the company expects to collect (i.e., at the net realizable value) c. match the cost of bad debts to the accounting period in which the related credit sales are made

b & c

By comparing the number of days to collect with the length of the credit policy, companies can infer that customers _____ if the days to collect is high. (Select all that apply.) a. really enjoy the product or service b. are more likely to default c. are less likely to default d. may be dissatisfied with the product or service

b & d

ABC Corp. received a 2-month, 8% per year, $1,500 note receivable on December 1. The adjusting entry on December 31 will include a _____. a. credit to Interest Receivable of $20 b. credit to Interest Revenue of $120 c. debit to Interest Receivable of $10 d. debit to Interest Revenue of $10

c

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take? a. increase Bad Debt Expense b. Nothing, as Bad Debt Expense has already been recorded c. Write off the uncollectible account and its corresponding allowance from the accounting records

c

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense? a. debit Bad Debt Expense and credit Sales Revenue b. debit Allowance for Bad Debt Expense and credit Bad Debt Expense c. debit Bad Debt Expense and credit Accounts Receivable d. debit Bad Debt Expense and credit Allowance for Doubtful Accounts

d

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a debit balance when the amount of write offs recorded during the period is ______ the amount estimated to uncollectible in the prior accounting period.

greater than

Bad Debt Expense ______. (Check all that apply.)

is an estimate is a cost of extending credit to customers

The 2 steps required using the allowance method, are to _____. (Select the 2 that apply.) a. later make an end-of-period adjustment to record the estimated bad debts b. later write-off specific customer balances when they are known to be uncollectible c. first make an end-of-period adjustment to record the estimated bad debts d. first write-off specific customer balances

b & c

The correct journal entry for the collection of a note receivable includes a _____. (Select all that apply.) a. debit to Notes Payable b. credit to Cash c. credit to Notes Receivable d. credit to Notes Payable e. debit to Cash f. debit to Notes Receivable

c & e

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

$100 less than

When accounting for accounts receivable and bad debts, the objectives are to ______. (Check all that apply.)

- match the cost of bad debts to the accounting period in which the related credit sales are made - report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect.

Place the events in proper sequence putting the first step on top for a 2-year note stablished in November that pays interest annually. 1. debit Notes Receivable and credit Cash 2. debit Cash and credit Interest Receivable 3. debit Cash and credit Notes Receivable, Interest Revenue, and Interest Receivable 4. Debit Interest Receivable and credit Interest Revenue

1, 4, 2, 3

Rank companies A-C based on how favorable their receivables turnover ratio is (from least favorable on the top to most favorable). (Assume the companies have similar credit terms.) Company B: 5.6 times Company A: 3.4 times Company C: 2.4 times

1. Company C 2. Company A 3. Company B

Which of the following is a permanent account whereby the ending balance of the prior accounting period equals its beginning balance of the next.

Allowance for Doubtful Accounts

Murphy's Paw, Inc. has credit sales of $100,000 for the month ended May 31. The Accounts Receivable balance is $8,000. Management estimates that 1% of its credit sales will be uncollectible. This adjusting entry includes a debit to ______.

Bad Debt Expense and credit to Allowance for Doubtful Accounts for $1,000

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______. (Select all that apply.)

Bad Debt Expense of $950 Allowance for Doubtful Accounts of $1,000

Why would a company debit Interest Receivable?

It generated interest on its notes receivable which will be collected in a later accounting period.

What is occurring if a company is debiting Cash and crediting Notes Receivable?

It is collecting the principal on amounts lent earlier

Which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance?

Percentage of credit sales method

Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order of occurrence from top to bottom.

Step 1: Accounts receivable are debited in the period the revenue is recognized Step2: bad debts expenses is estimated and recorded with an adjusting entry Step 3 :Specific customer balance are written off

Which account is used to reduce assets for the amount of estimated bad debts?

The contra-asset account called Allowance for Doubtful Accounts

Notes Receivable differ from Accounts Receivable in that Notes Receivable _____. a. generally charge the borrowers interest from the day they are signed to the day they are collected b. are noncurrent assets c. do not have to be created for every new transaction, so they are used more frequently

a

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a _____. (Check all that apply.) a. debit to Bad Debt Expense b. credit to Allowance for Doubtful Accounts c. credit to Accounts Receivable d. debit to Accounts Receivable e. credit to Bad Debt Expense

a & b

Delectables, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show _____. (Select all that apply.) a. Bad Debt Expense of $950 b.Allowance for Doubtful Accounts of $1,050 c. Allowance for Doubtful accounts of $950 d. Allowance for Doubtful Accounts of $1,000 e. Bad Debt Expense of $1,000

a & d

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is _____. (Select all that apply.) a. the company would lose track of which customers still owe money b. subsidiary accounts are unable to be reduced c. the write-offs were previously recorded so customer's accounts would be reduced twice d. the amounts are estimates and no one knows which particular customers will not pay

a & d

The entry to record the write-off of a specific customer's account requires a _____. (Select all that apply.) a. debit to Allowance for Doubtful Accounts b. credit to Allowance for Doubtful Accounts c. credit to Bad Debt Expense d. debit to Bad Debt Expense e. credit to Accounts Receivable

a & e

Which of the following are similarities between a 6-month note receivable and an account receivable? They both _____. (Select all that apply.) a. have the risk of not being collected b. are revenues c. are formal written contracts d. are interest bearing e. are current assets f. are current liabilities

a & e

The adjusting entry to record the allowance for doubtful accounts includes a _____. (Check all that apply.) a. credit to Allowance for Doubtful Accounts b. credit to Accounts Receivable c. debit to Sales Revenue d. debit to Allowance for Doubtful Accounts e. debit to Accounts Receivable f. credit to Bad Debt Expense g. credit to Sales Revenue h. debit to Bad Debt Expense

a & h

The challenge businesses face when estimating the allowance for previously recorded sales is that ______.

at the time of the sale, it is not known which particular customer will be a "bad" customer

ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy? a. There are no downsides as the credit card company bears all risks and costs b. Credit card companies charge fees reduce profits c. The company has to wait 30 days to collect cash from the credit card companies

b

An arrangement where receivables are sold to another company for immediate cash is called _____. a. depreciating b. factoring c. renting d. leasing

b

The challenge businesses face when estimating the allowance for previously recorded sales is that _____. a. past default rates are not a good predictor of future default rates b. at the time of the sale, it is not known which particular customer will be a "bad" customer c. in bad economic times, fewer customers will have problems with their payments

b

The entry to record the issuance of a note receivable is _____. a. debit Cash and Interest Receivable and credit Notes Receivable b. debit Notes Receivable and credit Cash c. debit Cash and credit Notes Receivable and Interest Revenue d. debit Cash and credit Notes Receivable e. debit Notes Receivable and credit Cash and Interest Revenue

b

True or false: Allowance for Doubtful Accounts is used for Accounts Receivable but not Notes Receivable. a. true b. false

b

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. a. false b. true

b

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the adjustment, Bad Debt Expense on the income statement will be ____ the Allowance for Doubtful Accounts on the balance sheet. a. less than b. greater than c. the same as

b

When the allowance method is used, the entry to record the write off of an uncollectible account _____. a. decrease net income b. has no effect on net income c. increases net income

b

The days to collect ratio provides what kind of information? (Check all that apply.) a. That a higher number of days means more customers are defaulting b. That a higher number of days means a longer (worse) time for collection c. The average number of days from sale on account to collection d. That a higher number of days means a shorter (better) time for collection

b & c

What are the potential drawbacks of speeding up collection of receivables? (Check all that apply.) a. The accounts receivable turnover will be lower because the accounts receivable balance higher b. Hounding customers to pay if their receivables are past due is time-consuming and costly c. None, as it is the business' money d. Customers may get annoyed and take their business elsewhere

b & d

The journal entry to record $5.6 million in sales on account includes a _____. (Select all that apply.) a. credit to Accounts Payable for $5.6 million b. credit to Sales Revenue of $5.6 million c. debit to Cash of $5.6 million d. debit to Allowance for Doubtful Accounts of $5.6 million e. debit to Accounts Receivable of $5.6 million

b & e

Which of the following makes notes receivable different from accounts receivable? (Select all that apply.) a. accounts receivable are formal written contracts b. Notes receivable have a stronger legal claim c. Accounts receivable are interest bearing d. Notes receivable are formal written contracts e. Notes receivable are interest bearing

b, d, & e

A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing would suggest _____. a. an investment opportunity b. cookie jar accounting c. channel stuffing

c

Given the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the amount of receivables written off was _____ than the amount estimated in the prior period. Thus, bad debt expense will be _____ in the current period than had than unadjusted balance been a credit balance. a. less; less b. less; greater c. greater; greater d. greater; less

c

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $9,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of _____. a. $9,000 debit b. $1,000 credit c. $1,000 credit d. $10,000 credit

c

Management estimates that 1% of the $100,000 of credit sales will be uncontrolled. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be _____ the Allowance for Doubtful Accounts on the balance sheet. a. $100 greater than b. the same as c. $100 less than

c

On November 1, 2015, Lendem, Inc., loaned an employee $100,000 at 6% with both the interest and principal due in 1 year. The adjusting entry to record the interest earned but not received as of December 31, 2015 includes a _____. a. debit to Interest Revenue of $1,000 b. debit to Interest Receivable of $6,000 c. debit to Interest Receivable of $1,000 d. debit to Cash of $5,000 e. debit to Interest Payable of $6,000

c

Detectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Detectable's financial statements will show _____. (Select all that apply.) a. Allowance for Doubtful Accounts of $1,050 b. Bad Debt Expense of $1,000 c. Bad Debt Expense of $950 d. Allowance for Doubtful Accounts of $1,000 e. Allowance for Doubtful Accounts of $950

c & d

For billing and collection purposes, companies keep a separate accounts receivable account for each customer called a _____. a. temporal account b. subsidized account c. temporary account d. subsidiary account e. general account

d

If the Allowance for Doubtful Accounts has $1,000 debit balance prior to making the end-of-period adjusting entry for bad debts using the aging of accounts receivable method, then it must mean that the _____. a. direct write-off method was used b. aging method was used c. sales method was used d. debit to Bad Debt Expense will be $1,000 more than the desired ending balance in the Allowance for Doubtful Accounts e. debit to Bad Debt Expense will be $1,000 less than if the Allowance balance had been $0.

d

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a _____. (Select all that apply.) a. debit to Bad Debt Expense of $1,100 b. credit to Allowance for Doubtful Accounts of $1,100 c. debit to Bad Debt Expense of $1,000 d. debit to Bad Debt Expense of $900 e. credit to Allowance for Doubtful Accounts of $1,000 f. credit to Allowance for Doubtful Accounts of $900

d & f

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings a.Allowance for Doubtful Accounts b. Accumulated Depreciation c. Accounts Receivable d. Depreciation Expense e. Sales Revenue f. Bad Debt Expense

d, e, & f

When the allowance method is used, the entry to record the write-off of an uncollectible account ______.

has no effect on net income

The receivables turnover ratio is computed as ______.

net sales revenue divided by average net accounts receivable

Sales made on account are recorded with a debit to Accounts Receivable and credit to Sales Revenue for the price times the quantity. Management knows that some of those accounts will not be collected but is unsure which specific customers it will be. Thus, management estimates the amount and records an adjusting entry. Later, when the specific non-paying customer is identified, it writes off the account. The effect of this process on the accounting equation is to _____.

reduce assets and stockholders' equity when the adjusting entry is recorded

True or False: Converting long-outstanding accounts receivable into new notes receivable to reduce bad debt expense is unethical. a. false b. true

true

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.

write-off of a specific customer's account