ACC311 Chapter 8

True or False: When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

False

Which of the following items should be included in accounts receivable reported on the balance sheet? A) Allowance for doubtful accounts. B) Interest receivable. C) Notes receivable. D) Advances to related parties and officers.

A) Allowance for doubtful accounts.

What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? A) As assets but separately from other receivables. B) By means of footnotes only. C) As trade notes and accounts receivable if they otherwise qualify as current assets. D) As offsets to capital.

A) As assets but separately from other receivables.

Why is the allowance method preferred over the direct write-off method of accounting for bad debts? A) Improved matching of bad debt expense with revenue. B) Allowance method is used for tax purposes. C) Determining worthless accounts under direct write-off method is difficult to do. D) Estimates are used.

A) Improved matching of bad debt expense with revenue.

Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct? A) Net approach. B) Contra revenue approach. C) Gross approach. D) Allowance approach.

A) Net approach.

Why would a company sell receivables to another company? A) To accelerate access to amounts collected. B) To limit its legal liability. C) To improve the quality of its credit granting process. D) To comply with customer agreements.

A) To accelerate access to amounts collected.

A Cash Over and Short account: A) is debited when the petty cash fund proves out short. B) is not generally accepted. C) is debited when the petty cash fund proves out over. D) is a contra account to Cash.

A) is debited when the petty cash fund proves out short.

The journal entries for a bank reconciliation: A) may include a debit to Office Expense for bank service charges. B) may include a debit to Accounts Payable for an NSF check. C) are taken from the "balance per bank" section only. D) may include a credit to Accounts Receivable for an NSF check.

A) may include a debit to Office Expense for bank service charges.

The accounting for cash discounts and trade discounts are: A) not the same. B) always recorded net. C) the same. D) tied to the timing of cash collections on the account.

A) not the same.

When a company has cash available in another account in the same bank at which an overdraft has occurred, the company will: A) offset the overdraft against cash account. B) report the same in the notes to financial statement. C) report the bank overdraft amount as account payable. D) classify the bank overdraft as compensating balance.

A) offset the overdraft against cash account

Consider the following: Cash in Bank - checking account of $18500, Cash on hand of $470, Post-dated checks received totaling $3710, and Certificates of deposit totaling $122000. How much should be reported as cash in the balance sheet? A) $22680. B) $18970. C) $134299. D) $18500.

B) $18970.

On January 1, 2017, Marigold Corp. borrows $2750000 from National Bank at 12% annual interest. In addition, Marigold is required to keep a compensatory balance of $275000 on deposit at National Bank which will earn interest at 4%. The effective interest that Marigold pays on its $2750000 loan is: A) 8.0%. B) 12.8%. C) 12.0%. D) 12.5%.

B) 12.8%.

How is days to collect accounts receivable determined? A) Net sales divided by 365. B) 365 days divided by accounts receivable turnover. C) Net sales divided by average net trade receivables. D) Accounts receivable turnover divided by 365 days

B) 365 days divided by accounts receivable turnover.

Which of the following statements is incorrect regarding the classification of accounts and notes receivable? A) Segregation of the different types of receivables is required if they are material. B) Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively. C) Disclose any loss contingencies that exist on the receivables. D) Valuation accounts should be appropriately offset against the proper receivable accounts.

B) Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.

Under which section of the balance sheet is "cash restricted for plant expansion" reported? A) Stockholders' equity. B) Non-current assets. C) Current assets. D) Current liabilities.

B) Non-current assets.

Which of the following should be recorded in Accounts Receivable? A) Dividends receivable. B) Oral promises from customers to pay for goods or services sold. C) Receivables from officers. D) Receivables from subsidiaries.

B) Oral promises from customers to pay for goods or services sold.

What is "recourse" as it relates to selling receivables? A) The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale. B) The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. C) The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay. D) The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

B) The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as: A) sales discounts forfeited in the cost of goods sold section of the income statement. B) a deduction from sales in the income statement. C) an item of "other expense" in the income statement. D) a deduction from accounts receivable in determining the net realizable value of accounts receivable.

B) a deduction from sales in the income statement.

What is a compensating balance? A) Margin accounts held with brokers. B) Temporary investments serving as collateral for outstanding loans. C) Minimum deposits required to be maintained in connection with a borrowing arrangement. D) Savings account balances.

C) Minimum deposits required to be maintained in connection with a borrowing arrangement.

Which of the following is considered cash? A) Postdated checks B) Certificates of deposit (CDs) C) Money market checking accounts D) Money market savings certificates

C) Money market checking accounts

In which account are post-dated checks received classified? A) Payables. B) Cash. C) Receivables. D) Prepaid expenses.

C) Receivables.

Which of the following is true when accounts receivable are factored without recourse? A) The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. B) The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. C) The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. D) The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

C) The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.

When should a transfer of receivables be recorded as a sale? A) The transferee cannot pledge or exchange the transferred assets. B) The transferor maintains effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity. C) The transferred assets are isolated from the transferor. D) The buyer surrenders control of the receivables to the seller.

C) The transferred assets are isolated from the transferor.

The category "trade receivables" includes: A) income tax refunds receivable. B) claims against insurance companies for casualties sustained. C) amounts owed by customers for goods bought or services rendered. D) advances to officers and employees.

C) amounts owed by customers for goods bought or services rendered.

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n): A) trade discount. B) enhancement discount. C) cash discount. D) nominal discount.

C) cash discount.

Deposits held as compensating balances: A) if legally restricted and held against short-term credit may be included as cash. B) if legally restricted and held against long-term credit may be included among current assets. C) if separately restricted and held against long-term credit may be included as noncurrent assets. D) usually do not earn interest.

C) if separately restricted and held against long-term credit may be included as noncurrent assets.

Why do companies provide trade discounts? A) Only for the purpose of easily altering prices for different customers. B) Only for the purpose of inducing prompt payment. C) Only for the purpose of avoiding frequent changes in catalogs. D) For both the purpose of avoiding frequent changes in catalogs and the purpose of easily altering prices for different customers.

D) For both the purpose of avoiding frequent changes in catalogs and the purpose of easily altering prices for different customers.

In which account are postage stamps classified? A) Receivables. B) Cash. C) Inventory. D) Office supplies.

D) Office supplies.

Which of the following is not considered cash for financial reporting purposes? A) Petty cash funds and change funds B) Money orders, certified checks, and personal checks C) Coin, currency, and available funds D) Postdated checks and I. O. U.'s

D) Postdated checks and I. O. U.'s

When preparing a bank reconciliation, bank credits are: A) added to the bank statement balance. B) deducted from the balance per books. C) deducted from the bank statement balance. D) added to the balance per books.

D) added to the balance per books.

Trade discounts are: A) recorded as other revenues and gains. B) used to avoid frequent changes in catalogs. C) presented in terms such as 2/10, n/30. D) all of these answer choices are correct.

D) all of these answer choices are correct.

Antique Company has notes receivable that have a fair value of $920,000 and a carrying amount of $710,000. Antique decides on December 31, 2017, to use the fair value option for these recently-acquired receivables. The adjusting entry to record this change will include a: A) debit to Unrealized Holding Gain or Loss―Income for $210,000. B) debit to Notes Receivable for $920,000. C) credit to Notes Receivable for $210,000. D) credit to Unrealized Holding Gain or Loss―Income for $210,000.

D) credit to Unrealized Holding Gain or Loss―Income for $210,000.

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach: A) best relates bad debt expense to the period of sale. B) is the only generally accepted method for valuing accounts receivable. C) makes estimates of uncollectible accounts unnecessary. D) gives a reasonably correct statement of receivables in the balance sheet.

D) gives a reasonably correct statement of receivables in the balance sheet.

Travel advances should be reported as: A) cash because they represent the equivalent of money. B) supplies. C) investments. D) receivables

D) receivables

True or False: All claims held against customers and others for money, goods, or services are reported as current assets.

False

True or False: Bank overdrafts are always offset against the cash account in the balance sheet.

False

True or False: Cash equivalents are investments with original maturities of six months or less.

False

True or False: Certificates of deposit are usually classified as cash on the balance sheet.

False

True or False: Companies must measure the loss on impairment at an undiscounted amount, not at a present-value amount, when it records the loss.

False

True or False: The FASB believes that historical cost for financial instruments provides more relevant and understandable information than fair value.

False

True or False: Trade receivables include notes receivable and advances to officers and employees.

False

True or False: When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

False

Which off the following is included under the heading of "cash?" I. currency. II. money market funds. III. checking account balance. IV. certificates of deposit.

I and III

Which of the following items are included in the Cash caption on the balance sheet? I. Postage stamps on hand II. Coins and currency in the cash register. III. Amounts on deposit in checking account at the bank. IV. Checks from other parties presently in the cash register.

II, III, IV

True or False: Companies record and report long-term notes receivable at the present value of the cash they expect to collect.

True

True or False: Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been.

True

True or False: Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

True