ACC Ch 7

A company considers a loan receivable impaired when it is probable, based on current information and events, that it will be successful at collecting all amounts due (both principal and interest). True False

False

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

False

Money market savings certificates and certificates of deposit (CDs) are classified as cash. True / False

False

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

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. True False

False

A company considers a loan receivable impaired when it is probable, based on current information and events, that it will not collect all amounts due (both principal and interest). True/False

True

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

True

For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay. True False

True

Petty cash and change funds are classified as current assets and included as part of cash. True False

True

Savings accounts are usually classified as cash on the balance sheet. True False

True

Short-term investments with original maturities of three months or less are classified as cash equivalents. True/False

True

Short-term, highly liquid investments may be included with cash on the balance sheet. True False

True

Under the direct write-off method, bad debts are only recognized when an account is determined to be uncollectible. True False

True

How can accounting for bad debts be used for earnings management? a Changing the percentage of receivables recorded as bad debt expense. b Using an aging of the accounts receivable balance to determine bad debt expense. c Determining which accounts to write-off. d Reversing previous write-offs.

a

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

a

The direct write-off method a is based on facts, not estimates. b is often used for financial reporting purposes. c records the expense in the same period as the associated revenue. d all of these answer choices are correct.

a

The minimum cash amounts that banks often require customers to whom they lend money to maintain in checking accounts is called: a compensating balances. b money market funds. c bank overdrafts. d cash equivalents.

a

Under which section of the balance sheet is "cash restricted for plant expansion" reported? a Non-current assets. b Stockholders' equity. c Current liabilities. d Current assets.

a

What is "recourse" as it relates to selling receivables? a The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay. b The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale. c The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected. d The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

a

What is the normal journal entry when writing-off an account as uncollectible under the allowance method? a Debit Allowance for Doubtful Accounts, credit Accounts Receivable. b Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. c Debit Accounts Receivable, credit Allowance for Doubtful Accounts. d Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.

a

When should a transfer of receivables be recorded as a sale? a The transferred assets are isolated from the transferor. b The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity. c The buyer surrenders control of the receivables to the seller. d The transferor maintains effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity.

a

Which of the following is a method used to generate cash from accounts receivable? a Assignment: Yes, Factoring: Yes b Assignment: No, Factoring: No c Assignment: No, Factoring: Yes d Assignment: Yes, Factoring: No

a

Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method? a Debit Accounts Receivable, credit Allowance for Doubtful Accounts. b Debit Allowance for Doubtful Accounts, credit Accounts Receivable. c Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. d Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

a

Which of the following methods of determining bad debt expense does not properly match expense and revenue? a Charging bad debts as accounts are written off as uncollectible. b Charging bad debts with a percentage of sales under the allowance method. c Charging bad debts with an amount derived from aging accounts receivable under the allowance method. d Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.

a

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

Deposits held as compensating balances a if legally restricted and held against short-term credit may be included as cash. b if separately restricted and held against long-term credit may be included as noncurrent assets. c if legally restricted and held against long-term credit may be included among current assets. d usually do not earn interest.

b

In a transfer of receivables accounted for as a secured borrowing: a a gain or loss is recorded. b a finance charge is recorded. c a recourse liability is recognized. d receivables are reduced.

b

Which of the following concepts relates to using the allowance method in accounting for accounts receivable? a Bad debt expense is based on the actual amounts determined to be uncollectible. b Bad debt expense is an estimate that is based only on an analysis of the receivables aging. c Bad debt expense is an estimate that is based on historical and prospective information. d Bad debt expense is management's determination of which accounts will be sent to the attorney for collection.

b

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? a An amount derived from aging accounts receivable and not adjusted for the balance in the allowance. b A percentage of accounts receivable adjusted for the balance in the allowance. c A percentage of accounts receivable not adjusted for the balance in the allowance. Actual losses from uncollectible accounts.

b

Which of the following is a method to generate cash from accounts receivable? Assignment Factoring a No No b Yes Yes c Yes No d No Yes

b

Which of the following methods of determining annual bad debt expense violates the expense recognition concept? a Percentage of ending accounts receivable b Direct write-off c Percentage of average accounts receivable d Percentage of sales

b

Which of the following statements is incorrect? a Securitization takes a pool of assets, such as credit card receivables, and sells shares in these pools of interest and principal payments. b Securitization requires the purchaser to service the receivables. c Securitization involves relatively tight margins and higher quality receivables. d Securitization can be done with virtually every asset with a payment stream and a long-term payment history.

b

Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale? a The transferee does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity. b The transferred asset has been isolated from the transferor. c The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. d The transferees have obtained the right to pledge or exchange the receivables.

c

Short-term paper with maturities of less than 3 months should be classified as a temporary investments. b receivables. c cash equivalents. d investments.

c

The procedure that provides a reasonably accurate estimate of the receivables' realizable value is often referred to as the: a direct write-off method. b percentage-of-sales approach. c percentage-of-receivables approach. d income statement approach.

c

What is the normal journal entry for recording bad debt expense under the allowance method? a Debit Accounts Receivable, credit Allowance for Doubtful Accounts. b Debit Allowance for Doubtful Accounts, credit Accounts Receivable. c Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. d Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.

c

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

c

Which of the following methods of determining annual bad debt expense does Not Satisfy the matching concept? a All of these Methods satisfy the Matching concept. b Percentage of ending accounts receivable c Direct write-off d Aging of accounts receivable

c

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and a has a current market value that is greater than its original cost. b bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation. c is acceptable as a means to pay current liabilities. d is so near its maturity that it presents insignificant risk of changes in interest rates.

d

A note receivable a is supported by a formal promissory note. b is a negotiable instrument. c always contains an interest element. d all of these answer choices are correct

d

At the beginning of 2019, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2019 year-end statement of financial position and $1,000 as sales revenue for 2019. What effect did this accounting for the note have on Gannon's net earnings for 2019, 2020, 2021, and its retained earnings at the end of 2021, respectively? a Overstate, overstate, understate, zero b Overstate, understate, understate, understate c Overstate, overstate, overstate, overstate d Overstate, understate, understate, zero.

d

Cash consists of all of the following except: a certified checks. b personal checks. c money orders. d short-term paper with a maturity of 6 months.

d

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

d

When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of a small account previously written off would a Decrease the allowance for doubtful accounts. b Increase net income. c Have no effect on the allowance for doubtful accounts. d Increase the allowance for doubtful accounts.

d

Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation? a Chargeback for NSF check. b Bank interest. c Bank service charge. d Deposit in transit.

d

Which of the following statements is correct regarding receivables? a Receivables that are expected to be collected within a year are classified as noncurrent. b Receivables are non-financial assets. c Receivables are written promises of the purchaser to pay for goods or services. d Receivables are claims held against customers and others for money, goods, or services.

d

Finance companies that buy receivables from businesses are called: principles. receivers. factors. recoursers.

factors