Accounting Chapter 8

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Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

$12,000 (The ending balance required in the allowance account is 7.5% times $160,000, or $12,000)

How much accrued interest should be reported on the payee's December 31 balance sheet on a $5,000, 8%, 9-month note receivable issued on June 1?

$233. Note was issued ($5,000 × 8% × 7/12 = $233).

What type of receivable is shown by a formal instrument and normally requires the payment of interest?

A note receivable

Which one of the following is the correct presentation of Accounts Receivable and its contra account on the balance sheet?

Accounts Receivable $642,000 Less: Allowance for Doubtful Accounts (2,000) $640,000

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method?

Allowance for Doubtful Accounts is debited.

Which statement is true about reporting receivables on the balance sheet?

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. Which of the following is/are the debit entry(ies) required to record this transaction by Good Stuff Retailers?

Cash $48,000 and Service Charge Expense $2,000

At what value are accounts receivable reported on the balance sheet?

Cash (net) realizable value

If a company uses the allowance method for uncollectible accounts, then the entry to record $800 of estimated uncollectibles is

Debit Bad Debts Expense 800, Credit Allowance for doubtful accounts 800

Butte Co. loaned $25,000 to Beavis Co. on June 1, at 12% interest for 3 months. What adjusting entry will Butte Co. have to make on June 30 before preparing the financial statements on June 30?

Debit Interest Receivable 250. Credit Interest Revenue 250

Obama Company has identified that Bill Clinton's receivable account of $100 is uncollectible. What is the journal entry needed to write off the account under the allowance method?

Debit allowance for doubtful accounts 100, credit accounts receivable 100

Allowance for Doubtful Accounts is closed at the end of the fiscal year

False. Only nominal accounts are closed at the end of the fiscal period

Receivables are reported on the balance sheet at the cash amount owed by customers

False. While the balance of accounts receivable represents the amount owed by customers, the amount reported on the balance sheet is shown at their cash (net) realizable value. This is the amount the company expects to collect

Which of these statements about Visa credit card sales is incorrect?

The retailer must wait to receive payment from the issuer.

Under the allowance method, the write off of an account receivable leaves the net realizable value of the recievables unchanged

True. When an account is written off, the entry is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.

Which one of the following is NOT a method used by companies to accelerate cash receipts?

Writing off receivables. Management can accelerate the collection of cash by selling its receivables, by allowing customers to pay with bank credit cards, and by offering discounts for early payment.

Factoring is the process of

selling accounts receivable at a discount to another party


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