Accounting Chapter 8 & 9

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 ______.

$1,000 debit

In its 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 ______.

$760 Bad Debt Expense = $38,000 x 0.02=$760.

The Three Little Pigs purchased three houses for a total cost of $160,000. Appraisal values for the three completed houses were: straw house, $40,000; wood house $60,000; and brick house $100,000. Using the basket purchase allocation, the recorded value of the brick house should be ______.

$80,000 eason: The recorded value of the brick house equals $80,000 or ($100,000/($40,000 + 60,000 + 100,000)) x $160,000.

Why would a company debit Interest Receivable? A. It generated interest on its notes receivable which will be collected in a later accounting period. B. It received an interest payment for amounts accrued in an earlier accounting period. C. It paid interest for amounts incurred in an earlier accounting period. D. It owes interest on its notes payable which will be paid in a later accounting period.

A. It generated interest on its notes receivable which will be collected in a later accounting period. An adjusting entry is recorded at the end of the accounting period for amounts generated and not yet collected with a debit to Interest Receivable (+A) and a credit to Interest Revenue (+SE).

The direct write-off method does not require the ______ account.

Allowance for Doubtful Accounts The direct write-off method (non-GAAP because it violates the expense recognition or matching principle) includes a credit to Accounts Receivable, not Allowance for Doubtful Accounts. The allowance method (GAAP) includes a credit to Allowance for Doubtful Accounts and is recorded in the period the sale is made, not later when it is discovered that the customer's account is uncollectible.

Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance? A. Percentage of credit sales method B. Aging of accounts receivable method C. Direct write-off method

B. Aging of accounts receivable method

Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet? A. The Allowance for Doubtful Accounts had an unadjusted dedit balance. B. The Allowance for Doubtful Accounts had an unadjusted credit balance. C. The both will always be the same amounts on the income statement and balance sheet.

B. The Allowance for Doubtful Accounts had an unadjusted credit balance. Prior to making the adjusting entry, the Allowance balance had an unadjusted credit balance, i.e., amounts allowed for in the past have not been written off. Thus, the adjusting entry, debit Bad Debt Expense and credit Allowance is less than the ending balance in the Allowance account.

Land improvements include items such as sidewalks, landscaping, fencing and are reported on the ______. A. income statement B. balance sheet C. statement of retained earnings

B. balance sheet

The fees charged by major credit card companies are included in ______. A. cost of goods sold on the balance sheet B. selling expenses on the income statement C. interest expense on the income statement D. selling expense on the balance sheet E. cost of goods sold on the income statement F. interest expense on the balance sheet

B. selling expenses on the income statement

Paving the parking lot and landscaping are recorded with a debit to ______. A. Construction in Progress, an asset B. Construction in Progress, an expense C. Land Improvements, an asset D. Land Improvements, an expense

C. Land Improvements, an asset

Once the construction of a new building is completed it is moved out of the ______ and into the ______ account.

Construction in Progress; Building

Why would a company debit Interest Receivable?

It generated interest on its notes receivable which will be collected in a later accounting period. an adjusting entry is recorded at the end of the accounting period for amounts generated and not yet collected with a debit to Interest Receivable and a credit to Interest Revenue

Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's income statement? (Check all that apply.)

Net income was too high. Expenses were too low. WorldCom overstated its assets by capitalizing the costs (i.e. debiting assets) instead of expensing the costs.

Sunny Sky paid $30,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation?

One asset increases, while another asset decreases.

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation? (Check all that apply.)

Total liabilities increase $315,000. Machinery, an asset, increases $320,750. Total assets increase $315,000.

The effect of capitalizing a cost that should have been expensed causes ______.

assets to be overstated on the balance sheet and expenses to be understated on the income statement A cost that was erroneously capitalized resulted in a debit to an asset (+A) instead of debit to an expense (+E,-SE) thus causing assets to be overstated and expenses to be understated.

Management estimates that 1% of the $100,000 of credit sales 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.)

debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000 The entry includes a debit to Bad Debt Expense of $1,000 (=1% x $100,000 credit sales). The corresponding credit is to Allowance for Doubtful Accounts for the same amount. After adjustment, the Allowance will have a $900 credit balance (=$1,000 credit - $100 unadjusted debit balance) on the balance sheet.

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

effectiveness in granting and collecting credit

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

Acme, Inc. bought land and a factory building for $80,000. The land was appraised at $25,000 and the building at $75,000. Using the basket purchase allocation, Acme would record the ______.

land at $20,000 and the building at $60,000

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 ______.

$1,000 credit The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and is later decreased (debited) when specific accounts receivables are written off. Since the $10,000 estimated amount in the Allowance account is greater than the $9,000 debited for write offs, a $1,000 unadjusted credit balance will result.

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. A. less than B. the same as C greater than

A. less than The aging method specifies the desired ending balance in the Allowance account. The amount of the entry will depend on what the unadjusted balance in the Allowance is. The aging method specifies the desired ending balance in the Allowance account needs to be $90,000. The $1,000 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $89,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $89,000.The expense will only be $89,000 because there is a $1,000 credit balance remaining in the Allowance account before adjustment.

Land improvements reported on a company's balance sheet might include ______. (Check all that apply.) A. the fence around a factory parking lot B. trees planted to provide shade for the customer parking lot C. a backhoe that a contractor uses to dig foundations D. sidewalks outside the corporate headquarters E. trees available for sale in a landscaping business

A. the fence around a factory parking lot B. trees planted to provide shade for the customer parking lot D. sidewalks outside the corporate headquarters

Which of the following is recorded with a debit to Interest Receivable and a credit to Interest Revenue? A. The receipt of the principal payment B. The establishment of a note C. The adjusting entry to record interest earned but not yet received D. The receipt of an interest payment

C. The adjusting entry to record interest earned but not yet received

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. 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. $100 less than The method used is the Percentage of Sales method whereby the expense is calculated first and then the balance in the Allowance for Doubtful Accounts is determined. The adjusting entry includes a debit to Bad Debt Expense (+E,-SE) of $1,000 (=1% x $100,000) and credit to Allowance for Doubtful Accounts (+xA,-A). After adjustment, the Allowance will have a $1,100 credit balance (=$1,000 credit + 100 credit) on the balance sheet and Bad Debt Expense will equal $1,000 on the income statement. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's credit sales. The expense is a temporary account and reports only the expense on the current period's credit sales.

Construction in progress is reported as a(n) ______. A. asset on the balance sheet B. expense on the income statement C. liability on the balance sheet D. retained earnings on the balance sheet

A. asset on the balance sheet

Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______. A. a daily entry with a debit to Interest Receivable and credit to Interest Revenue for each day's interest generated B. an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December C. interest earned on the payment date with a debit to Cash and credit to Interest Revenue for the 6 months of interest generated

B. an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December A company will record interest revenue either when it receives an interest payment or reaches the end of an accounting period, whichever comes first.

ABC, Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging of accounts receivable method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report ______. (Check all that apply.)

Bad Debt Expense of $7,250 on the income statement Allowance for Doubtful Accounts of $8,000 on the balance sheet The $750 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $7,250 to get to the desired $8,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $7,250.

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. The company has to wait 30 days to collect cash from the credit card companies. C. Credit card companies charge fees that reduce profits.

C. Credit card companies charge fees that reduce profits Reason: Credit card receipts can be deposited directly into a company's bank account as if they were actually cash.