ACG 2021 Ch. 8 Test 3

What are the five basic issues in accounting for notes receivable?

1. determining the maturity date 2. computing interest 3. recognizing notes receivable 4. valuing notes receivable 5. disposing of notes receivable

What are trade receivables?

Trade receivables derive from transactions with a company's customers

Lansing Construction Company had the following receivables: Accounts receivable- $ 9,000 Employee advances- $ 1,000 Income taxes refundable- 2,000 Interest receivable- 500 Loans to company officers- 1,200 Notes receivable (i.e., promissory notes from customers in exchange for services performed by Lansing Construction Co.- 3,300 Notes receivable (i.e., promissory notes obtained from creditors who purchased used equipment from Lansing Construction Co.- 4,000 Based on this information, what is the company's "Trade Receivables"? a. $12,300 b. $14,300 c. $16,300 d. $9,000 e. $11,000

a. $12,300 Trade receivables derive from transactions with a company's customers. Virtually all accounts receivable are trade receivables. If a note receivable results from a sale on account with a customer, it is considered to be a trade receivable. However, other notes receivable and other receivables are not trade receivables. Trade receivables = $9,000 + 3,300 = $12,300

How much accrued interest should be reported on the payee's December 31 balance sheet on a $6,000, 7%, 9-month note receivable issued on August 1? a. $175 b. $315 c. $350 d. $420 e. $400

a. $175 Interest earned is calculated by multiplying the face value (i.e., principal) times the interest rate times the portion of the year that has passed since the note was issued. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. Interest = Principal x interest rate x time = $6,000 x 7% x 5/12 = $175 Remember, all interest rates are annual interest rates unless designated otherwise

Edward Corporation had net credit sales during the year of $750,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $75,000 and at the end of the year was $110,000. The balance of total assets at the beginning of the year was $1,200,000 and at the end of the year was $1,500,000. How much is the accounts receivables turnover? a. 8.11 b. 9.00 c. 5.41 d. 10.0 e. 6.81

a. 8.11 The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its accounts receivable's average balance. The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. Accounts receivable turnover = $750,000/[($75,000 + $110,000)/2] = 8.11 The company's average accounts receivable for the year is $92,500. Its net credit sales are 8.11 times its average balance suggesting the company collected the equivalent of its average accounts receivable 8.11 times during the year

In the table below the information for four companies is provided. Each company's accounts receivable turnover: Alpha- 16.0 Beta- 13.1 Gamma- 12.5 Delta- 10.9 Industry Average- 13.0 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations? a. Alpha b. Delta c. Beta d. Gamma

a. Alpha The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. It is a measure of liquidity. The higher the accounts receivable turnover, the higher the likelihood of being able to pay its own liabilities as they come due. The highest accounts receivable turnover and the lowest average collection period: Alpha Company

Bright Electronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $150,000 at year-end and the total credit sales were $700,000. Management estimates that 5% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment? a. Bad Debts Expense 6,700 Allowance for Doubtful Accounts 6,700 b. Bad Debts Expense 7,500 Allowance for Doubtful Accounts 7,500 c. Bad Debts Expense 6,700 Accounts Receivable 6,700 d. Allowance for Doubtful Accounts 7,500 Bad Debt Expense 7,500 e. Allowance for Doubtful Accounts 6,700 Bad Debt Expense 6,700

a. Bad Debts Expense 6,700 Allowance for Doubtful Accounts 6,700 Allowance for Doubtful Accounts needs an ending credit balance of 5% of $150,000 or $7,500. To increase the current credit balance of $800 to the required amount of $7,500, the account requires a credit of $6,700. The entry to estimate bad debts is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $6,700

When an uncollectible account is recovered after it has been written off two journal entries are recorded. Which of the following journal entries will be recorded second? a. Debit Cash and credit Accounts Receivable b. Debit Cash and credit Allowance for Doubtful Accounts c. Debit Allowance for Doubtful Accounts and credit Accounts Receivable d. Debit Account Receivable and credit Bad Debt Expense e. Debit Accounts Receivable and credit Allowance for Doubtful Accounts

a. Debit Cash and credit Accounts Receivable When an uncollectible account is recovered after it has been written off, two journal entries are recorded. The first journal entry is Accounts Receivable will be debited and Allowance for Doubtful Accounts will be credited (i.e., this reverses the journal entry that wrote-off the account). The second journal entry requires and a debit to Cash and a credit to Accounts Receivable (i.e., this records the customer's payment)

Laurel Company factors $400,000 of receivables to Hardy Factors. Hardy Factors assesses a 3% fee on the amount of receivables sold. Laurel Co. factors its receivables to Hardy Factors regularly. What journal entry does Laurel Co. make when the factoring occurs? a. Debit Cash for $388,000, debit Service Charge Expense for $12,000, and credit Accounts Receivable for $400,000 b. Debit Cash for $388,000 and credit Accounts Receivable for $388,000 c. Debit Cash for $400,000, credit Accounts Receivable for $388,000, and credit Gain on Sale of Receivables for $12,000 d. Debit Cash for $388,000, debit Loss on Sale of Receivables for $12,000, and credit Accounts Receivable for $400,000

a. Debit Cash for $388,000, debit Service Charge Expense for $12,000, and credit Accounts Receivable for $400,000 This entry records the receipt of cash as a debit for $388,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $12,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $400,000

Which of the following should be classified as an "other" receivable? a. Interest receivable b. Payable receivable c. Notes receivable d. None of these e. Trade receivables

a. Interest receivable Accounts receivable (also called trade receivables) and notes receivables (sometimes considered to be a trade receivable) are both financial instruments typically accepted from customers for the value of a transaction. Notes receivable involve a formal instrument of credit and almost always have interest charges. Interest receivable occurs from loans and results because of the time value of money; interest receivable is one of the receivables in the other receivable category. Others examples of other receivables include receivables due to loans to company officers, advances to employees, income taxes refundable

Michael Co. accepts a $4,000, 3-month, 8% promissory note in settlement of an account with Tony Co. Michael Co. records this transaction as a. a debit to Notes Receivable for $4,000 and a credit to Accounts Receivable for $4,000 b. a debit to Interest Revenue for $80 and a credit to Interest Receivable for $80 c. a debit to Accounts Receivable for $4,080 and a credit to Notes Receivable for $4,080 d. a debit to Notes Receivable for $4,080 and a credit to Accounts Receivable for $4,080 e. a debit to Accounts Receivable for $4,000 and a credit to Notes Receivable for $4,000

a. a debit to Notes Receivable for $4,000 and a credit to Accounts Receivable for $4,000 On the date Michael Co. accepts the note in settlement of a note, Notes Receivable is debited for $4,000 and Accounts Receivable is credited for $4,000. Interest is accrued only with the passage of time

On January 5, Kelsey Company sold merchandise on account to Buyer Co. for $1,500 with terms 3/10, n/30. On January 10, Buyer Co. returns merchandise worth $300 to Kelsey Company. On January 14, Buyer Co. pays the balance due. What is the amount of cash received by Kelsey Company on January 14? a. $1,200 b. $1,170 c. $1,164 d. $1,455 e. $1,155

c. $1,164 The amount received on January 14 is $1,164. Because payment is made within the discount period of 10 days, the amount received is $1,200 ($1,500 - return of $300) minus the 3% discount of $36 ($1,200 x 3%), for a cash amount of $1,164

On January 1, Putnam Wholesale Company's Allowance for Doubtful Accounts had a credit balance of $18,000. During the year, it had net credit sales of $750,000 and it had $30,000 of uncollectible accounts receivable that were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 is $200,000, what is the required credit adjustment to the Allowance for Doubtful Accounts at December 31? a. $30,000 b. No credit adjustment needed c. $32,000 d. $20,000 e. $28,000

c. $32,000 After the write-offs are recorded (but before the year-end adjusting entry), Allowance for Doubtful Accounts will have a debit balance of $12,000 (i.e., $18,000 credit beginning balance combined with a $30,000 debit for the write-offs). Using the percentage of receivables basis, the balance in the allowance account needs to be a credit balance of $20,000 (i.e., $200,000 x 10%). In order to have an ending balance of $20,000, a credit entry of $32,000 must be made to Allowance for Doubtful Accounts. Thus, the amount of the adjusting entry must be $32,000

The following information relates to the beginning of the year: Accounts receivable, $245,000 Allowance for doubtful accounts (credit balance), $12,250 During the current year, sales on account were $1,100,000 and collections on account were $990,000. Also during the current year, the company wrote off $14,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $17,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year? a. $80,750 increase b. $4,750 increase c. $91,250 increase d. $105,250 increase e. $94,250 decrease

c. $91,250 increase Ending accounts receivable, $245,000 + 1,100,000 - 990,000 - 14,000 = 341,000 Ending allowance for doubtful accounts, $17,000 (given) Ending cash realizable value, $341,000 - 17,000 = 324,000 Beginning cash realizable value, $245,000 - 12,250 = $232,750 Increase (decrease) in cash realizable value, $324,000 - 232,750 = $91,250

Which one of these statements about promissory notes is correct? a. The party making the promise to pay is called the payee b. A promissory note is less liquid than an account receivable c. A promissory note is a long-term financial instrument d. Notes receivable are formal agreements e. The party to whom payment is to be made is called the make

c. A promissory note is a long-term financial instrument Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement. The maker is the party that will 'make' the payment to payee. The payee will receive the payment. Notes receivable are more liquid because they are formal agreements

Which one of the following account pairs are both permanent accounts? a. Bad Debt Expense; Allowance for Doubtful Accounts b. Bad Debts Expense; Accounts Receivable c. Accounts Receivable; Allowance for Doubtful Accounts d. Bad Debt Expense; Cash e. Accounts Receivable; Bad Debt Expense

c. Accounts Receivable; Allowance for Doubtful Accounts Bad Debts Expense is a temporary (i.e., nominal) account and is closed at the end of the fiscal period, while Accounts Receivable, Allowance for Doubtful Accounts, and Cash are permanent (i.e., real) accounts. They remain open at the end of the fiscal period with the year-end ending balance becoming the next year's beginning balance

Which of these is a method for accounting for uncollectible accounts? a. Write-off method b. Accounts Receivable Collection Method c. Allowance Method for Uncollectible Accounts d. Uncollectible Method e. Allowance Method for Collectible Accounts

c. Allowance Method for Uncollectible Accounts The two methods for accounting uses for uncollectible accounts are first, the direct write-off method, and second, the allowance method for uncollectible accounts

In August, Oliver Company sold merchandise on account to Mr. Reed for $300 with terms 1/15, n/30. Oliver Company uses the percentage of receivables basis for estimating uncollectible accounts on December 31. On March 25, Oliver Company determines that it will not collect the amount due from Mr. Reed. Prepare the journal entry to record the write-off on March 25. a. Allowance for Doubtful Accounts 297 Accounts Receivable 297 b. Bad Debts Expense 300 Allowance for Doubtful Accounts 300 c. Allowance for Doubtful Accounts 300 Accounts Receivable 300 d. Bad Debts Expense 300 Accounts Receivable 300 e. Accounts Receivable 300 Allowance for Doubtful Accounts 300

c. Allowance for Doubtful Accounts 300 Accounts Receivable 300 Accrual accounting requires the allowance method of accounting for bad debts which involves estimating uncollectible accounts at the end of each period. This method provide a better matching of revenues and expenses than the direct write-off method of accounting for uncollectible accounts. Several alternative procedures exist for estimating uncollectible accounts. Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Under the allowance method, Bad Debts Expense is estimated and recorded at the end of the period as an adjusting entry. Simultaneously, the Allowance for Doubtful Accounts balance is adjusted to reflect the estimated portion of Accounts Receivable not expected to be collected. Writing-off a specific customer's account receivable requires a reduction in the Accounts Receivable. Writing-off an account under the allowance method requires a decrease in the amount set aside in the Allowance for Doubtful Accounts. The adjusting journal entry includes a debit to the Allowance for Doubtful Accounts and a credit to Accounts Receivable for the amount written-off. Since the customer did not pay within the discount period, the customer's opportunity for a discount had been forfeited. Thus, the full invoice price was the amount due, and it is the amount written-off by the company

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method? a. Loss on Accounts Receivable is debited b. Retained Earnings is debited c. Allowance for Doubtful Accounts is debited d. Accounts Receivable is debited e. Bad Debts Expense is debited

c. Allowance for Doubtful Accounts is debited Under the allowance method, a write-off of a specific customer's account (or customers' accounts will require a journal-entry that reduce the company's Accounts Receivable and reduce the Allowance for Doubtful Accounts. Debit the Allowance for Doubtful Accounts and credit Accounts Receivable. No expense is recorded at this time because the expense is estimated and recognized as an adjusting entry

A 120-day promissory note is issued on April 11. What is the note's maturity date? a. August 7 b. August 11 c. August 9 d. August 10 e. August 8

c. August 9 A 120-day note (or promissory note) is due 120 days after the date of issue. When counting days, ignore the date the note is issued but count the date it is paid (i.e., the due date). Since the note is issued on April 11, count 19 days in April (i.e., beginning with April 12 and ending with April 30). Counting all of May, June, and July produces a subtotal of 73 days through the end of November (i.e., subtotal = 19 + 31 + 30 + 31 = 111 days). Therefore count 9 days in August. The note is due August 9. Chapter 8, Lear

Good Stuff Retailers accepted $60,000 of Wells Fargo Visa credit card charges for merchandise sold on July 1. Wells Fargo charges 4% for its credit card use. What should Good Stuff Retailers debit as a result of this transaction? a. Accounts Receivable for $60,000 b. Accounts Receivable for $57,600 and Service Charge Expense for $2,400 c. Cash for $57,600 and Service Charge Expense for $2,400 d. Cash for $60,000

c. Cash for $57,600 and Service Charge Expense for $2,400 The entry includes a credit to Sales for $60,000, a $57,600 debit to Cash, and a debit to Service Charge Expense for $2,400

A bank holds a 60-day, 7%, $27,000 note. The maker of the note pays in full on the maturity date. Which of the following is part of the journal entry that the bank will record on the maturity date? a. Debit to Accounts Receivable for $27,000 b. Credit to Cash for $27,000 c. Credit to Interest Revenue for $315 d. Credit to Notes Receivable for $27,315 e. Debit to Cash for $27,000

c. Credit to Interest Revenue for $315 The bank's journal entry will decrease Notes Receivable for the value of the note, recognize Interest Revenue for the term of the note, and increase the Cash account for the total owed by the maker including principal and interest. The bank's journal entry is: Debit: Cash 27,315 Credit: Notes Receivable 27,000 Credit: Interest Revenue 315 (i.e., $27,000 x 7% x 60/360 = $315)

Baker Co. loaned $30,000 to Idaho Co. on May 1, at 10% interest for 3 months. What adjusting entry should Baker Co. record on June 30 before preparing the financial statements on June 30? a. Debit Interest Expense for $750 and credit Interest Payable for $750 b. Debit Interest Expense for $250 and credit Interest Payable for $250 c. Debit Interest Receivable for $500 and credit Interest Revenue for $500 d. Debit Interest Receivable for $250 and credit Interest Revenue for $250 e. Debit Cash for $30,000 and credit Interest Revenue for $30,000

c. Debit Interest Receivable for $500 and credit Interest Revenue for $500 Interest earned is calculated by multiplying the face value (i.e., principal) times the interest rate times the portion of the year that has passed since the note was issued. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. Interest = Principal x interest rate x time = $30,000 x 10% x 2/12 = $500 Remember, all interest rates are annual interest rates unless designated otherwise. Baker Co. is the creditor; it loaned money to the other company. Baker Co. records increases to Interest Receivable and Interest Revenue

Kensington Company sold $7,000 of merchandise to customers who charged their purchases with a bank credit card. Kensington's bank charges it a 5% fee. Which one of the following is part of the journal entry to record this transaction? a. Credit to Sales for $6,650 b. Credit to Service Charge Expense for $350 c. Debit to Cash for $6,650 d. Debit to Cash for $7,000

c. Debit to Cash for $6,650 The fee is 5% times $7,000, or $350. Kensington will receive the difference between the face amount of the receivables and the fee, or $6,650. The journal entry includes a debit to cash for $6,650, a debit to Service Charge Expense for $350, and credit to sales for $7,000

What is often the most critical part of managing receivables? a. Monitoring the receivables b. Establishing a payment period c. Determining who gets credit and who does not get credit d. Evaluating the liquidity of outstanding receivables e. Determining which method to use to account for bad debts

c. Determining who gets credit and who does not get credit Managing accounts receivable involves five steps. These include (1) determining to whom to extend credit, (2) establish a payment period, (3) monitor collections, (4) evaluate the liquidity of receivables, and (5) accelerate cash receipts from receivables when necessary. The one that is considered the most critical is deciding on who gets credit and who doesn't

When a merchandiser sells goods, it increases Accounts Receivable by debiting it and it _________ Sales Revenue by __________ it. a. decreases; debiting b. decreases; crediting c. Increases; crediting d. increases; debiting e. None of these

c. Increases; crediting When a merchandiser sells goods, it increases Accounts Receivable by debiting it and increases Sales Revenue by crediting it. Revenues are increased with credits and expenses are increased with debits

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do? a. Require a higher interest rate b. Require the customer to pay cash in advance c. Provide the customer a lengthy payment period d. Require the customer to provide a letter of credit or a bank guarantee e. Contact references provided by the customer, such as banks and other suppliers

c. Provide the customer a lengthy payment period Longer payment period will increase the chances the company will not pay. Companies might require risky customers to provide letters of credit or bank guarantees, require them to pay cash in advance, or ask for references from banks and suppliers to determine their payment history

Which of the following accounts is debited when a company factors its accounts receivable? a. Interest Expense b. Loss on Sale of Accounts Receivable c. Service Charge Expense d. Accounts Receivable

c. Service Charge Expense Service Charge Expense and Cash are the two accounts debited when accounts receivable are factored

Which of these statements about national credit card (e.g., Visa) sales is incorrect? a. The retailer considers sales involving the use of a national credit card to be cash sales b. The retailer receives payment from the issuer upon notifying the issuer c. The retailer receives more cash when customers use national credit cards than when customers pay with cash instead of credit cards d. A retailer's acceptance of a national credit card is a form of factoring the receivable by the retailer

c. The retailer receives more cash when customers use national credit cards than when customers pay with cash instead of credit cards With a credit card sale, there is no wait for payment by the retailer. Upon notification of a credit card charge from a retailer, the bank that issued the card immediately adds the amount to the seller's bank balance. So, the retailer receives payment at the time the credit card is accepted from the customer as a form of factoring (or selling a receivable by the retailer). Also, the retailer has no concerns about the credit worthiness of the customer when the customer uses a credit card because the credit card issuer guarantees payment. It is the credit card issuer that assesses the card holder's credit worthiness, and this occurs when the issuer issues the card. In sum, the retailer records the sales revenue for the full invoice price and records a small service charge expense and cash. For example, a $100 sale with a 2% fee includes a debit to Cash for $98, a debit to Service Charge Expense for $2, and a credit to Revenue for $100

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal the following data before year-end adjusting entries: Accounts receivable, $1,200,000; Allowance for doubtful accounts balance before adjustment (credit balance), $24,000; Amounts expected to become uncollectible, $115,000. How much is the cash realizable value (i.e., net realizable value) of the accounts receivable at December 31, after adjusting entries? a. $1,061,000 b. $1,176,000 c. $1,109,000 d. $1,085,000 e. $1,200,000

d. $1,085,000 The net realizable value of the accounts receivable is accounts receivable less the ending balance in the Allowance for Doubtful Accounts. In this case, accounts receivable is $1,200,000 and the ending balance in Allowance for Doubtful Accounts will be $115,000 after the year-end adjusting entry has been recorded. This will result in cash realizable value (i.e., net realizable value) of $1,200,000 less $115,000, or $1,085,000

On May 2, Cartwright Company receives a $5,000, 6-month, 10% note from Sheldon Company as a settlement of its accounts receivable. What journal entry will Cartwright Company record on May 2? a. A debit to Accounts Receivable for $5,250 and a credit to Notes Receivable for $5,250 b. A debit to Notes Receivable for $5,250, a credit to Accounts Receivable for $5,000 and a credit to Interest Revenue for $250 c. A debit to Accounts Receivable for $5,000 and a credit to Notes Receivable for $5,000 d. A debit to Notes Receivable for $5,000 and a credit to Accounts Receivable for $5,000 e. A debit to Notes Receivable for $5,250 and a credit to Accounts Receivable for $5,250

d. A debit to Notes Receivable for $5,000 and a credit to Accounts Receivable for $5,000 Settling an account receivable by replacing it with a note receivable suggests that Notes Receivable will be debited for $5,000 and Accounts Receivable will be credited for $5,000

Schmidt Co. holds Murphy Inc.'s $10,000, 120-day, 6% note. What is the entry to be made by Schmidt Co. when the note is collected, assuming no interest has previously been accrued? a. Debit Cash for $10,200 and credit Notes Receivable for $10,200 b. Debit Accounts Receivable for $10,200, credit Notes Receivable for $10,000, and credit Interest Revenue for $200 c. Debit Cash for $10,000 and credit Notes Receivable for $10,000 d. Debit Cash for $10,200, credit Notes Receivable for $10,000, and credit Interest Revenue for $200 e. Debit Accounts Receivable for $10,200, credit Cash for $10,000, and credit Interest Revenue for $200

d. Debit Cash for $10,200, credit Notes Receivable for $10,000, and credit Interest Revenue for $200 When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $10,000 × 6% × 120/360 = $200. Total cash received = $20,000 + 400 = $10,200

A 120-day note dated March 7, would mature on a. June 2 b. June 3 c. June 4 d. June 5 e. June 6

d. June 3 If the note is described in terms of days (e.g., 120-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. This note is describes in terms of days so count days. March = 31 - 5 = 26 days outstanding (i.e., do not count the date of issue or days preceding it). April = 30 days May = 31 days June = 30 days Subtotal = 26 + 30 + 31 + 30 = 117. So, 3 more days are needed to reach 120 days. Due date = July 3

Receivables are assets that must be reported in the order of ______? a. Time b. Size in dollars c. Cash Equivalents d. Liquidity e. Interest Rates

d. Liquidity Receivables are assets that must be reported in the order of liquidity. Those expected to be converted into cash more quickly are reported first

Which one of the following is not a method used by companies to accelerate cash receipts? a. Offering discounts for early payment b. Accepting national credit cards for customer purchases c. Selling receivables to a factor d. Writing off receivables

d. Writing off receivables

What is the maturity value of a $30,000, 12%, 3-month note receivable dated March 1? a. $26,400 b. $30,300 c. $30,000 d. $33,600 e. $30,900

e. $30,900 The maturity value is the face value (i.e., principal) plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. Interest = Principal x interest rate x time = $30,000 x 12% x 3/12 = $900 Remember, all interest rates are annual interest rates unless designated otherwise. Maturity value = Principal + interest = $30,000 + 900 = $30,900

Net credit sales are $900,000, average inventory totals $60,000, average net receivables total $50,000, and the allowance for doubtful accounts totals $5,000. How much is the average collection period (also known as the days in receivable ratio)? a. 18.25 days b. 24.333 days c. 29.2 days d. 3.333 days e. 20.277 days

e. 20.277 days There are two steps: The accounts receivable turnover is net credit sales divided by average net accounts receivable = $900,000/$50,000 = 18 times The average collection period is 365 divided by the accounts receivable turnover ratio = 365/18 = 20.277 days

Star Corporation sells its goods on terms of 3/10, n/30. It has a receivables turnover ratio of 6.00. What is its average collection period (also known as the days in receivable ratio)? a. 48.67 days b. 30 days c. 2,190 days d. 3 days e. 60.83 days

e. 60.83 days The average collection period is computed by dividing the number of days in the year by the accounts receivable turnover, or 365/6 = 60.83 day

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $90,000 at year-end. The total credit sales were $2,600,000 for the year. Management estimates that 4% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $300 before the year-end adjusting entry for Bad Debt Expense? a. Allowance for Doubtful Accounts 3,600 Bad Debt Expense 3,600 b. Bad Debts Expense 3,600 Allowance for Doubtful Accounts 3,600 c. Allowance for Doubtful Accounts 3,900 Bad Debts Expense 3,900 d. Bad Debts Expense 3,600 Allowance for Doubtful Accounts 3,600 e. Bad Debts Expense 3,900 Allowance for Doubtful Accounts 3,900

e. Bad Debts Expense 3,900 Allowance for Doubtful Accounts 3,900 The Allowance for Doubtful Accounts needs an ending credit balance of 4% of $90,000 or $3,600. Since the pre-adjusted debit balance is $300, a credit of $3,900 is necessary to increase it to $3,600. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,900

Net credit sales for the month are $6,000,000 for Stacy Clothiers. Its accounts receivable balance is $300,000. The allowance is calculated as 7% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $10,000 before adjustment. How much is the balance of the allowance account after adjustment? a. Debit balance of $11,000 b. Debit balance of $21,000 c. Credit balance of $11,000 d. Credit balance of $10,000 e. Credit balance of $21,000

e. Credit balance of $21,000 The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be equal to 7% times $300,000, or $21,000.

What is the maturity value equal to? a. Maturity value less the face value b. Maturity value plus interest c. Face value d. Interest value e. Face value plus interest

e. Face value plus interest Maturity value = Face value (i.e., principal) + interest The maturity value is equal to face value of the note (the principal) plus interest accrued for the term of the note

When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain? a. None of these b. None of the answer choices are correct c. Two debits and one credit d. One debit and one credit e. Two credits and one debit

e. Two credits and one debit The entry to record this transaction will have a debit to Cash, a credit to Notes Receivable and a credit to Interest Revenue

Short-term notes receivable are reported in the current assets section of the balance sheet at a. face value plus interest for the term of the loan b. the selling price at which the inventory was sold to the customers c. market value d. maturity value e. cash realizable value

e. cash realizable value Companies report accounts receivable, short-term notes receivable, and other receivables in the current asset section of the balance sheet at their expected cash realizable value. By the way, a synonym for cash realizable value is net realizable value. Cash (net) realizable value is measured as face value minus the allowance for doubtful accounts