Chapter 7

In the gross method of recording cash discounts, sales discounts are: 1. never recorded. 2. recorded at the time of sale. 3. recorded when payment is received within the discount period. 4. ignored unless they are material in amount.

3

A note receivable 1. All of these answer choices are correct. 2. is supported by a formal promissory note. 3. is a negotiable instrument. 4. always contains an interest element.

1

All of the following are properly classified as temporary investments except: 1. Money orders. 2. Certificates of deposit (CDs). 3. Money market funds (no checking privileges). 4. Money market certificates.

1

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? 1. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. 2. The transferred asset has been isolated from the transferor. 3. The transferee cannot require the transferor to repurchase the receivables. 4. The transferees have obtained the right to pledge or exchange the receivables.

1

The accounts receivable turnover ratio is computed by dividing 1. net sales by average net receivables. 2. net sales by ending net receivables. 3. gross sales by ending net receivables. 4. gross sales by average net receivables.

1

Which of the following methods of determining bad debt expense does not properly match expense and revenue? 1. Charging bad debts as accounts are written off as uncollectible. 2. Charging bad debts with a percentage of sales under the allowance method. 3. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. 4. Charging bad debts with an amount derived from aging accounts receivable under the allowance

1

Which of the following requires a financial components approach? 1. Transfer of accounts receivable in a with recourse transaction. 2. Transfer of accounts receivable in a non-recourse transaction. 3. Pledging accounts receivable. 4. Assigning accounts receivable.

1

During the year, Trout Enterprises made an entry to write off a $8,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $100,000 and the balance in the allowance account was $9,000. The net realizable value of accounts receivable before and after the write-off entry was 1. $91,000. 2. $83,000. 3. $100,000. 4. $99,000.

1. Before: $100,000 - $9,000 = $91,000. After: ($100,000 - $8,000) - ($9,000 - $8,000) = $91,000.

Finance companies that buy receivables from businesses are called: 1. principles. 2. factors. 3. recoursers. 4. receivers.

2

Receivables may be classified as all of following except: 1. current or noncurrent. 2. restricted or unrestricted. 3. accounts receivable or notes receivable. 4. trade receivables or nontrade receivables.

2

When a company has cash available in another account in the same bank at which an overdraft has occurred, the company will: 1. classify the bank overdraft as compensating balance. 2. offset the overdraft against cash account. 3. report the bank overdraft amount as account payable. 4. report the same in the notes to financial statement.

2

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? 1. A percentage of sales adjusted for the balance in the allowance 2. A percentage of sales not adjusted for the balance in the allowance 3. A percentage of accounts receivable not adjusted for the balance in the allowance 4. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

2

Bank overdrafts, if material, should be 1. reported as a deduction from cash. 2. reported as a deduction from the current asset section. 3. reported as a current liability. 4. netted against cash and a net cash amount reported.

3

If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market 1. the prevailing rate of interest at each balance sheet date is used to value the note. 2. the note is not recorded in the financial statements, it is only disclosed in the notes to the financial statements. 3. an imputed interest rate is used to value the note. 4. the stated rate of interest on the note is used to value the note.

3

If, as anticipated, the FASB eliminates the cash equivalent classification, a treasury bill will be classified as: 1. cash. 2. an investment. 3. a short-term investment. 4. a receivable.

3

On April 2, Kelvin sold $30,000 of inventory items on credit with the terms 1/10, net 30. Payment on $18,000 sales was received on April 8 and the remaining payment on $12,000 sales was received on April 27. Assuming Kelvin uses the net method of accounting for sales discounts, the entry recorded on April 27 would include a: 1. debit to Cash and credit to Sales Discount Forfeited for $300. 2. debit to Accounts Receivable and credit to Sales Revenue for $30,000. 3. debit to Accounts Receivable and credit to Sales Discount Forfeited for $120. 4. debit to Cash and credit to Accounts Receivable for $11,880.

3

On July 22, Peter sold $15,500 of inventory items on credit with the terms 2/15, net 30. Payment on $10,000 sales was received on August 1 and the remaining payment was received on August 12. Assuming Peter uses the gross method of accounting for sales discounts, which one of the following entries was made on August 1 to record the cash received? 1. Cash 10,000 Accounts Receivable 10,000 2. Cash 9,800 Accounts Receivable 9,800 3. Cash 9,800 Sales Discount 200 Accounts Receivable 10,000 4. Accounts Receivable 200 Sales Discount Forfeited 200

3

Sparrow Corporation has recently acquired notes receivable that have a fair value of $405,000 and a carrying amount of $310,000. Sparrow decides on December 31, 2014, to use the fair value option for the first valuation of these receivables. Which of the following is incorrect? 1. Sparrow must value these receivables at fair value in all subsequent periods in which it holds these receivables. 2. Interest revenue will be reported as part of net income for the year ended December 31, 2014. 3. Sparrow must value all similar receivables at fair value in all subsequent periods in which it holds this type of receivable. 4. An unrealized holding gain of $95,000 will be reported as part of net income for the year ended December 31, 2014.

3

The accounting for cash discounts and trade discounts are 1. always recorded net. 2. tied to the timing of cash collections on the account. 3. not the same. 4. the same.

3

What is a possible reason for accounts receivable turnover to increase from one year to the next year 1. Write-off uncollectible receivables. 2. Granting credit to customers with lower credit quality. 3. Improved collection process. 4. Decreased credit sales during a recession.

3

Which of the following methods of determining annual bad debt expense best achieves the matching concept? 1. Percentage of ending accounts receivable 2. Direct write-off 3. Percentage of sales 4. Percentage of average accounts receivable

3

The required balance in Wheeler's Allowance for Doubtful Accounts is $36,750, based on an aging of its accounts receivable. The Allowance for Doubtful Accounts currently has a debit balance of $4,200. Wheeler's bad debt expense for the period is 1. $4,200. 2. $36,750. 3. $40,950. 4. $32,550.

3 ($36,750 + $4,200).

Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31 and sales on credit during the year of $6.4 million. There is also a debit balance of $3,000 in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense? 1. $15,700. 2. $67,000. 3. $61,000. 4. $12,700.

3 ($6,400,000 × .01) - $3,000 = $61,000.

Mayer Company received a seven-year zero-interest-bearing note on February 22, 2013, in exchange for property it sold to Reardon Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2013, 7.5% on December 31, 2013, 7.7% on February 22, 2014, and 8% on December 31, 2014. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2013 and 2014, respectively? 1. 7.5% and 8% 2. 0% and 0% 3. 7% and 7% 4. 7% and 7.7%

3 Since the interest rate was 7% on February 22, 2013, that is the rate that should be used.

Harper Company's average collection period is 45 days and its average accounts receivable are $600,000. What is the estimated amount of Harper Company's net credit sales for the period? 1. $5,000,000. 2. $72,000. 3. $74,074. 4. $4,860,000.

4

If a company purchases merchandise on terms of 1/10, n/30, the cash discount available (assuming a 360-day year) is equivalent to an effective annual interest rate of 1. 1% 2. 30% 3. 12% 4. 18%

4

Notes receivable can be classified as 1. trade. 2. current. 3. nontrade. 4. all of these answer choices are correct.

4

The journal entries for a bank reconciliation 1. are taken from the "balance per bank" section only. 2. may include a credit to Accounts Receivable for an NSF check. 3. may include a debit to Accounts Payable for an NSF check. 4. may include a debit to Office Expense for bank service charges.

4

The journal entries for a bank reconciliation 1. may include a debit to Accounts Payable for an NSF check. 2. may include a credit to Accounts Receivable for an NSF check. 3. are taken from the "balance per bank" section only. 4. may include a debit to Office Expense for bank service charges.

4

The percentage-of-receivables method for estimating uncollectible accounts is often referred to as the: 1. direct write-off method. 2. income statement approach. 3. aging method. 4. balance sheet approach.

4

Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation? 1.Bank service charge. 2. Bank interest. 3. Chargeback for NSF check. 4. Deposit in transit.

4

If a company employs the net method of recording accounts receivable from customers, then sales discounts not taken should be reported as 1. sales discounts forfeited in the cost of goods sold section of the income statement. 2. an addition to sales in the income statement. 3. a deduction from accounts receivable in determining the net realizable value of accounts receivable. 4. an item of "other revenue" in the income statement.

4 If using the net method, a company considers Sales Discounts Forfeited as an "Other revenue" item.

Wellington Corp. has outstanding accounts receivable totaling $5 million as of December 31 and sales on credit during the year of $25 million. There is also a debit balance of $20,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense? 1. $420,000. 2.. $2,000,000. 3. $380,000. 4. $400,000.

4 $5,000,000 × .08 = $400,000.

Becky had net sales (all on account) in 2014 of $600,000. At December 31, 2013, before adjusting entries, the balances in selected accounts were: accounts receivable $750,000 debit, and allowance for doubtful accounts $1,500 debit. Becky estimates that 3% of its net sales will prove to be uncollectible. What is the net realizable value of the receivables reported on the financial statements at December 31, 2014? 1. $730,500 2. $133,500 3. $732,000 4. $733,500

4 $750,000 - [($600,000 × .03) - $1,500] = $733,500.

On March 1, 2014, Beijing Pasta Company assigns $1,400,000 of its accounts receivable to Bank of China as collateral for a $1,000,000 note. Bank of China assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Which of the following is correct regarding this transaction? 1. Bank of China has purchased Beijing Pasta's receivables. 2. On March 1, 2014, Bank of China will credit Gain on Purchase of Receivables for $34,000. 3. On March 1, 2014, Bank of China will credit Due from Factor for $20,000. 4. On March 1, 2014, Bank of China will credit Interest Revenue for $14,000.

4 On March 1, 2014, Bank of China will debit Notes Receivable for $1,000,000, credit Interest Revenue for $14,000, and credit cash for $986,000. The bank has provided a loan, and the receivables are collateral for the loan.

Alma Company's average collection period is 45 days and its net sales are $2,430,000. What are Alma Company's average receivables for the period? 1. $6,658. 2. $202,500. 3. $54,000. 4. $300,000.

4. net sales/ average receivables (net) = the accounts receivable turnover ratio. The average collection period is computed as 365 days / the accounts receivable turnover ratio. In this case, 365/x = 45 days. So, the accounts receivable turnover ratio is 8.1. $2,430,000/Average A/R = 8.1. So, average A/R are $300,000.