ACC 401 SB7

(Face amount x annual rate x fraction of the annual period) is the formula for

interest on a note.

Company A offers Company B discount terms of 2/10, n/30. What does this mean?

Company B will receive a 2% discount if payment is made within 10 days.

When a previously written off account is collected, what happens after the reinstatement?

Collection is recorded with a debit to cash and a credit to accounts receivable.

The discount on notes receivable account is classified as

a contra account to notes receivable.

Riley has a $100,000 note receivable from a customer. The note receivable is an 8% note, due in 9 months. Three months after accepting the note, Riley discounts the note receivable at Third Bank at a discount rate of 10%. What are the cash proceeds of the discounted note?

$100,700

On January 1, 2022, Austin Company received a 12-month, $100,000 note with a stated rate of 7%. On April 30, 2022, Austin discounted the note at the Houston Bank. The bank's discount rate is 8%. What are the cash proceeds from discounting the note receivable?

$101,293

Jessica accepts a $50,000, 60-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is

$49,000.

On January 1, year 1. Jordan receives a $100,000 note receivable from a customer. The note receivable is a 10% note, due at the end of the year on December 31. Jordan immediately discounts the note receivable at Third Bank at a discount rate of 12%. What are the cash proceeds of the discounted note?

$96,800 Reason: ($100,000 x 1.10) = $110,000 maturity value. $110,000 x 0.12 = $13,200 discount. Maturity value of $110,000 less $13,200 discount = $96,800.

Lee accepts a $100,000, 90-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is

$97,000.

Examine the following journal entry. Debit Refund liability $10,000; credit Cash $10,000; debit Inventory $6,000; and credit Inventory-estimated returns $6,000. What is the transaction that required this entry?

Adjustment for sales returns that occurred.

Garcia sells goods to a customer for $100,000 on a noninterest-bearing, 180-day note receivable. The discount rate is 12%. The effective interest rate for this note is (use 360 days for the year)

12.77%.

When a specific account receivable is determined to be uncollectible, which of the following occur? (Select all that apply.)

Allowance account is reduced Account receivable is reduced

The formula for calculating interest multiplies which of the following? (Select all that apply.)

Annual interest rate Fraction of the annual period Face amount of the note

Inventory expected to be returned is included in what type of account?

Asset

When the amount of bad debts is material, GAAP requires the _____ method be used to reduce the carrying value of accounts receivable to the amount of cash expected to be received. (Enter only one word.)

Blank 1: allowance

The balance sheet approach estimates _____ _____ expense by determining the appropriate carrying value of accounts receivable.

Blank 1: bad Blank 2: debt or debts

Cash and cash equivalents are reported as a single amount on the _____ _____.

Blank 1: balance Blank 2: sheet

The gross method and the net method are two ways to record _____ discounts. (Enter only one word.)

Blank 1: cash or sales

A restriction of cash wherein the borrower is required to maintain a specific amount in a-low-interest or noninterest-bearing account at the bank is called a(n(

Blank 1: compensating

A(n) _____ balance is a cash restriction in connection with a loan tat creates a higher effective interest rate on that loan.

Blank 1: compensating

The discount on notes receivable account is a(n) _____ account to the note receivable account

Blank 1: contra

The discount on notes receivable account is a(n) _____ account to the note receivable account. (Enter only one word.)

Blank 1: contra

When recognizing allowance for uncollectible accounts, a company can only record an _____ of the amount of uncollectible accounts for its outstanding receivables at the end of a year.

Blank 1: estimate

The two methods used for recording sales discounts are the _____ method and the _____ method.

Blank 1: gross Blank 2: net

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n)

Blank 1: income Blank 2: statement

U.S. GAAP typically requires that bank overdrafts be treated as _____ on the balance sheet where IFRS allows them to offset other cash accounts.

Blank 1: liabilities or liability

In a(n) _____ bearing note, interest is deducted from the face amount of the loan to determine the cash proceeds available to the borrower at the time of loan.

Blank 1: noninterest, non interest, or non-interest

A(n) _____ _____ occurs when a customer returns merchandise for a refund. (Enter one word per blank.)

Blank 1: sales Blank 2: return

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) _____ _____.

Blank 1: sales Blank 2: return

Short-term investments that can be readily converted to cash and have a maturity date of less than three months from date of purchase are called

Cah equivalents

When an account previously written off is collected in full, the entry to reinstate the account would require which of the following? (Select all that apply.)

Credit Allowance for Uncollectible Accounts. Debit Accounts Receivable.

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require which of the following entries?

Debit Interest Receivable $2,000; credit interest revenue $2,000.

On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?

Debit Notes Receivable $100,000; credit Service Revenue $100,000.

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable.

A company believes its sales returns will be material. What is the journal entry required?

Debit sales returns; credit allowance for sales returns.

When actual inventory returns occur in a perpetual inventory system, which of the following happens?

Debit the asset inventory account

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise and receives a refund. As of May 15, the customer has paid for all of the goods with cash. What will Adrian record on May 15? (Select all that apply.)

Debit to Sales Returns. Credit to Cash.

Examine the following journal entry. This journal entry represents which of the following transactions?

Factoring without recourse

True or false: An interest-bearing note earns interest, whereas a noninterest-bearing note does not earn interest.

False

True or false: Most sellers estimate returns every time they make a sale.

False

True or false: The gross method and the cash method are the two ways to record sales discounts.

False

Which method permit the offsetting of bank overdraft against cash balances

IFRS only

Which method(s) permit the offsetting of bank overdrafts against cash balances?

IFRS only

Checks received from customers that have not been deposited yet are included where on a company's balance sheet?

In the current asset "cash" account.

Where are cash and cash equivalents reported in the financial statements?

In the current asset section of the balance sheet.

Tom Company offers Jane Company discount terms of 5/15, n/45. What does this mean?

Jane Company must pay the full amount if payment is made after day 15.

Cash equivalents include which of the following?

Money market funds Commercial paper with a maturity date of 90 days from day of purchase TReasury bills with a maturity date of 20 months from date of purchase

Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet?

No effect on total assets.

When a bank requires a borrower to set aside funds for the future payment of debt, this is known as what?

REstricted cash

What happens when a receivable previously written off is collected in full?

Reinstate the receivable and the allowance for uncollectible accounts.

Which of the following situations require cash to be restricted? (Select all that apply.)

Requirements to set aside funds to repay debt. Requirement to use cash for future plant expansion.

When a bank requires a borrower to set aside funds for the future payment of a debt, this is known as what? a noncurrent asset?

Restricted cash

Which of the following is usually reported on the balance sheet as a noncurrent asset?

Restricted cash

When a receivable is written off, which of the following occurs? (Select all that apply.)

The allowance for uncollectible accounts is reduced. Accounts receivable is reduced.

At what amount are accounts receivable recorded?

The amount expected to be collected.

When all or a portion of an account receivable is determined to be uncollectible, what occurs?

The amount of the receivable is written off.

Which approach for estimating bad debts uses a percentage of each period's net credit sales?

The income statement approach

How is inventory recorded related to returns? (Select all that apply.)

The inventory account is increased when returns occur to include the returned items. Inventory expected to be returned is included as an asset on the balance sheet.

The difference between the gross method and net method of recording sales revenue, in terms of the effect on income is what?

The timing of the recognition of any discounts not taken varies and could occur in different reporting periods.

True or false: Both interest bearing and noninterest bearing notes bear interest.

True

True or false: Inventory that is expected to be returned in the future is included on the balance sheet of the company expecting the return.

True

True or false: When a discount on notes receivable is amortized, interest revenue is recorded.

True

How do sellers typically account for returns? (Select all that apply.)

Using an adjusting entry at the end of the period for any remaining future expected returns. As returns occur.

When does the actual write-off of a receivable occur?

When it is determined that all or a portion of the receivable will not be collected.

Glaser Corp. does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements?

Year 1 net income is overstated.

The entry to write-off an uncollectible account includes the following:

a debit to the allowance account and a credit to accounts receivable

Cash that is restricted and is not available for current use may be reported in the balance sheet as

a noncurrent asset. investments and funds. other assets.

Which of the following items are not included in cash?

accounts receivable from customers

A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the _____ method of accounting for bad debts.

allowance

If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account?

allowance for sales returns

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

allowance for uncollectible accounts

To record bad debts at the end of the period, an adjustment would be made by a credit to

allowance for uncollectible accounts.

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?

allowance method

When initially recorded, the typical accounts receivable is valued at the

amount expected to be received.

Which of the following items are classified as receivables? (Select all that apply.)

amounts owed by customers tax refund claims amounts loaned and expected to be repaid

The balance sheet approach to measuring bad debt expense focuses on

appropriate carrying value of accounts receivable.

Restricted cash is usually reported in the balance sheet

as noncurrent assets.

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as

bad debt expense.

Which of the following items are included in cash?

balance in checking accounts currency and coins checks from customers

Cah and cash equivalents are reported as a single amount on the _____ _____.

balance sheet

On which financial statement is the account "cash and cash equivalents" reported?

balance sheet

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the _____ account on the balance sheet.

cash

Short-term, highly liquid investments such as money market funds or treasury bills are classified as

cash equivalents.

Which of the following items are included in cash?

checks from customers balance in checking accounts currency and coins

A cash restriction imposed by a bank wherein the debtor must leave a certain amount of funds such as 5% of the original loan in the low-interest or noninterest-bearing account is a

compensating balance.

An allowance for sales return account is classified as a(n)

contra account to sales revenue.

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end and principal and interest are due at maturity. The entry required on Light's books on April 1 when the note is due requires a (Select all that apply.)

credit to interest receivable, $2,000. credit to note receivable, $100,000 debit to cash, $104,000 credit to interest revenue, $2,000

On March 1, Song Corp. receives a $100,000, 90-day, noninterest-bearing note receivable from a customer. The discount rate is 12%. On June 1, when Song receives full payment from the customer, Song will record a

credit to interest revenue for $3,000.

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. Orange has a December 31 year-end. On February 1, year 2, when the note matures, the journal entry for Orange will include a

credit to interest revenue, $400.

On January 1, Klay Corp. receives a $100,000, 120-day, noninterest-bearing note receivable from a customer. The discount rate is 6%. On May 1, when Klay receives full payment from the customer, Klay will record a

credit to notes receivable for $100,000.

The journal entry required for a note receivable transferred as a sale would include a

credit to notes receivable.

Tilly Corp. factored accounts receivable that had a book value of $100,000 to Second Bank. The transfer was made with recourse. Second Bank charged a 5% factoring fee and retained $3,000 to provide a reserve against potential sales returns and allowances. Tilly estimates the amount of accounts receivable that will be uncollectible is $2,000. The journal entry Tilly will make to record the factoring arrangement will include a

credit to recourse liability for $2,000.

Restrictions on cash may be

informal arising from management intent. formal by contract.

On January 1, Klay Corp. receives a $100,000, 120-day, noninterest-bearing note receivable from a customer in exchange for the sale of goods. The note has a 6% discount rate. On January 1, when Klay receives the note from the customer, Klay will record (Select all that apply.)

credit to sales revenue for $98,000. debit to notes receivable for $100,000. credit to discount on notes receivable for $2,000.

Paredes uses the gross method to record sales on account. Paredes sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.)

credit to sales, $1,000. debit to accounts receivable, $1,000.

Tim Corporation uses the net method to record sales on account. Tim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.)

credit to sales, $4,900. debit to accounts receivable, $4,900.

The income statement approach for estimating bad debts focuses on

current year's credit sales.

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. The entry required on Orange's books on December 31, at the end of the year includes a

debit Interest Receivable, $800.

Planters Corp. has an account that was written off in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require (Select all that apply.)

debit to Accounts Receivable. credit to Allowance for Uncollectible Accounts.

Sully Corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a

debit to Bad Debt Expense for $2,000.

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a

debit to Notes Receivable, $40,000.

Kim Corp. uses the gross method to record sales on account. Kim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.)

debit to accounts receivable, $5,000. credit to sales, $5,000.

Kilroy uses the net method to record sales on account. Kilroy sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.)

debit to accounts receivable, $980. credit to sales, $980.

Tilly Corp. factored accounts receivable that had a book value of $100,000 to Second Bank. The transfer was made without recourse. Second Bank charged a 5% factoring fee and retained $3,000 to provide a reserve against potential sales returns and allowances. The journal entry Tilly will make to record the factoring arrangement will include a

debit to cash for $92,000.

Carly Corp. factored accounts receivable that had a book value of $100,000 to First Bank. The transfer was made without recourse. First Bank charged a 4% factoring fee and retained $5,000 to provide a reserve against potential sales returns and allowances. Management estimates the fair value of the last 9% of receivables to be equivalent to the book value. The journal entry Carly will make to record the factoring arrangement will include a

debit to loss on sale of receivables for $4,000.

On March 1, Song Corp. receives a $100,000, 90-day, noninterest-bearing note receivable from a customer. The note has a 12% discount rate. On March 1, when Song receives the note from the customer, Song will record a

debit to notes receivable for $100,000.

The transfer of a note receivable to a financial institution for an amount less than the face amount of the note is referred to as

discounting a note receivable.

Under the gross method, the initial recording of sales revenue will be ______ the amount recorded under the net method.

higher than

Cash that is restricted and is not available for current use may be reported in the balance sheet as (Select all that apply.)

investments and funds. a noncurrent asset. other assets.

The income statement approach for estimating bad debts uses a percentage of

net credit sales.

The two methods used for recording sales discounts are the

net method. gross method.

The transfer of a(n) ____ to a financial institution is called discounting.

note receivable

Receivable represent a company's claim to the future collection of

other assets services cash

Receivables represent a company's claims to the future collection of (Select all that apply.)

other assets services cash

Failing to estimate sales returns can result in income being _______ in the period the sale is made and _______ in the period the product is returned.

overstated; understated

A company's claims to the future collection of cash, other assets, or services is called a ________.

receivable

Examine the following journal entry. This journal entry represents which of the following transactions?

sale with recourse

To calculate the effective rate of interest on a noninterest-bearing note, the amount of interest is divided by the ______.

sales price

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

When recording noninterest-bearing notes receivable, the discount on a noninterest-bearing note receivable represents

the interest to be earned on the note receivable.

A difference between U.S GAAP and IFRS in accounting for cash and cash equivalents is that IFRS allows

the netting of bank overdrafts against the cash and cash equivalents.

A difference between U.S. GAAP and IFRS in accounting for cash and cash equivalents is that IFRS allows

the netting of bank overdrafts against the cash and cash equivalents.

Under the allowance method, when is bad debt expense recognized?

when the allowance is created