ch 8 practice quiz

Accounts receivable are reported in the current assets section of the balance sheet at

net realizable value.

Factoring is the process of

selling accounts receivable at a discount to another party.

On May 2, Cartwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What journal entry will Cartwright Company record on May 2?

A debit to Notes Receivable for $3,000 and a credit to Accounts Receivable for $3,000

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

Accounts Receivable is credited.

Based on this information, what is the company's "Trade Receivables"?

Accounts receivable + Notes receivable (i.e., promissory notes from customers in exchange for services performed by Lansing Construction Co. 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.

Which of the following is the correct sequence to report receivables on the balance sheet?

Accounts receivable, a 6-month note receivable, other receivables

Which one of the following statements is true?

Bad Debts Expense is a temporary account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a permanent account and remains open at the end of the fiscal period.

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

Cash realizable value Accounts receivable are reported at cash realizable value. Also, the terms cash realizable value and net realizable value are synonyms. They both refer to the total amount due from accounts receivable less an estimate for doubtful accounts.

Net credit sales for the month are $5,000,000 for Karl Clothiers. Its accounts receivable balance is $180,000. The allowance is calculated as 8.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $6,000 before adjustment. How much is the balance of the allowance account after adjustment?

Credit balance of $15,300 The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be a credit balance equal to 8.5% times $180,000, or $15,300.

What is often the most critical part of managing receivables?

Determining who gets credit and who does not get credit

What is the maturity value equal to?

Face value plus interest

When an uncollectible account is recovered after it has been written off, two journal entries are recorded. Which of the following accounts will be debited in these two journal entries?

First Accounts Receivable and second Cash 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).

When an uncollectible account is recovered after it has been written off, two journal entries are recorded. Which of the following accounts will be credited in these two journal entries?

First the Allowance for Doubtful Accounts and second Accounts Receivable

When a merchandiser sells goods, it increases Accounts Receivable by debiting it and it _________ Sales Revenue by __________ it.

Increases; crediting Revenues are increased with credits and expenses are increased with debits.

Which of the following should be classified as an "other" receivable?

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.

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do?

Provide the customer a lengthy payment period

Which one of the following is not one of the five basic issues in accounting for notes receivable?

Realizing notes receivable The five basic issues in accounting for notes receivable are 1) determining the maturity date, 2) computing interest, 3) recognizing notes receivable, 4) valuing notes receivable, and 5) disposing of notes receivable. Chapter 8, Learning objective 4: Compute the interest on notes receivable.

What type of receivables result from sales transactions?

Trade receivables Trade receivables are receivables the result from sales on account to customers. Almost all accounts receivable qualify as trade receivables. Some notes receivable may qualify as trade receivables, but most do not because they result from other types of transactions. The third category—other receivables--arise from such items as interest and loans to company officers, beyond the ordinary course of business operations. Non-trade receivables arise from such items as interest and loans to company officers, beyond the ordinary course of business operations. Receivables are current assets, except for receivables that are due beyond one year or operating cycle whichever is longer.

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?

Two credits and one debit

When is a receivable recorded by a service organization?

When service is provided on account

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 from receivables by selling its receivables, by allowing customers to pay with national (e.g., bank) credit cards, and by offering discounts for early payment.

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 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.

A promissory note will likely be used in all of the following settings except

when the party making the note is a high risk creditor. Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement. Notes receivable may be used (1) when the company lends or borrows money, (2) when the amount of the transaction and the credit period exceed normal limits, and (3) in settlement of accounts receivable. Beware of high risk creditors; there is a high risk they will not pay when an amount is due.