Chapter 7

Which of the following items are not included in cash?

accounts receivable from customers

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a ____ ____

sales return

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

sales return

When a specific account receivable is determined to be uncollectible, which of the following occur?

-Account receivable is reduced -Allowance account is reduced

When an account previously written off is collected in full, the entry to reinstate the account would require which of the following?

-Debit Accounts Receivable -Credit Allowance for uncollectible accounts

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

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.

An allowance for sales return account is classified as a

Contra account to inventory

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

IFRS only

The direct write-off method is required for

Income tax purposes

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

Net credit sales

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.

A formal credit arrangement between a creditor and debtor is called a(n)

Note receivable

IFRS

Recommends but does not require separate disclosure of receivables

U.S. GAAP

Requires more disaggregation and disclosure of receivables

Which of the following is an example of separation of duties in a good system of internal control?

The individual who receives the inventory does not have access to the accounting records.

A ________ discount is a way to change prices without publishing a new catalog.

Trade

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.

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.

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

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.

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

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

income statement

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

true

The formula for calculating interest multiplies which of the following?

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

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

-Investments and funds -other assets -a noncurrent asset

Which of the following give rise to a note receivable?

-Loaning money to an affiliated company -Loaning money to stockholders -A formal, written extension of the credit period to trade customers

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that

-all disbursements (other than petty cash) are made by check -checks are signed by authorized individuals -all expenditures are authorized

How do sellers typically account for returns?

-as returns occur -using an adjusting entry at the end of the period for any remaining future expected returns

Which of the following items are included in cash?

-balances in checking accounts -checks from customers -currency and coins

A trade discount is a reduction from the list price, which is to

-change prices without publishing a new catalog. -disguise real prices from competitors. -give quantity discounts to customers.

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

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

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

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

-debit to accounts receivable, $4,900 -debit to accounts receivable, $4,900

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

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

Internal control consists of plans to

-encourage adherence to company policies and procedures -promote operational efficiency -minimize errors and theft

Which of the following situations require cash to be restricted?

-requirement to use cash for future plant expansion -requirement to set aside funds to repay debt

Receivables represent a company's claims to the future collection of

-services -other assets -cash

How is inventory recorded related to returns?

-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

Which of the following is a contra account to accounts receivable?

Allowance for sales returns

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

Allowance for uncollectible accounts

When an accounts receivable is written off, which account is impacted?

Allowance for uncollectible accounts

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

Asset

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

Warner Corp. sells goods on account for $10,000. The customer pays the invoice in full on April 15, but on April 20, the customer returns $3,000 of the merchandise and receives a refund. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Cash.

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

Which of the following is an internal control procedure for cash disbursements?

Disbursements should be made by check.

An application where the interest rate stays the same over time, but interest revenue increases as the rate is multiplied by a receivable balance that increases is referred to as what?

Effective interest method

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

False

Both IFRS and U.S. GAAP permit the fair value option for accounting for receivables. Which of the following is correct regarding the application of this option?

IFRS restricts the circumstances for applying the fair value option

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

Interest on note

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

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

Reinstate the receivable and the allowance for uncollectible accounts.

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

Restricted cash

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

Sales return

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

The income statement approach

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

When the direct write-off method is used, an entry for bad debt expense is required

When the account receivable is determined to be uncollectible

A trade discount is

a percentage reduction from list price

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

allowance method

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 asset

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

bad debt

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

A ________ balance is a cash restriction in connection with a loan that creates a higher effective interest rate on that loan

compensating

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 _____ balance

compensating

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

contra account to inventory

The direct write-off method

could result in a mismatching of expenses and revenue

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

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

Conceptually, the _____ method of recording sales views a discount not taken by the customer as part of sales revenue, whereas the ________ method considers discounts not taken as interest revenue

gross net

Conceptually, the ________ method of recording sales views a discount not taken by the customer as part of sales revenue, whereas the _______ method considers discounts not taken as interest revenue.

gross net

The two methods used for recording sales discounts are the _________ method and the ______ method

gross net

The ____ of recording sales revenue recognizes the discount not taken as a part of the sale

gross method

The ____ of recording sales revenue recognizes the discount not taken as a part of the sale.

gross method

The two methods used for recording sales discounts are the

gross method net method

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

Separation of duties requires that

individuals who have physical responsibility for assets should not have access to accounting records.

A company's plans to adhere to policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data are referred to as

internal controls

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

liabilities

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

liabilities

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.

non-interest

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note receivable

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as _________ discount

sales

Which of the following is a discount that is a reduction in the amount to be paid if the customer pays within a specified time period?

sales discount

A _____ ______ occurs when a customer returns merchandise for a refund

sales return

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.

True or false: With the effective interest method, interest revenue differs between periods.

true

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial

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

when the allowance is created