Final Review Study Ch. 7

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

other assets cash services

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

If a company anticipates that some of its note receivables will not be collectible, it should

use an allowance account to value the note at net realizable value.

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission is an organization that

provides a framework for designing an internal control system.

Cash management involves a trade-off between earning lower returns and accepting higher risk.

True

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. all expenditures are authorized. checks are signed by authorized individuals.

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

cash equivalents

For internal control purposes, which of the following responsibilities should be separated for cash disbursements?

check writing and check mailing check signing and check writing

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.

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. Reason: $50,000 - ($50,000 x 12% x 60/360) = $49,000

Abby Company has three bank accounts with the following balances: account 1: $20,000; account 2: $40,000; account 3: $10,000 overdrawn. If Abby Company applies IFRS, it will report cash of:

$50,000

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. Reason: $100,000 x 12% x 3/12 = discount amount

What does a sales discount represent?

A reduction in the amount to be paid if paid within a specified period of time.

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

Asset

How does the CECL model differ from current GAAP?

Bad debt estimates will be based on predictions about the future. The "probable" threshold for identifying impaired receivables is removed.

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.

Which of the following statements are true regarding a company's policy for classifying investments as cash equivalents?

Companies must disclose policies for designating highly liquid investments as cash equivalents in the notes to financial statements. A company's policy for designating cash equivalents should be consistent with the usual motivation for acquiring the investments.

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.

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

Debit sales returns; credit allowance for sales returns.

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15?

Debit to Sales Returns. Credit to Accounts Receivable.

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: A note receivable is an informal agreement, whereas an account receivable is accompanied by a formal promissory note.

False Reason: An account receivable is informal and a note receivable is formal and accompanied by a promissory note.

True or false: In Year 1, Gilead Company estimates future returns to be $30,000; however, in Year 2 actual returns are $35,000. Gilead must restate its Year 1 financial statements to correct its initial estimate.

False Reason: Gilead will not revise prior years' financial statements. Instead, it will adjust the accounts to reflect the change in estimated returns, with any income effect reflected in the period the adjustment is made.

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 fair value option

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.

Gino estimates future sales returns of 2% of total sales. In its third year of operations, Gino believes a more accurate estimate of returns is 3.5%. How should Gino handle this change?

On a prospective basis in the current year and future years.

The IFRS Expected Credit Loss model bases expected credit losses on most receivables that could occur when?

Only within the next twelve months.

Kuhn Company sells a product that historically is rarely returned by its customers. At the end of the current accounting period, Kuhn's accountant estimates that future returns of already sold products will be immaterial. Which of the following is the correct accounting treatment?

Recognize the returns when they occur

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?

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

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

Restricted cash

The requirement that companies must document internal controls and assess their adequacy is required by the

Sarbanes-Oxley Act, Section 404.

When a receivable is written off, which of the following occurs?

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.

What information must a company disclose regarding cash and cash equivalents in the notes to the financial statements?

The company's policies regarding its cash and cash equivalents.

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.

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.

The classification and disclosure of a compensating balance depends on the nature of the restriction. Which condition will require that a compensating balance must be reported as restricted cash in either the current or noncurrent assets section of the balance sheet?

The restriction is legally binding.

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.

Cash equivalents include which of the following?

Treasury bills with a maturity date of 2 months from date of purchase Money market funds Commercial paper with a maturity date of 90 days from date of purchase

True or false: Long-term notes receivable are accounted for the same way as short-term notes receivable, but the time value of money has a larger effect.

True

True or false: The possibility of damaged or defective merchandise is included in a company's estimate of returns.

True

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

True

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

True

True or false: The CECL model broadens information that creditors should consider when estimating credit losses.

True Reason: The CECL model takes a broader approach to estimating bad debt than current GAAP.

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 Reason: The inventory is included as an asset because ownership is expected to revert back to the company

How do sellers typically account for returns?

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 discount on notes receivable account is classified as

a contra account to notes receivable.

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

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

A trade discount is

a percentage reduction from list price.

When sellers recognize revenue associated with an informal credit sale, a(n) _____ is created.

account receivable

Which of the following is a trade receivable?

accounts receivable

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

Accounts receivable are initially recorded at the exchange price agreed upon by the buyer and seller and subsequently reduced by which of the following?

allowance for sales returns 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.

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

amount expected to be received.

The balance sheet approach to measuring bad debt expense focuses on

appropriate carrying value of accounts receivable.

On January 1, 2021, Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

as a noncurrent asset

For a typical credit sale, the revenue recognition criteria is usually satisfied

at the point of delivery.

For most credit sales, revenue and the related expenses should be reported

at the point of delivery.

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.

The following information is taken from Landon Corp.'s accounting records: Accounts Receivable BB $100,000 BB $130,000 Allowance for Uncollectible Accounts EB 12,000 EB 16,000 During the year, Landon wrote off $7,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was

credit to Allowance for Uncollectible Accounts for $11,000. debit to Bad Debt Expense for $11,000. Reason: $16,000 + $7,000 - $12,000

The following information is taken from Connor Corp.'s accounting records: Accounts Receivable BB $100,000 BB $140,000 Allowance for Uncollectible Accounts EB 15,000 EB 18,000 During the year, Connor wrote off $17,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was

credit to Allowance for Uncollectible Accounts for $20,000. debit to Bad Debt Expense for $20,000.

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

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

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

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

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.

An account receivable is normally classified as a

current asset.

Depending on the nature of the restriction and the classification of the related debt, compensating balances may be disclosed in the financial statements as

current assets. noncurrent assets. cash and cash equivalents.

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.

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.

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.

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.

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.

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

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

On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On December 31, when Song records interest for the year, Song will record

debit to discount on note receivable $9,566 credit to interest revenue $9,566

On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On January 1, when Song receives the note from the customer, Song will record

debit to notes receivable $100,000 credit to discount on note receivable $20,281 credit to sales revenue $79,719

With respect to internal controls, the Sarbanes-Oxley Act requires that companies

document their internal controls assess the adequacy of internal controls

Internal control consists of plans to

enhance the reliability of accounting data. promote operational efficiency. enhance the accuracy of accounting data.

An alternative method for valuing notes receivable is the

fair value method.

Restrictions on cash may be

formal by contract. informal arising from management intent.

If a company elects the fair value option for receivables, changes in fair value are recognized as

gains and losses on the income statement.

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

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

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

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

income statement approach

The direct write-off method is required for

income tax purposes.

The possibility of damaged or defective merchandise _______ a company's estimate of returns.

increases

Separation of duties requires that

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

An aging schedule classifies accounts receivable based on

length of time outstanding.

It is likely that bad debt accruals under IFRS will be _____ and will occur _____ than under U.S. GAAP.

lower, later

Management should hold the minimum amount of cash to

meet its obligations. take advantage of opportunities. conduct business operations.

Jackson Corp. borrowed $10,000 from Second National Bank. The note is due in 5 years and includes a contractual agreement requiring Jackson to maintain a compensating balance of $2,000. The $2,000 compensating balance should be reported as

noncurrent assets.

Which of the following are factors considered when estimating sales returns?

overall economic conditions change in customer base

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 good internal control system would require that the employee who handles cash must not be involved in

reconciling the bank statement.

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

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

sales price

Which of the following are nontrade receivables?

tax refund claims interest receivable loan to employee

A good internal control system for cash would require that those who handle cash should not be involved with

the accounting records. reconciliation of bank balances.

The reconciliation process for cash receipts requires that the amount received from customers should agree with

the bank-generated deposit slip. the accounting records.

If a note with an unrealistic interest rate is received solely in exchange for cash, the present value of the note is considered to be

the cash paid

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

the interest to be earned on the note receivable.

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible.

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.

Accounts receivable are almost always considered current assets because

their normal collection, even if longer than a year, is part of the normal operating cycle.

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.

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

when the allowance is created

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% Reason: The interest is $100,000 x 12% x 180/360 days = $6,000. $6,000/$94,000 proceeds = 6.383% x 2 = 12.77% annual interest (rounded).

Lydia Corp. borrows $25,000 from the bank at an interest rate of 6%. If the bank requires a compensating balance of $5,000, the effective rate of interest on the loan is

7.5%

Kelly borrows $11,000 from the bank at an interest rate of 8%. If the bank requires a compensating balance of $1,000, the effective rate of interest on the loan is

8.8% Reason: $11,000 x 8% = $880. $880/10,000

Which condition will require that a compensating balance must be reported as restricted cash in noncurrent assets section of the balance sheet?

A company may not withdraw a portion of funds until its loan is due in 5 years.

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

Account receivable is reduced Allowance account is reduced

Which of the following is an accurate comparison of long-term notes receivable to short-term notes receivable?

The time value of money has a larger effect on long-term notes receivable.

Which of the following responsibilities are separated in a good internal control system for cash disbursements?

Cash disbursement documentation and the accounting recording function. Check writing and check signing.

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.

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.

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

IFRS only

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

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

Restricted cash

Restricted cash is usually reported in the balance sheet

as noncurrent assets.

Abby Company has three bank accounts with the following balances: account 1: $20,000; account 2: $40,000; account 3: $10,000 overdrawn. If Abby Company applies U.S. GAAP, it will report:

cash of $60,000 liability of $10,000

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

contra account to inventory.

Shannon Corp. determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include

credit to Accounts Receivable debit to Allowance for Uncollectible Accounts.

A note received solely for cash is valued at

its present value, which is the cash amount.

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.

Reconciling cash receipts to bank records helps verify that the amounts received also were

deposited

Which of the following items are classified as receivables?

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