ACC 3110 - CH7

Below is a schedule of accounts receivable. Using the aging method, determine the ending balance in the allowance for uncollectibles account. Length of time outstanding Accounts receivable balance Percentage estimated uncollectible 0-30 days $100,000 1% 30-60 days 60,000 2% 60-90 days 20,000 3% Over 90 days 50,000 4%

$4,800

Below is a schedule of accounts receivable. Using the aging method, determine the ending balance in the allowance for uncollectible accounts. Length of time outstanding Accounts receivable balance Percentage estimated uncollectible 0-30 days $200,000 0.5% 30-60 days 100,000 1 60-90 days 50,000 2 Over 90 days 40,000 6

$5,400

Below is information from the financial statements of Greenwich Company: Accounts receivable (net) 2016: $2,400 Accounts receivable (net) 2015: $2,200 Net sales 2016: $25,875 What is the receivables turnover?

11.25 times

Below is information from the financial statements of Greenwich Company: Accounts receivable (net) 2016: $2,400 Accounts receivable (net) 2015: $2,200 Net sales 2016: $25,875 What is the average collection period?

32.44 days

Below is information from the financial statements of Thornton Company: Accounts receivable (net) 2016: $1,100 Accounts receivable (net) 2015: $900 Net sales 2016: $8,000 What is the average collection period?

45.63 days Reason: Average = ($1100 + 900)/2 = $1000 $8000/1000 = 8 times receivables turnover 365/8 = 45.63 days

Below is information from the financial statements of Thornton Company: Accounts receivable (net) 2016: $1,100 Accounts receivable (net) 2015: $900 Net sales 2016: $8,000 What is the receivables turnover?

8 times

Which of the following is a cost of offering a cash discount?

A reduction in the amount of cash collected from customers who take advantage of the discount.

What does a sales discount represent?

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

If Company A sells accounts receivable without recourse to ABC Finance and the customer cannot pay, who assumes the risk of bad debts?

ABC Finance

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.

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

Allowance for sales returns

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

Allowance for uncollectible accounts

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

Which of the following are services performed by a factor? (Select all that apply.)

Buy accounts receivable. Handle billing and collection of accounts receivable.

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.

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 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.

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.

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.

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

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

IFRS only

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

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.

Which of the following are costs of extending credit terms to customers? (Select all that apply.)

Increased investment in receivables. Increase in uncollectible accounts.

Tom Company offers Jane Company discount terms of 5/15, n/45. What does this mean?term-33

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

Which of the following are potential benefits of offering cash discounts to customers? (Select all that apply.)

Reduction in bad debt Increased sales volume Accelerated customer payment

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.)

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

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.

Which of the following conditions must exist for a transfer of receivables to be treated as a sale? (Select all that apply.)

The assets are isolated and beyond the reach of the transferor. The transferor surrenders control of the asset. The transferee has the right to pledge or exchange the assets.

At what amount are accounts receivable initially recorded?

The exchange price agreed on by the buyer and seller.

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.

Which of the following indicate surrender of control over the assets transferred? (Select all that apply.)

The transferor will have no continuing involvement. Receivables are sold without recourse.

Who houses the financed receivables on their balance sheet in a secured borrowing?

Transferor

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: Management can influence the collection of receivables based on the terms they offer.

True

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

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.

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

a noncurrent asset. other assets. investments and funds.

Which of the following items are not included in cash?

accounts receivable from customers

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.)

allowance

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

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 balance sheet approach estimates _ _ expense by determining the appropriate carrying value of accounts receivable. (Enter one word per blank.)

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.

In a sale of an accounts receivable without recourse, if the customer does not pay, the loss is assumed by the _ of the accounts receivable. (Enter only one word.)

buyer, transferee, purchaser, owner, or factor

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the _ account on the balance sheet. (Enter only one word.)

cash

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

cash other assets services

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

cash OR sales

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

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

A(n) _ balance is a cash restriction in connection with a loan that creates a higher effective interest rate on that loan. (Enter only one word.)

compensating

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 inventory.

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of _. (Enter only one word.)

control

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 (Select all that apply.)

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

Which of the following items are included in cash? (Select all that apply.)

currency and coins checks from customers balance in checking accounts

An account receivable is normally classified as a

current asset.

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.

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.)

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 (Select all that apply.)

debit to accounts receivable, $4,900. credit to sales, $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 (Select all that apply.)

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

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.

Internal control consists of plans to (Select all that apply.)

encourage adherence to company policies and procedures. promote operational efficiency. minimize errors and theft. enhance the reliability of accounting data. enhance the accuracy of accounting data.

Management can influence credit and collections by

extending payment terms. offering cash discounts.

In a(n) _ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections. (Enter only one word.)

factoring

A trade discount is a reduction from the list price, which is to (Select all that apply.)

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

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

gross method

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) _ _ approach to measuring bad debts. (Enter one word per blank.)

income statement

The direct write-off method is required for

income tax purposes.

Separation of duties requires that

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

Restrictions on cash may be (Select all that apply.)

informal arising from management intent. formal by contract.

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

interest on a note.

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.

An aging schedule classifies accounts receivable based on

length of time outstanding.

U.S. GAAP typically requires that bank overdrafts be treated as _ on the balance sheet where IFRS allows them to offset other cash accounts. (Enter only one word.)

liabilities

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

net credit sales.

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

note receivable

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

note receivable.

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

note receivable.

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

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 a(n) _ discount. (Enter only one word.)

sales

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

sales return

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) _ _ . (Enter one word per blank.)

sales return

A(n) borrowing occurs when accounts receivable are assigned or pledged as collateral for a loan. (Enter one word per blank.

secured

Assigning or pledging accounts receivable is used in a

secured borrowing.

A critical aspect of a good internal control system is

separation of duties.

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.

A(n) _ discount is a way to change prices without publishing a new catalog. (Enter only one word.)

trade

The _ recognizes a note receivable in a secured borrowing agreement. (Enter only one word.)

transferee OR lender

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

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

The buyer assumes the risk of uncollectibility when accounts receivable are sold _ recourse.

without