ACTY 3100 Chapter 7

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 0-30 days 30-60 days 60-90 days Over 90 days Accounts receivable balance $100,000 60,000 20,000 50,000 Percentage estimated uncollectible 1% 2% 3% 4%

$4,800

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

(1) Allowance account is reduced (2) Account receivable is reduced

The formula for calculating interest multiplies which of the following?

(1) Annual interest rate (2) Face amount of the note (3) Fraction of the annual period

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

(1) Changes prices without publishing a new catalog (2) Give quantity discounts to customers (3) disguise real prices from competitors

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

(1) Checks are signed by authorized individuals (2) All disbursements (other than petty cash) are made by check (3) All expenditures are authorized

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

(1) Debit Accounts Receivable. (2) Credit Allowance for Uncollectible Accounts.

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?

(1) Debit to Sales Returns. (2) Credit to Cash

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.

(1) Gross (2) Net

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

(1) Gross (2) Net

Which of the following are services performed by a factor?

(1) Handle billing and collection of accounts receivable. (2) Buy accounts receivable.

Which of the following are costs of extending credit terms to customers?

(1) Increased investment in receivables. (2) Increase in uncollectible accounts.

Which of the following are potential benefits of offering cash discounts to customers?

(1) Increased sales volume (2) Accelerated customer payment (3) Reduction in bad debt

Internal control consists of plans to:

(1) Minimize errors and theft (2) Encourage adherence to company policies and procedures (3) Promote operational efficiency

Management can influence credit and collections by

(1) Offering cash discounts (2) Extending payment terms

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

(1) Other assets (2) Investments and funds (3) A noncurrent asset

Which of the following situations require cash to be restricted?

(1) Requirement to use cash for future plant expansion. (2) Requirements to set aside funds to repay debt.

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

(1) Sales (2) Return

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

(1) Services (2) Other Assets (3) Cash

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

(1) The allowance for uncollectible accounts is reduced. (2) Accounts receivable is reduced.

Which of the following conditions must exist for a transfer of receivables to be treated as a sale?

(1) The assets are isolated and beyond the reach of the transferor. (2) The transferor surrenders control of the asset. (3) The transferee has the right to pledge or exchange the assets.

How is inventory recorded related to returns?

(1) The inventory account is increased when returns occur to include the returned items. (2) 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?

(1) The transferor will have no continuing involvement. (2) Receivables are sold without recourse.

How do sellers typically account for returns?

(1) Using an adjusting entry at the end of the period for any remaining future expected returns. (2) As returns occur.

A secured borrowing occurs when accounts receivable are ____ or ____ as collateral for a loan.

(1) assigned (2) pledged

Which of the following items are included in cash?

(1) balance in checking accounts (2) currency and coins (3) checks from 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

(1) debit to Accounts Receivable. (2) credit to Allowance for Uncollectible Accounts.

Internal control consists of plans to:

(1) enhance the reliability of accounting data (2) enhance the accuracy of accounting data (3) promote operational efficiency

Restrictions on cash may be

(1) informal arising from management intent. (2) formal by contract.

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 Average = ($2400+2200)/2 = $2300 $25,875/2300= 11.25 times 365 days/11.25 = 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 Average = ($1100+ 900)/2 = $1000 $8000/1000 = 8 times 365 days/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 Average = ($1100 + 900)/2 = $1000 $8000/1000 = 8 times

When a company has a claim to receive assets in the future, how is this recorded on the balance sheet?

A receivable

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.

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.

Which of the following items are not included in cash?

Accounts receivable from customers

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 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.

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

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 A/R, $4,900 Credit to Sales, $4,900

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, $5000 Credit to Sales, $5,000

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

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.

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.

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.

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

Under which approach to financing with receivables does the borrower act like it borrowed money from the lender, with the receivables remaining on the borrowers balance sheet and serving as collateral?

Secured borrowing

A critical aspect of a good internal control system is

Separation of duties

At what amount are accounts receivable initially recorded?

The exchange price agreed on by the buyer and seller.

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

The income statement approach

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.

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.

A company is allowed to account for the transfer of receivables as a sale if what occurs?

The transferor has surrendered control over the assets transferred.

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

Match the accounting standard with the appropriate treatment of receivables

US GAAP: Requires more disaggregation and disclosure of receivables IFRS: Recommends but does not require separate disclosure of receivables

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.

A trade discount is

a percentage reduction from list price

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

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

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.

Restricted cash is usually reported in the balance sheet

as noncurrent assets

he 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

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.

buyer

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

cash

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

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.

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of ___

control

The direct write-off method

could result in a mismatching of expenses and revenue

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

debit to accounts receivable, $1,000 Credit to sales, $1,000

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.

The transfer of a note to a financial institution is referred to as ___

discounting

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.

In a(n) _____ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections.

factor

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

gross method

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

higher than

Accounts receivable are normally classified

in the balance sheet as current assets.

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

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.

(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

The ___ recognizes a note receivable in a secured borrowing agreement.

lender

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.

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.

noninterest

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.

The gross method and the net method are two ways to record ______ discounts

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(n) ____ ____ occurs when a customer returns merchandise for a refund.

sales return

Assigning or pledging accounts receivable is used in a

secured borrowing

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.

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