ch 8

WRONG 10. Which one of the following is the correct presentation of Accounts Receivable and its contra account on the balance sheet? A. Accounts Receivable $642,000 Less: Allowance for Doubtful Accounts (2,000) $640,000 B. Accounts Receivable $642,000 Plus: Allowance for Doubtful Accounts 2,000 $644,000 C. Accounts Receivable $642,000 Less: Bad Debt Expense (17,000) $625,000 D. Accounts Receivable $642,000 Less: Bad Debt Expense (17,000) Less: Allowance for Doubtful Accounts (2,000) $623,000

A. Accounts Receivable $642,000 Less: Allowance for Doubtful Accounts (2,000) $640,000 The contra asset account is deducted from Accounts Receivable resulting in the cash (net) realizable value.

Ryan Leaf Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end and the total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a credit balance of $200 before adjustment? A. Bad Debts Exp. 1,600 Allowance for Doubtful Accts 1,600 B. Bad Debts Exp. 1,800 Allowance for Doubtful Accts. 1,800 C. Bad Debts Exp. 1,600 Accounts Rec. 1,600 D. Allowance for Doubtful Accts 1,800 Bad Debt Exp. 1,800

A. Bad Debts Exp. 1,600 Allowance for Doubtful Accts 1,600 The desired balance is the percentage estimated to be uncollectible times the receivables balance. The amount in the allowance account must be considered when making the adjustment.

RyTronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $100,000 at year-end and the total credit sales were $800,000. Management estimates that 4% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment? A. Bad Debts Expense 3,200 Allowance for Doubtful Accts 3,200 B. Bad Debts Exp 4,000 Allowance for Doubtful Accts 4,000 C. Bad Debts Exp 3,200 Accounts Rec. 3,200 D. Allowance for Doubtful Acct 4,000 Bad Debt Exp 4,000

A. Bad Debts Expense 3,200 Allowance for Doubtful Accts 3,200 Allowance for Doubtful Accounts needs an ending credit balance of 4% of $100,000 or $4,000. To increase the current credit balance of $800 to the required amount of $4,000, the account requires a credit of $3,200. The entry to estimate bad debts is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,200.

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. Which of the following is/are the debit entry(ies) required to record this transaction by Good Stuff Retailers? A. Cash $48,000 and Service Charge Expense $2,000 B. Accounts Receivable $48,000 and Service Charge Expense $2,000 C. Cash $50,000 D. Accounts Receivable $50,000

A. Cash $48,000 and Service Charge Expense $2,000 The entry includes a credit to Sales for the selling price, a debit to Service Charge Expense for the fee, and a debit to cash for the difference.

WRONG 24. Laurel Company factors $300,000 of receivables to Hardy Factors. Hardy assesses a 3% fee on the amount of receivables sold. Laurel Co. factors its receivables to Hardy regularly. What journal entry does Laurel make when the factoring occurs? A. Cash 291,000 Service Charge Exp. 9,000 Accounts Rec. 300,000 B. Cash 291,000 Accounts Rec. 291,000 C. Cash 300,000 Gain on Sale of Rec. 9,000 Accounts Rec. 291,000 D. Cash 291,000 Loss on Sale of Rec. 9,000 Accounts Rec. 300,000

A. Cash 291,000 Service Charge Exp. 9,000 Accounts Rec. 300,000 The entry should record the receipt of cash, recognize the service charge expense based on a percentage of the receivables, and reduce accounts receivable for the face value of the receivables that are sold.

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment? A.$12,000 B.$7,000 C.$17,000 D.$300,000

A.$12,000 Because the estimate is based on a percentage of receivables, the balance in the Allowance accounts must be considered.

How much accrued interest should be reported on the payee's December 31 balance sheet on a $5,000, 8%, 9-month note receivable issued on June 1? A.$233 B.$300 C.$400 D.$33

A.$233 Interest earned is calculated by multiplying the principal times the interest rate times the portion of the year that has passed since the note was issued.

Eddy Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. How much is the accounts receivables turnover? A.6.4 B.8.0 C.5.3 D.4.0

A.6.4 The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable, $800,000/[($100,000 + $150,000)/2] = 6.4.

What approach does IFRS require when testing whether the value of loans and receivable are impaired? A.A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group. B.A company should write off those receivables that are impaired, and then attempt to collect those amounts. C.A company should estimate how much will not be collected, and then write off amounts not collected. D.A company should look at specific loans and receivables to determine if impaired, and then write those off.

A.A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group. A company should look at specific loans and receivables to determine if impaired, and also evaluate them as a group in testing for impairment.

A company holds a 120-day, 10%, $21,000 note which was not paid in full on the maturity date. Which of the following will the journal entry on the maturity date include? A.Debit to Accounts Receivable for $21,700 B.Credit to Notes Receivable for $21,700 C.Debit to Cash for $21,700 D.Debit to Notes Receivable for $21,000

A.Debit to Accounts Receivable for $21,700 The journal entry will decrease Notes Receivable for the value of the note, recognize interest revenue for the term of the note, and increase the Accounts Receivable account for the total owed by the maker.

Kerrison Company sold $6,000 of merchandise to customers who charged their purchases with a bank credit card. Kerrison's bank charges it a 4% fee. Which one of the following is part of the journal entry to record the credit card sales? A.Debit to Cash for $5,760 B.Credit to Sales for $5,760 C.Debit to Cash for $6,000 D.Credit to Service Charge Expense for $240

A.Debit to Cash for $5,760 The fee is 4% times $6,000, or $240. Kerrison will receive the difference between the face amount of the receivables and the fee, or $5,760. The journal entry includes a debit to cash for $5,760, a debit to Service Charge Expense for $240, and credit to sales for $6,000.

Which one of the following is not one of the principles of managing accounts receivable? A.Determining from which vendor credit should be requested B.Establishing a payment period C.Monitoring collections D.Accelerating cash receipts from receivables when necessary

A.Determining from which vendor credit should be requested Establishing a payment period is a principle of managing accounts receivable.

At what amount is a short-term notes receivable recorded on the issue date? A.Face value B.Fair market value C.Present value D.Maturity value

A.Face value Short-term notes receivable are recorded at face value, which is the principal amount of the note.

On the date a 90-day note is honored, how much cash will the payee receive? A.Face value plus 90 days of interest B.Maturity value plus 90 days of interest C.Face value D.Maturity value less the face value

A.Face value plus 90 days of interest The maturity value is equal to face value of the note (the principal) plus interest accrued for the 90-day term of the note.

Which of the following accounts is debited when a company factors its accounts receivable? A.Service Charge Expense B.Interest Expense C.Loss on Sale of Accounts Receivable D.Accounts Receivable

A.Service Charge Expense Interest expense is not associated with the factoring of accounts receivable.

A captive finance company is one that is owned by the company selling the product. A.True B.False

A.True A captive finance company is one that is owned by the company selling the product.

Short-term notes receivable are reported at their cash (net) realizable value. A.True B.False

A.True This statement is true. Like accounts receivable, short-term notes receivable are reported at net realizable value.

The direct write-off method violates the expense recognition principle. A.True B.False

A.True This statement is true. The direct write-off method waits until a receivable has declined in value and is determined to be uncollectible before it is written off. This usually occurs after the end of the fiscal period of the related sale, which violates the expense recognition principle.

WRONG 7. Under the allowance method, the write off of an account receivable leaves the net realizable value of the receivables unchanged. A.True B.False

A.True This statement is true. When an account is written off, the entry is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. This reduces the accounts receivable and the allowance for doubtful accounts by the same amount, so that the difference between the two, the net realizable value, does not change.

Notes receivable are reported in the current assets section of the balance sheet at A.cash (net) realizable value. B.market value. C.total principal plus interest for the term of the loan. D.the selling price at which the inventory was sold to the customers.

A.cash (net) realizable value. Companies report accounts receivable, notes receivable, and other receivables in the current asset section of the balance sheet at their expected cash (net) realizable value.

Butte Co. loaned $25,000 to Beavis Co. on June 1, at 12% interest for 3 months. What adjusting entry will Butte Co. have to make on June 30 before preparing the financial statements on June 30? A. Interest Rec. 750 Interest Rev. 750 B. Interest Rec. 250 Interest Rev. 250 C. Interest Rec. 1,000 Interest Rev. 1,000 D. Interest Rec. 3,000 Interest Rev. 3,000

B. Interest Rec. 250 Interest Rev. 250 Interest earned is calculated by multiplying the principal times the interest rate times the portion of the year that has passed since the note was issued.

Michael Co. accepts a $4,000, 3-month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is A. Notes Rec. 4,120 Accounts Rec. 4,120 B. Notes Rec. 4,000 Accounts Rec. 4,000 C. Notes Rec. 4,000 Sales 4,000 D. Notes Rec. 4,120 Sales 4,120

B. Notes Rec. 4,000 Accounts Rec. 4,000 On the date Michael accepts the note, it is recorded at face amount. Interest is accrued only with the passage of time.

Net credit sales are $800,000, average net receivables total $150,000, average inventory totals $200,000, and the allowance for doubtful accounts totals $8,000. How much is the average collection period? A.5.33 days B.68.5 days C.2.2 days D.328.8 days

B.68.5 days The accounts receivable turnover is net credit sales ($800,000) divided by average net accounts receivable ($150,000), or 5.33 times. The average collection period is 365 divided by the accounts receivable turnover, which is 365/5.33 = 68.5 days.

Which of the following is the correct sequence to report receivables on the balance sheet? A.A 6-month note receivable, other receivables, accounts receivable B.Accounts receivable, a 6-month note receivable, other receivables C.A 6-month note receivable, accounts receivable, other receivables D.Accounts receivable, other receivables, a 6-month note receivable

B.Accounts receivable, a 6-month note receivable, other receivables Receivables are assets that must be reported in the order of liquidity. Those expected to be converted into cash more quickly are reported first.

Which statement is true about reporting receivables on the balance sheet? A.Bad Debts Expense and Allowance for Doubtful Accounts are shown as a deduction from Accounts Receivable on the balance sheet. B.Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet. C.Bad Debts Expense is is shown as a deduction from Accounts Receivable on the balance sheet. D.Bad Debts Expense is subtracted from Accounts Receivable and is then shown as a deduction from Accounts Receivable on the balance sheet.

B.Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet. Bad Debts Expense is a nominal account reported on the income statement.

Which of the following is the value at which loans and receivables should be reported under IFRS? A.Cash realizable value B.Amortized cost C.Net of bad debt expense D.Maturity value

B.Amortized cost IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts. IFRS sometimes refers to these allowances as provisions.

The accounts receivables turnover is computed by dividing net sales by accounts receivable. A.True B.False

B.False The accounts receivables turnover is computed by dividing net credit sales (net sales less cash sales) by average net accounts receivable.

Allowance for Doubtful Accounts is closed at the end of the fiscal year. A.True B.False

B.False This statement is false. Only nominal accounts are closed at the end of the fiscal period. Allowance for Doubtful Accounts is a real account and remains active and open from fiscal period to fiscal period.

6. Receivables are reported on the balance sheet at the cash amount owed by customers. A.True B.False

B.False While the balance of accounts receivable represents the amount owed by customers, the amount reported on the balance sheet is shown at their cash (net) realizable value. This is the amount the company expects to collect.

Which of the following should be classified as an "other" receivable? A.Trade receivables B.Interest receivable C.Accounts receivable D.Notes receivable

B.Interest receivable Trade, accounts, and notes receivables are financial instruments typically accepted from customers for the value of a transaction. Interest receivable results because of the time value of money.

Which one of the following is not one of the five basic issues in accounting for notes receivable? A.Recognizing notes receivable B.Realizing notes receivable C.Valuing notes receivable D.Disposing of notes receivable

B.Realizing notes receivable Disposing of notes receivable may occur by payoff at maturity, dishonor of the amount due, or factoring. This is one of the five basic issues.

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? A.Two debits and one credit B.Two credits and one debit C.One debit and one credit D.None of the answer choices are correct

B.Two credits and one debit The entry to record this transaction will have a debit to Cash, a credit to Notes Receivable and a credit to Interest Revenue.

When is a receivable recorded by a service organization? A.When the customer pays B.When service is provided on account C.When the related expenses are incurred D.When the bill is sent to the customer

B.When service is provided on account The receivable should be recorded when the service is performed, not at some other specific date.

Factoring is the process of A.determining the percentage of accounts receivable expected to be collected. B.selling accounts receivable at a discount to another party. C.determining the average collection period. D.determining the allowance for doubtful accounts value.

B.selling accounts receivable at a discount to another party. This is part of analyzing receivables.

WRONG 2. What is the maturity value of a $25,000, 9%, 4-month note receivable issued on December 1 if the company has a fiscal year end on December 31? A.$25,250 B.$25,000 C.$25,750 D.$27,250

C.$25,750 The maturity value is the face value plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note.

During 2014, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2014, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014? A.$20,000 B.$28,000 C.$32,000 D.$30,000

C.$32,000 The balance of Allowance for Doubtful Accounts after the write-offs are recorded must first be determined. The desired balance is the percentage estimated as uncollectible times the receivables balance. The amount in the allowance account must be considered when making the adjustment.

On June 15, Kersee Company sold merchandise on account to Eng Co. for $1,000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received on June 24? A.$700 B.$680 C.$686 D.None of the answer choices are correct.

C.$686 Because payment is made within the discount period of 10 days, the discount should be deducted to determine the cash amount received.

Prall Corporation sells its goods on terms of 2/10, n/30. It has a receivables turnover ratio of 7.00. What is its average collection period (days)? A.2,555 days B.30 days C.52 days D.2 days

C.52 days The average collection period is computed by dividing the number of days in the year by the accounts receivable turnover.

What type of receivable is evidenced by a formal instrument and normally requires the payment of interest? A.An account receivable B.A trade receivable C.A note receivable D.Past-due accounts receivables

C.A note receivable A note receivable represent claims for which formal instruments of credit are issued as evidence of the debt. The note normally requires the payment of the principal and interest on a specific date.

Which one of these statements about promissory notes is incorrect? A.The party making the promise to pay is called the maker. B.The party to whom payment is to be made is called the payee. C.A promissory note is not a negotiable instrument. D.A promissory note is more liquid than an account receivable.

C.A promissory note is not a negotiable instrument. Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement.

When an uncollectible account is recovered after it has been written off, which of the following accounts will be credited in the process? A.Allowance for Doubtful Accounts and Cash B.Cash and Account Receivable C.Accounts Receivable and Allowance for Doubtful Accounts D.Allowance for Doubtful Accounts and Bad Debts Expense

C.Accounts Receivable and Allowance for Doubtful Accounts Cash is received which creates a debit.

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method? A.Bad Debts Expense account is debited. B.Accounts Receivable account is debited. C.Allowance for Doubtful Accounts is debited. D.Loss on Accounts Receivable account is debited.

C.Allowance for Doubtful Accounts is debited. The debit account is Allowance for Doubtful Accounts, and Accounts Receivable is credited to remove the customer's account.

Which one of the following statements is true? A.Bad Debts Expense and Allowance for Doubtful Accounts are both nominal accounts and are closed at the end of the fiscal period. B.Bad Debts Expense and Allowance for Doubtful Accounts are both real accounts and neither are closed at the end of the fiscal period. C.Bad Debts Expense is a nominal account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period. D.Bad Debts Expense is a real account and remains open at the end of the fiscal period, while Allowance for Doubtful Accounts is a nominal account and is closed at the end of the fiscal period.

C.Bad Debts Expense is a nominal account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period. Bad Debts Expense is a nominal or temporary account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period. Feedback D: Bad Debt Expense is a nominal or temporary account and Allowance for Doubtful Accounts is a real or permanent account. Only temporary accounts are closed at the end of the period.

At what value are accounts receivable reported on the balance sheet? A.Fair market value B.Present value C.Cash (net) realizable value D.Maturity value

C.Cash (net) realizable value Fair market value implies the amount for which the accounts receivable could be sold.

A 90-day promissory note is issued on September 15. What is the note's maturity date? A.December 16 B.December 15 C.December 14 D.December 13

C.December 14 You must count the number of days. The date the note is issued is omitted, while the due date is counted.

Which of these statements about Visa credit card sales is incorrect? A.The credit card issuer conducts the credit investigation of the customer. B.The retailer is not involved in the collection process. C.The retailer must wait to receive payment from the issuer. D.The retailer receives cash more quickly than it would from individual customers.

C.The retailer must wait to receive payment from the issuer. The retailer has no concerns about the credit worthiness of the customer and does not have to pursue payment.

What type of receivables result from sales transactions? A.Other receivables B.Non-trade receivables C.Trade receivables D.Long-term receivables

C.Trade receivables Accounts receivable and notes receivable resulting from sales transactions are called trade receivables.

Obama Company has identified that Bill Clinton's receivable account of $100 is uncollectible. What is the journal entry needed to write off the account under the allowance method? A. Accounts Rec. 100 Bad Debts Exp. 100 B. Bad Debts Exp. 100 Accounts Rec. 100 C. Allowance for Doubtful Accts 100 Bad Debts Exp. 100 D. Allowance for Doubtful Accts 100 Accounts Rec. 100

D. Allowance for Doubtful Accts 100 Accounts Rec. 100 This journal entry increases Accounts Receivable and decrease Bad Debts Expense. It will increase the amount that Bill owes rather than decrease it. Bad debt expense is recognized only when doubtful accounts are estimated, not when they are written off.

If a company uses the allowance method for uncollectible accounts, then the entry to record $800 of estimated uncollectibles is A. Bad Debts Exp. 100 Accounts Rec. 100 B. Allowance for Doubtful Accts 800 Accounts Rec. 800 C. Accounts Rec. 800 Allowance for Doubtful Accts 800 D. Bad Debts Exp. 800 Allowance for Doubtful Accts 800

D. Bad Debts Exp. 800 Allowance for Doubtful Accts 800 This journal entry would reinstate an account that had been previously written off. The journal entry to record the estimate of uncollectible accounts is a debit to Bad Debts Expense and a credit to the Allowance for Doubtful Accounts.

Schleis Co. holds Murphy Inc.'s $10,000, 120-day, 9% note. What is the entry to be made by Schleis Co. when the note is collected, assuming no interest has previously been accrued? A. Cash 10,300 Notes Rec. 10,300 B. Cash 10,000 Notes Rec. 10,000 C. Accounts Rec. 10,300 Notes Rec. 10,000 Interest Rev. 300 D. Cash 10,300 Notes Rec. 10,000 Interest Rev. 300

D. Cash 10,300 Notes Rec. 10,000 Interest Rev. 300 When Schleis receives payment, it will increase cash, reduce the notes receivable account, and recognize the interest earned for the term of the note.

On May 2, Wainwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What entry will Wainwright Company make when it receives the note on May 2? A. Notes Rec. 3,100 Accounts Rec. 3,100 B. Notes Rec. 3,000 Interest Rec. 100 Accounts Rec. 3,000 Interest Rev. 100 C. Notes Rec. 3,100 Sales 3,100 D. Notes Rec. 3,000 Accounts Rec. 3,000

D. Notes Rec. 3,000 Accounts Rec. 3,000 On the date Wainwright accepts the note, it is recorded at face amount. Interest is accrued only with the passage of time.

Danta Company has a March 31 fiscal year end. What is the maturity value of a $25,000, 12%, 3-month note receivable dated March 1? A.$25,000 B.$28,000 C.$25,250 D.$25,750

D.$25,750 The maturity value is the face value plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note.

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal the following data: Accounts receivable $800,000 Allowance for doubtful accounts balance before adjustment (credit) 12,000 Amounts expected to become uncollectible 65,000 How much is the cash (net) realizable value of the accounts receivable at December 31, after adjustment? A.$747,000 B.$788,000 C.$723,000 D.$735,000

D.$735,000 The cash (net) realizable value of the accounts receivable is accounts receivable less the ending balance in the Allowance for Doubtful Accounts.

Which of the following is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company? A.Concentration risk B.Payment risk C.Credit risk D.A concentration of credit risk

D.A concentration of credit risk A threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company is called a concentration of credit risk.

Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable? A.Allowance for Doubtful Accounts B.Loss on Notes Receivable C.Bad Debts Expense D.Accounts Receivable

D.Accounts Receivable Allowance for Doubtful Accounts is debited only when amounts are written off as uncollectible.

What is often the most critical part of managing receivables? A.Establishing a payment period B.Determining which method to use to account for bad debts C.Monitoring the receivables D.Determining who gets credit and who doesn't

D.Determining who gets credit and who doesn't Managing accounts receivable involves five steps. The one that is considered the most critical is deciding on who gets credit and who doesn't.

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do? A.Require the customer to pay cash in advance B.Require the customer to provide a letter of credit or a bank guarantee C.Contact references provided by the customer, such as banks and other suppliers D.Provide the customer a lengthy payment period to increase the chance of paying

D.Provide the customer a lengthy payment period to increase the chance of paying Longer payment period will increase the chances the company will not pay. Companies might require risky customers to provide letters of credit or bank guarantees, require them to pay cash in advance, or ask for references from banks and suppliers to determine their payment history.

Which one of the following is not a method used by companies to accelerate cash receipts? A.Offering discounts for early payment B.Accepting national credit cards for customer purchases C.Selling receivables to a factor D.Writing off receivables

D.Writing off receivables Management can accelerate the collection of cash from receivables by offering discounts for early payment.