Chapter 7 Accounting for Receivables

What is the term used to describe the amount of accounts receivable that is actually expected to be collected?

Net realizable value

The following information is available for Blankenship Company for the most recent year. Sales $1,100,000 Cost of goods sold 760,000 Gross profit 340,000 Net income 85,000 Accounts receivable (average # of days to sell inventory) 90,000 Inventory (50 days) 105,000 What was Blankenship's operating cycle for the most recent year? (Round to the nearest whole day.) A) 30 days B) 50 days C) 80 days D) 120 days

80 days

Which of the following businesses would most likely have the longest operating cycle? A) A chain of coffee shops B) A national sporting goods chain C) An antiques dealer D) A Christmas tree farm

A Christmas tree farm

The best estimate of the amount of cash a company expects to collect from its accounts receivable is the face value of the receivables. True or False?

False

net realizable value

The amount of accounts receivable a business expects to collect.

Hancock Medical Supply Co., earned $160,000 of revenue on account during Year 1, its first year of operation. During Year 1, Hancock collected $128,000 of cash from its receivables accounts. The company did not write-off any uncollectible accounts. It estimates that it will be unable to collect 1% of revenue on account. What is the net realizable value of receivables that will be reported on the balance sheet at December 31, Year 1? A) $30,400 B) $30,720 C) $32,000 D) $30,000

$30,400

Which of the following is (are) the term(s) used to describe the person responsible for making payment on the due date of a promissory note? A) Lender or maker B) Maker or debtor C) Borrower D) Borrower or maker or debtor

Borrower or maker or debtor

The Yankee Corporation has recently begun to accept credit cards. On July 7, Year 1, Yankee made a credit card sale of $600. The credit card company charges a fee of 3% for handling a credit card transaction. Which of the following correctly describes the effect of the collection of cash from the credit card company on the financial statements of Yankee Corporation?

Collecting the amount due ($582) from the credit card company increases assets (cash) and decreases assets (accounts receivable - credit card company), resulting in no net effect on total assets, total liabilities, or stockholders' equity. It is reported as a cash inflow for operating activities.

How is the accounts receivable turnover ratio computed? A) Sales ÷ Net accounts receivable B) Net accounts receivable ÷ Sales C) Cost of goods sold ÷ Inventory D) 365 days ÷ Net accounts receivable

Sales ÷ Net accounts receivable

Which of the following is the term commonly used to describe the practice of reporting the net realizable value of receivables in the financial statements?

Allowance method

Which of the following best describes the percent of receivables method? A) Income statement approach B) Direct write-off approach C) Credit sales approach D) Balance sheet approach

Balance sheet approach

Most companies report receivables on their balance sheets at the net realizable value. True or False?

True

Under the allowance method, recognizing the write-off of an uncollectible account receivable will

will not affect the total amount of the net realizable value of receivables.

Domino Company ages its accounts receivable to estimate uncollectible accounts expense. Domino began Year 2 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $76,500 and $5,800, respectively. During Year 2, the company wrote off $4,640 in uncollectible accounts. In preparation for the company's estimate of uncollectible accounts expense for Year 2, Domino prepared the following aging schedule: Days Past AR % likely uncollectable due Current $104,000 1% 0-30 $45,000 5% 31-60 $9,920 10% 61-90 $4,440 25% Over 90 $3,800 50% What amount will be reported as uncollectible accounts expense on the Year 2 income statement? A) $6,132 B) $1,512 C) $7,292 D) $4,640

$6,132

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. What is the amount of interest revenue that Rosewood would report in Year 1 and Year 2, respectively? A) $960 in Year 1 and $0 in Year 2 B) $0 in Year 1 and $960 in Year 2 C) $240 in Year 1 and $720 in Year 2 D) $720 in Year 1 and $240 in Year 2

$720 in Year 1 and $240 in Year 2

How is the average number of days to collect accounts receivable computed? A) Accounts Receivable ÷ Net income B) 365 ÷ Accounts receivable turnover ratio C) Accounts Receivable ÷ 365 D) Sales ÷ Net accounts receivable

365 ÷ Accounts receivable turnover ratio

Rhodes Company reports the following information for the Year 1 fiscal year: Sales on account $650,000 Accounts receivable $70,000 Allowance for doubtful accounts $4,000 Determine the average number of days it takes Rhodes to collect its accounts receivable. (Round intermediate calculations to 2 decimal places.) A) 37 B) 14 C) 39 D) 20

37

How is a company's operating cycle determined? A) Adding the inventory turnover ratio to the receivables turnover ratio divided into 365 days. B) Adding the average days in inventory to the average days in receivables. C) Dividing cost of goods sold by average inventory. D) Dividing 365 days by the difference in the inventory turnover and receivable turnover.

Adding the average days in inventory to the average days in receivables.

How would accountants estimate the amount of a company's uncollectible accounts expense? A) Consider new circumstances that are anticipated to be experienced in the future. B) Compute as a percentage of credit sales. C) Consult with trade association and business associates. D) All of these answer choices are correct.

All of these answer choices are correct.

What is the effect of recognizing $7,500 of uncollectible accounts expense under the direct write-off method? A) Assets and liabilities increase B) Assets and stockholders' equity increase C) Assets and stockholders' equity decrease D) There is no effect on total assets, liabilities or stockholders' equity

Assets and stockholders' equity decrease

The length of the operating cycle of a business can be determined by:

Average number of days to sell Inventory + Average days to collect receivables = Length of Operating Cycle

How does the year-end adjustment to recognize uncollectible accounts expense affect the elements of the financial statements?

Decrease total assets and decrease stockholders' equity.

What effect will recognizing the uncollectible accounts expense for Year 2 have on the elements of the financial statements? A) Increase total assets and retained earnings B) Decrease total assets and increase retained earnings C) Decrease total assets and net income D) Increase total assets and decrease net income

Decrease total assets and net income

On January 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During Year 2, Kincaid reported $72,500 of credit sales, wrote off $550 of receivables as uncollectible, and collected cash from receivables amounting to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Which of the following describes the effects of writing off the uncollectible accounts? A) Increase assets and stockholders' equity B) Increase assets and decrease stockholders' equity C) Decrease assets and stockholders' equity D) Does not affect assets or stockholders' equity

Does not affect assets or stockholders' equity

The collection of an account receivable is an asset source transaction. True or False?

False

The direct write-off method does a better job of matching revenues and expenses than does the allowance method. True or False?

False

The face value of Accounts Receivable plus the balance in the Allowance for Doubtful Accounts is equal to the net realizable value of the receivables. True or False

False

Hoff Company uses the allowance method. An account that had been previously written-off as uncollectible was recovered. How do the two parts of the recovery (reinstate receivable and collect the receivable) affect the elements of the financial statements when the two parts are considered together?

Has no effect on total assets, total liabilities or stockholders' equity

What does the accounts receivable turnover ratio measure? A) How quickly accounts receivable turn into cash B) How quickly the accounts receivable balance increases C) Average balance of accounts receivables D) How quickly inventory turns into accounts receivable

How quickly accounts receivable turn into cash

Assume that the Loudoun Corporation uses the direct write-off method. Which of the following correctly describes the effect of the write-off of the customer's account on Loudoun's financial statements?

If Loudoun uses the direct write-off method, the write-off will decrease assets (accounts receivable) and stockholders' equity (retained earnings). It increases expenses (uncollectible accounts expense), which decreases net income. It does not affect the statement of cash flows.

When is it acceptable to use the direct write-off method? A) If the dollar amount of uncollectible accounts is not material. B) If most uncollectible accounts do not occur in the period of sale. C) If most sales are made to other businesses. D) All of these answer choices are correct.

If the dollar amount of uncollectible accounts is not material.

Elliston Company accepted credit card payments for $10,000 of services provided to customers. The credit card company charges a 3% fee for handling the transaction. Which of the following describes the effect of this transaction? A) Increase revenue by $9,700 B) Increase assets by $10,000 C) Increase stockholders' equity (retained earnings) by $9,700 D) Increase net income by $10,000

Increase stockholders' equity (retained earnings) by $9,700

If the allowance method is used, how does recording the recovery of an uncollectible account affect the elements of the financial statements? (Hint: Consider the effect of both the reinstatement and the collection of the receivable taken together.) A) No effect on total assets or stockholders' equity B) Increase stockholders' equity C) Decrease total assets D) Increase total assets and stockholders' equity

No effect on total assets or stockholders' equity

Glebe Company accepted a credit card account receivable in exchange for $1,100 of services provided to a customer. The credit card company charges a 5% fee for handling the transaction. What effect will the collection of cash from the credit card company have on the elements of the financial statements? A) Increase assets by $1,045 B) Decrease assets and stockholders' equity by $55 C) Increase assets by $1,100 D) None of these answer choices are correct

None of these answer choices are correct

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050. Which of the following correctly states the effect of recording the collection of the reestablished receivable on April 4, Year 2?

Once the receivable is reestablished, the collection of the receivable is recorded as an increase to assets (cash) and a decrease to assets (accounts receivable), resulting in no net effect on total assets, total liabilities, or stockholders' equity. It is reported as a cash inflow for operating activities.

Which of the following is not a significant difference between the allowance method and the direct write-off method? A) One method requires writing off uncollectible accounts and the other does not. B) One method conforms to GAAP and the other typically does not. C) One method reports net realizable value on the balance sheet and the other does not. D) One method requires the estimation of uncollectible accounts and the other does not.

One method requires writing off uncollectible accounts and the other does not.

Which of the following reflects the effect of the year-end adjustment to record estimated uncollectible accounts expense using the allowance method?

Recording uncollectible accounts expense decreases assets (increases allowance for doubtful accounts) and stockholders' equity (retained earnings). It increases expenses, which decreases net income. It does not affect the statement of cash flows.

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050. Which of the following correctly states the effect of Loudoun's recording the reestablishment of the receivable on April 4, Year 2?

Reestablishing the receivable increases assets (accounts receivable) and decreases assets (increase to allowance for doubtful accounts), resulting in no net effect on total assets, total liabilities, or stockholders' equity.

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts? A) The account is a contra account. B) The account is a liability. C) The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company's receivables. D) The account is increased by an estimate of uncollectible accounts expense.

The account is a liability.

The accounting records of the Harris and Schubert Companies contained the following account balances: Sales Accounts receivable Harris $300,00 $60,000 Schubert 180,000 40,000 Which of the following statements is true? A) Schubert Company has a lower likelihood of lost income resulting from credit costs. B) The company with the higher accounts receivable turnover ratio will also have the longer average number of days to collect accounts receivable. C) The accounts receivable for Schubert Company turns over 6 times each year. D) The average number of days to collect accounts receivable for Harris is 73 days.

The average number of days to collect accounts receivable for Harris is 73 days.

Operating Cycle

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

The Yankee Corporation has recently begun to accept credit cards. On July 7, Year 1, Yankee made a credit card sale of $600. The credit card company charges a fee of 3% for handling a credit card transaction. Which of the following correctly shows the effects of the sale on July 7?

The credit card sale increases total assets (accounts receivable - credit card company) and stockholders' equity (retained earnings) by $582 [or $600 − ($600 × 3%)]. It increases revenue by $600 and increases expenses (credit card expense) by $18 (or $600 × 3%) and increases net income by $582 (or $600 − $18). The statement of cash flows is not affected. Difficulty: 2 Medium

Which of the following is not considered a "cost" of extending credit to customers? A) The opportunity cost of lost interest B) Keeping the records for accounts receivable C) The increased sales resulting from the extension of credit D) The possibility of unpaid accounts

The increased sales resulting from the extension of credit

Which accounting concept can be used by some companies to justify the use of the direct write-off method? A) The entity concept B) The materiality concept C) The going concern concept D) The monetary principle

The materiality concept

Which of the following is a true statement about a company that uses the allowance method?

The net realizable value of its accounts receivable is shown on the balance sheet.

Alberta Company accepts a credit card as payment for $450 of services provided for the customer. The credit card company charges a 4% fee for handling the transaction. How does this this transaction affect the elements of the financial statements?

The sale increases assets (accounts receivable - credit card company) and stockholders' equity (retained earnings) by $432 [or ($450 − ($450 × 4%)]. It increases revenue by $450, increases expenses (credit card expense) by $18 (or $450 × 4%), and increases net income by $432 (or $450 − $18). The statement of cash flows is not affected.

Buttercup Florist uses the allowance method to account for uncollectible accounts. Unable to collect a $150 account from a customer, Buttercup determined it was uncollectible. How would the write-off of this account affect the elements of the company's financial statements?

The write-off decreases assets (accounts receivable) and increases assets (decrease to allowance for doubtful accounts), resulting in no net change to total assets, total liabilities, or stockholders' equity. A write-off does not affect the statement of cash flows.

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050. Which of the following correctly states the effect of Loudoun Company writing off the customer's account?

The write-off increases assets by decreasing the allowance for doubtful accounts and decreases assets (accounts receivable), resulting in no net effect on total assets, total liabilities, or stockholders' equity.

Which of the following is not an advantage of accepting credit cards from retail customers? A) The acceptance of credit cards tends to increase sales. B) The credit card company performs credit worthiness assessments. C) There are fees charged for the privilege of accepting credit cards. D) The credit card company assumes the cost of slow collections and write-offs.

There are fees charged for the privilege of accepting credit cards.

The net realizable value of accounts receivable is the amount of receivables a company expects to collect. True or False?

True

Using the allowance method of accounting for uncollectible receivables requires an estimate of the amount of receivables that will not be collected. True or False?

True

Which of the following is a cost of extending credit to customers? A) Uncollectible accounts expense B) Lost sales C) Fees paid to credit card companies D) Explicit interest

Uncollectible accounts expense

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050. Which of the following correctly states the effect of the adjustment dated December 31, Year 1, on the elements of the financial statements of the Loudoun Corporation?

Uncollectible accounts expense = Credit sales of $112,500 × 3% = $3,375 The adjustment decreases assets (by increasing the allowance for doubtful accounts) and decreases stockholders' equity (retained earnings). It increases expenses (uncollectible accounts expense), which decreases net income. It does not affect the statement of cash flows.

Under the allowance method the uncollectible accounts expense is

estimated and recognized at the end of the accounting period.