Financial Accounting Ch. 8

In a promissory note, the party making the promise to pay is called the maker. A. True B. False

TRUE

Notes and accounts receivable that result from sales transactions are often called trade receivables. A. True B. False

TRUE

Under the percentage-of-receivables basis, the amount of bad debt expense is the difference between the required balance and the existing balance in the allowance account. A. True B. False

TRUE

Cash (net) realizable value is the net amount the company expects to receive in cash from collecting its accounts receivable. A. True B. False

TRUE

Companies report short-term notes receivable at their cash (net) realizable value. A. True B. False

TRUE

A note receivable is a negotiable instrument that A can be transferred to another party by endorsement B may be turned over by special request C can be used only by the firm that first receives it D is less legally binding than accounts receivable

A

Accounts and short-term notes receivable are reported in the current assets section of the balance sheet at A. cash (net) realizable value. B. net book value. C. lower-of-cost-or-market value. D. invoice cost.

A

Blinka Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Blinka Retailers will include a credit to Sales of $50,000 and a debit(s) to A. Cash $48,000/ Service Charge Expense $2,000 B. Accounts Receivable $48,000/ Service Charge Expense $2,000 C. Cash $50,000 D. Accounts Receivable $50,000

A

Interest revenue and gain on sale of notes receivable are shown under other revenues and gains. A True B False

A

Receivables might be sold to generate cash quickly. A True B False

A

Sales resulting from the use of Visa and MasterCard credit cards are considered A. cash sales. B. credit sales. C. credit card sales. D. card sales.

A

Short-term notes receivable are reported at A. cash (net) realizable value. B. face value. C. gross realizable value. D. maturity value.

A

The percentage-of-receivables basis of estimating uncollectibles A. produces a better estimate of cash realizable value. B. results in a better matching of expenses with revenues. C. emphasizes income statement relationships. D. ignores the existing balance in Allowance for Doubtful Accounts.

A

What are notes or accounts receivables that result from sales transactions often called? A trade receivables B merchandise receivables C non-trade receivables D sales receivables

A

What are the two key parties to a promissory note? A maker and the payee B sender and the receiver C maker and a bank D debtor and the payee

A

When would a credit card holder receive lower interest charges? A when the card company allows a grace period before interest is accrued B when the card company states interest as a monthly percentage rather than an annual percentage C when the card company calculates finance charges from the date of purchase to the date the amount is paid D when the card company allows cardholders to skip payments on their cards

A

Which of the following approaches for bad debts is best described as a balance sheet method? A. Percentage-of-receivables basis. B. Direct write-off method. C. Percentage-of-sales basis. D. Both direct write-off method and percentage-of-receivables basis.

A

Which of the following would be recorded in an income statement under "other revenues and gains"? A interest revenue B notes receivable C operating expenses D bad debt expense

A

Which of the following are the result of credit sales to a company? Select all that apply. A notes receivable B accounts receivable C nontrade receivables D interest receivable

A, B

A 60-day note receivable dated April 13 has a maturity date of A. June 13. B. June 12. C. June 11. D. June 10.

B

Bond Company recorded bad debts expense of $35,000 and wrote off accounts receivable of $20,000 during the current year. The net effect of these two transactions on net income was A. a decrease of $55,000. B. a decrease of $35,000. C. a decrease of $20,000. D. no effect.

B

Companies report accounts receivable on the balance sheet at A. cost. B. cash (net) realizable value. C. gross realizable value. D. face value.

B

For an interest-bearing note, the amount due at maturity is the A. face value of the note. B. face value of the note plus interest. C. maturity value plus interest. D. cash (net) realizable value.

B

Foti Co. accepts a $1,000, 3-month, 12% promissory note in settlement of an account with Bartelt Co. The entry to record this transaction is as follows: A. Notes Receivable 1,030/ Accounts Receivable 1,030 B. Notes Receivable 1,000/ Accounts Receivable 1,000 C. Notes Receivable 1,000/ Sales 1,000 D. Notes Receivable 1,020/ Accounts Receivable 1,020

B

Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on the review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. The amount of bad debts expense which should be reported for the year is A. $5,000. B. $55,000. C. $60,000. D. $65,000.

B

If a company fails to record estimated bad debts expense, A. cash realizable value is understated. B. expenses are understated. C. revenues are understated. D. receivables are understated.

B

In 2014, Roso Carlson 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 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31, 2014? A. $10,050. B. $10,500. C. $22,500. D. $40,500.

B

Interest is usually associated with A. accounts receivable. B. notes receivable. C. doubtful accounts. D. bad debts.

B

Maynard Mills received a 60-day, 5% note for $10,000 on April 5. Which of the following statements is true? A Maynard Mills will receive $10,000 plus interest of $500 at maturity. B The principal of the note plus interest is due on June 4. C The maturity value of this note is $10,000. D Maynard Mills should record a total receivable due of $10,500 on April 5.

B

Net sales for the month are $800,000, and bad debts are expected to be 1.5% of net sales. The company uses the percentage-of-sales basis. If the Allowance for Doubtful Accounts has a credit balance of $15,000 before adjustment, what is the balance after adjustment? A. $15,000. B. $27,000. C. $23,000. D. $31,000.

B

Sanders Company has a debit balance of $7,000 in its Allowance for Doubtful Accounts before any adjustments are made. Based on a review of its accounts receivable at the end of the year, Sanders estimates that $70,000 of its receivables are uncollectible. The amount of bad debts expense which should be reported for the year is A. $7,000. B. $77,000. C. $70,000. D. $63,000.

B

The accounts receivable turnover ratio is computed by dividing A. total sales by average net accounts receivable. B. net credit sales by average net accounts receivable. C. total sales by ending gross accounts receivable. D. net credit sales by ending gross accounts receivable.

B

The accounts receivable turnover ratio is computed by dividing A. total sales by average net accounts receivable. B. net credit sales by average net accounts receivable. C. total sales by ending net accounts receivable. D. net credit sales by ending net accounts receivable.

B

The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts expense in the A. direct write-off method. B. percentage of receivables basis. C. percentage of sales basis. D. percentage of receivables and percentage of sales basis.

B

The maturity date of a 60-day note dated April 12 is A. June 10. B. June 11. C. June 12. D. June 13.

B

The percentage-of-sales basis of estimating uncollectibles A. produces a better estimate of cash realizable value. B. results in a better matching of expenses with revenues. C. emphasizes balance sheet relationships. D. considers the existing balance in Allowance for Doubtful Accounts.

B

The retailer ________ when customers use national credit cards to make purchases. A absorbs any losses from uncollectible accounts B is not involved in the collection process C is responsible for maintaining customer accounts D receives cash equal to the full price of the merchandise sold from the credit card company

B

Voight Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $1,400,000 and $70,000 (credit balance), respectively. An aging of accounts receivable indicated that $128,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is A. $128,000. B. $58,000. C. $198,000. D. $70,000.

B

When a factor buys accounts receivable, the charge for the factor's commission is recorded as A Commission Expense B Service Charge Expense C Loss on Sale of Receivables D Bad Debts Expense

B

When a note receivable is honored, Cash is debited for the note's A. net realizable value. B. maturity value. C. gross realizable value. D. face value.

B

Which of the following practices by a credit card company results in lower interest charges to the cardholder? A. The card company states interest as a monthly percentage rather than an annual percentage. B. The card company allows a grace period before interest is accrued. C. The card company allows cardholders to skip payments on their cards. D. The card company calculates finance charges from the date of purchase to the date the amount is paid.

B

Which of the following statements concerning receivables are true? Select all that apply. A Notes receivable are often listed last under receivables. B Interest revenue and gain on sale of notes receivable are shown under other revenues and gains. C The contingent liability from selling notes receivable should be disclosed. D Both the gross amount of receivables and the allowance for doubtful accounts should be reported.

B, C, D,

A company that receives an interest bearing note receivable will A. debit Notes Receivable for the maturity value of the note. B. credit Notes Receivable for the maturity value of the note. C. debit Notes Receivable for the face value of the note. D. credit Notes Receivable for the face value of the notes.

C

Allowance for Doubtful Accounts is A. closed at the end of the fiscal year. B. an operating expense. C. a contra asset account. D. added to Accounts Receivable on the balance sheet.

C

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

C

How is the average collection period computed? A. by dividing net credit sales by average gross accounts receivable B. by dividing net credit sales by ending gross accounts receivable C. by dividing 365 days by the accounts receivable turnover ratio D. by dividing the accounts receivable turnover ratio by 365 days

C

Liddle Company accepted $10,000 of Bayswater Bank MasterCard credit card charges for merchandise sold on October 1. Bayswater Bank charges 4% for its credit card use. The entry to record this transaction by Liddle Company will include a credit to Sales Revenue of $10,000 and a debit(s) to A Accounts Receivable for $10,000 B Cash for $10,000 C Cash for $9,600 and Service Charge Expense for $400 D Accounts receivable for $9,600 and Service Charge Expense for $400

C

Notes or accounts receivables that result from sales transactions are often called A. sales receivables. B. non-trade receivables. C. trade receivables. D. merchandise receivables.

C

Oliveras Company had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in accounts receivable at the beginning of the year was $100,000, and the end of the year it was $150,000. What were the accounts receivable turnover ratio and the average collection period in days? A. 4.0 and 91.3 days. B. 5.3 and 68.9 days. C. 6.4 and 57 days. D. 8.0 and 45.6 days

C

On February 1, Kline Company received a $6,000, 10%, four-month note receivable. The cash to be received by Kline Company when the note becomes due is A. $200. B. $6,000. C. $6,200. D. $6,600.

C

On May 1, Kingston Company received a $6,000, 10%, four-month note receivable. The cash to be received by Kingston Company when the note becomes due is A. $200. B. $6,000. C. $6,200. D. $6,600.

C

One of the following statements about promissory notes is incorrect. The incorrect statement is 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 often required from high-risk customers.

C

Short-term notes receivable A. have a related allowance account called Allowance for Doubtful Notes Receivable. B. are reported at their gross realizable value. C. use the same estimations and computations as accounts receivable to determine cash realizable value. D. present the same valuation problems as long-term notes receivables.

C

The direct write-off method A. is acceptable for financial reporting purposes. B. debits Allowance for Doubtful Accounts to record write-offs of accounts. C. shows only actual losses from uncollectible accounts. D. estimates bad debt losses.

C

A cash discount can occur when a seller wants to encourage early payment of an accounts receivable. A. True B. False

TRUE

The use of credit cards offers advantages to the retailer. Which of the following is NOT an advantage of credit cards to the retailer? A the issuer undertakes the collection process B all of these choices are disadvantages C the retailer receives more cash from the credit card issuer D the issuer does the credit investigation of customers

C

Under the allowance method, estimated uncollectible receivables are credited to A. Bad Debts Expense. B. Accounts Receivable. C. Allowance for Doubtful Accounts. D. Uncollectible Accounts Expense.

C

When a note is accepted to settle an open account, Note Receivable is debited for the note's A. net realizable value. B. maturity value. C. face value. D. face value plus interest.

C

Which of the following statements about Visa credit card sales is incorrect? A. The credit card issuer makes the credit investigation of the customer. B. The retailer is not involved in the collection process. C. Two parties are involved. D. The retailer receives cash more quickly than it would from individual customers on account.

C

Ginter Co. holds Kolar Inc.'s $10,000, 120-day, 9% note. The entry made by Ginter Co. when the note is collected, assuming no interest has been previously accrued, is A. Cash 10,300/ Notes Receivable 10,300 B. Cash 10,000/ Notes Receivable 10,000 C. Accounts Receivable 10,300/ Notes Receivable 10,000, Interest Revenue 300 D. Cash 10,300/ Notes Receivable 10,000, Interest Revenue 300

D

Hughes has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on the review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible In this situation, the amount of bad debts expense that should be reported for the year is A. $5,000. B. $55,000. C. $60,000. D. $65,000.

D

In recording the sale of accounts receivable, the commission charged by a factor is recorded as A. Bad Debts Expense. B. Commission Expense. C. Loss on Sale of Receivables. D. Service Charge Expense.

D

Receivables are frequently classified as A. accounts receivable, company receivables, and other receivables. B. accounts receivable, notes receivable, and employee receivables. C. accounts receivable and general receivables. D. accounts receivable, notes receivable, and other receivables.

D

The average collection period is computed by dividing A. net credit sales by average net accounts receivable. B. net credit sales by ending net accounts receivable. C. the accounts receivable turnover ratio by 365 days. D. 365 days by the accounts receivable turnover ratio.

D

The balance of the Allowance for Doubtful Accounts account at January1 of the current year was $6,800. During the year, accounts receivable in the amount of $9,000 were written off. Estimated uncollectible accounts expense using the percentage-of-sales basis for the year amounts to $7,200. The balance of the Allowance for Doubtful Accounts account to be reported on the balance sheet at year-end is A. $14,000. B. $7,200. C. $8,600. D. $5,000.

D

The entry to recognize the bad debt expense ________ when the allowance method is used. A has no effect on current assets B increases net income C has no effect on net income D decreases current assets

D

The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to A. Notes Receivable. B. Cash. C. Allowance for Doubtful Accounts. D. Accounts Receivable.

D

The interest rate specified in a note is for a A. day. B. month. C. week. D. year

D

The sale of receivables by a business A. indicates that the business is in financial difficulty. B. is generally the major revenue item on its income statement. C. is an indication that the business is owned by a factor. D. can be a quick way to generate cash for operating needs.

D

What is the Bad Debts Expense considered? A avoidable unless there is a recession B an internal control weakness C an avoidable cost in doing business on a credit basis D a necessary risk of doing business on a credit basis

D

When a note receivable is dishonored, A. interest revenue is never recorded. B. bad debts expense is recorded. C. the maturity value of the note is written off. D. accounts receivable is debited if eventual collection is expected.

D

Which of the following would require a compound journal entry? A. To record merchandise returned that was previously purchased on account. B. To record sales on account. C. To record purchases of inventory when a discount is offered for prompt payment. D. To record collection of accounts receivable when a cash discount is taken.

D

Writing off an uncollectible account affects ________ under the allowance method. A. both balance sheet and income statement accounts B. only income statement accounts C. all financial statements D only balance sheet accounts

D

A dishonored note receivable is no longer negotiable and the payee has no claim against the maker of the note. A. True B. False

FALSE

Retailers consider sales from the use of national credit cards as credit sales. A. True B. False

FALSE

The percentage-of-receivables basis results in a better matching of expenses with revenues than the percentage-of-sales basis. A. True B. False

FALSE

To determine the maturity date of a note, you need to include the date the note is issued but omit the due date. A. True B. False

FALSE

The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts is relevant when using the percentage of receivables basis.

IS

Accelerating cash receivables is a(n) sound application of accounts receivable management.

SOUND

Writing off an uncollectible account under the allowance method requires a debit to A. Accounts Receivable. B. Allowance for Doubtful Accounts. C. Bad Debts Expense. D. Uncollectible Accounts Expense.

V

_________ for computing interest on an interest-bearing note is Face Value of Note × Annual Interest Rate × Time in Terms of One Year = Interest. A The basic formula B A seldom used formula C The second most popular method D A shortcut method

a

The net amount expected to be received in cash from receivables is termed the value.

cash realizable