Financial Accounting Chapter 5

On September 1, Year 1, Dallas Corporation accepts a $30,000 six-month, 12 percent promissory note from one of its clients. The year-end adjustment to accrue interest revenue on December 31, Year 1 will include a _____.

$1,200 debit to Interest Receivable (Think about the number of months for which interest will accrue in Year 1)

Winner Corporation had credit sales of $30 million in the current year. At the end of the year, $20 million remained to be collected from customers. The company uses the percentage-of-credit-sales method to estimate future bad debts. The allowance account has a $2 million credit balance at the end of the current year. The company expects 10 percent of credit sales to be uncollectible. What would be the net accounts receivable after the year-end adjustment?

$15 million

On January 1, Year 1, Data Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. How much interest will be collected at the maturity date of the note?

$225 (Face Value x Interest Percentage x Fraction of Year)

Winner Corporation had credit sales of $30 million in the current year. At the end of the year, $20 million remained to be collected from customers. The company uses the percentage-of-credit-sales method to estimate future bad debts. The allowance account has a $2 million credit balance at the end of the current year. The company expects 10 percent of credit sales to be uncollectible. The year-end adjustment to estimate future bad debts will involve a _____.

$3 million debit to Bad Debt Expense

Outlook Corporation performed event management services worth $1.5 million during its first year of operations. At the end of the year, the company has $400,000 due from its customers. The company's credit manager estimates that approximately 10 percent of those accounts receivable will not be collected. Which of the following will be included in the year-end adjustment entry to allow for these future uncollectible accounts?

- A credit to Allowance for Uncollectible Accounts for $40,000 - A debit to Bad Debt Expense for $40,000

Uncollectible accounts have the effect of _______ and _________ expenses (bad debt expense).

- Reducing total assets (accounts receivable) - Increasing (bad debt expense)

Which of the following accounts are recorded when a customer pays within the discount period?

- Sales Discounts - Cash - Accounts Receivable

Which of the following are contra revenue accounts?

- Sales Discounts - Sales Returns

Net credit sales for Turner Company are $200,000 for the year and the average accounts receivable balance is $20,000. What is the company's average collection period?

36.5 days

Net credit sales for Winner Company are $100,000 for the year. The Accounts Receivable account had a balance of $15,000 at the beginning of the year and $25,000 at the end of the year. What is the company's receivables turnover ratio?

5.0

__________ has a normal credit balance.

Allowance for Uncollectible Accounts

Beta Corporation wrote off $100,000 due from a specific client in March. However, this client was able to make a partial payment of $40,000 in June. Recording this cash collection will involve all of the following accounts except:

Bad Debt Expense

The percentage-of-receivables method is sometimes referred to as the ________ method, because we base the estimate of bad debts on an amount found in this particular financial statement

Balance Sheet

How are trade discounts recognized?

By recording the sale at the discounted price.

Writing off an account receivable will include a:

Credit to Accounts Receivable

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes the payment on March 7. The receipt of payment will involve a:

Debit Sales Discounts for $20.00

Company A and Company B operate in the same industry and region. Compared to Company B, Company A has a low receivables turnover ratio and a correspondingly high average collection period. From this information, we can conclude that Company A is managing its receivables better than Company B.

False

Standard Computers had credit sales of $20 million in the current year. At the end of the year, $10 million remained to be collected from customers. The company could use either the percentage-of-receivables method or the percentage-of-credit-sales method to estimate future bad debts. The balance of the allowance account is zero. For the percentage-of-receivables method, the company uses an estimate of 30 percent of receivables. For the percentage-of-credit-sales method, the company uses an estimate of 10 percent of credit sales. The usage of percentage-of-receivables method will result in a higher reported net income.

False

Beta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Beta required the customer to sign a six-month, 11 percent promissory note on February 1, Year 2. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?

No impact on the accounting equation (Think about the type of accounts involved.)

The percentage increase in receivables for Petro Corporation is greater than the percentage increase in sales. Which of the following conclusions can be drawn from this information?

The average collection period will increase

Why is the percentage-of-receivables method currently preferred over the percentage-of-credit-sales method

The percentage-of-receivables method results in better measurement of assets.

Which of the following represents a reduction in the listed price of a product or service?

Trade Discounts

Collecting cash on an account previously written off increases total assets but has no effect on net income.

True

The balances in sales discounts, returns, and allowances are subtracted from total revenues when calculating net revenues.

True

The percentage-of-credit-sales method is also called the income statement method.

True

Writing off actual bad debts and reestablishing those previous write-offs when it appears that customers will pay has no effect on net accounts receivable.

True

Flint Corporation has a debit balance of $2 million in its Allowance for Uncollectible Accounts before the year-end adjustment. Based on all available information, Flint estimates that the allowance for uncollectible accounts should be $6 million. This can be accomplished with:

a credit to Allowance for Uncollectible Accounts for $8 million

A company performs $1,000 worth of services account on March 1, with the terms 2/10, n/30. The customer makes the payment on March 27. The receipt of payment will involve a:

credit to Accounts Receivable for $1,000

On September 1, Year 1, 2G Corporation accepts a $100,000 six-month, nine percent promissory note from one of its clients. The transaction recorded by the company on March 1, Year 2, the maturity date, will involve all of the following except _____.

credit to Interest Receivable for $4,500 (Note that this note extends over two accounting periods. There will be a year-end adjustment before maturity.)

On January 1, Year 1, Data Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. It will record this transaction with a _____.

debit to Notes Receivable for $10,000 (Think of the face value of the note and the type of asset.)