MBUS 300 Chapter 7

The adjusting entry to recognize uncollectible accounts expense is an asset use transaction.

True.

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

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

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? a) Increase total assets and decrease total liabilities b) Has no effect on total assets, total liabilities or stockholders' c) equity c) Increase total assets and stockholders' equity d) Decrease total liabilities and increase stockholders' equity

B Hoff must first reinstate the receivable that was previously written off. The reinstatement increases assets (accounts receivable) and decreases assets (by increasing the allowance for doubtful accounts, a contra asset account), with no net effect on any of the elements of the financial statements. Next, Hoff records collection of the receivable, which increases assets (cash) and decreases assets (accounts receivable) with no net effect on total assets.

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? a) Direct write-off method. b) Allowance method. c) Accrual method. d) Cash flow method.

B Allowance method Reporting accounts receivable in the financial statements at net realizable value is commonly called the allowance method of accounting for uncollectible accounts.

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

C Allowance for doubtful accounts is a contra asset account; thus, it is a permanent (rather than a temporary) account. Uncollectible accounts expense, which is reported on the income statement, is a temporary account.

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

C All of these answer choices are correct. Accountants use a variety of methods to estimate uncollectible accounts expense. There is no requirement that they use a particular approach.

Which of the following is a true statement about a company that uses the allowance method? a) Uncollectible Accounts Expense is recorded when a receivable is written off. b) Uncollectible accounts are not recorded until the amount becomes significant. c) None of these answer choices are correct. d) The net realizable value of its accounts receivable is shown on the balance sheet.

D The net realizable value of its accounts receivable is shown on the balance sheet. A company that uses the allowance method estimates uncollectible accounts expense before they actually become uncollectible, using a contra asset account known as allowance for doubtful accounts, and reports the net realizable value of accounts receivable on the balance sheet.

The collection of an account receivable is an asset source transaction.

False Collection of an account receivable is an asset exchange transaction. Assets (cash) increase while assets (accounts receivable) decrease.

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.

False Net realizable value = Accounts receivable − Allowance for doubtful accounts

When a company accepts a credit card payment for a sale, the amount of sales revenue to be recorded is reduced by the amount of the credit card company's fee.

False Revenue is recorded for the full amount of the sale, and the fee is recorded as a separate expense. Income increases by the amount of revenue and decreases by the amount of the credit card expense. Net income increases by the difference between the two amounts.

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? Increase revenue by $9,700 Increase net income by $10,000 Increase assets by $10,000 Increase stockholders' equity (retained earnings) by $9,700

Increase stockholders' equity (retained earnings) by $9,700 The credit card sale increases total assets (accounts receivable - credit card company) and increases stockholders' equity (retained earnings) by $9,700 [or $10,000 − ($10,000 × 3%)]. It increases revenue by $10,000, increases expenses (credit card expense) by $300 (or $10,000 × 3%), and increases net income by $9,700 (or $10,000 − $300). The statement of cash flows is not affected.

When a company receives payment from a customer whose account was previously written off, the customer's account should be reinstated.

True

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?

$720 in Year 1 and $240 in Year 2 Interest revenue = Principal × Annual interest rate × Time outstandingYear 1 (April through December):Interest revenue = $16,000 × 6% × 9/12 months = $720Year 2 (January through March):Interest revenue = $16,000 × 6% × 3/12 months = $240

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) $30,000 d) $32,000

A Ending accounts receivable = Beginning accounts receivable of $0 + Revenue on account of $160,000 − Collections on account of $128,000 = $32,000 Ending allowance for doubtful accounts = Beginning allowance for doubtful accounts of $0 + Uncollectible accounts expense of ($160,000 × 1%) − Write-offs of $0 = $1,600 Net realizable value = Accounts receivable of $32,000 − Allowance for doubtful accounts of $1,600 = $30,400

On January 1, Year 1, the Accounts Receivable balance was $37,000 and the balance in the Allowance for Doubtful Accounts was $2,800. On January 15, Year 1, an $800 uncollectible account was written-off. What is the net realizable value of accounts receivable immediately after the write-off? a) $34,200 b) $36,200 c) $35,000 d) $33,400

A $34,200 Accounts receivable after the write-off = $37,000 − $800 = $36,200 Allowance for doubtful accounts after the write-off = $2,800 − $800 = $2,000 Net realizable value = Accounts receivable of $36,200 − Allowance for doubtful accounts of $2,000 = $34,200

The balance in Accounts Receivable at the beginning of the year amounted to $16,000. During the year, $64,000 of credit sales were made to customers. If the ending balance in Accounts Receivable amounted to $10,000, and uncollectible accounts expense amounted to $4,000, what is the amount of cash inflow from customers that would appear in the operating activities section of the cash flow statement? a) None of these answers are correct. b) $64,000. c) $66,000. d) $80,000.

A None of these answers are correct. The $4,000 in uncollectible accounts expense does not affect accounts receivable, and does not affect cash flows. Ending accounts receivable of $10,000 = Beginning accounts receivable of $16,000 + Credit sales of $64,000 − Collections on account Collections on account (that is, cash inflow from customers) = $16,000 + $64,000 − $10,000 = $70,000

How does the year-end adjusting entry to recognize uncollectible accounts expense affect the elements of the financial statements? a)Decrease total liabilities and increase stockholders' equity. b)Decrease total assets and decrease stockholders' equity. c)Increase total assets and decrease stockholders' equity. d)Increase total liabilities and increase stockholders' equity.

B. The adjusting entry will decrease assets (by increasing the allowance for doubtful accounts, a contra asset account) and stockholders' equity. It will increase expenses (uncollectible accounts expense), which decreases net income.

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

C. Both methods require writing off uncollectible accounts.

Which of the following is a cost of extending credit to customers? a) Fees paid to credit card companies b) Lost sales c) Explicit interest d) Uncollectible accounts expense

D Uncollectible accounts expense Two costs of extending credit to customers are uncollectible accounts expense and recordkeeping costs.

Many businesses find it more efficient to offer credit directly to customers rather than to accept third-party credit cards.

False Maintaining accounts and notes receivable is expensive. In addition to uncollectible accounts expense, companies extending credit to their customers incur considerable costs for such clerical tasks as running background checks and maintaining customer records. On the other hand, the credit card company deducts a service fee (usually between 1% and 5%) from the gross amount of the sale and pays the merchant the net balance (gross amount of sale less credit card fee) in cash. However, in return, the merchant avoids the risk of uncollectible accounts, as well as the cost of maintaining customer credit records. Many businesses find it more efficient to accept third-party credit cards instead of offering credit directly to their customers.

Some accountants believe that the percent of revenue method for estimating uncollectible accounts expense is superior to the percent of receivables method because it is more conservative.

False Some accountants believe they can better estimate the amount of uncollectible accounts expense by basing their estimates on a percentage of accounts receivable rather than a percentage of revenue. This approach is commonly called the percent of receivables method of estimating uncollectible accounts expense.

For a company that uses the allowance method, the write-off of an uncollectible account receivable is an asset use transaction.

False The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (because it decreases the allowance for doubtful accounts, a contra asset account).

The adjusting entry to recognize uncollectible accounts expense does not affect the net realizable value of receivables.

False. Net realizable value = Accounts receivable − Allowance for doubtful accountsRecognizing uncollectible accounts expense decreases net realizable value because it increases allowance for doubtful accounts.

The net realizable value of accounts receivable decreases when an account receivable is written off.

False. Net realizable value = Accounts receivable − Allowance for doubtful accountsThe net realizable value is unaffected by a write-off because both accounts receivable and allowance for doubtful accounts decrease by the same amount.

Which of the following reflects the effect of the year-end adjusting entry to record estimated uncollectible accounts expense using the allowance method? Assets=Liab.+Stk.EquityRev.−Exp.=Net Inc.Stmt of CashFlows A.- NA -NA - -−OA B.NA - -NA + -NA C.NA - -NA + -−OA D.- NA -NA + -NA

Option D 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

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

True

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

True

Most companies report receivables on their balance sheets at the net realizable value.

True GAAP requires the use of the allowance method, which results in the reporting of net realizable value (or accounts receivable minus the allowance for doubtful accounts) unless uncollectible accounts are immaterial.

When an uncollectible account receivable is written off, the amount of total assets is unchanged.

True The write-off is an asset exchange transaction that decreases assets (accounts receivable) and increases assets (because it decreases the allowance for doubtful accounts, a contra asset account).

The year-end adjusting entry to accrue interest on a note receivable is an asset source transaction.

True This is an asset source transaction. The entry increases assets (interest receivable) and increases stockholders' equity (retained earnings). It also increases interest revenue, which increases net income.

Willis Company had $200,000 in credit sales for Year 1, and it estimated that 2% of the credit sales would not be collected. The balance in Accounts Receivable at the end of the year was $38,000. Willis had never used the allowance method to account for its receivables until Year 1. The net realizable value of its accounts receivable at the end of the year was $34,000.

True Uncollectible accounts expense (increase to allowance for doubtful accounts) = $200,000 × 2% = $4,000Net realizable value = Accounts receivable of $38,000 − Allowance for doubtful accounts of $4,000 = $34,000

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)Borrower or maker or debtor b)Borrower c)Maker or debtor d)Lender or maker

a)Borrower or maker or debtor

What is the term used to describe the amount of accounts receivable that is actually expected to be collected? a)The present value of accounts receivable b)Uncollectible accounts expense c)Allowance for doubtful accounts d)Net realizable value

d)Net realizable value

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)Increase assets by $1,100 c)Decrease assets and stockholders' equity by $55 d)None of these answer choices are correct

d)None of these answer choices are correct