ACC2003 Chapter 5 Lecture Questions

Jefferson Company made a loan of $6,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of cash flow from operating activities that Jefferson would report in Year 1 and Year 2, respectively would be

$0, and $360. Since the total amount of interest is collected on the maturity date in Year 2, there would be zero cash flow in Year 1 and $360 in Year 2.

Blain Company has $10,000 of accounts receivable that are current, $5,000 that are between 0 and 30 days past due, $3,000 that are between 30 and 60 days past due, and $800 that are more than 60 days past due. Blain estimates that 2% of the receivables that are current will be uncollectible, 5% of those between 0 and 30 days past due will be uncollectible, 10% of those between 30 and 60 days past due will be uncollectible, and 50% of those more than 60 days past due will be uncollectible. Just prior to recognizing uncollectible accounts expense, Blain's allowance for doubtful accounts account has a $100 positive balance. Assuming Blain uses the aging method to estimate uncollectible accounts expense, the amount of uncollectible expense will be

$1,050.

On September 1, Year 1 Western Company loaned $36,000 cash to Eastern Company. The one-year note carried a 5% rate of interest. The amount of interest revenue on the income statement and the amount of cash flow from operating activities shown on Western's Year 2 financial statements would be

$1,200 interest revenue and $1,800 cash inflow from operating activities. Since the total amount of interest will be collected on the maturity date in Year 2, the cash flow associated with interest revenue in Year 2 is $1,800.

At the end of Year 1, Blain Company has $10,000 of accounts receivable that are current, $5,000 that are between 0 and 30 days past due, $3,000 that are between 30 and 60 days past due, and $800 that are more than 60 days past due. Blain estimates that 2% of the receivables that are current will be uncollectible, 5% of those between 0 and 30 days past due will be uncollectible, 10% of those between 30 and 60 days past due will be uncollectible, and 50% of those more than 60 days past due will be uncollectible. At the beginning of Year 1, Blain had a $1,000 positive balance in its allowance for doubtful accounts account. During Year 1 Blain wrote-off $1,100 of uncollectible receivables. Assuming Blain uses the aging method to estimate uncollectible accounts expense, the amount of uncollectible expense will be

$1,250.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3 Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. The December 31, Year 3 ending balance in the allowance for doubtful accounts account (balance after expense recognition) is

$1,640. Beginning accounts receivable balance $52,000 Plus: Revenue earned on account $220,000 Less: Collections on accounts receivable ($230,000) Less: Write-off of accounts receivable ($1,000) Ending accounts receivable balance $41,000 $41,000 ending accounts receivable *0.04 estimate of uncollectible accounts = $1,640.

On December 31, Year 3, Alpha Company had an ending balance of $200,000 in its accounts receivable account and an unadjusted (current) balance in its allowance for doubtful accounts account of $300. Alpha estimates uncollectible accounts expense to be 1% of receivables. Based on this information, the amount of uncollectible accounts expense shown on the Year 3 income statement is

$1,700. Ending Balance in allowance account ($200,000 *0.01) = $2000 Less: Unadjusted (or current) balance in allowance account = ($300) Estimated uncollectible accounts expense = $2,000-$300 = $1,700. Equation: Uncollectible accounts expense = Ending balance in allowance account - unadjusted balance in allowance account.

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning Inventory 200 Units @ $5 ea. Purchases made in Year 2 800 Units @ $8 ea. Units sold 900 Units @ $12 ea. Which of the following is the amount of the gross margin assuming Alpha uses a LIFO cost flow method?

$3,900.

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the LIFO cost flow method, the balance in the inventory account after the sales transaction will be

$30. If the Company is using LIFO, it would have recognized $32 of cost of goods sold and there would be $30 left in inventory.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3 Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the amount of net realizable value of receivables shown on the Year 3 balance sheet is

$39,360. Beginning Balance $52,000 Plus: Revenue earned on account $220,000 Less: Collections of accounts receivable ($230,000) Less: Write-off of accounts receivable ($1,000) Ending Balance = $41,000. Ending balance in allowance for doubtful accounts account: $41,000 * 0.04 Estimate = $1,640 Ending Balance $41,000 Less: Ending allowance for doubtful accounts balance ($1,640) Net Realizable Value = $39,360.

At the end of the accounting period Anderson Company had $4,500 in accounts receivable and $500 in its allowance for doubtful accounts account. Based on this information the net realizable value of accounts receivable is...

$4,000. Net realizable value of accounts receivable is determined by subtracting the balance in the allowance for doubtful accounts from the balance in the accounts receivable account ($4,500 - $500 = $4,000).

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning Inventory 200 Units @ $5 ea. Purchases made in Year 2 800 Units @ $8 ea. Units sold 900 Units @ $12 ea. Which of the following is the amount of the gross margin assuming Alpha uses a weighted average cost flow method?

$4,140. Cost of goods available = Beginning Inventory $1,000 Year 2 Purchases $6,400 = $7,400 Weighted Average = $7,400 / (800+200) = $7.40 Cost of goods sold = $6,660 ($7.40 * 900 units) Gross margin = $10,800 - $6,660 = $4,140.

The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning Inventory 200 Units @ $5 ea. Purchases made in Year 2 800 Units @ $8 ea. Units sold 900 Units @ $12 ea. Which of the following is the amount of the gross margin assuming Alpha uses a FIFO cost flow method?

$4,200. Beginning inventory 200 * $5 ea. = $1,000. Purchases made in year 2 700 * $8 ea. = $5,600 Cost of goods sold = $6,600 Gross margin = $10,800 sales revenue - $6,600 cost of goods sold = $4,200.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3 Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. The December 31, Year 3 unadjusted (current) balance in the allowance for doubtful accounts account (balance before expense recognition) is

$400. Unadjusted balance = Beginning allowance account balance $1,400 Less: Write-off of accounts receivable ($1,000) Current allowance = $1,400-$1,000 = $400.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3, Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the December 31, Year 3 balance in the accounts receivable account is

$41,000. Beginning accounts receivable balance $52,000 Plus: Revenue earned on account $220,000 Less: Collections of accounts receivable ($230,000) Less: Write-off of accounts receivable ($1,000) Ending accounts receivable balance $41,000.

On September 1, Year 1 Western Company loaned $36,000 cash to Eastern Company. The one-year note carried a 5% rate of interest. The amount of interest revenue on the income statement and the amount of cash flow from operating activities shown on Western's December 31, Year 1 financial statements would be

$600 interest revenue and zero cash flow from operating activities.

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the weighted average cost flow method, the amount of gross margin shown on the income statement will be

$9. ($30+$32)/2 = $31 $40 revenue - $31 cost of goods sold = $9 gross margin.

Baltimore Company accepts a credit card as payment for $950 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Select the answer that shows how the entry to record the event would affect Baltimore's financial statements

Account Receivable = $912 ($950 revenue - $38 expense). Balance Sheet Assets $912 Liability NA Equity $912 Income Statement Revenue $950 Expenses $38 Net Income $912 Statement of Cash Flows NA

Assuming Alpha company uses the percent of receivables method to determine the amount of uncollectible expense, which of the following shows how the recognition of the expense will affect Alpha's financial statements?

Balance Sheet Assets - Liabilities NA Equity - Income Statement Revenue NA Expenses + Net Income - Statement of Cash Flows NA

On December 31, Year 1, Kardashian Company recorded an adjusting entry to recognize $5,470 of uncollectible accounts expense. Which of the following shows how this entry will affect Kardashian's financial statements?

Balance Sheet Assets - ($5,470) Liabilities - NA Equity - ($5,470) Income Statement Revenue - NA Expenses - $5,470 Net Income - ($5,470) Statement of Cash Flows NA

On November 1, Year 1 Shelter Company loaned $7,000 cash to Cove Company. The one-year note carried a 7% rate of interest. Which of the following shows how the loan will affect Shelter's financial statements on November 1, Year 1?

Balance Sheet Assets NA Liabilities NA Equity NA Income Statement Revenue NA Expense NA Net Income NA Statement of Cash Flows ($7,000) IA

Beacon Company accepts a credit card as payment for $2,000 of services provided to a customer. The credit card company charges a 3% handling charge for its collection services. Select the answer that shows how the collection of cash from the credit card company will affect Beacon's financial statements.

Balance Sheet Assets NA Liabilities NA Equity NA Income Statement Revenue NA Expenses NA Net Income NA Statement of Cash Flows $1940 OA Account receivable from company = $1,940 ($2,000 - $60 fee) Amount of total assets is not affected. Since the $1,940 cash inflow is associated with the collection of accounts receivable, it is classified as an operating activity.

Forest Beach Company experienced an event that had the following effects on its financial statements. Balance Sheet Assets NA Liabilities NA Equity NA Income Statement Revenue NA Expenses NA Net Income NA Statement of Cash Flows +IA

Collected cash for the principal balance of a note receivable.

The following information was drawn from the inventory records of Preston Company. Beginning inventory (purchased in Year 1) 100 units @ $10 ea. 1st Purchase made in Year 2 400 Units @ $12 ea. 2nd Purchase made in Year 2 500 Units @ $14 ea. Units Sold 950 Units @ $15 ea. Based on this information, which of the following represents the amount of ending inventory appearing on the balance sheet assuming a LIFO cost flow?

Cost of goods available - Cost of goods sold = $12,800 - $12,300 = $500.

At the beginning of Year 3 Omega Company had a $52,000 balance in its accounts receivable account and a $1,400 balance in allowance for doubtful accounts. During Year 3, Omega experienced the following events. (1) Omega earned $220,000 of revenue on account. (2) Collected $230,000 cash from accounts receivable. (3) Wrote-off $1,000 of accounts receivable as uncollectible. Omega estimates uncollectible accounts to be 4% of receivables. Based on this information, the amount of uncollectible accounts expense shown on the Year 3 income statement is

Ending balance in the allowance for doubtful accounts account (from last question): $41,000 ending accounts receivable *0.04 estimate = $1,640. Current (unadjusted) balance in the allowance for doubtful accounts account: Beginning allowance account balance $1,400 Less: Write-off of accounts receivable ($1,000) Current allowance account balance $400 Uncollectible accounts expense: $1,640 end balance in the allowance for doubtful accounts - $400 current balance = $1,240.

Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. When the Company sold one of the items for $40, it expensed $30 to its cost of goods sold account. Based on this information which of the following cost flow methods is the company using?

FIFO. In this case, the first item the business purchased cost $30. Since the cost of goods sold is $30, the business must be using the FIFO method.

On August 1, Year 1 Hernandez Company loaned $48,000 cash to Acosta Company. The one-year note carried a 5% rate of interest. Which of the following shows how the accrual of interest revenue in Year 2 will affect Hernandez's financial statements?

Interest in Year 2 = $200 * 7 months = $1,400 (Remaining months after Year 1) Balance Sheet Assets $1,400 Liabilities NA Equity $1,400 Income Statement Revenue $1,400 Expenses NA Net Income $1,400 Statement of Cash Flows NA

Which of the following cost flow methods would provide the lowest amount of net income in an inflationary environment?

LIFO. In an inflationary environment the last items in are the most expensive. If the last items are the ones recognized as cost of goods sold, the amount of gross margin AND net income will be the lowest.

Ron Company experienced an accounting event that had the following effects on its financial statements. Balance Sheet Assets $3,300 Liabilities NA Equity ($3,300) Income Statement Revenue NA Expenses $3,300 Net Income ($3,300) Statement of cash flows NA Which of the following events could have caused these effects?

Recognized uncollectible accounts expense under percent of receivables method. Recognized uncollectible accounts expense under the aging method. Recognized uncollectible accounts expense under the percent of revenue method.

Barron Company accepts a credit card as payment for $1,200 of services provided to a customer. The credit card company charges a 5% handling fee for its collection services. Select the answer that shows how the entry to recognize the event would affect Barron's financial statements.

The sales revenue is $1,200. The credit card expense charged by the credit card company is $60 ($1,200 * 0.05). The customer will pay the credit card company $1,200 and the credit card company will pay Barron $1,140 ($1,200 - $60). Therefore, Barron's assets (cash) increase by $1,140.

Hope Company determined that an $8,000 account receivable was uncollectible. Which of the following shows how the write-off of this receivable will affect Hope's financial statements?

The write-off is an asset exchange transaction. The amount of total assets is not affected. Since the expense was previously recognized, the income statement is also not affected by this write-off. There was also no payment or receipt of cash, therefore the statement of cash flows is also not affected.

Westover Company accepts a credit card as payment for $1,000 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Select the answer that shows how the entry to record the event would affect Westover's financial statements.

Total Assets $960 Net Income $960 Cash flow from operating activities NA Account Receivable $960 Net Income = $960 ($1,000 revenue - $40 expense)

On August 1, Year 1 Hernandez Company loaned $48,000 cash to Acosta Company. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will effect Hernandez's financial statements?

Total annual interest = $48,000 * 0.05 = $2,400 Monthly Interest = $2,400 / 12 months = $200 Interest earned in year 1 = $200 * 5 months = $1,000. Balance Sheet Assets $1,000 Liabilities NA Equity $1,000 Income Statement Revenue $1,000 Expenses NA Net Income $1,000 Statement of Cash Flows NA

DeKalb Company made a loan of $6,000 to one of the company's employees on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest revenue that DeKalb would report in Year 1 and Year 2, respectively would be

Total annual interest = $6,000 * 0.06 = $360 Monthly interest = $360 / 12 month = $30 Year 1 = $30 * 9 = $270 Year 2 = $30 * 3 = $90. $270, and $90 respectively.

Accrued interest revenue will appear on the income statement but not on the statement of cash flows.

True. Accrued interest revenue means that a company has recognized interest revenue but has not yet collected the cash associated with the earned interest.

Which of the following is a cost of providing credit to customers?

Uncollectible accounts expense Determining customers credit worthiness Recording keeping and collection costs

Zane Enterprises accepts a credit card as payment for $500 of services provided to a customer. The credit card company charges a 4% handling charge for its collection services. Based on this information

Zane will collect $480 cash from the credit card company. The fee charged by the credit company is $20 ($500 * 0.04). The customer will ultimately pay the credit card company $500, and the card company will pay Zane $480 ($500 - $20).

Under the allowance method, the uncollectible accounts expense is...

estimated and recognized at the end of the accounting period. This is to promote the matching of revenue and expense. This will also reduce the amount of net income as any other expense would.

The recovery and collection of an account receivable that had previously been written off will

not affect total assets. Recognizing cash collection will cause one asset account (cash) to increase and another (accounts receivable) to decrease. This is an asset exchange transaction and therefore does not affect the total amount of assets. However, the cash inflow from the collection of the accounts receivable is classified as an operating activity.

The aging method of estimating uncollectible accounts method is based on the assumption that the longer an account receivable remains outstanding, the less likely it is to be collected. This statement is

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. The net realizable value of receivables increases as there is a decrease in the allowance account. The decrease in the accounts receivable account decreases the net realizable value of receivables. Because of this, there is no change in the total amount of the net realizable value of receivables since the value is offset by both transactions. This is considered an asset exchange transaction.