ACG 3031 Ch. 7 Review Questions

Kari, Inc.'s cash book balance on December 31, 2020, was $5,000. In addition, Kari had the following items on its premises on December 31: Check payable to Kari, Inc., dated January 3, 2021, included in December 31 book balance= $200 Postage stamps on hand not included in December 31 book balance= $100 Cashier's check payable to Kari, Inc., dated December 28, 2020, not included in December 31 book balance= $1,300 The proper amount to be shown as Cash on Kari's balance sheet at December 31st, 2020, is:

$6,100 Answer Shown: Unadjusted cash balance at 12/31/20: $5,000 Add: Cashier's check: $1,300 Less: Postdated check: ($200) Correct cash balance at 12/31/20: $6,100

Indicate three reasons why a company might sell its receivables to another company?

1. A company might sell receivables because money is tight and access to normal credit is not available or is prohibitively expensive. 2. A company might have to sell receivables, instead of borrowing, to avoid violating existing lending arrangements. 3. Billing and collecting of receivables are often time consuming and costly.

Gardein Corporation uses the allowance method of accounting for uncollectible accounts, During 2020 Gardin had charges to Bad Debt Expense of $20,000 and wrote off as uncollectible, accounts receivable totaling $16,000. There transactions decreased working capital by: A. $20,000 B. $16,000 C. $4,000 D. $0

A. $20,000 The entry to record bad debt expense includes a credit to the Allowance for Doubtful Accounts account. Working capital is reduced by the credit to the account because it is a contra account to the current asset accounts receivable. The subsequent entry to write off $16,000 of accounts deemed uncollectible does not affect working capital because the net amount of accounts receivable (total receivables less the allowance) is unchanged. For example: Before Write-off After Write-off Accounts Receivable: $120,000 $104,000 Allowance: 30,000 14,000 Net $90,000 $90,000

Which of the following journal entries is appropriate to establish an imprest petty cash fund? A. Petty Cash Fund 500 Cash 500 B. Petty Cash Expense 500 Cash 500 C. Administrative Expense 100 Selling Expense 200 Operating Expense 200 Cash 500 D. Miscellaneous Expense 500 Cash 500

A. Petty Cash Fund 500 Cash 500 The establishment of an imprest petty cash account requires the establishment of a fund that is recorded in an asset account. In an imprest petty cash system the fund is replenished by an entry debiting expense accounts(s) and crediting cash.

Which of the following results when a company chooses the fair value option as the basis of measurement of receivables in the financial statements? Receivables recorded at fair value Gains and losses reported in NI A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes When a company uses fair value as the basis of measurement for receivables in the financial statements, the receivables are reported at fair value with unrealized gains and losses reported in net income.

The advantage of relating a company's bad debt expense to its accounts receivable is that this approach: A. gives a reasonably correct measure of receivables in the balance sheet B. relates bad debt expense to the period of sale C. is the only generally accepted method of valuing accounts receivable D. makes estimates of uncollectible accounts unnecessary

A. gives a reasonably correct measure of receivables in the balance sheet The objective of relating bad debt expense to accounts receivable is to report receivables in the balance sheet at the net amount expected to be collected.

Of the following conditions, which is the only one that NOT required if the transfer of receivables with recourse is to be accounted for as a sale? A.The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible B. The transferor surrenders control of the future economic benefits of the receivables C. The transferee cannot require the transferor to repurchase the receivables. D. The transferor's obligations under the recourse provisions can be reasonably estimated.

A.The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible Alternatives B, C, and D represent the three conditions that must be present for with recourse transfers to be accounted for as sales. These are the conditions that are specified by the FASB.

For the month of December 2020, the records of Turling Corporation show the following information: Cash sales= $20,000 Cash received on accounts receivable= 25,000 Accounts receivable, December 1, 2020= 70,000 Accounts receivable, December 31, 2020= 64,000 Accounts receivable written off as uncollectible= 1,000 The Turling Corporation uses the direct write-off method in accounting for uncollectible accounts receivable. What are the gross sales for the month of December 31, 2020? A. $39,000 B. $40,000 C. $45,000 D. $52,000

B. $40,000 Turling Corporation's gross sales for December 2020 can be calculated as follows: $70,000 (month beginning A/R)- $25,000 (cash received) - $1,000 (written off)= $44,000 $64,000 (month end A/R) - $44,000 = $20,000 (credit sales) Gross sales: Cash sales= $20,000 Credit sales (see above)= 20,000 Total= $40,000

Green Company wrote off a client's account receivable of $400 as uncollectible. What will be the effect on net income under each of the following methods of recognizing bad debt expense? Direct Write-Off Allowance A. None Decrease B. Decrease None C. None None D. Decrease Decrease

B. Decrease for Direct Write-Off & None for Allowance The entries for the write off of an account receivable under each method would be: DIRE WRITE-OFF METHOD (Decrease Net Income): Bad Debt Expense 400 Accounts Receivable 400 ALLOWANCE METHOD (No Effect On Net Income): Allowance for uncollectible receivable 400 Accounts receivable 400 From the above example entries, it can be seen that when a specific customer's account receivable is written off as uncollectible there is no effect on income if the allowance method is used. However, when the direct write-off method is used, writing off a specific customer's account decreases net income for the period.

When preparing a bank reconciliation for the purpose of arriving at the correct cash balance: A. outstanding checks can be added to the balance per books B. NSF checks should be deducted from the balance per books C. deposits in transit are deducted from the balance per bank D. notes collected by the bank should be added to the balance per bank

B. NSF checks should be deducted from the balance per books When preparing a bank reconciliation for the purpose of arriving at a correct cash balance. NSF (not sufficient funds) checks should be deducted from the balance per books. This is because these checks were added to the book balance when received; however, as the maker is unable to pay the check, the cash book balance would be overstated if the amounts were not deducted. The other alternatives reflect the opposite treatment each would receive on a bank reconciliation designed to arrive at a corrected cash balance.

Pinkowski sold land to Ewell for $100,000 cash and a zero interest-bearing note with a face amount of $400,000. The fair value of the land at the date of the sale was $450,000. Pinkowski should value the note receivable at: A. $450,000 B. $400,000 C. $350,000 D. $500,000

C. $350,000 The note should be valued at the fair value of the asset exchanged. If the land has a fair value of $450,000 and $100,000 cash is given, then the note is valued at $350,000. The additional $50,000 ($400,000 - $350,000) is an interest factor or discount that should be amortized over the life of the note.

Which of the following statements is INCORRECT regarding the classification of accounts and notes receivable? A. Segregation of the different types of receivables is required if they are material B. Disclose any loss contingencies that exist on the receivable C. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asst or liability respectively D. Valuation accounts should be appropriately offset against the proper receivable accounts

C. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asst or liability respectively Premiums or discounts that arise from present value computations for notes receivable transactions are not assets or liabilities. The discount or premium accounts are reported in the balance sheet as a direct deduction from or addition to the notes' face amount.

What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? A. as offsets to capital B. By means of footnotes only C. As assets but separately from other receivables D. As trade notes and accounts receivable if they otherwise qualify as current assets.

C. As assets but separately from other receivables Notes and accounts receivable from officer, employees, or affiliated companies may have different terms, such as due dates and interest rates, than trade receivables. Therefore, these receivables should be reported separately from other receivables on the balance sheet if they are material.

Which of the following is properly classified as cash? A. Customer's postdated checks on hand B. Certificates of deposit C. Savings accounts D. Bond sinking fund cash

C. Savings Account Reasons Why: A customer's postdated check is most appropriately classified as a receivable. Certificates of deposit provide investors with an opportunity to earn high rates of interest and should be classified as temporary investments rather than cash. Bond sinking fund cash is restricted and is classified either in the current asset or in the long-term asset section, depending on the date of distribution (three-months or less is current asset). A savings account is the only item listed that is properly classified as cash.

Which of the following statements is NOT correct regarding uncollectible accounts receivable? A. The direct write-off method records the bad debt in the year that it is determined that a specific receivable cannot be collected. B. The allowance method is based on past and current events as well as forecasts of future collectibility. C. The direct write-off method will provide for a proper matching of cost with revenues of the period when the average monthly accounts receivable balance is consistent throughout the year. D. An uncollectible account receivable is a loss of revenue that requires- through proper entry in the accounts- a decrease in the asset accounts receivable and a related decrease in income and stockholders' equity.

C. The direct write-off method will provide for a proper matching of cost with revenues of the period when the average monthly accounts receivable balance is consistent throughout the year. The major problem with the direct write-off method is that it does not match costs with revenues of the period nor does it result in receivables being stated at the net amount expected to be collected on the balance sheet. The other three alternatives reflect accurate statements about uncollectible accounts receivable.

A compensating balance as defined by the SEC is best reflected by which of the following? A. A savings account maintained at the bank equal to te amount of all oustanding loans. B. An amount of capital stock held in the company's treasury equal to outstanding loan commitments. C. The portion of any demand deposit, time deposit, or certificate of deposit maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with the lending institution. D. A balance held in a time or demand deposit account that is equal to the interest currently due on a loan.

C. The portion of any demand deposit, time deposit, or certificate of deposit maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with the lending institution. The SEC defines the concept of a compensating balance in terms of deposits with a lending institution that support existing borrowing arrangements. The amount is not specified to be equal to outstanding loans nor is the interest due a consideration.

Lynn Spellman Corporation sold its accounts receivable outright to White Company, a financing company which normally buys accounts receivable of other companies without recourse. The accounts receivable have been: A. collateralized B. pledged C. factored D. assigned

C. factored Accounts receivable are said to be factored when they are sold outright without recourse. Answers (B) and (D) are INCORRECT because accounts receivable are pledged or designated as collateral for borrowings. These transactions are NOT sales of the accounts receivables.

Vonesh Company sold a drill press to Mary Company, taking in exchange a zero interest-bearing note. The drill press had a fair market value of $12,000 and the face amount of the note was $13,000. In a balance sheet prepared immediately after receipt of the note, Vonesh should present the note at its face amount: A. plus implicit interest B. plus the anticipated net earnings related to the note C. less implicit interest D. without adjustment

C. less implicit interest The zero interest-bearing note received by Vonesh Company should be valued at the fair market value of the drill press sold. This value would equal the face of the note less imputed interest.

In preparing its bank reconciliation for the month of September 2020, Moran Company has available the following information: Balance per bank statement, 9/30/20 $42,000 Deposits in transit, 9/30/20 7,200 Outstanding checks, 9/30/20 6,500 Bank service charges for September 25 What should be the correct balance of cash at September 30, 2020? A. $41, 275 B. $41,300 C. $42,675 D. $42,700

D. $42,700 Moran Company's correct cash balance at September 30, 2020, can be calculated as follows: Balance per bank, 9/30/20 $42,000 Add: Deposits in transit, 9/30/20 7,200 Less: Outstanding checks, 9/30/20 (6,500) Correct balance per books, 9/30/20 $42,700 The bank service charge would not be deducted since the bank would have already accounted for it in its balance per bank.

Moluf Corporation receives a 5-year, $20,000 zero interest-bearing note, the present value of which is $11,348.60. What is the implicit interest rate that equates the total cash to be received to the present value of the future cash flows? A. 8% B. 9% C. 10% D. 12%

D. 12% Present Value / Cash To Be Received = P.V. factor for 5 years. ($11,348.60 / $20,000 = .56743). In Table 6-2 the factor .56743 is the factor for 5 periods at 12%. Can also be reached by using calculator: FV= -$20,000 PV= $11,348.60 N= 5 compute for I/Y to get 11.9%

Etheredge Company held an IOU at December 31, 2020. The IOU should be reported as: A. an investment B. petty cash C. cash D. a receivable

D. A Receivable IOUs should be reported as receivables. Only coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier's checks, personal checks, and bank drafts should be reported as part of the cash balance.

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n): A. trade discount B. nominal discount C. enhancement discount D. cash discount

D. cash discount A cash discount (sometimes called a sales discount) is often offered as an inducement to prompt payment. Such discounts may be quoted as 2/10, n/30, which means a 2% discount is given if the price is paid within 10 days, otherwise the gross amount is due in 30 days. A trade discount is an amount taken off the price of merchandise as an inducement for customers to buy the merchandise. The other two terms, nominal and enhancement, have no formal definition as discount terminology.

The allowance method is preferable to the direct write-off method because the allowance method: A. relies on estimates which are always accurate and stable among years. B. reflects the real facts C. recognizes the expense of a bad debt in the year in which the account is determined to be uncollectible D. recognizes the expense of a bad debt in the same period as the sale

D. recognizes the expense of a bad debt in the same period as the sale It is believed that matching the estimated expenses of bad debt against sales in the PERIOD OF THE SALE gives the best matching of revenues and expense. Answer C is incorrect because a proper matching of revenues and expenses is NOT obtained under the direct write-off method.

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and: A. is acceptable as a means to pay current liabilities B. has a current market value that is greater than its original cost C. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation D. so near the maturity that the present insignificant risk of changes in value because of changes in interest rates

D. so near the maturity that the present insignificant risk of changes in value because of changes in interest rates Cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rate.

What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?

DIRECT WRITE-OFF METHOD: If the direct write-off method is used, the only alternative is to Debit Cash and Credit a revenue account entitled Uncollectible Accounts Recovered. ALLOWANCE METHOD: If the allowance method is used, then the accountant would Debit Accounts Receivable and Credit the Allowance for Doubtful Accounts. An entry is then made to Credit the customer's account and Debit Cash upon receipt of the remittance. Accounts Receivable $1,000 Allowance For Doubtful Accounts $1,000 (to reverse write-off of account) Cash $1,000 Accounts Receivable $1,000 (Collection of account)

Bank overdrafts occur when a check is written for less than the amount in the cash account.

False. Bank overdrafts occur when a check is written for more than the amount in the cash account.

Because the bank has the legal right to demand notice before withdrawal, savings accounts usually are not classified on an entity's balance sheet as cash.

False. Banks rarely exercise this right to demand notice before withdrawal of funds from a savings account. Thus, these funds are normally classified as cash for financial reporting purposes.

Cash consist of coin, currency, money market funds, certificates of deposit and other available funds on deposit at the bank.

False. Cash consists of coin, currency, and available funds on deposit at the bank. Money market funds, money market savings certificates, certificates of deposit (CDs), and similar types of deposits that provide small investors with an opportunity to earn high rates of interest are more appropriately classified as temporary investments.

The replenishment of the petty cash fund under an imprest system requires a debit to the Petty Cash account for the amount of the replenishment.

False. Entries are made to the Petty Cash account only to increase or decrease the size of the fund. When the petty cash fund is replenished, various expense accounts are debited and the cash account is credited.

Factoring is the term used to describe the pledging of receivables as collateral for a loan.

False. Factoring is the sale of accounts receivable to factors. Factors are finance companies or banks that buy receivables from businesses for a fee and then collect remittances directly from the customer.

Accounts receivable are frequently accepted from customers who need to extend the payment period of an outstanding note receivable.

False. Notes receivable are frequently accepted from customers who need to extend the payment period of an outstanding accounts receivable.

Postage stamps on hand are classified as part of cash.

False. Postage stamps on hand are classified as part of office supplies inventory or as a prepaid expense.

The direct write-off method used in recording uncollectible accounts receivable allows the expense associated with bad debts always to be recorded in the accounting period in which the sale was made.

False. The direct write-off method does not always match costs with revenues of the period. This is because receivables recorded late in one year might be written off in a subsequent year under the direct write-off method.

A trade receivable due two years hence should never be classified as a current asset.

False. The rule about classification of current assets is that the item is generally classified as a current asset if it has an original maturity date of three months or less.

When estimating the allowance for doubtful accounts on a note receivable, the expected cash flows are discounted at the current market rate of interest.

False. When estimating the allowance for doubtful accounts on a note receivable, the expected cash flows are discounted at the loan's historical effective-interest rate.

In a bank reconciliation that attempts to reconcile the ban balance to the correct cash balance, the following items would affect the reconciliation in what way> Outstanding Checks Deposits in Transit A. Added Added B. Subtracted Added C. Added Subtracted D. Subtracted Subtracted

Outstanding Checks Deposits in Transit B. Subtracted Added Outstanding checks are checks that have been written by the company and have not cleared the bank as of the date of the reconciliation. Deposits in transit are deposits sent to the bank that have not cleared the bank as of the reconciliation date. Thus, the outstanding checks need to be deducted from the bank balance and the deposits in transit need to be added in arriving at the correct cash balance.

The basic accounting issues for both accounts receivable and notes receivable would center around which of the following? Recognition Valuation A. Yes No B. Yes Yes C. No Yes D. No No

Recognition Valuation B. Yes Yes The basic issues in accounting of notes and accounts receivable are essentially the same- recognition and valuation. When and where the item should be included in the financial statements along with the proper amount to record are the basic accounting issues surrounding the receivables accounts.

What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?

The direct write-off method usually fails to record expenses in the same period as associated revenues. Nor does it result in receivables being stated at the net amount expected to be collected on the balance sheet. So, the direct write-off method is not considered appropriate to be used, except when the amount uncollectible is immaterial. The allowance method involves estimating uncollectible accounts at the end of each period, and this ensures that companies state receivables on the balance sheet at the NET AMOUNT EXPECTED TO BE COLLECTED (carrying value of the receivable - estimated uncollectible accounts). Under the allowance method the balance sheet reflects the current estimate of expected uncollectible account losses at the reporting date, and the income statement reflects the effects of credit deterioration (or improvement) that has taken place during the period.

What are two methods of recording accounts receivable transactions when a cash discount is involved? Which is more theoretically correct? Which is used in practice more if the time? Why?

The two methods to record accounts receivable when a cash discount is involved are: 1. Record receivables and sales gross 2. Record receivables and sales net The NET METHOD is more DESIRABLE THEORETICALLY because it VALUES the receivable at its NET REALIZABLE value. It also records the sales at net which provides a better assessment of the revenue that was recognized from the sale of the product. If the purchasing company DOESN'T take the discount then the company should reflect this amount as income. The GROSS METHOD for receivables and sale is USED IN PRACTICE because it's advantageous, and using it generally doesn't have significant effect on the presentation of financial statements.

A bank reconciliation is an integral part of the system of internal control over cash.

True.

Bond sinking fund cash should not be classified as a current assets because its use is restricted.

True.

Companies record and report long-term notes receivable at the present value at the cash they expect to collect.

True.

If a company expects that the discount will be taken, it should record the accounts receivable and related sales revenue as its net price.

True.

If cash proves out short in a petty cash fund, the shortage is debited to the Cash Over and Short account.

True.

If receivables are sold with recourse, the seller guarantees payment to the purchaser in the event the debtor does not pay.

True.

Legally restricted deposits held as compensating balances against short-term borrowing arrangements should be stated separately among the cash and cash items in current assets.

True.

Of the two bank reconciliation formats used by a business entity, the more widely used form reconciles both the bank balance and the book balance to a correct cash balance.

True.

Sales Returns and Allowances is a contra revenue account to Sales Revenue.

True.

The essence of a transfer of receivables in a borrowing transaction is that the transferor retains the same risks of collectibility on the receivables after the transaction that it had before the transaction.

True.

The present value of a note is measured by the fair value of the property, goods, or services exchanged for the note or by an amount that reasonably approximates the market value of the note.

True.

There re a variety of techniques that might be used to estimate the allowance for doubtful accounts.

True.

Under the allowance method, companies debit every bad debt write-off to the allowance account rather than to Bad Debt Expense.

True.

When preparing a bank reconciliation for the purpose of arriving at a correct cash balance, NSF (not sufficient funds) checks are subtracted from the balance per books.

True.