Chapter 7 Intermediate Accounting : Review - Cash and Receivables
Q 7.12: Why is the allowance method preferable to the direct write-off method? A The allowance method recognizes the expense of a bad debt in the same period as the sale. B The allowance method relies on estimates which are always accurate and stable among years. C The allowance method provides tax savings. D The allowance method recognizes the expense of a bad debt in the year in which the account is determined to be uncollectible.
A
Q 7.16: Hat Trick Manufacturing sold equipment to Puck & Co., taking in exchange a zero interest bearing note. The equipment had a fair market value of $36,000 and the face amount of the note was $40,000. How should Hat Trick Manufacturing present the note in a balance sheet prepared immediately after receipt of the note? A At face amount less implicit interest. B At face amount plus the anticipated net earnings related to the note. C At face amount plus implicit interest. D At face amount without adjustment.
A
Q 7.29: Which classification would not apply to a note receivable? A : forfeited B : nontrade C : current D : trade
A
Receivables 7. Two types of discounts that must be considered in determining the value of receivables are __ and __. Trade discounts represent reductions from the list or catalog prices of merchandise. They are often used to avoid frequent changes in catalogs or to quote different prices for different quantities purchased. Trade discounts are not recorded, they are simply recorded at net. Cash discounts (sales discounts) are offered as an inducement for prompt payment and are communicated in terms that read, for example, 2/10, n/30 (2% discount if paid within 10 days of the purchase or invoice date, otherwise the gross amount is due in 30 days). Generally companies record the case discounted revenue at gross, unless the amount of discounts expected to not be taken are material, then the net method should be used.
trade discounts, cash discounts (sales discounts)
Q 7.38: What is the reason to use an aging schedule in conjunction with the accounts receivable turnover ratio? A : to reveal patterns of delinquent payment that may be hidden by a satisfactory turnover ratio B : to reveal the relative risk of individual accounts to better classify the receivables C : to accurately determine the number of days required to collect on average D : to accurately represent the liquidity of the accounts receivables to investors
A
Q 7.4: Which of the following is most like the SEC definition for a compensating balance? A 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. B A balance held in a time or demand deposit account that is equal to the interest currently due on a loan. C An amount of capital stock held in the company's treasury equal to outstanding loan commitments. D A savings account maintained at the bank equal to the amount of all outstanding loans.
A
Q 7.8: Why do companies often use the gross method of recording cash discounts if the net method is theoretically more correct? A The gross method requires less bookkeeping. B The gross method is preferred by the FASB. C The net method recognizes interest revenue, which should be ignored because it is not material. D The net method requires the sales discounts forfeited to be calculated, which requires math too complex for most accountants.
A
Q 7.15: Miles Corporation sold land to South Ridge Inc. for $200,000 cash and a zero interest-bearing note with a face amount of $600,000. The fair value of the land at the date of sale was $690,000. What value should be assigned to the note receivable by Miles Corporation? A $490,000 B $400,000 C $590,000 D $600,000
A The land has a fair value of $690,000 so the cash plus note must equal that amount. $690,000 - $200,000 = $490,000
Q 7.35: On June 11, 2015, Hat Trick Manufacturing sold goods worth $400,000 with terms 2/10, n/30 to Ice House Sports. On June 20, 2015, Hat Trick Manufacturing received payment for 1/2 of the amount due from Ice House Sports. What will be the amount reported in the financial statements for the accounts receivable due from Ice House Sports if the fiscal year ends on June 30, 2015 and the gross method is used? A : $200,000 B : $196,000 C : $392,000 D : $400,000
A Under the gross method the accounts receivable would show the entire amount due. $400,000 - $200,000 = $200,000
Q 7.37: When may a company choose the fair value option? Select all that apply. A : when a new basis of accounting is triggered B : when a new calendar year begins C : at the time the financial instrument is officially recognized D : during the open enrollment period E : when the fiscal year is over
A, C
Q 7.10: Which of the following statements are true regarding uncollectible accounts receivable? (Select all that apply.) 1. The direct write-off method records the bad debt in the year that it is determined that a specific receivable cannot be collected. 2. The allowance method is based on the assumption that the percentage of receivables that will not be collected can be predicted from past experiences, present market conditions, and an analysis of outstanding balances. 3. The direct write-off method will provide for a proper matching of costs with revenues of the period when the average monthly accounts receivable balance is consistent throughout the year. 4. 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. A 1, 2, 3, and 4 B 1, 2, and 4 but not 3 C 1, 2, and 3 but not 4 D 1 and 2 but not 3 or 4
B
Q 7.1: A _____ would be properly classified as cash. A certificate B savings account C bond sinking fund composed entirely of cash D post-dated check on hand
B
Q 7.20: Which phrases fill in the following blanks? Orion Industries calculated the ________ to assess how successful they were at collecting outstanding receivables and the ________ to assess the effectiveness of their credit and collection policies. A days outstanding; average net trade receivables B accounts receivable turnover; days outstanding C average net trade receivables; days to collect accounts receivable D days to collect accounts receivable; accounts receivable turnover
B
Q 7.22: What is the net change in the fair value of a receivable from one period to another, exclusive of interest revenue? A : a fair value option B : an unrealized holding gain or loss C : the actual gain or loss D : the imputed interest rate
B
Q 7.23: The historical cost for financial instruments is more relevant and easier to understand than fair value according to the FASB. A : True B : False
B
Q 7.28: A company would report unrealized holding gains and losses on receivables as part of other comprehensive income under the fair value option. A : True B : False
B
Q 7.3: How should Trinitron Inc. report an IOU from Julius Corporation? A As cash B As a receivable C As petty cash D As an investment
B
Q 7.9: When a customer purchases merchandise inventory from a business organization, the customer may be given a discount which is designed to induce prompt payment. What is the term for this type of discount? A A nominal discount B A cash discount C A trade discount. D An enhancement discount
B
Q 7.31: Thor's Hammer Company made an entry to write off a $38,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $250,000 and the balance in the allowance account was $18,000. What is the net realizable value of accounts receivable after the write-off entry? A : $212,000 B : $232,000 C : $194,000 D : $230,000
B The accounts receivable and the allowance account are reduced by the amount written off. The net realizable value is the accounts receivable less the allowance account. ($250,000 - $38,000) - ($18,000 - $38,000) = $232,000
Restricted Cash 4. __ occur when a check is written for more than the amount in the cash account. __ should be accounted for as accounts payable or, if material, separately disclosed.
Bank overdrafts, Bank overdrafts
Q 7.17: Which of the following statements are true regarding the classification of accounts and notes receivable? (Select all that apply.) 1. Segregation of the different types of receivables is required if they are material. 2. Disclose any loss contingencies that exist on the receivables. 3. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively. 4. Valuation accounts should be appropriately offset against the proper receivable accounts. A 1, 2, 3, and 4 B 1, 3, and 4 but not 2 You got it correct : C 1, 2, and 4 but not 3 D 1 and 4 but not 2 or 3
C
Q 7.26: A company would sell receivables to another company in order A : to improve the quality of its credit granting process. B : to comply with customer agreements. C : to accelerate access to amounts collected. D : to limit its legal liability.
C
Q 7.30: What is the expected result of an increase in fair value for a note receivable when using the fair value option? A : a realized gain B : an unrealized holding loss C : an unrealized holding gain D : a realized loss
C
Q 7.32: Which phrases fill in the following blanks? The normal journal entry when writing-off an account as uncollectible under the allowance method would debit ___ and credit ___. A : Accounts Receivable, Allowance for Doubtful Accounts B : Bad Debt Expense, Allowance for Doubtful Accounts C : Allowance for Doubtful Accounts, Accounts Receivable D : Allowance for Doubtful Accounts, Bad Debt Expense
C
Q 7.39: The following cash discount terms of 1/10, n/30 means the customer gets a: A : 1% discount if they pay within 20 days. B : 10% discount if they pay within 20 days. C : 1% discount if they pay within 10 days. D : 10% discount if they pay within 30 days.
C
Q 7.13: Gandalf & Sons 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 10% B 9% C 12% D 8%.
C $20,000/$11348.6 = 1.7623 Raise 1.7623 to the power of 1/the number of periods and then subtract 1. 1.7623(1/5) - 1 = 11.999
Q 7.34: Ceres Corporation factors $5,000,000 of its accounts receivables without recourse for a finance charge of 4%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Ceres Corporation estimates the fair value of the recourse liability at $145,000. Ceres Corporation would record a _________ on the transfer. A : loss of $145,000 B : loss of $500,000 C : loss of $200,000 D : gain of $355,000
C $5,000,000 x 0.04 = $200,000
Q 7.2: Al's Toys Cashbalance on December 31, 2017, was $10,000. In addition, Al had the following items on its premises on December 31: Check payable to Al's Toys, dated January 5, 2018, included in December 31 book balance $ 250 Postage stamps on hand not included in December 31 book balance 120 Cashier's check payable to Al's Toys, dated December 26, 2017, not included in December 31 Cash balance 1,500 The proper amount to be shown as Cash on AI's balance sheet at December 31, 2017, is A $11,620 B $11,870 C $11,250 D $9,630
C Cash should be reduced by the $250 that was improperly included for the postdated check and then increased by $1,500 for the improperly excluded. $10,000 -$250 + $1,500 = $11,250
Q 7.11: For the month of May 2017, Ceres Corporation, which uses the direct write-off method in accounting for uncollectible accounts receivable, has the following information: Cash sales $40,000 Cash received on accounts receivable 32,000 Accounts receivable, May 1, 2017 105,000 Accounts receivable, May 31, 2017 92,000 Accounts receivable written off as uncollectible 2,000 What are the gross sales for May 2017? A $59,000 B $19,000 C $61,000 D $78,000
C Find the difference between the beginning and ending accounts receivable. $105,000 - $92,000 = $13,000 Subtract this from the cash received on accounts receivable to find the amount of credit sales. $32,000 -$13,000 = $19,000 Add this to the cash sales. $19,000 + $40,000 = $59,000 Adjust for the direct write offs. $59,000 + $2,000 = $61,000
Nature of Cash 2. __ consists of coin, currency, bank deposits, and negotiable instruments such as money orders, checks, and bank drafts. Cash that has been designated for some specific use, other than for payment of currently maturing obligations, is segregated from the general cash account. __ are short-term, highly liquid investments and should generally only be recognized as current assets when they have original maturities of three months of less otherwise they should be shown as noncurrent assets.
Cash, Cash equivalents
Q 7.14: What is the expected result if Northern Pine Company pays $16,750 for a zero-interest-bearing, three-year note with a face value of $20,000? A Northern Pine will earn interest but has no way to determine the interest rate since it is not stated. You got it wrong : B Northern Pine will have no interest revenue from this note because it is zero-interest-bearing. C Northern Pine must approximate the fair value of the note by comparing it to similar items. D Northern Pine can determine the yearly interest by amortizing the difference between the future value and the present value over the life of the note.
D
Q 7.18: Unitex sold its accounts receivable outright to Hyperion Enterprises which is a financing company that normally buys accounts receivable of other companies without recourse. What has happened to the accounts receivable? A They have been collateralized. B They have been assigned. C They have been pledged. D They have been factored.
D
Q 7.19: Which of the following conditions are required if the transfer of receivables with recourse is to be accounted for as a sale? 1. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. 2. The transferor surrenders control of the future economic benefits of the receivables. 3. The transferee cannot require the transferor to repurchase the receivables. 4. The transferor's obligation under the recourse provisions can be reasonably estimated. A 1, 3, and 4 but not 2 B 2 and 4 but not 1 or 3 C 1, 2, 3, and 4 D 2, 3, and 4 but not 1
D
Q 7.21: What is the option to record receivables at fair value, with unrealized holding gains or losses reported as part of net income? A : net value B : equitable equity C : unrealized holding D : fair value
D
Q 7.24: Which of the following is not a problem associated with the valuation of accounts receivable? A : allowances granted B : uncollectible accounts C : returns D : cash discounts under the net method
D
Q 7.25: What does the accounts receivable turnover ratio measure? A : The number of times the average balance of inventory is sold during the period. B : The percentage of accounts receivable turned over to a collection agency during the period. C : The percentage of accounts receivable arising during certain seasons. D : The number of times the average balance of accounts receivable is collected during the period.
D
Q 7.36: What is the fair value option? A : Receivables are recorded at fair value, with unrealized holding gains or losses reported based on their historical value. B : Receivables are recorded at carrying cost, with unrealized holding gains or losses reported at their fair value. C : Receivables and the associated interest are recorded at fair value, exclusive of net income. D : Receivables are recorded at fair value, with unrealized holding gains or losses reported as part of net income.
D
Q 7.5: In addition to being a short-term, highly liquid investment that is readily convertible into known amounts of cash, which of the following is also true of cash equivalents? A They are acceptable as a means to pay current liabilities. B They have current market values that are greater than the original cost. C They bear an interest rate that is at least equal to the prime rate of interest at the date of liquidation. D It is likely they will be recorded as temporary investments in the future.
D
Q 7.6: Accounts receivable from officers, employees, or affiliated companies should be presented on the balance sheet A as offsets to capital. B as trade notes and accounts receivable if they otherwise qualify as current assets. C by means of footnotes only. D as assets but separately from other receivables.
D
Q 7.7: What is the expected result of an accounts receivable that the company expects to collect in 10 months? A It would be classified as a noncurrent receivable regardless of the date or operating cycle. B If would be classified as a noncurrent receivable because the current year or operating cycle includes the next 10 months. C It would be classified as a current receivable regardless of the date or operating cycle. D It would be classified as a current receivable because the current year or operating cycle includes the next 10 months.
D
Q 7.40: Ceres Corporation factors $5,000,000 of its accounts receivables with recourse for a finance charge of 2%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Ceres Corporation estimates the fair value of the recourse liability at $145,000. Ceres Corporation would record a ___ on the transfer. A : gain of $100,000 B : gain of $745,000 C : loss of $145,000 D : loss of $245,000
D $5,000,000 x 0.02 = $100,000 finance charge Loss = $100,000 (finance charge) + $145,000 (recourse liability) = $245,000.
Q 7.27: Hadley Corporation decides to use the fair value option on December 31, 2017 which is the first valuation of recently acquired notes receivable. The notes have a fair value of $620,000 and a carrying amount of $440,000. Hadley Corporation will record which of the following entries on December 31, 2017 to account for unrealized holding gain/loss? A : Notes Receivable.....180,000-Dr. Unrealized Holding Gain or Loss-Equity.....180,000-Cr. B : Unrealized Holding Gain or Loss-Income.....180,000-Dr. Notes Receivable.....180,000-Cr. C : Unrealized Holding Gain or Loss-Equity.....180,000-Dr. Notes Receivable.....180,000-Cr. D : Notes Receivable.....180,000-Dr. Unrealized Holding Gain or Loss-Income.....180,000-Cr.
D $620,000 -$440,000 = $180,000
Q 7.33: What would be the accounts receivable turnover ratio for Cerise Inc. who had net sales of $650,000 if they began the year with $115,000 in accounts receivable and ended the year with $150,000 in accounts receivable? A : 2.5 B : 4.3 C : 5.7 D : 4.9
D Sales/average accounts receivable = turnover Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable )/2 =($115,000 + $150,000)/2 =$132,500 $650,000/$132,500 = 4.9
Receivables 5. (L.O. 2) __ are claims held against customers and others for money, goods, or services. Receivables may generally be classified as __ or __. Trade receivables (accounts receivable and notes receivable) are the most significant receivables an enterprise possesses. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. Notes receivable are written promises to pay a certain sum of money on a specified future date. Nontrade receivables arise from a variety of transactions and can be written promises either to pay or to deliver. Nontrade receivables are generally classified and reported as separate items in the balance sheet.
Receivables, trade, nontrade
Restricted Cash 3. It is common practice for an enterprise to have an agreement with a bank concerning credit and borrowing arrangements. When such an agreement exists, the bank usually requires the enterprise to maintain a minimum cash balance on deposit. This minimum balance is known as a __. Compensating balances that result in legally restricted deposits must be separately classified in the balance sheet. The nature of the borrowing arrangement determines whether the compensating balance is classified as a current asset or a noncurrent asset.
compensating balance
Receivables 9. (L.O. 3) It is highly unlikely that a company that extends credit to its customers will be successful in collecting all of its receivables. Thus, some method must be adopted to account for receivables that ultimately prove to be uncollectible. The two methods currently used are the __ and the __. Under the direct writeoff method, the receivable account is reduced and an expense is recorded when a specific account is determined to be uncollectible. The directwrite off method is theoretically deficient because it usually does not match costs and revenues of the period, nor does it result in receivables being stated at estimated realizable value on the balance sheet. The direct writeoff method is not appropriate if the amount deemed uncollectible is material.
direct writeoff method, allowance method
Receivables 10. Use of the allowance method requires a yearend estimate of expected uncollectible accounts based upon outstanding receivables. This ensures that companies state receivables on the balance sheet at their __. The __ is the net amount the company expects to receive in cash. The estimate of uncollectable accounts is recorded by debiting an expense and crediting an allowance account in the period in which the sale is recorded. Then, in a subsequent period, when an account is deemed to be uncollectible, an entry is made debiting the allowance account and crediting accounts receivable.
net realizable value, net realizable value
Receivables 11. Advocates of the allowance method contend that its use provides for a proper matching of revenues and expenses as well as reflecting a proper carrying value for accounts receivable at the end of the period. When the allowance method is used, an estimated amount of uncollectible accounts is normally calculated. One method is the percentageofreceivables approach. Under the __ approach, the unadjusted ending balance in the allowance account must be considered in arriving at bad debt expense for the year.
percentage-of-receivables
