Chapter 7 Study Quiz

A trial balance before adjustments included the following: Debit Credit Sales $1,700,000 Sales returns and allowance $56,000 Accounts receivable 172,000 Allowance for doubtful accounts 3,040 If the estimate of uncollectible accounts is made by taking 10% of gross account receivables, the amount of the adjustment is A) $14,160. B) $17,200. C) $16,896. D) $20,240.

A

Companies record and report long-term notes receivable at the present value of the cash they expect to collect. A) True B) False

A

Companies value and report short-term receivables at net realizable value⎯the net amount they expect to receive in cash. A) True B) False

A

For a loan receivable, impairment loss is calculated as the difference between the investment in the loan and the expected future cash flows discounted at the loan's historical effective interest rate. A) True B) False

A

For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay. A) True B) False

A

Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct? A) Net approach. B) Gross approach. C) Allowance approach. D) Contra revenue approach

A

Savings accounts are usually classified as cash on the balance sheet. A) True B) False

A

Short-term, highly liquid investments may be included with cash on the balance sheet. A) True B) False

A

What is "recourse" as it relates to selling receivables? A) The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. B) The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay C) The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale. D) The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

A

What is the normal journal entry when writing-off an account as uncollectible under the allowance method? A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable. B) Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. C) Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. D) Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

A

Which of the following concepts relates to using the allowance method in accounting for accounts receivable? A) Bad debt expense is an estimate that is based on historical and prospective information. B) Bad debt expense is based on the actual amounts determined to be uncollectible. C) Bad debt expense is an estimate that is based only on an analysis of the receivables aging. D) Bad debt expense is management's determination of which accounts will be sent to the attorney for collection.

A

Which of the following methods of determining annual bad debt expense best achieves the matching concept? A) Percentage of sales B) Percentage of ending accounts receivable C) Percentage of average accounts receivable D) Direct write-off

A

A trial balance before adjustments included the following: Debit Credit Sales $1,700,000 Sales returns and allowance $56,000 Accounts receivable 172,000 Allowance for doubtful accounts 3,040 If the estimate of uncollectible accounts is made by taking 5% of gross accounts receivables, the amount of the adjustment is A) $8,448. B) $5,560. C) $8,600. D) $11,640.

B

AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as revenue? A) $24,500. B) $24,750. C) $25,000. D) $25,250.

B

Bank overdrafts are always offset against the cash account in the balance sheet. A) True B) False

B

Before year-end adjusting entries, Dunn Company's account balances at December 31, 2017, for accounts receivable and the related allowance for uncollectible accounts were $1,500,000 and $90,000, respectively. An aging of accounts receivable indicated that $125,000 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is A) $1,465,000. B) $1,375,000. C) $1,285,000. D) $1,410,000.

B

Cash equivalents are investments with original maturities of six months or less. A) True B) False

B

Certificates of deposit are usually classified as cash on the balance sheet. A) True B) False

B

Consider the following: Cash in Bank - checking account of $18,500, Cash on hand of $500, Post-dated checks received totaling $3,500, and Certificates of deposit totaling $124,000. How much should be reported as cash in the balance sheet? A) $ 18,500. B) $ 19,000. C) $ 22,500. D) $136,500.

B

The FASB believes that historical cost for financial instruments provides more relevant and understandable information than fair value. A) True B) False

B

Vasguez Corporation had a 1/1/17 balance in the Allowance for Doubtful Accounts of $40,000. During 2017, it wrote off $28,800 of accounts and collected $8,400 on accounts previously written off. The balance in Accounts Receivable was $800,000 at 1/1 and $960,000 at 12/31. At 12/31/17, Vasguez estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2017? A) $8,000. B) $28,400. C) $36,800. D) $48,000.

B

What is imputed interest? A) Interest based on the stated interest rate. B) Interest based on the implicit interest rate. C) Interest based on the average interest rate. D) Interest based on the coupon rate.

B

When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value. A) True B) False

B

Which of the following is considered cash? A) Certificates of deposit (CDs) B) Money market checking accounts C) Money market savings certificates D) Postdated checks

B

AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale? A) Debit Accounts Receivable for $24,750. B) Debit Accounts Receivable for $24,750 and Sales Discounts for $250. C) Debit Accounts Receivable for $25,000. D) Debit Accounts Receivable for $25,000 and Sales Discounts for $250.

C

Antique Company has notes receivable that have a fair value of $920,000 and a carrying amount of $710,000. Antique decides on December 31, 2017, to use the fair value option for these recently-acquired receivables. The adjusting entry to record this change will include a: A) debit to Unrealized Holding Gain or Loss⎯Income for $210,000. B) credit to Notes Receivable for $210,000. C) credit to Unrealized Holding Gain or Loss⎯Income for $210,000. D) debit to Notes Receivable for $920,000.

C

Kaniper Company has the following items at year-end: Cash in bank $35,000 Petty cash 300 Short-term paper with maturity of 2 months 5,500 Postdated checks 1,400 Kaniper should report cash and cash equivalents of A) $35,000. B) $35,300. C) $40,800. D) $42,200.

C

The following information is available for Murphy Company: Allowance for doubtful accounts at December 31, 2016 $ 24,000 Credit sales during 2017 1,200,000 Accounts receivable deemed worthless and written off during 2017 27,000 As a result of a review and aging of accounts receivable in early January 2018, it has been determined that an allowance for doubtful accounts of $16,000 is needed at December 31, 2017. What amount should Murphy record as "bad debt expense" for the year ended December 31, 2017? A) $13,000 B) $16,000 C) $19,000 D) $40,000

C

Wellington Corp. has outstanding accounts receivable totaling $6 million as of December 31 and sales on credit during the year of $30 million. There is also a debit balance of $24,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense? A) $2,400,000. B) $ 456,000. C) $ 480,000. D) $ 504,000.

C

What is the normal journal entry for recording bad debt expense under the allowance method? A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable. B) Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. C) Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. D) Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

C

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

Which of the following is true when accounts receivable are factored without recourse? A) The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. B) The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. C) The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. D) The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

C

Why would a company sell receivables to another company? A) To improve the quality of its credit granting process. B) To limit its legal liability. C) To accelerate access to amounts collected. D) To comply with customer agreements.

C

Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $120,000 payment in two years? (The present value of $1 for two periods at 10% is 0.82645). A) $120,000. B) $108,844. C) $109,090. D) $99,174.

D

Bank overdrafts, if material, should be A) reported as a deduction from the current asset section. B) reported as a deduction from cash. C) netted against cash and a net cash amount reported. D) reported as a current liability.

D

During the year, Kiner Company made an entry to write off a $32,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $400,000 and the balance in the allowance account was $36,000. The net realizable value of accounts receivable after the write-off entry was A) $400,000. B) $396,000. C) $332,000. D) $364,000.

D

Travel advances should be reported as A) supplies. B) cash because they represent the equivalent of money. C) investments. D) receivables

D

Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 6% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year? A) $ 402,000. B) $ 390,000. C) $1,440,000. D) $ 378,000.

D

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

Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method? A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable. B) Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. C) Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. D) Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

D

Which of the following is not considered cash for financial reporting purposes? A) Petty cash funds and change funds B) Money orders, certified checks, and personal checks C) Coin, currency, and available funds D) Postdated checks and I. O. U.'s

D

Why do companies provide trade discounts? A) To avoid frequent changes in catalogs. B) To induce prompt payment. C) To easily alter prices for different customers. D) To avoid frequent changes in catalogs and to easily alter prices for different customers.

D

Why is the allowance method preferred over the direct write-off method of accounting for bad debts? A) Allowance method is used for tax purposes. B) Estimates are used. C) Determining worthless accounts under direct write-off method is difficult to do. D) Improved matching of bad debt expense with revenue.

D