Chapter 8 Accounting Quiz

Accounts receivable are reported in the current assets section of the balance sheet at

net realizable value. Solution:Companies report accounts receivable, short-term notes receivable, and other receivables in the current asset section of the balance sheet at their expected net realizable value. By the way, a synonym for net realizable value is cash realizable value. Cash (net) realizable value is measured as face value minus the allowance for doubtful accounts.

Offering discounts for early payment is a method used by companies to

Accelerate the collection of cash

The interest on a $5,000, 10%, 180-day note receivable is

$250. Solution: The interest on a $5,000, 10%, 180-day note receivable is $250. Interest = Principal x annual interest rate x number of years = $5,000 x 10% x 180/360 = $250. When computing interest on notes described in days, such as 180 days, assume that the full year has 360 days.

A company accepted $60,000 of Visa credit card charges for merchandise sold on July 1. The bank that issued the Visa card charges 4% for its credit card use. The company's journal entry to record this transaction will include a debit or debits to

Cash for $57,600 and Service Charge Expense for $2,400 olution:The entry includes a credit to Sales for $60,000, a $57,600 debit to Cash, and a debit to Service Charge Expense for $2,400.

Accounts receivables that result from sales transactions are often called

trade receivables. Solution:Trade receivables result from sales transactions with customers. Accounts receivable are trade receivables. Notes receivable may or may not arise from sales transactions with customers. Notes receivable arising from sales transactions are trade receivables, and notes receivable not arising from sales transactions with customers are not trade receivables.

The following information is related to beginning of the year balances. Accounts receivable, $700,000 Allowance for doubtful accounts (credit balance), $60,000During the current year, sales on account were $195,000 and collections from customer were $115,000. Also during the current year, the company wrote off $11,000 in uncollectible accounts. At year-end, the company's credit manager estimates that $72,000 of the outstanding accounts receivable will prove uncollectible. Bad debt expense for the current year is:

$23,000 Solution:At the end of the period, accounts receivable has a balance of $700,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is will have a balance equal to $72,000 (i.e., given). Prior to the adjusting entry, the Allowance for Doubtful Accounts has a credit balance of $49,000 (i.e., $60,000 - 11,000 = $49,000). The adjusting entry records the difference of $23,000 (i.e., $72,000 - 49,000 = $23,000). This adjustment records Bad Debt Expense and the change to the Allowance for Doubtful Accounts.

What is the maturity value of a $28,000, 10%, 3-month note receivable dated March 1?

$28,700 Solution:The maturity value is the face value plus (i.e., principal) interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest.Interest = Principal x interest rate x time = $28,000 x 10% x 3/12 = $700Remember, all interest rates are annual interest rates unless designated otherwise.Maturity value = Principal + interest = $28,000 + 700 = $28,700.Chapter 8, Learning objective 4: Compute the interest on notes receivable.

On December 14, a company sold $5,000 of merchandise on account to a customer with terms 1/10, n/30. On December 20, the customer returned $1,200 of merchandise to the company. The company received no payments from that customer in December. On December 21, the company received $1,500 from a different customer for merchandise to be delivered in January. Assuming the company has only these two customers, what is its accounts receivable on December 31?

$3,800 Solution:A customer bought $5,000 of merchandise on account but returned $1,200 for a net purchase of $3,800. The customer did not pay during December. Another customer paid in advance which the seller would record as an increase in cash—not accounts receivable—and an increase in unearned revenue.Accounts receivable = $5,000 - 1,200 = $3,800

A company has the following receivables: Advances to employees $ 1,280 Accounts receivables 3,500 Income taxes refundable 1,120 Interest receivable 950 Note receivable issued by its largest customer 2,220 A loan to the company president 8,000 Based on this information, what is the company's trade receivables?

$5,720 Solution:Trade receivables result from sales transactions with customers. Accounts receivable are trade receivables. Notes receivable may or may not arise from sales transactions with customers. Notes receivable arising from sales transactions are trade receivables, and notes receivable not arising from sales transactions with customers are not trade receivables. Trade receivables = $3,500 + 2,220 = $5,720

A corporation had net credit sales during the year of $750,000 and cost of goods sold of $500,000. The balance of total assets at the beginning of the year was $1,200,000 and at the end of the year was $1,500,000. The net accounts receivables at the beginning of the year was $75,000 and at the end of the year was $110,000. How much is the accounts receivables turnover?

8.11 Solution:The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its net accounts receivable average balance. The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable.Accounts receivable turnover = $750,000/[($75,000 + $110,000)/2] = 8.11The company's average accounts receivable for the year is $92,500. Its net credit sales are 8.11 times its average balance suggesting the company collected the equivalent of its average accounts receivable 8.11 times during the year.

Which one of the following account pairs are both permanent accounts?

Accounts Receivable; Allowance for Doubtful Accounts Solution:Bad Debts Expense is a temporary (i.e., nominal) account and is closed at the end of the fiscal period, while Accounts Receivable, Allowance for Doubtful Accounts, and Cash are permanent (i.e., real) accounts. They remain open at the end of the fiscal period with the year-end ending balance becoming the next year's beginning balance.

A company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and sales on account are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will the company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

Bad Debt Expense 6,000 Allowance for Doubtful Accounts 6,000

A company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end. The total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $200 before the year-end adjusting entry for Bad Debt Expense?

Bad Debts Expense 2,000 Allowance for Doubtful Accounts 2,000 Solution:The Allowance for Doubtful Accounts needs an ending credit balance of 3% of $60,000 or $1,800. Since the pre-adjusted debit balance is $200, a credit of $2,000 is necessary to increase it to $1,800. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $2,000.

If a company is concerned about lending money to a risky customer, which one of the following would it want to do?

Contact references provided by the customer, such as banks and other suppliers Solution:Longer payment period will increase the chances the company will not pay. Companies might require risky customers to provide letters of credit or bank guarantees, require them to pay cash in advance, or ask for references from banks and suppliers to determine their payment history.

When an uncollectible account is recovered after it has been written off two journal entries are recorded. Which of the following journal entries will be recorded second?

Debit Cash and credit Accounts Receivable Solution:When an uncollectible account is recovered after it has been written off, two journal entries are recorded. The first journal entry is Accounts Receivable will be debited and Allowance for Doubtful Accounts will be credited (i.e., this reverses the journal entry that wrote-off the account). The second journal entry requires and a debit to Cash and a credit to Accounts Receivable (i.e., this records the customer's payment).Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.

A company holds a $10,000, 120-day, 9% note issued by a corporation. What is the journal entry recorded by the company that holds the note when it matures assuming no interest has previously been accrued?

Debit Cash for $10,300, credit Notes Receivable for $10,000, and credit Interest Revenue for $300 Solution:When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor.Interest = $10,000 × 9% × 120/360 = $300.Total cash received = $10,000 + 300 = $10,300.

A company factors $500,000 of receivables. The factors assesses a 4% fee on the amount of receivables sold. What journal entry does the company make when the factoring occurs?

Debit cash for $480,000, debit service charge expense for $20,000, and credit accounts receivable for $500,000 Solution:This entry records the receipt of cash as a debit for $480,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $20,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $500,000.

A company sold $6,000 of merchandise to customers who charged their purchases with a bank credit card. The company's bank charges it a 4% fee. Which one of the following is part of the journal entry to record this transaction?

Debit to Cash for $5,760 Solution:The fee is 4% times $6,000, or $240. The company will receive the difference between the face amount of the receivables and the fee, or $5,760. The journal entry includes a debit to cash for $5,760, a debit to Service Charge Expense for $240, and credit to sales for $6,000.

A company lends a corporation $30,000 on December 1 accepting a four-month, 6% interest note. The lending company prepares it financial statements as of December 31. What year-end adjusting entry must it record?

Interest Receivable 150 Interest Revenue 150 Solution: A 6% $30,000 note dated December 1 will accrued one month of interest by December 31 computed as follows: Interest = Principal x Interest rate x Periods = $30,000 x 6% x 1/12 =$150 The year-end adjusting entry that the creditor making the loan will debit Interest Receivable for $150 and credit Interest Revenue for $150.

When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain?

One debit and two credits Solution:The entry to record this transaction will have a debit to Cash, a credit to Notes Receivable and a credit to Interest Revenue.

A company accepts a $6,000, 3-month, 12% promissory note in settlement of an account receivable. The company records this transaction as

a debit to Notes Receivable for $6,000 and a credit to Accounts Receivable for $6,000. Solution:On the date Michael Co. accepts the note in settlement of an account, Notes Receivable is debited for $6,000 and Accounts Receivable is credited for $6,000. Interest is accrued only with the passage of time.Chapter 8, Learning objective 4: Compute the interest on notes receivable.

If a company collects from a customer after the customer's account has been written off as uncollectible, the company is said to recover the uncollectible account. When a company uses accrual basis accounting and it recovers an uncollectible accounts, the recovery

does not affect the company's total assets in the period it is collected. Solution: Under the allowance method for uncollectible accounts, a company estimates its uncollectible accounts receivable at year-end and records an adjusting journal-entry to adjust the Allowance for Doubtful Accounts to its proper balance and to record the appropriate amount of bad debt expense. In the following period when a specific customer's account becomes identified as uncollectible, the company reduces its accounts receivable by that amount (i.e., the company writes-off that customer's account receivable) and it reduces the Allowance for Doubtful Accounts by debiting that account. Occasionally, a customer whose account had been previously written-off pays the company. When such a recovery occurs, the company records two journal entries. First, it reverses the write-off of that customer's account by debiting Accounts Receivable and crediting the Allowance for Doubtful Accounts. Second, the company debits Cash by the amount collected from the customer and it credits Accounts Receivable. The net effect of these two recovery-related journal entries is to merely exchange balances between asset accounts (i.e., total assets are neither increased nor decreased). Neither of these two journal entries affects net income.

The type of receivable that is usually evidenced by a formal instrument of credit is a(n)

note receivable. Solution:A note is an unconditional written promise to pay a definite sum of money at a certain date, usually with interest at a specified rate. The unconditional written promise to pay is a formal instrument evidencing a loan.

At the beginning of the year, a company had accounts receivable of $700,000 and an allowance for doubtful accounts with a credit balance of $60,000. During the current year, sales on account were $195,000 and collections on account were $110,000. Also during the current year, the company wrote off $10,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $32,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?

$103,000 increase Solution:Ending accounts receivable = $700,000 + 195,000 - 110,000 - 10,000 = $775,000Ending allowance for doubtful accounts = $32,000 (given)Ending cash realizable value = $775,000 - 32,000 = $743,000Beginning cash realizable value = $700,000 - 60,000 = $640,000Increase (decrease) in cash realizable value = $743,000 - 640,000 = $103,000

At the start of the current year, a company's allowance for doubtful accounts had a debit balance of $15,000. During the current year, it had net credit sales of $600,000 and it wrote-off $24,000 of accounts receivable as uncollectible. The company's accounts receivable at the end of the year is $160,000. Past experience indicates that the allowance should be 10% of the balance in receivables. What is the bad debt expense for the year?

$55,000 Solution:At the end of the period, accounts receivable has a balance of $160,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is has a balance equal to 10% of the end-of-period accounts receivable balance (i.e., given). So, the Allowance for Doubtful Accounts needs a credit balance of $16,000 (i.e., 10% x $160,000 = $16,000). Prior to recording the adjusting entry, it had a debit balance of $39,000 (i.e., debit balance of $15,000 and debited by $24,000 when receivables were written-off). In order to change the balance from a $39,000 debit balance to a $16,000 credit balance, the company needs to credit the Allowance for Doubtful Accounts by $55,000.

A corporation's sales revenue for the year is $330,000. It sells all of its goods on account. It has an average collection period of 35.2 days. What is its accounts receivable turnover (rounded)?

10.4 Solution:Average collection period = 365/accounts receivable turnoverAccounts receivable turnover = 365/average collection period = 365/35.2 = 10.369

In December, a company sold merchandise on account for $300 with terms 1/15, n/30. It uses the percentage of receivables basis for estimating uncollectible accounts at year-end. On May 1 of the next year, the company determines that it will not collect the amount due from the customer. Prepare the journal entry to record the write-off on May 1.

Allowance for Doubtful Accounts 300 Accounts Receivable 300

A company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will the company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

Bad Debt Expense 10,000 Allowance for Doubtful Accounts 10,000

When the allowance method for uncollectible accounts is used, a company records Bad Debt Expense when

adjusting entries are recorded.

Factoring arrangements

are a way to accelerate receivables collection. Solution:A factor is a finance company or bank that purchases the accounts receivable of businesses for a fee and then collects the payments directly from the customers. The company selling the receivables to the factor receives cash but incurs a fee.

Short-term notes receivable are reported in the current assets section of the balance sheet at

cash realizable value.

A high accounts receivable turnover ratio indicates

customers are making payments very quickly.

The adjusting entry to record estimated uncollectible accounts receivable using the allowance method includes a

debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. Solution:When using an allowance method for uncollectible accounts, a company records a year-end adjusting entry by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.

A debit balance in the Allowance for Doubtful Accounts

indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. Solution: A debit balance in the allowance for doubtful accounts indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. The allowance for doubtful account had been increased to a credit balance for the estimated amount of receivable that would not be collected, but the actual write-off of accounts exceeded that credit balance eliminating it and replacing it with a credit balance.

Under the allowance method for uncollectible accounts, when a specific account is written off

total assets will be unchanged. Solution: When an account receivable is written-off by a company using the allowance method, the company reduces accounts receivable (i.e, which reduces assets) and it reduces the allowance for doubtful accounts (which reduces a contra asset and increases assets). The net effect on total assets is zero. Under the allowance method of accounting for uncollectible accounts, the net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off

Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited

when an account is determined to be uncollectible.

At the start of the year, a company's Allowance for Doubtful Accounts had a credit balance of $36,000. During the year, it had credit sales of $1,500,000. It also wrote-off $45,000 of uncollectible accounts receivable during the year. Past experience indicates that the allowance should be 5% of the balance in receivables. If the accounts receivable balance at December 31 was $400,000, what is the bad debt expense for the year?

$29,000 Solution:Bad debt expense = Ending accounts receivable times percent uncollectible minus the subtotal balance in the allowanceBad debt expense = ($400,000 x 5%) - (36,000 - 45,000) = $29,000Note: the allowance had a $36,000 credit balance that was reduced by $45,000 producing a$ 9,000 debit balance, and the allowance needs to have a $20,000 credit balance.

A company's net credit sales are $750,000, average cash is $5,000, average inventory totals $50,000, and average net account receivables is $60,000. How much is the average collection period (also known as the days in receivable ratio)?

29.2 days Solution:There are two steps:The accounts receivable turnover is net credit sales divided by average net accounts receivable = $750,000/$60,000 = 12.5 timesThe average collection period is 365 divided by the accounts receivable turnover ratio = 365/12.5 = 29.2 days.Chapter 8, Learning objective 8: Identify ratios to analyze a company's receivables

Which one of these statements about promissory notes is incorrect?

A promissory note is not a negotiable instrument.

A company lends a corporation $25,000 accepting the corporation's 120-day, 9% interest note. No interest has been accrued prior to the note's collection. What journal entry does the lending company record when the note matures?

Cash 25,750 Notes Receivable 25,000 Interest Revenue 750 A 9% $25,000 note that is outstanding for 120 days will accrued interest as follows: Interest = Principal x Interest rate x Periods = $25,000 x 9% x 120/360 =$750 The journal-entry to record collecting the note with interest will include a debit to cash for $25,750 (i.e., the principal and interest) and credits to notes receivable for $25,000 and interest revenue for $750.

A company's net credit sales for the year are $4,000,000. On December 31, its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

Credit balance of $12,000 Solution:The ending balance in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be a credit balance equal to 7.5% of $160,000, or $12,000. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.

Which one of the following is not one of the principles of managing accounts receivable?

Determining from which vendor credit should be requested Solution:Managing accounts receivable involves five steps. These include (1) determining to whom to extend credit, (2) establish a payment period, (3) monitor collections, (4) evaluate the liquidity of receivables, and (5) accelerate cash receipts from receivables when necessary. The one that is considered the most critical is deciding on who gets credit and who doesn't. Requesting credit from a vendor is a concern for dealing with accounts payable rather than accounts receivable.

The Allowance for Doubtful Accounts is necessary in accrual accounting because

when recording uncollectible accounts expense, it is not possible to know which specific accounts will not be collected from customers. Solution:In accrual accounting, expenses are matched to revenues. Companies estimate uncollectible accounts receivable to match the bad debt expenses against revenues. This estimation is necessary because it is not possible to know which specific accounts will not be collected.