Chapter nine sample test
The interest on a $9,000, 6%, 1-year note receivable is
$540 $9,000 × .06 = $540
Which one of the following is not a primary problem associated with accounts receivable?
Depreciating accounts receivable
Able Company accepted a national credit card for a $5,000 purchase. The cost of the goods sold is $3,000. The credit card company charges a 2% fee. What is the impact of this transaction on net operating income?
Increase by $1,900 ($5,000 - $3,000) - ($5,000 × .02) = $1,900
If a department store fails to make the entry to accrue the finance charges due from customers,
interest revenue will be understated.
When customers make purchases with a national credit card, the retailer
is not involved in the collection process
Allowance for Doubtful Accounts on the balance sheet
is offset against accounts receivable.
The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts
is relevant when using the percentage of receivables basis.
Two bases for estimating uncollectible accounts are:
percentage of receivables and percentage of sales
The existing balance in Allowance for Doubtful Accounts is considered in computing bad debt expense in the
percentage of receivables basis
A cash discount is usually granted to all of the following except
retail customers
Major advantages of credit cards to the retailer include all of the following except the
retailer receives more cash from the credit card issuer.
Short-term notes receivables
use the same estimations and computations as accounts receivable to determine cash realizable value.
Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited
when an account is determined to be uncollectible.
The interest on a $8,000, 5%, 90-day note receivable is
$100. $8,000 × .05 × 90/360 = $100
Bozemen Co., makes a credit card sale to a customer for $800. The credit card sale has a grace period of 30 days and then an interest charge of 1.8% per month is added to the balance. If the unpaid balance on the above sale is $650 at the end of the grace period, the interest charge is
$11.70 $650 × .018 = $11.70
In reviewing the accounts receivable, the cash realizable value is $14,000 before the write-off of a $1,800 account. What is the cash realizable value after the write-off?
$14,000
In 2016, Yale Company had credit sales of $1,050,000 and granted sales discounts of $25,000. On January 1, 2016, Allowance for Doubtful Accounts had a credit balance of $26,400. During 2016, $43,000 of uncollectible accounts receivable were written off. Past experience indicates that 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31, 2016?
$14,150 $26,400 - $43,000 + [($1,050,000 - $25,000) × .03] = $14,150
Kerr Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $2,100,000 and $20,000 (Cr.), respectively. An aging of accounts receivable indicated that $170,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is
$150,000 $170,000 - $20,000 = $150,000
Maine Corporation's unadjusted trial balance includes the following balances (assume normal balances): Accounts Receivable $850,000 Allowance for Doubtful Accounts 18,000 Bad debts are estimated to be 5% of outstanding receivables. What amount of bad debt expense will the company record?
$24,500 ($850,000 × .05) - $18,000 = $24,500
Using the percentage-of-receivables method for recording bad debts expense, estimated uncollectible accounts are $23,000. If the balance of the Allowance for Doubtful Accounts is $2,000 debit before adjustment, what is the amount of bad debt expense for that period?
$25,000 $23,000 + $2,000 = $25,000
In 2016, Warehouse 13 had net credit sales of $850,000. On January 1, 2016, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2016, $27,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivable basis). If the accounts receivable balance at December 31 was $160,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016?
$25,000 ($160,000 × .10) + ($27,000 - $18,000) = $25,000
A company has net credit sales of $750,000 for the year and it estimates that uncollectible accounts will be 3% of sales. If Allowance for Doubtful Accounts has a credit balance of $3,000 prior to adjustment, its balance after adjustment will be a credit of
$25,500 ($750,000 × .03) + $3,000 = $25,500
During 2016, Belfour Inc. had sales on account of $189,000, cash sales of $78,000, and collections on account of $162,000. In addition, they collected $1,275 which had been written off as uncollectible in 2015. As a result of these transactions, the change in the accounts receivable balance indicates a
$27,000 increase.
Homeplate sells softball equipment. On November 14, they shipped $4,000 worth of softball uniforms to Bonita Middle School, terms 2/10, n/30. On November 21, they received an order from Vista High School for $1,500 worth of custom printed bats to be produced in December. On November 30, Bonita Middle School returned $200 of defective merchandise. Homeplate has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the balance sheet as of November 30?
$3,800 $4,000 - $200 = $3,800
Using the following information: 12/31/15 Accounts receivable $525,000 Allowance (40,000) Cash realizable value $485,000 During 2016, sales on account were $145,000 and collections on account were $100,000. Also during 2016, the company wrote off $5,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $45,000. The change in the cash realizable value from the balance at 12/31/15 to 12/31/16 was a
$35,000 increase
Jill Company provides for bad debt expense at the rate of 3% of credit sales. The following data are available for 2016: Allowance for doubtful accounts, 1/1/16 (Cr.) $ 15,000 Accounts written off as uncollectible during 2016 9,000 Credit sales in 2016 1,000,000 The Allowance for Doubtful Accounts balance at December 31, 2016, should be
$36,000 ($1,000,000 × .03) + ($15,000 - $9,000) = $36,000
On November 1, Tacoma Company received a $4,000, 5%, three-month note receivable. The cash to be received by Tacoma Company when the note becomes due is:
$4,050 $4,000 + ($4,000 × .05 × 3/12) = $4,050
In 2016, Winslow Company had net credit sales of $1,250,000. On January 1, 2016, Allowance for Doubtful Accounts had a credit balance of $25,000. During 2016, $32,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $360,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016?
$43,000 ($360,000 × .10) + ($32,000 - $25,000) = $43,000
Jere Retailers accepted $57,000 of Maxibank Visa credit card charges for merchandise sold on July 1. Maxibank charges 3% for its credit card use. The entry to record this transaction by Jere Retailers will include a credit to Sales Revenue of $57,000 and a debit(s) to
$55,290 and Service Charge Expense $1,710. $57,000 - ($57,000 × .03) = $55,290
The maturity value of a $6,000, 5%, 60-day note receivable dated February 10th is
$6,050 $6,000 + ($6,000 × .05 × 60/360) = $6,050
Woulk Company has a debit balance of $8,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Woulk estimates that $60,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is:
$68,000. $60,000 + $8,000 = $68,000
An analysis and aging of the accounts receivable of Downs Company at December 31 revealed the following data: Accounts Receivable $80,000 Allowance for Doubtful Accounts per books before adjustment (Cr.) 50,000 Amounts expected to become uncollectible 53000 The cash realizable value of the accounts receivable at December 31, after adjustment, is:
$747,000 $800,000 - $53,000 = $747,000
On February 1, Carson Company received a $9,000, 4%, four-month note receivable. The cash to be received by Carson Company when the note becomes due is
$9,120. $9,000 + ($9,000 × .04 × 4/12) = $9,120
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $12,000. If the balance of the Allowance for Doubtful Accounts is $2,500 credit before adjustment, what is the amount of bad debt expense for that period?
$9,500 $12,000 - $2,500 = $9,500
On January 15, 2016, Jaymes Company received a two-month, 4%, $7,000 note from Peter Long for the settlement of his open account. The entry by Jaymes Company on March 15, 2016 if Long dishonors the note and collection is expected is:
. Accounts Receivable—P. Long 7,047 Notes Receivable 7,000 Interest Revenue 47
Valli Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $700,000 and credit sales are $2,500,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Valli Company make to record the bad debts expense?
. Bad Debts Expense 25,000 Allowance for Doubtful Accounts 25,000
The average collection period is computed by dividing
365 days by the accounts receivable turnover.
The financial statements of Daye Manufacturing Company report net sales of $720,000 and accounts receivable of $70,000 and $90,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days?
40.6 $720,000 ÷ $80,000 = 9; 365 ÷ 9 = 40.6
The financial statements of Georgi Manufacturing Company report net sales of $595,000 and accounts receivable of $80,000 and $60,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days?
42.9 days $595,000 ÷ $70,000 = 8.5; 365 ÷ 8.5 = 42.9
The financial statements of Daye Manufacturing Company report net sales of $720,000 and accounts receivable of $70,000 and $90,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Daye?
9 times $720,000 ÷ [($70,000 + $90,000) ÷ 2] = 9
The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to
Accounts Receivable
A customer charges a treadmill at Sports Equipment Shop. The price is $4,000 and the financing charge is 8% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account. The accounts affected by the journal entry made by Sports Equipment Shop to record the finance charge are
Accounts Receivable Interest Revenue
On March 1, 2016, Mike Dials purchased a suit at Lenny's Fine Apparel Store. The suit cost $800 and Mike used his Lenny's credit card. Lenny's charges 3% per month interest if payment on credit charges is not made within 30 days. On April 30, 2016, Mike had not yet made his payment. What entry should Lenny's make on April 30th?
Accounts Receivable 24 Interest Revenue 24 $800 × .03 = $24
On February 1, 2016, Fresno Company sells merchandise on account to Aiken Company for $7,800. The entry to record this transaction by Fresno Company is
Accounts Receivable 7,800 Sales Revenue 7,800
When an account becomes uncollectible and must be written off,
Accounts Receivable should be credited.
Which of the following are also called trade receivables?
Accounts receivable
Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP?
All of these are essentially the same for IFRS and GAAP.
Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP?
All of these are essentially the same for IFRS and GAAP.
Writing off an uncollectible account under the allowance method requires a debit to
Allowance for Doubtful Accounts
A 90-day note dated May 18 has a maturity date of
August 16. 90 - (31 - 18) - 30 - 31 = 16
Which use the term impairment to indicate that a receivable may not be collected?
Both IFRS and GAAP
Sandle Company lends Roseenn Company $9,000 on April 1, accepting a four-month, 4% interest note. Sandle Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared?
Interest Receivable 30 Interest Revenue 30 $9,000 × .04 × 1/12 = $30
A 30-day note dated June 13 has a maturity date of
July 13
Leek Company receives a $12,000, 3-month, 5% promissory note from Rey Company in settlement of an open accounts receivable. What entry will Leek Company make upon receiving the note?
Notes Receivable 12,000 Accounts Receivable—Rey Company 12,000
Which of the following receivables would not be classified as an "other receivable"?
Notes receivable
Which of the following statements concerning receivables is incorrect?
Notes receivable are often listed last under receivables
Which of the following is not true regarding a promissory note?
Promissory notes may not be transferred to another party by endorsement
Which of the following would be considered as an unlikely occurrence?
Retailer offers a cash discount to a customer.
A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables?
Selling expenses will increase each time accounts are sold
In recording the sale of accounts receivable, the commission charged by a factor is recorded as
Service Charge Expense.
Which of the following practices by a credit card company results in lower interest charges to the cardholder?
The card company allows a grace period before interest is accrued.
Which of the following would require a compound journal entry?
To record collection of accounts receivable when a cash discount is taken
An alternative name for Bad Debt Expense is
Uncollectible Accounts Expense
On October 1, 2016, Beane Company sells (factors) $600,000 of receivables to Milago Factors, Inc. Milago assesses a service charge of 4% of the amount of receivables sold. The journal entry to record the sale by Beane will include
a debit of $24,000 to Service Charge Expense
Under the direct write-off method of accounting for uncollectible accounts
a specific account receivable is decreased for the actual amount of bad debt at the time of write-off
The average collection period for accounts receivable is computed by dividing 365 days by
accounts receivable turnover.
Under the allowance method, writing off an uncollectible account
affects only balance sheet accounts
Bad Debt Expense is reported on the income statement as
an operating expense.
The basic issues in accounting for notes receivable include each of the following except
analyzing notes receivable.
The allowance method of accounting for uncollectible accounts is required if
bad debts are significant in amount
Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments?
both FASB and IASB
Which board(s) has(have) worked to implement fair value measurement for financial instruments?
both FASB and IASB.
A note receivable is a negotiable instrument which
can be transferred to another party by endorsement.
Short-term notes receivable are reported at
cash (net) realizable value.
The net amount expected to be received in cash from receivables is termed the
cash realizable value
The percentage of receivables basis for estimating uncollectible accounts emphasizes
cash realizable value
When an account is written off using the allowance method, the
cash realizable value of total accounts receivable will stay the same
Retailers generally consider sales from the use of national credit card sales as a
cash sale
The retailer considers Visa and MasterCard sales as
cash sales
On January 15, 2016, Jaymes Company received a two-month, 4%, $7,000 note from Peter Long for the settlement of his open account. The entry by Jaymes Company on January 15, 2016 would include a:
debit of $7,000 to Notes Receivable
An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $700 debit balance, the adjustment to record bad debts for the period will require a
debit to Bad Debt Expense for $4,700 $4,000 + $700 = $4,700
An aging of a company's accounts receivable indicates that $6,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $800 credit balance, the adjustment to record bad debts for the period will require a
debit to Bad Debt Expense for $5,200 $6,000 - $800 = $5,200
When an account is written off using the allowance method, accounts receivable
decreases and the allowance account decreases
The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles
does not affect income in the period it is collected
The direct write-off method of accounting for bad debts
does not require estimates of bad debt losses.
The percentage of sales basis of estimating expected uncollectibles
emphasizes the matching of expenses with revenues.
If a company fails to record estimated bad debts expense,
expenses are understated
Notes receivable are recognized in the accounts at
face value
When a note is accepted to settle an open account, Notes Receivable is debited for the note's
face value
Receivables might be sold to
generate cash quickly.
IFRS
implies that receivables with different characteristics should be reported separately
When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded
in the same year as the credit sale
A debit balance in the Allowance for Doubtful Accounts
indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.
The two key parties to a promissory note are the
maker and the payee
When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when
management estimates the amount of uncollectibles
When a note receivable is honored, Cash is debited for the note's
maturity value.
A promissory note
may be used to settle an accounts receivable
The receivable that is usually evidenced by a formal instrument of credit is a(n)
note receivable
Claims for which formal instruments of credit are issued as proof of the debt are
notes receivable
Interest is usually associated with
notes receivable
Three accounting issues associated with accounts receivable are
recognizing, valuing, and disposing
IFRS and GAAP accounting are the same for each of the following except for the
recording of a factoring transaction
If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)
selling expense.
The direct write-off method
shows only actual losses from uncollectible accounts receivable
The best managed companies will have
some accounts that will prove to be uncollectible
The face value of a note refers to the amount
that is identified on the formal instrument of credit.
Under the allowance method of accounting for uncollectible accounts,
the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
If an account is collected after having been previously written off,
there will be both a debit and a credit to accounts receivable.
Notes or accounts receivables that result from sales transactions are often called
trade receivables
The interest rate specified on any note is for a
year
