Accounting chapter 7 & 8

Segregation of duties

Accounting and cash collections should be properly separated

Safeguards over assets and records

Blank checks should be stored in a locked location.

While preparing the April 30th bank reconciliation, the accountant identified the following items: Company's balance according to the general ledger $15,000 Outstanding checks 2,500 Bank service charge 15 A customer's NSF check returned by the bank 100 What is the company's adjusted cash balance at April 30th?

$12,385 $12,500 $14,885 $17,385 Response Feedback: 15,000 book balance − 100 NSF check − 15 service charge = 14,885 Correct: $14,885

All Star Auto has an accounts receivable balance after posting net collections from customers for 2013 of $180,000. The customers took advantage of sales discounts of $15,000. Management aged the accounts receivable and estimate for uncollected account percentages as follows: $90,000 Current at 2% $50,000 1-30 days past due at 5% $30,000 31-60 days past due at 10% $10,000 60+ days past due at 25% The net realizable value of the accounts receivable is

$173,200 $170,200 $172,700 $180,000 Response Feedback: Accounts receivable balance $180,000 Less: Allowance for bad debt 9,800* Net realizable value $170,200 *Allowance for bad debt = (90,000 x .02) +(50,000 x .05) + (30,000 x .10) + (10,000 x .25) =1,800 +2,500 + 3,000+ 2,500= 9,800 Correct: $170,200

What is the distinguishing characteristic between accounts receivable and notes receivable?

Accounts receivable are usually current assets while notes receivable are usually long-term assets. Accounts receivable require payment of interest while notes receivable does not have payment of interest. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies. Notes receivable generally specify an interest rate and a maturity date at which any interest and principle must be repaid. Correct: Notes receivable generally specify an interest rate and a maturity date at which any interest and principle must be repaid.

While preparing a bank reconciliation, which of the following items would be added to the bank statement balance?

Answers: outstanding checks deposits in transit bank service charges interest earned on the bank account Correct: deposits in transit

Which of the following items would be added to the company's cash balance on a bank reconciliation?

Answers: outstanding checks deposits in transit bank service charges interest earned on the bank account Correct: interest earned on the bank account

Which one of the following is an accurate description of the Allowance for Bad Debts?

Contra Account Liability Account Revenue Account Expense Account Correct: Contra Account

Adequate documents and records

Initial entry into the accounting system should be from a consistent source with complete information.

If a company uses the direct write-off method of accounting for bad debts,

It establishes an estimate for the allowance for doubtful accounts. It will record bad debt expense only when an account is determined to be uncollected. When an account is written off, total assets will stay the same. It will reduce the accounts receivable account at the end of the accounting period for estimated uncollected accounts. Correct: It will record bad debt expense only when an account is determined to be uncollected.

All of the following are true for a company that uses the allowance method of accounting for bad debts, EXCEPT:

It uses a contra-asset account called the allowance for doubtful accounts. It records bad debt expense each time an account is determined to be uncollectible. It reduces its accounts receivable balance when the account is written off. It reports accounts receivable in the balance sheet at their net realizable value. Correct:It records bad debt expense each time an account is determined to be uncollectible.

Checks on recorded amounts

One employee or department should verify the work of another to determine that amounts are correct and that the correspond to properly authorized activites. An example would be to prepare a bank reconciliation.

Clearly defined authority and responsibility

Specific approval is given by management for the performance of activities.

At December 31 year-end, Craig Corp. has an $8,400 note receivable from a customer. Interest of 10% has accrued for 10 months on the note. What will Craig's financial statements report for this situation at December 31?

The balance sheet will report a note receivable of $8,400. The balance sheet will report the note receivable of $8,400 and interest receivable of $700. Nothing because the business has not received the cash yet. The income statement will report a note receivable of $8,400. Answer Feedback: Interest receivable = $8,400 principal x .10 interest rate x 10/12 fraction of one year = $700 Correct: The balance sheet will report the note receivable of $8,400 and interest receivable of $700.

While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the bank statement?

outstanding checks deposits in transit bank service charges interest earned on the bank account Correct: outstanding checks