Accounting Chapter 7
As of December 31, 2018, Chippewa Company has $26,440 cash in its checking account, as well as several other items listed below: Bank credit card slips signed by customers $ 3,600 Money market fund balance $ 25,000 Investment in U.S. Treasury bills, mature within 90 days $ 80,000 Checks received from customers, but $ 4,600 not yet deposited in the bank Investment in ATT 7% bonds, maturing June 2022 $ 70,000 What amount should be shown in Chippewa's December 31, 2018, balance sheet as "Cash and cash equivalents"?
$139,640
Taylor, Inc. had accounts receivable of $310,000 and an allowance for doubtful accounts of $19,500 just before writing off as worthless an account receivable from Burton Company of $1,300. The net realizable value of the accounts receivable before and after the write-off were:
$290,500 before and $290,500 after.
As of December 31, 2018, Valley Company has $16,920 cash in its checking account, as well as several other items listed below: Bank credit card slips signed by customers $ 1,400 Money market fund balance $ 10,000 Investment in U.S. Treasury bills, mature within 90 days $ 40,000 Checks received from customers, but not yet deposited in the bank $ 1,800 Investment in ATT 10% bonds, maturing June 2019 $ 60,000 What amount should be shown in Valley's December 31, 2018, balance sheet as "Cash and cash equivalents"?
$70,120
Bert had accounts receivable of $280,000 and an allowance for doubtful accounts of $10,800 just before writing off as worthless an account receivable from Ernie Company of $1,600. After writing off this receivable what would be the balance in Bert's Allowance for Doubtful Accounts?
$9,200 credit balance.
On December 30, 2018, Varsity Corporation sold available for sale marketable securities costing $800,000 for $860,000 cash. The securities were purchased on January 2, 2016 and the market value of the securities on December 31, 2016 and December 31, 2017 was $820,000 and $780,000, respectively. How much gain or loss will Varsity report in its income statement for the year ending December 31, 2018?
A $60,000 gain.
Which of the following items on a bank reconciliation would have been known to the depositor before the bank statement arrived?
A deposit in transit
At the beginning of the year, Robert Company's Allowance for Doubtful Accounts had a $3,200 credit balance. During January, a provision of 2% of sales was made for uncollectible accounts expense. During January, sales totaled $350,000, and $2,900 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the month. Robert's financial statements for January show:
Allowance for Doubtful Accounts with a credit balance of $7,300.
Shrek Cyclery sells a bicycle to W. O'Connor, a customer who uses Empress Charge (a national credit card, but not issued by a bank). In recording this sale, Shrek Cyclery should record:
An account receivable from Empress Charge.
When the maker of a note defaults:
An account receivable is recorded in the amount of the principal plus interest through the maturity date.
In reconciling a bank statement, which of the following items could cause the cash per the bank statement to be greater than the balance of cash shown in the depositor's accounting records?
An outstanding check
With a line of credit, a liability arises:
As soon as any money is borrowed.
The accounts receivable turnover rate for Baldwin Corporation is 8, and for Basinger Company the turnover rate is 10. These statistics indicate that:
Basinger collects its accounts receivable faster than does Baldwin Company.
The _______________ department compares what was shipped with what was ordered and prepares and mails an invoice.
Billing
The unused portion of a line of credit:
Can be used at any time by drawing a check on a special bank account.
Sales to customers using bank credit cards, such as Visa or MasterCard, are recorded as:
Cash sales.
Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation:
Cleopatra is considered the maker of the note and records the note as a liability in her accounting records.
When reading a bank statement, which reference indicates an increase in the cash balance?
Credit Memorandum
When preparing a bank reconciliation, an NSF check will:
Decrease the balance per depositor's records.
Deegan Industries has an accounts receivable turnover rate of 8. Which of the following statements is not true?
Deegan writes off accounts receivable as uncollectible if they are over 45 days old.
A line of credit creates a liability for the borrower when it is granted by the bank.
False
An account receivable that arose from normal sales activity has a 16-month credit term. This receivable will be classified as a noncurrent asset.
False
An example of good internal control over cash is to have the person responsible for physically handling all cash perform the bank statement reconciliations.
False
An unrealized holding loss on available-for-sale securities will reduce net income.
False
Charges for depositing NSF checks are an example of a transaction that has been recorded by the depositor but may not have been recorded by the bank.
False
Compensating balances are not included in the amount of cash listed on a balance sheet.
False
Deposits in transit would not appear on a company's bank reconciliation but would appear on the company's bank statement.
False
Entries made in the general journal after preparing a bank reconciliation are called closing entries.
False
Financial assets describe not just cash, but all assets that are easily and directly convertible into known amounts of cash, except marketable securities.
False
Financial assets may be current or long-term assets.
False
Gains (or losses) on sales of marketable securities, as well as any unrealized holding gains (or losses) on investments in available for sale securities, are reported in the income statement.
False
If the account Cash Over and Short has a debit balance, it is reported in the balance sheet as a current asset.
False
If the allowance method is used, the recovery of an account receivable previously written-off results in a gain being recorded on the income statement.
False
If the note receivable bears interest, the amount debited to Notes Receivable is for the maturity amount of the note.
False
In general, the longer an account receivable is outstanding, the greater the likelihood it will be collected.
False
In order for a company's accounting records to be up-to-date and accurate after a bank reconciliation has been completed, journal entries should be made for any service charges by the bank and for deposits in transit.
False
In order to maximize sales and profits, effective internal control over receivables ensures that credit is extended to all customers who request credit.
False
Internal control is strengthened by a policy of making payments by check, from cash receipts, or from a petty cash fund.
False
One of the major steps in achieving internal control over accounts receivable is that the Billing department reviews the sales order, the customer's credit file, and decides whether and how much credit should be extended.
False
Restricted cash may be available to meet the normal operating needs of a company.
False
Short-term investments in marketable securities may not be reported in the balance sheet at values higher than original cost.
False
The Allowance for Doubtful Accounts should be listed on the balance sheet as a current liability.
False
The balance shown on a bank statement is always less than the month-end balance of a company's cash account in the general ledger.
False
The direct write-off method is more conservative than the allowance method for valuation of receivables.
False
The first step in a bank reconciliation is to update the depositor's accounting records for any deposits in transit.
False
The maker of a note is the party to whom payment is to be made.
False
The term "financial asset" is synonymous with the term "cash equivalent."
False
U.S. Treasury bills that mature within a period of four to six months are cash equivalents.
False
When doing a bank reconciliation, an NSF check will reduce the bank's balance.
False
When interest is collected, it is debited to the Interest Revenue account and credited to the Notes Receivable account.
False
If a 15%, two-month note receivable is acquired from a customer in settlement of an existing account receivable of $5,000, the accounting entry for acquisition of the note will:
Include a debit to Notes Receivable for $5,000 and no entry for interest.
If a 5%, four-month note receivable is acquired from a customer in settlement of an existing account receivable of $50,000, the accounting entry for acquisition of the note will:
Include a debit to Notes Receivable for $50,000 and no entry for interest.
After preparing a bank reconciliation, a journal entry would be required for which of the following:
Interest earned on the company's checking account.
Each of these categories of assets is normally shown in the balance sheet at current value, except:
Inventories
Financial assets include all of the following except:
Inventories.
Under the allowance method, when a receivable that had been previously written off is collected:
Neither net income nor net assets are affected.
When the account Allowance for Doubtful Accounts is used, writing off of an uncollectible accounts receivable will:
Not change income or total assets.
With available for-sale securities, unrealized holding gains and losses are:
Reported in the stockholders' equity section of the balance sheet.
Uncollectible accounts expense:
Represents the loss in value of accounts receivable that are estimated to be uncollectible.
Which of the following transactions will appear in the bank statement but generally not have been recorded by the depositor?
Service charges.
The aging of the accounts receivable approach to estimating uncollectible accounts does not:
Stress the relationship between uncollectible accounts expense and net sales.
Effective internal control over accounts receivable ensures:
That credit is only extended to customers that meet the company's credit standards.
Effective internal control includes all the following steps except:
The Accounting department receives the checks and the mailroom listing of checks received and prepares the daily bank deposit.
In handling of daily cash transactions, a few minor errors inevitably will occur. Which of the following is used to adjust the accounting records for these small errors?
The Cash Over and Short account
A bank reconciliation explains the differences between:
The balance per bank statement and the cash balance per the accounting records of the depositor.
Silver Company received a two-month, 6% note for $16,000 on August 5. Which of the following statements is true?
The maturity value of this note is $16,160.
Gold Company received a two-month, 12% note for $8,000 on June 16. Which of the following statements is true?
The principal of the note plus interest is due on August 15.
If a company uses a percentage of net sales in computing the amount of uncollectible accounts expense:
The relationship between revenue and expenses is being stressed more than the valuation of receivables at the balance sheet date.
The purpose of the fair value adjustment for securities classified as "available-for-sale" is:
To adjust the valuation of a company's investment to current market value.
When a bank reconciliation has been satisfactorily completed, the only related entries to be made in the depositor's records are:
To record items that explain the difference between the balance per the accounting records and the adjusted cash balance.
A basic characteristic of all marketable securities is that they can be purchased or sold quickly and easily at quoted market prices.
True
A compensating balance is often required by a bank as a condition for granting a loan.
True
A line of credit is an advance agreement by a bank to lend a company any amount of money up to a specified limit.
True
A major purpose of using an Allowance for Doubtful Accounts is to recognize uncollectible accounts expense in the same accounting period as the related sales that caused the expense.
True
An unrealized holding gain on available for sale securities will increase shareholders' equity.
True
Cash equivalents are the most liquid of all assets.
True
Cash equivalents include money market funds, U.S. Treasury bills, and high-grade commercial paper that mature within 90 days of acquisition.
True
Dividend revenue and interest revenue are reported in the income statement as a component of a company's net income.
True
If the maker of a note defaults, an entry is made to debit Accounts Receivable and credit Notes Receivable.
True
In the bank reconciliation, every adjustment to the balance per depositor's records requires a journal entry.
True
Industries with relatively high accounts receivable turnover rates include restaurants and hotels.
True
Internal control will aid in achieving accurate accounting for cash transactions.
True
Marketable securities include investments in bonds and in the capital stocks of publicly traded corporations.
True
Service charges are an example of a transaction that appears in the bank statement but which may not yet have been recorded by the company.
True
The Allowance for Doubtful Accounts is a contra-asset account and appears on the balance sheet.
True
The Allowance for Doubtful Accounts is called a valuation account, or contra-asset account, and normally has a credit balance.
True
The higher a company's accounts receivable turnover rate, the more liquid the company's receivables.
True
The income statement approach used to estimate uncollectible receivables uses a percentage of net sales without considering the current balance in the Allowance account.
True
The lower the accounts receivable turnover rate, the longer a company must wait to collect from its credit customers.
True
To "write-off" an account receivable is to reduce the balance of the customer's account to zero.
True
When a company makes a sale by accepting a bank-issued credit card from the customer, the sale is recorded as a cash sale.
True
When an Allowance for Doubtful Accounts is used, accounts receivable are valued in the balance sheet at their estimated net realizable value.
True
When the direct write-off method is used to recognize uncollectible accounts expense, an Allowance for Doubtful Accounts is not required.
True
Factoring allows a business to obtain immediate cash instead of waiting to collect the account receivable.
True.
The term cash equivalent refers to:
Very liquid short-term investments such as U.S. Treasury Bills and commercial paper.
Effective internal control over receivables is designed to ensure that customers' payments are promptly deposited.
true