Accounting Test 2

For the allowance method, what time periods are companies required to take into consideration

-Estimate future uncollectible accounts -Record estimates in the current year

Direct write-off method (Not GAAP)

-Write off bad debts only at the time they actually become uncollectible -primarily used for tax reporting

•Estimated uncollectible accounts -Reduce assets: -Increase expenses:

-accounts receivable -bad debt expense

Which of the following values is used to report Accounts Receivable on the Balance Sheet? A) Net Realizable Value B) Present Value C) Market Value D) Historical Cost

A) Net Realizable Value

When a credit card is used, the - account increases

Accounts payable

The correct equation (COGS model) that applies to the computation of cost of goods sold is A. Beginning inventory - purchases + ending inventory = cost of goods sold. B. Beginning inventory + purchases - ending inventory = cost of goods sold. C. Beginning inventory + purchases + ending inventory = cost of goods sold. D. None of the above.

B. Beginning inventory + purchases - ending inventory = cost of goods sold.

JDC purchased inventory for $5000 and also paid a $300 freight in bill. JDC returned half the goods to the seller and later took a 2% purchase discount. What is JDC's cost of the inventory that it kept? A) $2700 B) $2800 C) $2750 D) $2500

C) $2750

Contra revenue accounts are NOT

Expenses

Where is bad debt expense reported?

Income statement

Contra asset accounts are NOT - accounts

Liability

When is interest recorded?

When it is earned

Which of the following generally is recorded at the time a company provides services to customers on account? a. Accounts receivable b. Interest receivable c. Notes receivable d. Tax refund claims

a. Accounts receivable

How would an NSF check from a customer be recorded in the accounting records? a. Debit Accounts Receivable; Credit Cash b. Debit Cash; Credit Accounts Receivable c. Debit Accounts Payable; Credit Cash d. Debit Cash; Credit Miscellaneous Expense

a. Debit Accounts Receivable; Credit Cash

When an entry is made to write off an uncollectible account, a. Bad debt expense is debited. b. Net income is decreased. c. Net accounts receivable is unchanged. d. The allowance account is credited.

c. Net accounts receivable is unchanged

When writing off an uncollectible account: a. Bad debt expense is debited. b. Net income is decreased. c. Total assets are unchanged. d. The allowance account is credited.

c. Total assets are unchanged.

Which of the following statements is true? a. Having too much cash represents idle resources that are not being used to produce revenues. b. One way to assess cash holdings is to compare cash assets to noncash assets. c. In recent years cash holdings have increased tremendously. d. All of the above are true.

d. All of the above are true.

On December 31 before adjusting entries, a company's balance of Allowance for Uncollectible Accounts is a credit of $2,000. What does a "credit" balance prior to adjusting entries indicate? a. The company did not estimate bad debts last year. b. Last year's estimate of bad debts was too low. c. The company's estimate equals actual bad debts. d. Last year's estimate of bad debts was too high.

d. Last year's estimate of bad debts was too high. If the account balance at the end of the year is a credit, then estimated bad debts for this year are greater than this year's actual bad debts.

Common items that are shown on the left-hand side of the bank reconciliation include...

deposits outstanding, checks outstanding, and bank errors

Sales Allowances

•Customer does NOT return a product (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account

What can increase a company's cash balance?

-Bank collections on the company's behalf -Interest earned

At the end of 2021, Kimzey is owed $20 million from customers and estimates that 30% will not be collected

-Debit Bad Debt Expense $6 million -Credit Allowance for Uncollectible Accounts $6 million ($20 million x 30% = $6 million

What can decrease a company's cash balance?

-Electronic Funds Transfers (EFTs) -NSF checks (nonsufficient funds) -Bank service fees

Average Collection Period= -Number of days the average accounts receivable balance is outstanding

365/Receivables Turnover Ratio

Smith Farms purchases a combine on January 1, 2015 for $50,000. Using the double declining balance method for depreciation, a 5 year lifetime and a $5,000 salvage value, what would be the book value of the combine December, 31, 2016? A) $18,000 B) $20,000 C) $22,000 D) $30,000

A) $18,000

Samson Company had the following balances and transactions during 2015. January 1 Beginning inventory: 20 units at $70 each March 10 Purchased 10 units at $80 each June 10 Sold 23 units for $100 each 7) What would Samson Company's inventory amount be on December 31, 2015 if the LIFO method was used? A) $490 B) $510 C) $525 D) $560

A) $490

The ending inventory for Misty Harbor Co. is $57,000. If beginning inventory was $68,000 and goods available for sale totaled $117,000, the cost of goods sold is: A) $60,000 B) $128,000 C) $68,000 D) $49,000 E) none of the above

A) $60,000

A company's net sales revenue is $25,000,000. Its cost of goods sold is $15,000,000. Its beginning inventory is $100,000 and its ending inventory is $200,000. Which of the following is its rate of inventory turnover? A) 100 B) 75 C) 1.67 D) 0.01

A) 100 cost of goods sold/average inventory

Internal Controls

Attempt to eliminate opportunity for fraud A company's plans to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information

In 2015, First Company purchased Second Company for $16,000,000 cash. At the time of purchase Second Company has assets with a fair value of $18,500,000 and liabilities with a fair value of $11,000,000. Calculate the amount paid for goodwill: A) $10,500,000 B) $8,500,000 C) $3,500,000 D) $0.

B) $8,500,000

Which of the following is not a capital expenditure? A) The addition of a building wing B) A tune-up of a company vehicle C) A complete overhaul of an air-conditioning system D) Replacement of an old motor with a new one in a piece of equipment E) The cost of installing a piece of equipment

B) A tune-up of a company vehicle

1.Marketable securities purchased on June 1, 2015 for $85,000 were valued at $80,000 on December 31, 2015. The securities were sold at beginning of 2016 for $83,000. The 2016 income statement should report a(n): A) Realized loss of $2,000. B) Realized gain of $3,000. C) Unrealized loss of $5,000 and a realized gain of $3,000. D) Unrealized gain recovered of $3,000.

B) Realized gain of $3,000.

Land is purchased for $62,500. Back taxes paid by the purchaser were $7,500; total costs to demolish an existing building were $11,000; fencing costs were $12,500; and lighting costs were $1,500. What is the cost of the land? A) $62,500 B) $81,000 C) $93,500 D) $95,000

B)$81,000

What is the difference between recording bad debt expense and writing off an uncollectible account (allowance for uncollectible accounts)

Bad debt expense is recorded in a prior year when estimating uncollectible accounts, whereas writing off an account occurs when an account is deemed to ACTUALLY be uncollectible

What is this financial statement? -Balance of cash -Snapshot at the end of the period -Current or noncurrent asset

Balance Sheet

The following information is from the 2015 records of Armadillo Camera Shops. Accounts Receivable, December 31, 2015 $330,000 (debit) Allowance for uncollectible accounts, January 1, 2015 30,000 (credit) Net sales for 2015 1,500,000 Accounts written off as uncollectible during 2015 25,500 Uncollectible accounts expense is estimated by the percent-of-sales method. Management estimates that 2% of net sales are uncollectible. Which of the following will be the 12/31/15 balance in the allowance for uncollectible accounts? A) $25,500 B) $30,000 C) $34,500 D) $30,500

C) $34,500

Samson Company had the following balances and transactions during 2015. January 1 Beginning inventory: 20 units at $70 each March 10 Purchased 10 units at $80 each June 10 Sold 23 units for $100 each December 31 Replacement cost: $75 each 9) What would Samson Company's inventory amount be on December 31, 2015 if the FIFO method was used with lower of cost or market? A) $490 B) $510 C) $525 D) $560

C) $525

How does the buyer's accountant record transportation charges on a shipment labeled FOB shipping point, and who pays the charges? The charges were paid with cash. A) No entry is made, because the seller pays the shipping charges. B) Debit Transportation Expense, Credit cash, because the buyer pays the shipping charges. C) Debit Inventory, Credit cash, because the buyer pays the shipping charges. D) Debit Sales Revenue, Credit cash, because the buyer pays the shipping charges.

C) Debit Inventory, Credit cash, because the buyer pays the shipping charges.

A machine with an original cost of $6,000, an expected useful life of 5 years, and salvage value of $500, is depreciated by the straight line method. The machine was purchased on January 1, 2015. On July 1, 2017, the machine is sold for $2,500. The entry to record the sale will include? A) a loss of $500 B) a gain of $500 C) a loss of $750 D) a gain of $750

C) a loss of $750

Checks outstanding means...

Cash decreases

Deposits outstanding means...

Cash increases

Sales Discount is what type of account?

Contra revenue account

Allowance for uncollectible accounts has a - balance

Credit

Sales Return

Customer returns goods previously purchased (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account

4) The petty cash fund of $400 was established for minor disbursements. At the end of the month, the fund included petty cash tickets for the purchase of $185 in supplies, $41 for postage, $86 for fuel and a delivery charge of $65 and cash of $23. How much cash is required to replenish the fund? A) $23 B) $226 C) $312 D) $377

D) $377

3) A company received a bank statement with a balance of $5,350. Reconciling items included a bookkeeper error of $200 (a $300 check recorded as $500), two outstanding checks totaling $720, a service charge of $15, a deposit in transit of $180, and interest revenue of $21. What is the adjusted balance? A) $4,636 B) $4,610 C) $5,016 D) $4,810

D) $4,810

The Jupiter Corporation acquired land, buildings, and equipment from a bankrupt company at a lump sum price of $96,000. The appraisal disclosed the following values: Land $60,000 Buildings 40,000 Equipment 20,000 Which of the following amounts would be debited to the Land account? A) $30,000 B) $32,000 C) $46,000 D) $48,000

D) $48,000

Samson Company had the following balances and transactions during 2015. January 1 Beginning inventory: 20 units at $70 each March 10 Purchased 10 units at $80 each June 10 Sold 23 units for $100 each 8) What would Samson Company's inventory amount be on December 31, 2015 if the FIFO method was used? A) $490 B) $510 C) $525 D) $560

D) $560

When interest is accrued, what is the transaction?

Debit interest receivable, credit interest revenue

How would an NSF check from a customer be treated on a bank reconciliation? a. Addition on the bank side b. Deduction on the bank side c. Addition on the company side d. Deduction on the company side

Deduction on the company side

Which of the following items would be found on the "bank side," or the left-hand side, of the bank reconciliation? a. Interest income received on the account b. Deposits outstanding c. NSF check from a customer d. Service fee charged by the bank

Deposits outstanding

Percentage of Credit Sales Method

Estimates uncollectible accounts based on the percentage of credit sales

Statement of Cash Flows Operating activities: -revenues and expenses

Examples: Cash received from customers, cash paid for rent, utilities, supplies, and salaries

Statement of Cash Flows Financing activities: -Financial transactions

Examples: Issue common stock or pay dividends; borrow or repay debt

Statement of Cash Flows Investing activities:

Examples: Purchase or sale of land, equipment, and buildings for cash

Collect interest based on?

How much of the year has passed

Where is allowance for uncollectible amounts reported?

It is a contra asset that is reported in the balance sheet

Receivables Turnover Ratio -Number of times during a year the average accounts receivable balance is collected

Net Credit Sales / Average Accounts Receivable

Income Statement Reports

Revenues Net of Sales Returns, Allowances, and Discounts

Cost of Goods Sold

Starting inventory + purchases − ending inventory

What is this financial statement? -Inflows/outflows -Covers a period of time -Operating, investing, and financing

Statement of Cash Flows

Which is more accurate the single percentage method or the aging method?

The aging method

What happens when it becomes clear a customer will not pay?

The company writes off the customer's account balance as uncollectible

Bank Reconciliation

The matching of the balance of cash in the bank with the balance of cash in the company's own records

What happens when a customer's account is written off as uncollectible?

The write-off: -Reduces the balance of Accounts Receivable (debit) -Reduces the balance of the Allowance for Uncollectible Accounts (credit)

Net Revenue is equal to

Total Revenue - Sales Discounts - Sales Allowances

A higher receivables turnover and shorter collection period means

a company is more effective

Sales discount

a reduction given by a seller for prompt payment of a credit sale

The Astroids Company records show the following aging of accounts receivable: Days 0‑30 31‑60 61‑90 Over 90 Amount $2,000 $1,000 $ 500 $ 100 % Estimated Uncollectible 5% 20% 30% 50% If the balance in the Allowance For Doubtful Accounts is a credit of $50 before adjustment, the Bad Debt Expense for the period is: a. $ 450 b. $ 500 c. $ 550 d. $1400

a. $ 450

You received a 4-month, 6%, $10,000 note on 10/1/2015. Your accounting period starts at 1/1 and ends at 12/31. How much interest revenue did you earn during 2015 on this note? a. $150 b. $50 c. $200 d. $600

a. $150

A company accepts a note receivable of $5,000 on September 1, 2021, that matures in 10 months and has stated interest of 6%. What amount of interest revenue will the company record in 2021 and 2022? a. 2021 = $100; 2022 = $150 b. 2021 = $125; 2022 = $125 c. 2021 = $150; 2022 = $100 d. 2021 = $0; 2022 = $250

a. 2021 = $100; 2022 = $150 2021: Interest Revenue = $5,000 × 6% × 4/12 = $100 2022: Interest Revenue = $5,000 × 6% × 6/12 = $150

On December 31 before adjusting entries, a company reports the following balances: Accounts Receivable $100,000 Allowance for Uncoll. Accts. $2,000 (credit) The company estimates bad debts to be 20% of accounts receivable. The adjusting entry would include: a. A debit to Bad Debt Expense = $18,000 b. A credit to Allowance for Uncoll. Accts. = $24,000 c. A credit to Allowance for Uncoll. Accts. = $22,000 d. A debit to Bad Debt Expense = $20,000

a. A debit to Bad Debt Expense = $18,000 Bad debts are estimated to be $20,000 (= $100,000 × 20%). The current $2,000 credit balance of the Allowance needs a credit adjustment of $18,000 to be equal to $20,000 credit. The adjustment of $18,000 is recorded as a debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.

The following statements regarding perpetual inventory and periodic inventory methods of handling merchandise are all correct except (choose one): a. A perpetual inventory method makes it unnecessary to take a physical count of inventory on hand. b. The perpetual inventory method offers better inventory control and more accurate determination of cost of goods sold than the period inventory method. c. The periodic inventory method is based upon the assumption that goods that were acquired and are not on hand have been previously sold. d. The periodic inventory system is less expensive to operate but may lead to inefficiencies.

a. A perpetual inventory method makes it unnecessary to take a physical count of inventory on hand.

A delivery truck costing $8,000 with a salvage value of $500 and an estimated useful life of 5 years was purchased on July 1 of Year 1. Depreciation Expense, Year 1, double‑declining balance method would be a. $1,500 b. $1,600 c. $3,000 d. $3,200

b. $1,600

A delivery truck costing $8,000 with a salvage value of $500 and an estimated useful life of 5 years was purchased on January 1, Year 1. Accumulated Depreciation balance, at the end of Year 2, straight line method would be a. $1,500 b. $3,000 c. $3,200 d. $3,700

b. $3,000

The effect of a sales allowance will result in which of the following: a. An increase to net income b. A decrease to net income c. An increase to accounts receivable d. An increase to sales revenue

b. A decrease to net income

Espana Van Conversions had credit sales of $2,000,000 during Year 1. On 12/31/Year 1, the balance in Accounts Receivable was $81,000. The company estimates bad debts to equal 1% of credit sales. What effect will the company's 12/31 adjusting entry have on the company's income statement and balance sheet? a. Decrease income by $20,000; no effect on balance sheet b. Decrease income by $20,000; decrease assets by $20,000 c. No effect on either income statement or balance sheet d. None of the above.

b. Decrease income by $20,000; decrease assets by $20,000

Which of the following would be true for a company that has an accounts receivable turnover of 10? a. The company turns over their accounts receivable more than once a month. b. The company would have an average collection period of 36.5 days. c. The company would be considered as doing an efficient job of collecting receivables if the terms were net 30. d. The company would have an average collection period of 20 days.

b. The company would have an average collection period of 36.5 days. The average collection period is computed as 365 divided by the accounts receivable turnover of 10 (= 36.5 days).

Which of the following is true regarding Allowance for Uncollectible Accounts? a. It is a liability account. b. It is added to the total of Sales Discounts, Sales Returns, and Sales Allowances. c. It is subtracted from the balance of Accounts Receivable in the balance sheet. d. It appears in the income statement as an expense.

c. It is subtracted from the balance of Accounts Receivable in the balance sheet.

Which of the following items would be categorized as an investing activity on a statement of cash flows? a. Borrowed money from the local bank by signing a note to repay the full amount two years later b. Paid for supplies in cash c. Paid for the purchase of equipment using cash d. Paid salaries to employees

c. Paid for the purchase of equipment using cash

Which of the following computations would be used to compute Net Revenue? a. Total Revenue + Accounts Receivable - Sales Discounts - Sales Allowances b. Net Revenue + Sales Allowances - Sales Discounts c. Total Revenue - Sales Discounts - Sales Allowances d. Net Income - Change in Accounts Receivable

c. Total Revenue - Sales Discounts - Sales Allowances

Deposits Outstanding

cash receipts of the company that have not been added to the bank's record of the company's balance

Checks Outstanding

checks the company has written that have not been subtracted from the bank's record of the company's balance

Allowance for Uncollectible Accounts

contra account that reduces accounts receivable to the net amount expected to be collected

Inventory Turnover Ratio

cost of goods sold/average inventory

For the receivables turnover ratio, the amount for net credit sales is found in the...

current period's income statement

On December 31 before adjusting entries, a company reports the following balances: Accounts Receivable $100,000 Allowance for Uncoll. Accts. $2,000 (credit) Credit Sales $500,000 The company estimates bad debts to be 4% of credit sales. The adjusting entry would include: a. A debit to Bad Debt Expense = $18,000 b. A credit to Allowance for Uncoll. Accts. = $24,000 c. A credit to Allowance for Uncoll. Accts. = $22,000 d. A debit to Bad Debt Expense = $20,000

d. A debit to Bad Debt Expense = $20,000 The adjustment equals $500,000 × 4% = $20,000. The adjusting entry includes a debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.

Which of the following is true about the aging method? a. No estimate for uncollectible accounts is made. b. Older accounts are more likely to be collected. c. It is not acceptable for GAAP. d. Older accounts are less likely to be collected

d. Older accounts are less likely to be collected

Timing Differences

occur when the company records transactions either before or after the bank records the same transactions

Goodwill

purchase price - assets - liabilities

Sales Allowances is a contra - account.

revenue

Sales Returns is a contra - account

revenue

petty cash fund

small amount of cash kept on hand to pay for minor purchases

The more frequently a business is able to "turn over" its average accounts receivable...

the more effective a company is at granting credit to and collecting cash from its customers

Aging method

using a higher percentage for "old" accounts than for "new" accounts when estimating uncollectible accounts