Chapter 08 Accounting for Receivables. Test Bank for Accounting Principles, Eleventh Edition. This document/TEST BANK Contains 241 Questions With Answers, Worked Solutions and Essay Explanations

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CHAPTER 8 ACCOUNTING FOR RECEIVABLES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY sg This question also appears in the Study Guide. st This question also appears in a sel... f-test at the student companion website. SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise MA = Matching SA = Short-Answer Essay CHAPTER LEARNING OBJECTIVES 1. Identify the different types of receivables. 2. Explain how companies recognize accounts receivable. 3. Distinguish between the methods and bases companies use to value accounts receivable. 4. Describe the entries to record the disposition of accounts receivable. 5. Compute the maturity date of and interest on notes receivable. 6. Explain how companies recognize notes receivable. 7. Describe how companies value notes receivable. 8. Describe the entries to record the disposition of notes receivable. 9. Explain the statement presentation and analysis of receivables. TRUE-FALSE STATEMENTS 1. Trade receivables occur when two companies trade or exchange notes receivables. 2. Other receivables include nontrade receivables such as loans to company officers. 3. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. 4. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts. 5. The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing. 6. Accounts receivable are the result of cash and credit sales. 7. If a retailer assesses a finance charge on the amount owed by a customer, Accounts Receivable is debited for the amount of the interest. 8. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts. 9. The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships. 10. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period. 11. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible. 12. Allowance for Doubtful Accounts is a contra asset account. 13. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales. 14. Generally accepted accounting principles require that the direct write-off method be used for financial reporting purposes if it is also used for tax purposes. 15. Under the allowance method, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off. 16. Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off. 17. The percentage of sales basis for estimating uncollectible accounts always results in more Bad Debt Expense being recognized than the percentage of receivables basis. 18. An aging schedule is prepared only for old accounts receivables that have been past due for more than one year. 19. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected. 20. Sales resulting from the use of Visa and MasterCard are considered credit sales by the retailer. 21. A factor purchases receivables from businesses for a fee and collects the remittances directly from customers. 22. A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services. 23. Receivables may be sold because they may be the only reasonable source of cash. 24. If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts. 25. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time. 26. The maturity date of a 1-month note receivable dated June 30 is July 30. 27. The two key parties to a note are the maker and the payee. 28. When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days. 29. The accounts receivable turnover is computed by dividing total sales by the average net receivables during the year. 30. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements. 31. Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt. 32. The two methods of accounting for uncollectible accounts are (a) percentage of sales and (b) percentage of receivables. 33. The account Allowance for Doubtful Accounts is closed out at the end of the year. 34. In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash. 35. When counting the exact number of days to determine the maturity date of a note, the date of issue is included but the due date is omitted. 36. A note is dishonored when it is not fully paid at maturity. 37. Short-term receivables are reported in the current assets section before temporary investments. Answers to True-False Statements MULTIPLE CHOICE QUESTIONS 38. Claims for which formal instruments of credit are issued as proof of the debt are a. accounts receivable. b. interest receivable. c. notes receivable. d. other receivables. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 39. Interest is usually associated with a. accounts receivable. b. notes receivable. c. doubtful accounts. d. bad debts. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 40. The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 41. Which of the following receivables would not be classified as an "other receivable"? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 42. Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. non-trade receivables. c. trade receivables. d. merchandise receivables. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 43. The term "receivables" refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 44. A cash discount is usually granted to all of the following except a. retail customers. b. retailers. c. wholesalers. d. All of these answers are correct. , , AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 45. Which one of the following is not a primary problem associated with accounts receivable? a. Depreciating accounts receivable b. Recognizing accounts receivable c. Valuing accounts receivable d. Disposing of accounts receivable , , AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 46. Trade accounts receivable are valued and reported on the balance sheet a. in the investment section. b. at gross amounts less sales returns and allowances. c. at net realizable value. d. only if they are not past due. , , AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 47. Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing. b. depreciating, valuing, and collecting. c. recognizing, valuing, and disposing. d. accrual, bad debts, and disposing. , , AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 48. Which of the following would require a compound journal entry? a. To record merchandise returned that was previously purchased on account. b. To record sales on account. c. To record purchases of inventory when a discount is offered for prompt payment. d. To record collection of accounts receivable when a cash discount is taken. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 49. Which of the following would be considered as an unlikely occurrence? a. Manufacturer offers a cash discount to a wholesaler. b. Wholesaler offers a cash discount to a retailer. c. Retailer offers a cash discount to a customer. d. All of these answers are correct. , IMA: Business Economics 50. A customer charges a treadmill at Annie's Sport Shop. The price is $4,000 and the financing charge is 6% 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. What is the amount of the finance charge? a. $8 b. $20 c. $80 d. $240 Solution: $4,000  .06  30360  $20 51. A customer charges a treadmill at Annie's Sport Shop. The price is $4,000 and the financing charge is 9% 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 Annie's Sport Shop to record the finance charge are a. Accounts Receivable Cash b. Cash Finance Receivable c. Accounts Receivable Interest Payable d. Accounts Receivable Interest Revenue , LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 52. Which of the following practices by a credit card company results in lower interest charges to the cardholder? a. The card company states interest as a monthly percentage rather than an annual percentage. b. The card company allows a grace period before interest is accrued. c. The card company allows cardholders to skip payments on their cards. d. The card company calculates finance charges from the date of purchase to the date the amount is paid. 53. If a department store fails to make the entry to accrue the finance charges due from customers, a. accounts receivable will be overstated. b. interest revenue will be understated. c. interest expense will be overstated. d. interest expense will be understated. , LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 54. Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts. b. affects both balance sheet and income statement accounts. c. affects only income statement accounts. d. is not acceptable practice. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 55. The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value. , , AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 56. If a company fails to record estimated bad debts expense, a. cash realizable value is understated. b. expenses are understated. c. revenues are understated. d. receivables are understated. , LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 57. Lifetime sells softball equipment. On November 14, they shipped $3,000 worth of softball uniforms to Palos Middle School, terms 2/10, n/30. On November 21, they received an order from Tinley High School for $1,800 worth of custom printed bats to be produced in December. On November 30, Palos Middle School returned $300 of defective merchandise. Lifetime 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? a. $2,700 b. $3,000 c. $4,500 d. $4,800 , LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000  $300  $2,700 58. Syfy Company on July 15 sells merchandise on account to Eureka Co. for $5,000, terms 2/10, n/30. On July 20 Eureka Co. returns merchandise worth $2,000 to Syfy Company. On July 24 payment is received from Eureka Co. for the balance due. What is the amount of cash received? a. $2,900 b. $2,940 c. $3,000 d. $5,000 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($5,000  $2,000)  .98  $2,940 59. The existing balance in Allowance for Doubtful Accounts is considered in computing bad debt expense in the a. direct write-off method. b. percentage of receivables basis. c. percentage of sales basis. d. percentage of receivables and percentage of sales basis. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 60. When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when a. a sale is made. b. an account becomes bad and is written off. c. management estimates the amount of uncollectibles. d. a customer's account becomes past-due. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 61. When an account becomes uncollectible and must be written off, a. Allowance for Doubtful Accounts should be credited. b. Accounts Receivable should be credited. c. Bad Debt Expense should be credited. d. Sales Revenue should be debited. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 62. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase income in the period it is collected. b. will decrease income in the period it is collected. c. requires a correcting entry for the period in which the account was written off. d. does not affect income in the period it is collected. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 63. The percentage of sales basis of estimating expected uncollectibles a. emphasizes the matching of expenses with revenues. b. emphasizes balance sheet relationships. c. emphasizes cash realizable value. d. is not generally accepted as a basis for estimating bad debts. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 64. An aging of a company's accounts receivable indicates that $14,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $14,000. b. debit to Allowance for Doubtful Accounts for $12,900. c. debit to Bad Debt Expense for $12,900. d. credit to Allowance for Doubtful Accounts for $14,000. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $14,000  $1,100  $12,900 65. A debit balance in the Allowance for Doubtful Accounts a. is the normal balance for that account. b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. c. indicates that actual bad debt write-offs have been less than what was estimated. d. cannot occur if the percentage of sales method of estimating bad debts is used. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 66. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 67. An alternative name for Bad Debt Expense is a. Deadbeat Expense. b. Uncollectible Accounts Expense. c. Collection Expense. d. Credit Loss Expense. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 68. A reasonable amount of uncollectible accounts is evidence a. that the credit policy is too strict. b. that the credit policy is too lenient. c. of a sound credit policy. d. of poor judgments on the part of the credit manager. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 69. Bad Debt Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 70. The best managed companies will have a. no uncollectible accounts. b. a very strict credit policy. c. a very lenient credit policy. d. some accounts that will prove to be uncollectible. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 71. Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 72. The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales. b. bad debts are significant in amount. c. the company is a retailer. d. the company charges interest on accounts receivable. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 73. Bad Debt Expense is reported on the income statement as a. part of cost of goods sold. b. reducing gross profit. c. an operating expense. d. a contra-revenue account. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 74. When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 75. The method of accounting for uncollectible accounts that results in a better matching of expenses with revenues is the a. aging accounts receivable method. b. direct write-off method. c. percentage of receivables method. d. percentage of sales method. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 76. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales Revenue and a credit to Accounts Receivable. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 77. Under the allowance method of accounting for uncollectible accounts, a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off. b. Bad Debt Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 78. Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is offset against accounts receivable. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 79. When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. cash realizable value of total accounts receivable will decrease. c. allowance account will increase. d. cash realizable value of total accounts receivable will stay the same. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 80. If an account is collected after having been previously written off, a. the allowance account should be debited. b. only the control account needs to be credited. c. both income statement and balance sheet accounts will be affected. d. there will be both a debit and a credit to accounts receivable. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 81. When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 82. Two bases for estimating uncollectible accounts are: a. percentage of assets and percentage of sales. b. percentage of receivables and percentage of total revenue. c. percentage of current assets and percentage of sales. d. percentage of receivables and percentage of sales. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 83. The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value. b. the relationship between accounts receivable and bad debt expense. c. income statement relationships. d. the relationship between sales and accounts receivable. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 84. Haven Company uses the percentage of sales method for recording bad debt expense. For the year, cash sales are $600,000 and credit sales are $2,700,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Haven Company make to record the bad debt expense? a. Bad Debt Expense 33,000 Allowance for Doubtful Accounts 33,000 b. Bad Debt Expense 27,000 Allowance for Doubtful Accounts 27,000 c. Bad Debt Expense 27,000 Accounts Receivable 27,000 d. Bad Debt Expense 33,000 Accounts Receivable 33,000 , LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,700,000  .01  $27,000 85. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts a. is relevant when using the percentage of receivables basis. b. is relevant when using the percentage of sales basis. c. is relevant to both bases of adjusting for uncollectible accounts. d. will never show a debit balance at this stage in the accounting cycle. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 86. The direct write-off method of accounting for bad debts a. uses an allowance account. b. uses a contra-asset account. c. does not require estimates of bad debt losses. d. is the preferred method under generally accepted accounting principles. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 87. Under the direct write-off method of accounting for uncollectible accounts a. the allowance account is increased for the actual amount of bad debt at the time of write-off. b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. c. balance sheet relationships are emphasized. d. bad debt expense is always recorded in the period in which the revenue was recorded. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 88. An aging of a company's accounts receivable indicates that $5,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $900 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $5,000. b. debit to Allowance for Doubtful Accounts for $4,100. c. debit to Bad Debt Expense for $4,100. d. credit to Allowance for Doubtful Accounts for $5,000. , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $5,000  $900  $4,100 89. An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $800 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $2,200. b. debit to Bad Debt Expense for $3,000. c. debit to Bad Debt Expense for $3,800. d. credit to Allowance for Doubtful Accounts for $800. , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000  $800  $3,800 90. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $32,000. If the balance of the Allowance for Doubtful Accounts is $8,000 debit before adjustment, what is the amount of bad debt expense for that period? a. $8,000 b. $24,000 c. $32,000 d. $40,000 , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $32,000  $8,000  $40,000 91. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $15,000. If the balance of the Allowance for Doubtful Accounts is $2,000 credit before adjustment, what is the amount of bad debt expense for that period? a. $2,000 b. $13,000 c. $15,000 d. $17,000 , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $15,000  $2,000  $13,000 92. Using the percentage of receivables method for recording bad debt expense, estimated uncollectible accounts are $14,000. If the balance of the Allowance for Doubtful Accounts is $2,000 debit before adjustment, what is the balance after adjustment? a. $2,000 b. $12,000 c. $14,000 d. $16,000 , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $14,000  $2,000  $16,000 93. Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $38,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before adjustment, what is the amount of bad debt expense for the period? a. $7,000 b. $31,000 c. $38,000 d. $45,000 , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $38,000  $7,000  $31,000 94. Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $38,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before adjustment, what is the amount of bad debt expense for the period? a. $7,000 b. $31,000 c. $38,000 d. $45,000 , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $38,000  $7,000  $45,000 95. In reviewing the accounts receivable, the cash realizable value is $16,000 before the write-off of a $1,500 account. What is the cash realizable value after the write-off? a. $1,500 b. $14,500 c. $16,000 d. $17,500 , LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 96. In 2015, Warehouse 13 had net credit sales of $750,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $16,000. During 2015, $29,000 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 $150,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2015? a. $150,000 b. $29,000 c. $28,000 d. $31,000 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($150,000  .10)  ($29,000  $16,000)  $28,000 97. A company has net credit sales of $750,000 for the year and it estimates that uncollectible accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of $2,000 prior to adjustment, its balance after adjustment will be a credit of a. $13,000. b. $15,000. c. $15,040. d. $17,000. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($750,000  .02)  $2,000  $17,000 98. In 2015, Chandler Company had net credit sales of $1,125,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $27,000. During 2015, $42,000 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 $380,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2015? a. $23,000 b. $38,000 c. $53,000 d. $97,500 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($380,000  .10)  ($42,000  $27,000)  $53,000 99. Using the following information: 12/31/14 Accounts receivable $525,000 Allowance (35,000) Cash realizable value $490,000 During 2015, sales on account were $145,000 and collections on account were $100,000. Also during 2015, the company wrote off $4,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000. The change in the cash realizable value from the balance at 12/31/14 to 12/31/15 was a a. $36,000 increase. b. $41,000 increase. c. $44,000 increase. d. $45,000 increase. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $40,000  $4,000  $36,000 100. Using the following information: 12/31/14 Accounts receivable $525,000 Allowance (35,000) Cash realizable value $490,000 During 2015, sales on account were $145,000 and collections on account were $100,000. Also during 2015, the company wrote off $4,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000. Bad debt expense for 2015 is a. $4,000. b. $5,000. c. $9,000 d. $40,000. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $40,000  ($35,000  $4,000)  $9,000 101. During 2015, Alfred Inc. had sales on account of $198,000, cash sales of $81,000, and collections on account of $126,000. In addition, they collected $2,175 which had been written off as uncollectible in 2014. As a result of these transactions, the change in the accounts receivable balance indicates a a. $69,825 increase. b. $72,000 increase. c. $150,825 increase. d. $153,000 increase. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $198,000  $126,000  $72,000 102. Kill Corporation’s unadjusted trial balance includes the following balances (assume normal balances): Accounts Receivable $850,000 Allowance for Doubtful Accounts 15,000 Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $15,000 b. $36,000 c. $50,100 d. $51,000 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($850,000  .06)  $15,000 = $36,000 103. Jack Company provides for bad debt expense at the rate of 2% of credit sales. The following data are available for 2015: Allowance for doubtful accounts, 1/1/15 (Cr.) $ 12,000 Accounts written off as uncollectible during 2015 9,000 Credit sales in 2015 1,200,000 The Allowance for Doubtful Accounts balance at December 31, 2015, should be a. $3,000. b. $21,000. c. $24,000. d. $27,000. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($1,200,000  .02)  ($12,000  $9,000)  $27,000 104. In 2015, Boyle Company had credit sales of $1,080,000 and granted sales discounts of $24,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $26,400. During 2015, $45,000 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, 2015? a. $13,080 b. $13,800 c. $31,680 d. $39,720 105. An analysis and aging of the accounts receivable of Hugh Company at December 31 revealed the following data: Accounts Receivable $900,000 Allowance for Doubtful Accounts per books before adjustment (Cr.) 50,000 Amounts expected to become uncollectible 56,000 The cash realizable value of the accounts receivable at December 31, after adjustment, is: a. $794,000. b. $844,000. c. $850,000. d. $894,000. 106. Herman Company has a debit balance of $5,000 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, Herman estimates that $70,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is: a. $5,000. b. $65,000. c. $70,000. d. $75,000. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $70,000  $5,000  $75,000 107. On October 1, 2015, Milago Company sells (factors) $700,000 of receivables to Beanfield Factors, Inc. Beanfield assesses a service charge of 3% of the amount of receivables sold. The journal entry to record the sale by Milago will include a. a debit of $700,000 to Accounts Receivable. b. a credit of $721,000 to Cash. c. a debit of $721,000 to Cash. d. a debit of $21,000 to Service Charge Expense. 108. On March 1, 2015, Dick Miles purchased a suit at Kenny's Fine Apparel Store. The suit cost $600 and Dick used his Kenny credit card. Kenny charges 2% per month interest if payment on credit charges is not made within 30 days. On April 30, 2015, Dick had not yet made his payment. What entry should Kenny make on April 30th? a. Uncollectible Account 600 Accounts Receivable 600 b. Bad Debt Expense 588 Interest Expense 12 Accounts Receivable 600 c. Accounts Receivable 612 Interest Revenue 12 Sales Revenue 600 d. Accounts Receivable 12 Interest Revenue 12 , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600  .02  $12 109. Jeff Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 2% for its credit card use. The entry to record this transaction by Jeff Retailers will include a credit to Sales Revenue of $75,000 and a debit(s) to a. Cash $73,500 and Service Charge Expense $1,500. b. Accounts Receivable $73,500 and Service Charge Expense $1,500. c. Cash $73,500 and Interest Expense $1,500. d. Accounts Receivable $75,000. , LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $75,000  ($75,000  .02)  $73,500 110. XYZ Company accepted a national credit card for a $4,000 purchase. The cost of the goods sold is $2,400. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,480 b. Increase by $1,552 c. Increase by $1,600 d. Increase by $3,880 , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($4,000  $2,400)  ($4,000  .03)  $1,480 111. Major advantages of credit cards to the retailer include all of the following except the a. issuer does the credit investigation of customers. b. issuer undertakes the collection process. c. retailer receives more cash from the credit card issuer. d. All of these answers are correct. 112. The sale of receivables by a business a. indicates that the business is in financial difficulty. b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a factor. d. can be a quick way to generate cash for operating needs. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 113. If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n) a. selling expense. b. interest expense. c. other expense. d. contra asset. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 114. If a company sells its accounts receivables to a factor, a. the seller pays a commission to the factor. b. the factor pays a commission to the seller. c. there is a gain on the sale of the receivables. d. the seller defers recognition of sales revenue until the account is collected. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 115. Retailers generally consider sales from the use of national credit card sales as a a. credit sale. b. collection of an accounts receivable. c. cash sale. d. collection of a note receivable. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 116. Receivables might be sold to a. lengthen the cash-to-cash operating cycle. b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly. d. finance companies at an amount greater than cash realizable value. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 117. 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? a. The loss section of the income statement will increase each time receivables are sold. b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold. c. Selling expenses will increase each time accounts are sold. d. The other expense section of the income statement will increase each time accounts are sold. , LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 118. T’Pol Furniture factors $900,000 of receivables to Trip Factors, Inc. Trip Factors assesses a 2% service charge on the amount of receivables sold. T’Pol Furniture factors its receivables regularly with Trip Factors. What journal entry does T’Pol make when factoring these receivables? a. Cash 882,000 Loss on Sale of Receivables 18,000 Accounts Receivable 900,000 b. Cash 882,000 Accounts Receivable 882,000 c. Cash 900,000 Accounts Receivable 882,000 Gain on Sale of Receivables 18,000 d. Cash 882,000 Service Charge Expense 18,000 Accounts Receivable 900,000 , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $900,000  ($900,000  .02)  $882,000 119. When customers make purchases with a national credit card, the retailer a. is responsible for maintaining customer accounts. b. is not involved in the collection process. c. absorbs any losses from uncollectible accounts. d. receives cash equal to the full price of the merchandise sold from the credit card company. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 120. The retailer considers Visa and MasterCard sales as a. cash sales. b. promissory sales. c. credit sales. d. contingent sales. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 121. The basic issues in accounting for notes receivable include each of the following except a. analyzing notes receivable. b. disposing of notes receivable. c. recognizing notes receivable. d. valuing notes receivable. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 122. A 60-day note receivable dated July 13 has a maturity date of a. September 12. b. September 11. c. September 10. d. September 13. , LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 60  (31  13)  31  11 123. The maturity value of a $50,000, 9%, 60-day note receivable dated July 3 is a. $50,000. b. $50,750. c. $54,500. d. $59,000. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $50,000  ($50,000  .09  60360)  $50,750 124. A 90-day note dated May 14 has a maturity date of a. August 14. b. August 12. c. August 13. d. August 15. , LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 90  (31  14)  30  31  12 125. A 30-day note dated June 18 has a maturity date of a. July 19. b. July 18. c. July 17. d. July 16. , LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 30  (30  18)  18 126. A promissory note a. is not a formal credit instrument. b. may be used to settle an accounts receivable. c. has the party to whom the money is due as the maker. d. cannot be factored to another party. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 127. Which of the following is not true regarding a promissory note? a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party. c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by name. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 128. The two key parties to a promissory note are the a. maker and a bank. b. debtor and the payee. c. maker and the payee. d. sender and the receiver. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 129. When calculating interest on a promissory note with the maturity date stated in terms of days, the a. maker pays more interest if 365 days are used instead of 360. b. maker pays the same interest regardless if 365 or 360 days are used. c. payee receives more interest if 360 days are used instead of 365. d. payee receives less interest if 360 days are used instead of 365. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 130. The maturity value of a $5,000, 9%, 60-day note receivable dated February 10th is a. $5,000. b. $5,038. c. $5,075. d. $5,450. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $5,000  ($5,000  .09  60360)  $5,075 131. The interest on a $10,000, 8%, 1-year note receivable is a. $800. b. $10,000. c. $10,080. d. $10,800. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $10,000  .08  $800 132. The maturity value of a $70,000, 8%, 3-month note receivable is a. $70,467. b. $70,560. c. $71,400. d. $75,600. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $70,000  ($70,000  .08  312)  $71,400 133. The interest on a $6,000, 6%, 60-day note receivable is a. $60. b. $120. c. $180. d. $360. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $6,000  .06  60360  $60 134. The interest on a $9,000, 6%, 90-day note receivable is a. $135. b. $270. c. $405. d. $540. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $9,000  .06  90360  $135 135. On November 1, Gentle Company received a $3,000, 6%, three-month note receivable. The cash to be received by Gentle Company when the note becomes due is: a. $3,000. b. $3,030. c. $3,045. d. $3,180. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $3,000  ($3,000  .06  312)  $3,045 136. On January 15, 2015, Craig Company received a two-month, 9%, $9,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on January 15, 2015 would include a: a. debit of $9,135 to Notes Receivable. b. debit of $9,000 to Notes Receivable. c. credit of $9,135 to Accounts Receivable. d. credit of $9,000 to Notes Receivable. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA 137. On January 15, 2015, Craig Company received a two-month, 9%, $9,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on March 15, 2015 if Pentel dishonors the note and collection is expected is: a. Accounts Receivable—W. Pentel 9,000 Notes Receivable 9,000 b. Accounts Receivable—W. Pentel 9,135 Notes Receivable 9,000 Interest Revenue 135 c. Accounts Receivable—W. Pentel 8,865 Interest Lost 135 Notes Receivable 9,000 d. Bad Debt Expense 9,135 Notes Receivable 9,135 , LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,000  ($9,000  .09  212)  $9,135 138. Notes receivable are recognized in the accounts at a. cash (net) realizable value. b. face value. c. gross realizable value. d. maturity value. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 139. A note receivable is a negotiable instrument which a. eliminates the need for a bad debts allowance. b. can be transferred to another party by endorsement. c. takes the place of checks in a business firm. d. can only be collected by a bank. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 140. A company that receives an interest bearing note receivable will a. debit Notes Receivable for the maturity value of the note. b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note. d. credit Notes Receivable for the face value of the note. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 141. The face value of a note refers to the amount a. that can be received if sold to a factor. b. borrowed plus interest received at maturity from the maker. c. that is identified on the formal instrument of credit. d. remaining after a service charge has been deducted. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 142. Reck Company receives a $15,000, 3-month, 8% promissory note from Fey Company in settlement of an open accounts receivable. What entry will Reck Company make upon receiving the note? a. Notes Receivable 15,300 Accounts Receivable—Fey Company 15,300 b. Notes Receivable 15,300 Accounts Receivable—Fey Company 15,000 Interest Revenue 300 c. Notes Receivable 15,000 Interest Receivable 300 Accounts Receivable—Fey Company 15,000 Interest Revenue 300 d. Notes Receivable 15,000 Accounts Receivable—Fey Company 15,000 , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA 143. When a note is accepted to settle an open account, Notes Receivable is debited for the note's a. net realizable value. b. maturity value. c. face value. d. face value plus interest. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 144. Short-term notes receivable are reported at a. cash (net) realizable value. b. face value. c. gross realizable value. d. maturity value. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 145. Short-term notes receivables a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value. c. use the same estimations and computations as accounts receivable to determine cash realizable value. d. present the same valuation problems as long-term notes receivables. , LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 146. When a note receivable is dishonored, a. interest revenue is never recorded. b. bad debts expense is recorded. c. the maturity value of the note is written off. d. Accounts Receivable is debited if eventual collection is expected. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 147. Randie Company lends Luann Company $10,000 on April 1, accepting a four-month, 6% interest note. Randie Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared? a. Note Receivable 10,000 Cash 10,000 b. Interest Receivable 50 Interest Revenue 50 c. Cash 50 Interest Revenue 50 d. Interest Receivable 200 Interest Revenue 200 , LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $10,000  .06  112  $50 148. When a note receivable is honored, Cash is debited for the note's a. net realizable value. b. maturity value. c. gross realizable value. d. face value. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 149. Magneto Company had net credit sales during the year of $1,350,000 and cost of goods sold of $810,000. The balance in accounts receivable at the beginning of the year was $180,000, and the end of the year it was $120,000. What was the accounts receivable turnover? a. 5.6 b. 7.5 c. 9.0 d. 11.3 , LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,350,000  [($180,000  $120,000)  2]  9 150. The average collection period for accounts receivable is computed by dividing 365 days by a. net credit sales. b. average accounts receivable. c. ending accounts receivable. d. accounts receivable turnover. , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 151. The average collection period is computed by dividing a. net credit sales by average gross accounts receivable. b. net credit sales by ending gross accounts receivable. c. the accounts receivable turnover by 365 days. d. 365 days by the accounts receivable turnover. , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 152. The financial statements of Danielle Manufacturing Company report net sales of $750,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Danielle? a. 5 times b. 8.3 times c. 10 times d. 12.5 times , LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000  [($60,000  $90,000)  2]  10 153. The financial statements of Danielle Manufacturing Company report net sales of $750,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days? a. 29.2 b. 36.5 c. 43.8 d. 73 , LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000  $75,000  10; 365  10  36.5 154. The financial statements of Gervais Manufacturing Company report net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Gervais? a. 6.3 times b. 8.3 times c. 10 times d. 12.5 times , LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $500,000  [($80,000  $40,000)  2]  8.3 155. The financial statements of Gervais Manufacturing Company report net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days? a. 29.2 days b. 36.5 days c. 43.8 days d. 57.9 days , LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $500,000  $60,000  8.33; 365  8.33  43.8 156. Which of the following are also called trade receivables? a. Accounts receivable b. Other receivables c. Advances to employees d. Income taxes refundable , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 157. On February 1, 2015, Fugit Company sells merchandise on account to Armen Company for $6,500. The entry to record this transaction by Fugit Company is a. Sales Revenue 6,500 Accounts Payable 6,500 b. Cash 6,500 Sales Revenue 6,500 c. Accounts Receivable 6,500 Sales Revenue 6,500 d. Notes Receivable 6,500 Accounts Receivable 6,500 , LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA 158. Writing off an uncollectible account under the allowance method requires a debit to a. Accounts Receivable. b. Allowance for Doubtful Accounts. c. Bad Debt Expense. d. Uncollectible Accounts Expense. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 159. When the allowance method of recognizing bad debts expense is used, the entry to recognize that expense a. increases net income. b. decreases current assets. c. has no effect on current assets. d. has no effect on net income. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 160. The direct write-off method a. is acceptable for financial reporting purposes. b. debits Allowance for Doubtful Accounts to record write-offs of accounts. c. shows only actual losses from uncollectible accounts receivable. d. estimates bad debt losses. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 161. Deborah Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $2,100,000 and $50,000 (Cr.), respectively. An aging of accounts receivable indicated that $180,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is a. $130,000. b. $180,000. c. $210,000. d. $230,000. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $180,000  $50,000  $130,000 162. In recording the sale of accounts receivable, the commission charged by a factor is recorded as a. Bad Debt Expense. b. Commission Expense. c. Loss on Sale of Receivables. d. Service Charge Expense. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 163. Schwartzman 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 1.5% per month is added to the balance. If the unpaid balance on the above sale is $640 at the end of the grace period, the interest charge is a. $6.40. b. $9.60. c. $11.00. d. $16.00. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $640  .015  $9.60 164. The interest rate specified on any note is for a a. day. b. month. c. week. d. year. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 165. On February 1, Ville Company received a $6,000, 5%, four-month note receivable. The cash to be received by Ville Company when the note becomes due is a. $100. b. $6,000. c. $6,100. d. $6,300. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $6,000  ($6,000  .05  412)  $6,100 166. The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to a. Notes Receivable. b. Cash. c. Allowance for Doubtful Accounts. d. Accounts Receivable. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 167. Which of the following statements concerning receivables is incorrect? a. Notes receivable are often listed last under receivables. b. The contingent liability from selling notes receivable should be disclosed. c. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. d. Interest revenue and gain on sale of notes receivable are shown under other revenues and gains. , LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 168. The accounts receivable turnover is computed by dividing a. total sales by average net accounts receivable. b. net credit sales by average net accounts receivable. c. total sales by ending net accounts receivable. d. net credit sales by ending net accounts receivable. , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 169. Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these are essentially the same for IFRS and GAAP. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 170. Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these are essentially the same for IFRS and GAAP. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 171. IFRS requires loans and receivables to be recorded at a. amortized cost. b. amortized cost, adjusted for allowances for doubtful accounts. c. unamortized cost. d. unamortized cost, adjusted for allowances for doubtful accounts. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 172. IFRS sometimes refers to allowances as a. revenues. b. discounts. c. provisions. d. reserves. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 173. IFRS a. implies that receivables with different characteristics should be reported separately. b. requires that receivables with different characteristics should be reported separately. c. implies that receivables with different characteristics should be reported as one unsegregated amount. d. requires that receivables with different characteristics should be reported as one unsegregated amount. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 174. Which board(s) has(have) worked to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 175. Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB. IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 176. Which is part of IFRS accounting for financial instruments? Disclosure of fair value information Optional recording of some financial for receivables in the notes instruments at fair value a. Yes Yes b. Yes No c. No Yes d. No No IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 177. Which requires a two-tiered approach to test whether the value of loans and receivables are impaired? GAAP IFRS a. yes no b. yes yes c. no no d. no yes IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 178. What criteria are used to determine how to record a factoring transaction? GAAP IFRS a. risks and rewards, and loss of control risks and rewards, and loss of control b. risks and rewards, and loss of control loss of control c. loss of control loss of control d. loss of control risks and rewards, and loss of control IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 179. Which permits partial derecognition of receivables? GAAP IFRS a. yes no b. yes yes c. no no d. no yes IFRS: , LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics Answers to Multiple Choice Questions BRIEF EXERCISES BE 180 Record the following transactions for Lett Company. 1. On August 4, Lett sold merchandise on account to Smiley Company for $610, terms 2/10, n/30. 2. On August 7, Lett granted Smiley a sales allowance and reduced the cost of the merchandise by $60 because some of the goods were slightly damaged. 3. On August 12, Smiley paid the account in full. LO: 2, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 181 At December 31, 2015, Wynne Company reported Accounts Receivable of $45,000 and Allowance for Doubtful Accounts of $3,500. On January 7, 2016, Brown Enterprises declares bankruptcy and it is determined that the receivable of $1,200 from Brown is not collectible. 1. What is the cash realizable value of Accounts Receivable at December 31, 2015? 2. What entry would Wynne make to write off the Brown account? 3. What is the cash realizable value of Accounts Receivable after the Brown account is written off? LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Eaton Company’s ledger at the end of the current year shows Accounts Receivable of $150,000. Instructions a. If Allowance for Doubtful Accounts has a credit balance of $4,400 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period. b. If Allowance for Doubtful Accounts has a debit balance of $4,400 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period. LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 183 Stine Co. sells Christmas angels. Patel determines that at the end of December, it has the following aging schedule of Accounts Receivable: Customer Total Not Yet Due Number of Days Past Due 1–30 31–60 61–90 Over 90 DV Gannon $500 $300 $200 JJ Joysen 300 100 200 NJ Bell 150 50 100 JC Werly 200 200 ? 300 300 250 200 100 % uncollectible 1% 5% 10% 20% 50% Total Estimated Uncollectible Amounts ? ? ? ? ? ? Compute the net receivables based on the above information at the end of December. (There was no beginning balance in the Allowance for Doubtful Accounts). LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Net Receivables = ($1,150 – $133 = $1,017) BE 184 Newton Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred. Oct. 15 Sold $15,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge. 25 Made sales of $800 on VISA credit cards. The credit card service charge is 2%. Instructions Journalize the transactions. LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 185 Determine the interest on the following notes: (a) $2,000 at 6% for 90 days. (b) $900 at 9% for 5 months. (c) $3,000 at 8% for 60 days (d) $1,600 at 7% for 6 months LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution 185 (5 min.) (a) $30.00 ($2,000 × .06 × 90/360) (b) $33.75 ($900 × .09 × 5/12) (c) $40.00 ($3,000 × .08 × 60/360) (d) $56.00 ($1,600 × .07 × 6/12) BE 186 Ace Distributors has the following transactions related to notes receivable during the last month of the year. Dec. 1 Loaned $15,000 cash to K. Hogan on a 1-year, 6% note. 16 Sold goods to F. Manning, receiving a $4,800, 60-day, 7% note. 31 Accrued interest revenue on all notes receivable. BE 186 (Cont.) Instructions Journalize the transactions for Ace Distributors. LO: 5,6, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 187 Compute the maturity value for each of the following notes receivable. 1. A $5,000, 6%, 3-month note dated July 20. Maturity value $____________. 2. A $12,000, 9%, 150-day note dated August 5. Maturity value $____________. LO: 5,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics BE 188 On February 7, Jackson Company sold goods on account to Phillips Enterprises for $5,200, terms 2/10, n/30. On March 9, Phillips gave Jackson a 60-day, 12% promissory note in settlement of the account. Record the sale and the acceptance of the promissory note on the books of Jackson Company. LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution 188 (4 min.) February 7 Accounts Receivable 5,200 Sales Revenue 5,200 March 9 Notes Receivable 5,200 Accounts Receivable 5,200 BE 189 On March 9, Phillips gave Jackson Company a 60-day, 12% promissory note for $5,200. Phillips honors the note on May 8. Record the collection of the note and interest by Jackson assuming that no interest has been accrued. LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 190 On March 9, Phillips gave Jackson Company a 60-day, 12% promissory note for $5,200. Phillips dishonors the note on May 8. Record the entry that Jackson would make when the note is dishonored, assuming that no interest has been accrued. LO: 8, Bloom: AN, K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 191 The following data exists for Carley Company. 2015 2014 Accounts Receivable $ 50,000 $ 70,000 Net Sales 500,000 410,000 Calculate the accounts receivable turnover and the average collection period for accounts receivable in days for 2015. EXERCISES Ex. 192 Presented below are various receivable transactions entered into by Beran Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet. a. Loaned a company officer $5,000. b. Accepted a $3,000 promissory note from a customer as payment on account. c. Determined that a $10,000 income tax refund is due from the IRS. d. Sold goods to a customer on account for $4,000. e. Recorded $500 accrued interest on a note receivable due next year. f. Advanced $1,400 to a trusted employee. LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Ex. 193 Prepare journal entries to record the following transactions entered into by Valente Company: 2014 June 1 Received a $10,000, 12%, 1-year note from Andrea Foley as full payment on her account. Nov. 1 Sold merchandise on account to Patton, Inc. for $12,000, terms 2/10, n/30. Nov. 5 Patton, Inc. returned merchandise worth $500. Nov. 9 Received payment in full from Patton, Inc. Dec. 31 Accrued interest on Foley's note. Ex. 193 (Cont.) 2015 June 1 Andrea Foley honored her promissory note by sending the face amount plus interest. No interest has been accrued in 2015. LO: 1,8, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA June 1 Cash 11,200 Notes Receivable 10,000 Interest Receivable 700 Interest Revenue 500 ($10,000 × 12% × 5/12 = $500) Ex. 194 Record the following transactions for Adcock Company. 1. On April 12, sold $11,000 of merchandise to Milton Inc., terms 2/10, n/30. 2. On April 15, Milton returned $2,000 of merchandise. 3. On April 22, Milton paid for the merchandise. LO: 2, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 195 (a) On January 6, Whitson Co. sells merchandise on account to Garcia Inc. for $7,000, terms 2/10, n/30. On January 16, Garcia Inc. pays the amount due. Prepare the entries on Whitson's books to record the sale and related collection. (b) On January 10, Jill Hoyle uses her Berkman Co. credit card to purchase merchandise from Berkman Co. for $9,000. On February 10, Hoyle is billed for the amount due of $9,000. On February 12, Hoyle pays $4,000 on the balance due. On March 10, Hoyle is billed for the amount due, including interest at 2% per month on the unpaid balance as of February 12. Prepare the entries on Berkman Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 196 Fleming Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2014, and December 31, 2015, appear below: 12/31/14 12/31/15 Net Credit Sales $400,000 $500,000 Accounts Receivable 60,000 80,000 Allowance for Doubtful Accounts 5,200 ? Instructions (a) Record the following events in 2015. Aug. 10 Determined that the account of Sue King for $800 is uncollectible. Sept. 12 Determined that the account of Tom Young for $3,700 is uncollectible. Oct. 10 Received a check for $500 as payment on account from Sue King, whose account had previously been written off as uncollectible. She indicated the remainder of her account would be paid in November. Nov. 15 Received a check for $300 from Sue King as payment on her account. Ex. 196 (Cont.) (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2015. (c) What is the balance of Allowance for Doubtful Accounts at December 31, 2015? LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 197 Molina Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31, 2015, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts $120,000 1% 1–30 days past due 20,000 3% 31–60 days past due 10,000 6% 61–90 days past due 10,000 12% Over 90 days past due 8,000 30% Total Accounts Receivable $168,000 Ex. 197 (Cont.) Instructions (a) Prepare the adjusting entry on December 31, 2015, to recognize bad debt expense. (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $500 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. (c) Assume that the company has a policy of providing for bad debts at the rate of 1% of sales, that sales for 2015 were $550,000, and that Allowance for Doubtful Accounts had a $650 credit balance before adjustment. Prepare the adjusting entry for the current year's provision for bad debts. LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 198 Compute bad debt expense based on the following information: (a) RLF Company estimates that 2% of net credit sales will become uncollectible. Sales revenue are $600,000, sales returns and allowances are $30,000, and the allowance for doubtful accounts has a $6,000 credit balance. (b) RLF Company estimates that 10% of accounts receivable will become uncollectible. Accounts receivable are $100,000 at the end of the year, and the allowance for doubtful accounts has a $500 debit balance. LO: 3, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 199 The December 31, 2014 balance sheet of Barone Company had Accounts Receivable of $400,000 and a credit balance in Allowance for Doubtful Accounts of $32,000. During 2015, the following transactions occurred: sales on account $1,500,000; sales returns and allowances, $50,000; collections from customers, $1,250,000; accounts written off $36,000; previously written off accounts of $6,000 were collected. Instructions (a) Journalize the 2015 transactions. (b) If the company uses the percentage-of-sales basis to estimate bad debt expense and anticipates 3% of net sales to be uncollectible, what is the adjusting entry at December 31, 2015? (c) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 8% of accounts receivable, what is the adjusting entry at December 31, 2015? (d) Which basis would produce a higher net income for 2015 and by how much? LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 200 Megan's Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2015, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,800,000 during 2015. An aging analysis of the accounts receivable indicated that $40,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible. Instructions Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage-of-sales basis and (2) the percentage-of-receivables basis under each of the following independent assumptions: (a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment. Ex. 201 The income statement approach to estimating uncollectible accounts expense is used by Kerley Company. On February 28, the firm had accounts receivable in the amount of $437,000 and Allowance for Doubtful Accounts had a credit balance of $2,140 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts expense would amount to 1% of net credit sales made during February. On March 10, an accounts receivable from Kathy Black for $6,100 was determined to be uncollectible and written off. However, on March 31, Black received an inheritance and immediately paid her past due account in full. Instructions (a) Prepare the journal entries made by Kerley Company on the following dates: 1. February 28 2. March 10 3. March 31 (b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31. LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 202 Handel Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions: January 5 Sold merchandise to Terry Richman for $2,000, terms n/15. April 15 Received $600 from Terry Richman on account. August 21 Wrote off as uncollectible the balance of the Terry Richman account when she declared bankruptcy. October 5 Unexpectedly received a check for $300 from Terry Richman. It is not felt any more will be received from Richman LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 203 Avett Furniture Store has credit sales of $400,000 in 2015 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2015, $130,000 of accounts receivable remain uncollected. The credit manager prepared an aging schedule of accounts receivable and estimates that $7,000 will prove to be uncollectible. On March 4, 2016, the credit manager authorizes a write-off of the $1,200 balance owed by B. Fernitti. Instructions (a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2015. (b) Show the balance sheet presentation of accounts receivable on December 31, 2015. (c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $160,000 and the balance of Allowance for Doubtful Accounts is a credit of $3,000. Make the appropriate entry to record the write-off of the Fernetti account. Also show the balance sheet presentation of accounts receivable before and after the write-off. LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 204 An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Dec. 17 Cash 2,940 Sales Discounts 60 Accounts Receivable 3,000 (To record collection of 12/4 sales, terms 2/10, n/30) 20 Cash 18,360 Notes Receivable 18,000 Interest Revenue 360 (Collection of $18,000, 8%, 90 day note dated Sept. 21. Interest had been accrued through Nov. 30.) Ex. 204 (Cont.) 27 Cash 1,000 Bad Debt Expense 1,000 (Collection of account previously written off as uncollectible under allowance method) 31 Bad Debt Expense 600 Allowance for Doubtful Accounts 600 (To recognize estimated bad debts based on 1% of net sales of $600,000) Instructions Prepare the correcting entries. LO: 3,8, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 205 Prepare the necessary journal entry for the following transaction. Linton Company sold $270,000 of its accounts receivables to a factor. The factor charges a 3% fee. LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 206 Norton Company has accounts receivable of $40,000 in its general ledger at July 31: During August, the following transactions occurred. Aug. 1 Added 1% finance charges to $13,000 of credit card balances for not paying within the 30 day grace period. 15 Sold $21,000 of accounts receivable to Iron Factors Inc. who charge a 4% commission. 28 Collected $8,000 from Norton credit card customers including $400 of finance charges previously billed. Instructions (a) Journalize the transactions. (b) Indicate the statement presentation of finance and service charges. LO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 207 Listed below are two independent situations involving the disposition of receivables. 1. Morales Company sells $320,000 of its receivables to Instant Factors, Inc. Instant Factors assesses a finance charge of 3% of the amount of receivables sold. Instructions Prepare the journal entry to record the sale of the receivables on Morales Company's books. 2. A restaurant is the site for a large company party. The bill totals $3,400 and is charged by the patron on a Visa credit card. Ex. 207 (Cont.) Instructions Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the restaurant's books. LO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 208 Wainwright Stores accepts both its own and national credit cards. During the year the following selected summary transactions occurred. Jan. 15 Made Wainwright credit card sales totaling $24,000. (There were no balances prior to January 15.) 20 Made Visa credit card sales (service charge fee 2%) totaling $7,000. Feb. 10 Collected $14,000 on Wainwright credit card sales. 15 Added finance charges of 1% to Wainwright credit card balance. Instructions (a) Journalize the transactions for Wainwright Stores. (b) Indicate the statement presentation of the financing charges and the credit card service charge expense for Wainwright Stores. LO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 209 Compute the maturity date and the maturity value associated with each of the following notes receivables. 1. A $15,000, 6%, 3-month note dated April 20. Maturity date ___________, Maturity value $____________. 2. A $25,000, 8%, 72-day note dated June 10. Maturity date ___________, Maturity value $____________. 3. An $8,000, 9%, 30-day note dated September 20. Maturity date ___________, Maturity value $____________. LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 210 Compute the maturity date and interest for the following notes. Dates of Notes Terms Principal Interest Rate (a) April 17 60 days $60,000 6% (b) August 11 3 months 80,000 8% LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 211 Compute the missing amount for each of the following notes: Principal Annual Interest Rate Time Total Interest ——————————————————————————————————————— (a) $40,000 10% 2.5 years ? ——————————————————————————————————————— (b) $120,000 ? 9 months $7,200 ——————————————————————————————————————— (c) ? 10% 90 days $1,500 ——————————————————————————————————————— (d) $40,000 9% ? $1,200 ——————————————————————————————————————— LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 212 Joe's Supply Co. has the following transactions related to notes receivable during the last 2 months of 2015. Nov. 1 Loaned $20,000 cash to Sara Rondelli on a 1-year, 12% note. Dec. 11 Sold goods to Phair, Inc., receiving a $11,700, 90-day, 8% note. 16 Received an $12,000, 6-month, 9% note in exchange for Grace Tanner's outstanding accounts receivable. 31 Accrued interest revenue on all notes receivable. Instructions (a) Journalize the transactions for Joe's Supply Co. (b) Record the collection of the Rondelli note at its maturity in 2016. Ex. 213 Morton Company had the following select transactions. Apr. 1, 2015 Accepted Remington Company's 1-year, 12% note in settlement of a $25,000 account receivable. July 1, 2015 Loaned $15,000 cash to Jenny Green on a 9-month, 10% note. Dec. 31, 2015 Accrued interest on all notes receivable. Apr. 1, 2016 Received principal plus interest on the Remington note. Apr. 1, 2016 Jenny Green dishonored its note: Morton expects it will eventually collect. Instructions Prepare journal entries to record the transactions. Morton prepares adjusting entries once a year on December 31. LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 214 Prepare the necessary journal entries for the following transactions for Kennedy Co. May 25 Kennedy Co. received a $30,000, 2-month, 6% note from Holt Company in settlement of an account receivable. July 25 Kennedy Co. received payment on the Holt note. LO: 6,8, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 215 Record the following transactions in general journal form for Karen Heller Company. July 1 Received a $20,000, 8%, 3-month note, dated July 1, from Nancy Freeman in payment of her open account. Oct. 1 Received notification from Nancy Freeman that she was unable to honor her note at this time. It is expected that Freeman will pay at a later date. Nov. 15 Received full payment from Nancy Freeman for her note receivable previously dishonored. LO: 6,8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 216 Fine Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Fine Boat Company. Feb. 12 Accepted a $25,000, 6%, 60-day note from Bob Yates for a 24-foot motorboat built to his specifications. April 14 Received notification from Bob Yates that he was unable to honor his promissory note but that he expects to pay the amount owed in May. May 26 Received a check from Bob Yates for the total amount owed. June 10 Received notification by the bank that Bob Yates check was being returned "NSF" and that Mr. Yates had declared personal bankruptcy. LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 217 The following information is available for Edmiston Company. Beginning accounts receivable $ 70,000 Ending accounts receivable 110,000 Net sales 990,000 Instructions Compute the accounts receivable turnover and the average collection period. LO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 218 Renfro Company had accounts receivable of $100,000 on January 1, 2015. The only transactions that affected accounts receivable during 2015 were net credit sales of $1,200,000, cash collections of $1,000,000, and accounts written off of $30,000. Instructions (a) Compute the ending balance of accounts receivable. (b) Compute the accounts receivable turnover for 2015. (c) Compute the average collection period in days. COMPLETION STATEMENTS 219. Accounts receivable, which are also referred to as ______________ receivables, are amounts owed by customers on account. LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 220. The three primary accounting problems associated with accounts receivable are (1) ______________, (2) _______________, and (3) ______________ of accounts receivable. , AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 221. In order to encourage prompt payment of a trade receivable, companies often offer ______________ to customers. , AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 222. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis. LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 223. The two methods of accounting for uncollectible accounts are the ____________ method and the ______________ method. LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 224. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet. LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 225. When the allowance method is used to account for uncollectible accounts, the ______________ is credited when an account is determined to be uncollectible. 226. The _____________ basis of estimating uncollectibles provides a better _____________ of bad debt expense with sales revenue and therefore emphasizes income statement relationships. LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 227. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value and therefore emphasizes balance sheet relationships. LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 228. Sales resulting from the use of Visa and MasterCard are considered ______________ by the retailer. LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 229. A finance company or bank that purchases receivables from businesses is known as a ______________. LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 230. A 75-day note receivable dated June 10 would mature on ______________. LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 231. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________. LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 232. A note which is not paid on the maturity date is said to be ______________. MATCHING 233. Match the items below by entering the appropriate code letter in the space provided. A. Aging of receivables F. Percentage of receivables basis B. Direct write-off method G. Factoring C. Promissory note H. Dishonored note D. Trade receivables I. Average collection period E. Percentage of sales basis J. Credit card sales 1. A written promise to pay a specified amount on demand or at a definite time. 2. Sales that involve the customer, the retailer, and the credit card issuer. 3. Emphasizes the matching of costs and revenues in the same period. 4. Amounts owed by customers from the sale of goods and services. 5. A note which is not paid in full at maturity. 6. Analysis of customer account balances by length of time they have been unpaid. 7. Emphasizes expected cash realizable value of accounts receivable. 8. Generally not acceptable for financial reporting purposes. 9. The amount of time that a receivable is outstanding. 10. Sale of accounts receivable to a factor. SHORT-ANSWER ESSAY QUESTIONS S-A E 234 Management can choose between two bases in calculating the estimated uncollectible accounts under the allowance method. One basis emphasizes an income statement viewpoint whereas the other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two approaches. How do the different points of view affect the amount recognized as Bad Debt Expense during the accounting period? S-A E 235 Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa, MasterCard). S-A E 236 Your friend Jenny has opened an office supply store. She will extend open credit to local businesses and is concerned about potential bad debts. What can Jenny do to reduce potential bad debts? S-A E 237 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics S-A E 238 An article recently appeared in the Wall Street Journal indicating that companies are selling their receivables at a record rate. Why are companies selling their receivables? LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics S-A E 239 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics S-A E 240 (Ethics) Seaver Books, a small book publishing company, wrote off the debt of The Learning Center, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Seaver Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Seaver Books, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Seaver Books act ethically in reinstating the debt of one client, and not the other? Explain. LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Problem Solving, IMA: Business Economics S-A E 241 (Communication) Petersen Company received a letter from Jane Kimler, a customer. Jane had purchased $425 worth of clothing from Petersen on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Petersen. Her total debt presently, with interest and late fees, is $351.13. Jane sent a letter to Petersen in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Petersen certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Petersen write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Petersen were among the best she had ever owned, and that she "told everybody" that Petersen was definitely the best place to get clothes. S-A E 241 (Cont.) Required: You are the accounting manager for Petersen. Write a short letter to Jane explaining why her debt cannot be written off. LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Business Economics CHALLENGE EXERCISES CE 1 Presented below are selected transactions of Palmer Company. Palmer sells in large quantities to other companies and also sells its product in a small retail outlet. March 1 Sold merchandise on account to Grey Company for $6,000, terms 2/10, n/30. 3 Grey Company returned merchandise worth $600 to Palmer. 9 Palmer collected the amount due from Grey Company from the March 1 sale. 15 Palmer sold merchandise for $10,000 in its retail outlet. The customers used their Heinrich credit card. 31 Palmer added 1 monthly interest to the customers' credit card balance. April 10 Palmer collected $3,050 from credit card customers. Instructions (a) Prepare journal entries for the transactions above. (b) What is the balance from credit card transactions in Accounts Receivable after the April 10 transaction? LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution CE 1 a) March 1 Accounts Receivable  Grey Company 6,000 Sales Revenue 6,000 3 Sales Return and Allowance 600 Accounts Receivable  Grey Company 600 9 Cash 5,292 Sales Discounts (5,400  2%) 108 Accounts Receivable  Grey Company 5,400 15 Accounts Receivable 10,000 Sales Revenue 10,000 31 Accounts Receivable ($10,000  1%) 100 Interest Revenue 100 April 10 Cash 3,050 Accounts Receivable 3,050 b) $10,000 + $100  $3,050 = 7,050 CE 2 The ledger of Maxx Company at the end of the current year shown Accounts Receivable $170,000, Sales $1,200,000, and Sales Returns and Allowances $50,000. Instructions (a) If Maxx uses the direct write-off method to account for uncollectible account, journalize the adjusting entry at December 31, assuming Maxx determines that Barkley Company's $2,400 balance is uncollectible. (b) If allowance for Doubtful account has a credit balance of 3,500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of account receivable. (c) If allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable. LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting CE 3 Presley Supply Co. has the following transaction related to notes receivable during the last 2 months of 2014. Nov. 1 Loaned $30,000 cash to Logan Ransey on a 1-year, 10% note. Dec. 11 Sold goods to be Joe Noland, Inc., receiving a $9,000, 90-day, 8% note. 16 Received a $4,000, 6-month, 9% note in exchange for Jane Brock's outstanding accounts receivable. 31 Accrued interest revenue on all notes receivable. Instructions (a) Journalize the above transactions for Presley Supply Co. Round interest to the nearest dollar. (b) Record the collection of the Ransey note at its maturity in 2015. (c) Assume Ransey dishonors its note at its maturity in 2015; Presley expects to eventually collect the note. Record the dishonors of the Ransey note. LO: 5,6,8, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting [Show More]

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