Financial Accounting Testbank part 3

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

Matching Question: 236

IFRS Questions: 245-255

CHAPTER LEARNING OBJECTIVES

1. Identify the different types of receivables. Receivables are frequently classified as (1) accounts, (2) notes, and (3) other. Accounts receivable are amounts customers owe on account. Notes receivable are claims for which lenders issue formal instruments of credit as proof of the debt. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

2. Explain how companies recognize accounts receivable. Companies record accounts receivable at invoice price. They are reduced by sales returns and allowances. Cash discounts reduce the amount received on accounts receivable. When interest is charged on a past due receivable, the company adds this interest to the accounts receivable balance and recognizes it as interest revenue.

3. Distinguish between the methods and bases companies use to value accounts receivable. There are two methods of accounting for uncollectible accounts: the allowance method and the direct write-off method. Companies use either the percentage-of-sales or the percentage-of-receivables basis to estimate uncollectible accounts using the allowance method. The percentage of sales basis emphasizes the expense recognition (matching) principle. The percentage-of-receivables basis emphasizes the cash realizable value of the accounts receivable. An aging schedule is often used with this basis.

4. Describe the entries to record the disposition of accounts receivable. When a company collects an account receivable, it credits Accounts Receivable. When a company sells (factors) an account receivable, a service charge expense reduces the amount collected.

5. Compute the maturity date of and interest on notes receivable. For a note stated in months, the maturity date is found by counting the months from the date of issue. For a note stated in days, the number of days is counted, omitting the issue date and counting the due date. The formula for computing interest is Face value × Interest rate × Time.

6. Explain how companies recognize notes receivable. Companies record notes receivable at face value. In some cases, it is necessary to accrue interest prior to maturity. In this case, companies debit Interest Receivable and credit Interest Revenue.

7. Describe how companies value notes receivable. As with accounts receivable, companies report notes receivable at their cash (net) realizable value. The notes receivable allowance account is Allowance for Doubtful Accounts. The computation and estimations involved in valuing notes receivable at cash realizable value, and in recording the proper amount of bad debt expense and related allowance are similar to those for accounts receivable.

8. Describe the entries to record the disposition of notes receivable. Notes can be held to maturity. At that time the face value plus accrued interest is due, and the note is removed from the accounts. In many cases, the holder of the note speeds up the conversion by selling the receivable to another party (a factor). In some situations, the maker of the note dishonors the note (defaults), in which case the company transfers the note and accrued interest to an accounts receivable or writes off the note.

9. Explain the statement presentation and analysis of receivables. Companies should identify in the balance sheet or in the notes to the financial statements each major type of receivable. Short-term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debts and service charge expenses in the multiple-step income statement as operating (selling) expenses; interest revenue appears under other revenues and gains in the nonoperating activities section of the statement. Managers and investors evaluate accounts receivable for liquidity by computing a turnover ratio and an average collection period.

TRUE-FALSE STATEMENTS

1. Trade receivables occur when two companies trade or exchange notes receivables.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2. Other receivables include nontrade receivables such as loans to company officers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

3. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

6. Accounts receivable are the result of cash and credit sales.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

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.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

9. The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

11. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12. Allowance for Doubtful Accounts is a contra asset account.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from net sales.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. Under the allowance method, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16. Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17. The percentage of sales basis for estimating uncollectible accounts always results in more Bad Debts Expense being recognized than the percentage of receivables basis.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18. An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

20. Sales resulting from the use of Visa and MasterCard are considered credit sales by the retailer.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21. A factor purchases receivables from businesses for a fee and collects the remittances directly from customers.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

23. Receivables may be sold because they may be the only reasonable source of cash.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

24. If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

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.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26. The maturity date of a 1-month note receivable dated June 30 is July 30.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

27. The two key parties to a note are the maker and the payee.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

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.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

29. A company records a note receivable at its maturity value when the note is accepted.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

30. Companies report short-term notes receivable at their cash (net) realizable value.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

31. A note is honored when its maker pays in full at its maturity date.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32. The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements.

Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34. Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

35. The two methods of accounting for uncollectible accounts are (a) percentage of sales and (b) percentage of receivables.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

36. The account Allowance for Doubtful Accounts is closed out at the end of the year.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37. In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

38. 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.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

39. A note is dishonored when it is not fully paid at maturity.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

40. Short-term receivables are reported in the current assets section before temporary investments.

Ans: F, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

41. 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.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42. Interest is usually associated with

a. accounts receivable.

b. notes receivable.

c. doubtful accounts.

d. bad debts.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

43. 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.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

44. 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

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45. 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.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

46. 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.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47. A cash discount is usually granted to all of the following except

a. retail customers.

b. retailers.

c. wholesalers.

d. All of these are granted discounts.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

48. 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

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

49. 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.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50. 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.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

51. 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.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

52. 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 are standard practices.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

53. 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.

What is the amount of the finance charge?

a. $12

b. $30

c. $120

d. $360

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

54. 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

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

55. 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.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

56. 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.

Ans: B, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

57. 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.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

58. Lifetime sells softball equipment. On November 14, they shipped $2,000 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 $1,200 worth of custom printed bats to be produced in December. On November 30, Palos Middle School returned $200 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. $1,800

b. $2,000

c. $3,000

d. $3,200

Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

59. Syfy Company on July 15 sells merchandise on account to Eureka Co. for $3,000, terms 2/10, n/30. On July 20 Eureka Co. returns merchandise worth $1,200 to Syfy Company. On July 24 payment is received from Eureka Co. for the balance due. What is the amount of cash received?

a. $1,740

b. $1,764

c. $1,800

d. $3,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

60. 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.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

61. 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.

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62. The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts 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.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

63. When the allowance method is used to account for uncollectible accounts, Bad Debts 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.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

64. 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 Debts Expense should be credited.

d. Sales should be debited.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

65. 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.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

66. 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.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67. An aging of a company's accounts receivable indicates that $10,000 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 Debts Expense for $10,000.

b. debit to Allowance for Doubtful Accounts for $8,900.

c. debit to Bad Debts Expense for $8,900.

d. credit to Allowance for Doubtful Accounts for $10,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

68. 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.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

69. Under the direct write-off method of accounting for uncollectible accounts, Bad Debts 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.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

70. An alternative name for Bad Debts Expense is

a. Deadbeat Expense.

b. Uncollectible Accounts Expense.

c. Collection Expense.

d. Credit Loss Expense.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

71. 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.

Ans: C, 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

72. Bad Debts 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.

Ans: C, 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

73. 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.

Ans: D, 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

74. 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.

Ans: D, 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 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.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76. Bad Debts 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.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

77. When the allowance method of accounting for uncollectible accounts is used, Bad Debts 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.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

78. 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.

Ans: D, 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

79. 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 Debts 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 and a credit to Accounts Receivable.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

80. 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 Debts 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.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

81. 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.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

82. 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.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

83. 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.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

84. 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.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

85. 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.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

86. The percentage of receivables basis for estimating uncollectible accounts emphasizes

a. cash realizable value.

b. the relationship between accounts receivable and bad debts expense.

c. income statement relationships.

d. the relationship between sales and accounts receivable.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

87. Haven Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $600,000 and credit sales are $2,200,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Haven Company make to record the bad debts expense?

a. Bad Debts Expense ........................................................ 28,000

Allowance for Doubtful Accounts .......................... 28,000

b. Bad Debts Expense ........................................................ 22,000

Allowance for Doubtful Accounts .......................... 22,000

Multiple Choice 87. (Cont.)

c. Bad Debts Expense ........................................................ 22,000

Accounts Receivable ............................................. 22,000

d. Bad Debts Expense ........................................................ 28,000

Accounts Receivable ............................................. 28,000

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

88. 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.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

89. 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.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

90. 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 debts expense is always recorded in the period in which the revenue was recorded.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

91. An aging of a company's accounts receivable indicates that $4,000 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 Debts Expense for $4,000.

b. debit to Allowance for Doubtful Accounts for $3,100.

c. debit to Bad Debts Expense for $3,100.

d. credit to Allowance for Doubtful Accounts for $4,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

92. An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $700 debit balance, the adjustment to record bad debts for the period will require a

a. debit to Bad Debts Expense for $2,300.

b. debit to Bad Debts Expense for $3,000.

c. debit to Bad Debts Expense for $3,700.

d. credit to Allowance for Doubtful Accounts for $700.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

93. Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $27,000. If the balance of the Allowance for Doubtful Accounts is $8,000 debit before adjustment, what is the amount of bad debts expense for that period?

a. $8,000

b. $19,000

c. $27,000

d. $35,000

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

94. Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $11,000. If the balance of the Allowance for Doubtful Accounts is $2,000 credit before adjustment, what is the amount of bad debts expense for that period?

a. $2,000

b. $9,000

c. $11,000

d. $13,000

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

95. Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $11,000. 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. $9,000

c. $11,000

d. $13,000

Ans: C, 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. Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $31,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before adjustment, what is the amount of bad debts expense for the period?

a. $7,000

b. $24,000

c. $31,000

d. $38,000

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

97. Using the percentage-of-receivables basis, the uncollectible accounts for the year is estimated to be $31,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before adjustment, what is the amount of bad debts expense for the period?

a. $7,000

b. $24,000

c. $31,000

d. $38,000

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

98. In reviewing the accounts receivable, the cash realizable value is $14,000 before the write-off of a $1,500 account. What is the cash realizable value after the write-off?

a. $1,500

b. $12,500

c. $14,000

d. $15,500

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

99. In 2013, Warehouse 13 had net credit sales of $750,000. On January 1, 2013, Allowance for Doubtful Accounts had a credit balance of $16,000. During 2013, $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 $200,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2013?

a. $20,000

b. $29,000

c. $33,000

d. $36,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

100. A company has net credit sales of $950,000 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. $17,000.

b. $19,000.

c. $19,040.

d. $21,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

101. In 2013, Chandler Company had net credit sales of $1,125,000. On January 1, 2013, Allowance for Doubtful Accounts had a credit balance of $27,000. During 2013, $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 $330,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2013?

a. $18,000

b. $33,000

c. $48,000

d. $97,500

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

102. Using the following information:

12/31/12

Accounts receivable $525,000

Allowance (35,000)

Cash realizable value $490,000

During 2013, sales on account were $145,000 and collections on account were $100,000. Also during 2013, the company wrote off $8,000 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 12/31/12 to 12/31/13 was a

a. $32,000 increase.

b. $37,000 increase.

c. $40,000 increase.

d. $45,000 increase.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

103. Using the following information:

12/31/12

Accounts receivable $525,000

Allowance (35,000)

Cash realizable value $490,000

During 2013, sales on account were $145,000 and collections on account were $100,000. Also during 2013, the company wrote off $8,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000.

Bad debts expense for 2013 is

a. $5,000.

b. $8,000.

c. $13,000

d. $40,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

104. During 2013, Alfred Inc. had sales on account of $132,000, cash sales of $54,000, and collections on account of $84,000. In addition, they collected $1,450 which had been written off as uncollectible in 2012. As a result of these transactions, the change in the accounts receivable balance indicates a

a. $46,550 increase.

b. $48,000 increase.

c. $100,550 increase.

d. $102,000 increase.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

105. Kill Corporation’s unadjusted trial balance includes the following balances (assume normal balances):

Accounts Receivable $750,000

Allowance for Doubtful Accounts 15,000

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense will the company record?

a. $15,000

b. $30,000

c. $44,100

d. $45,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

106. Jack Company provides for bad debts expense at the rate of 2% of credit sales. The following data are available for 2013:

Allowance for doubtful accounts, 1/1/13 (Cr.)................................ $ 12,000

Accounts written off as uncollectible during 2013................... 9,000

Credit sales in 2013................................................................. 1,500,000

The Allowance for Doubtful Accounts balance at December 31, 2013, should be

a. $3,000.

b. $27,000.

c. $30,000.

d. $33,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

107. In 2013, Boyle Company had credit sales of $900,000 and granted sales discounts of $20,000. On January 1, 2013, Allowance for Doubtful Accounts had a credit balance of $22,000. During 2012, $37,500 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, 2013?

a. $10,900

b. $11,500

c. $26,400

d. $33,100

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

108. An analysis and aging of the accounts receivable of Hugh Company at December 31 revealed the following data:

Accounts Receivable...................................................................... $800,000

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. $694,000.

b. $744,000.

c. $750,000.

d. $794,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

109. 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 $60,000 of its receivables are uncollectible. The amount of bad debts expense which should be reported for the year is:

a. $5,000.

b. $55,000.

c. $60,000.

d. $65,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

110. At the end of May, the unadjusted trial balance of Barker Industries included the following accounts:

Barker Industries uses the percentage of sales approach in estimating uncollectible accounts. The uncollectible accounts expense is estimated to be 3% of credit sales The net realizable value of Barker's accounts receivable in the May 31 balance sheet is

a. $250,800

b. $229,200

c. $236,400

d. $226,200

Ans: b LO: 3 Bloom: K, Difficulty: Easy, Min: 2 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111. At the end of May, the unadjusted trial balance of Barker Industries included the following accounts:

Barker uses the percentage of sales approach in estimating uncollectible accounts expense. The uncollectible accounts expense is estimated to be 3% of credit sales. What is the amount of uncollectible accounts expense recognized in Barker's income statement for May?

a. $7,200.

b. $9,000.

c. $4,800.

d. $10,800.

Ans: b LO: 3 Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

112. On October 1, 2013, Milago Company sells (factors) $500,000 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 $500,000 to Accounts Receivable.

b. a credit of $515,000 to Cash.

c. a debit of $515,000 to Cash.

d. a debit of $15,000 to Service Charge Expense.

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

113. On March 1, 2013, Dick Miles purchased a suit at Kenny's Fine Apparel Store. The suit cost $500 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, 2013, Dick had not yet made his payment. What entry should Kenny make on April 30th?

a. Uncollectible Account...................................................... 500

Accounts Receivable.............................................. 500

b. Bad Debts Expense......................................................... 490

Interest Expense.............................................................. 10

Accounts Receivable.............................................. 500

c. Accounts Receivable....................................................... 510

Interest Revenue.................................................... 10

Sales Revenue....................................................... 500

d. Accounts Receivable....................................................... 10

Interest Revenue.................................................... 10

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

114. Jeff Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Jeff Retailers will include a credit to Sales of $75,000 and a debit(s) to

a. Cash $72,000 and Service Charge Expense $3,000.

b. Accounts Receivable $72,000 and Service Charge Expense $3,000.

c. Cash $72,000 and Interest Expense $3,000.

d. Accounts Receivable $75,000.

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

115. XYZ Company accepted a national credit card for a $3,000 purchase. The cost of the goods sold is $1,800. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?

a. Increase by $1,110

b. Increase by $1,164

c. Increase by $1,200

d. Increase by $2,910

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

116. 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 are advantages.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

117. 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.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

118. 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.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

119. 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.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

120. 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.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

121. 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.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

122. 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.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

123. T’Pol Furniture factors $700,000 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................................................................................. 686,000

Loss on Sale of Receivables........................................... 14,000

Accounts Receivable.............................................. 700,000

b. Cash................................................................................. 686,000

Accounts Receivable.............................................. 686,000

c. Cash................................................................................. 700,000

Accounts Receivable.............................................. 686,000

Gain on Sale of Receivables.................................. 14,000

d. Cash................................................................................. 686,000

Service Charge Expense................................................. 14,000

Accounts Receivable.............................................. 700,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

124. 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.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

125. The retailer considers Visa and MasterCard sales as

a. cash sales.

b. promissory sales.

c. credit sales.

d. contingent sales.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

126. 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.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

127. A 60-day note receivable dated June 13 has a maturity date of

a. August 13.

b. August 12.

c. August 11.

d. August 10.

Ans: B, 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

128. The maturity value of a $60,000, 10%, 60-day note receivable dated July 3 is

a. $60,000.

b. $61,000.

c. $66,000.

d. $70,000.

Ans: B, 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

129. A 90-day note dated June 14 has a maturity date of

a. September 14.

b. September 12.

c. September 13.

d. September 15.

Ans: B, 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

130. A 30-day note dated May 18 has a maturity date of

a. June 18.

b. June 17.

c. June 19.

d. June 16.

Ans: B, 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

131. 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.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

132. 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.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

133. 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.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

134. 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.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

135. The maturity value of a $4,000, 9%, 60-day note receivable dated February 10th is

a. $4,000.

b. $4,030.

c. $4,060.

d. $4,360.

Ans: C, 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

136. The interest on a $10,000, 10%, 1-year note receivable is

a. $1,000.

b. $10,000.

c. $10,100.

d. $11,000.

Ans: A, 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

137. The maturity value of a $60,000, 8%, 3-month note receivable is

a. $60,400.

b. $60,480.

c. $61,200.

d. $64,800.

Ans: C, 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

138. The interest on a $5,000, 6%, 60-day note receivable is

a. $50.

b. $100.

c. $150.

d. $300.

Ans: A, 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

139. The interest on a $6,000, 6%, 90-day note receivable is

a. $90.

b. $180.

c. $270.

d. $360.

Ans: A, 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

140. On November 1, Gentle Company received a $3,000, 10%, three-month note receivable. The cash to be received by Gentle Company when the note becomes due is:

a. $3,000.

b. $3,050.

c. $3,075.

d. $3,300.

Ans: C, 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

141. Silver Inc. received a 60-day, 6% note for $24,000 on April 5. Which of the following statement is true?

a. Silver will receive $24,000 plus interest of $1,440 at maturity.

b. Silver should record a total receivable due of $25,440 on April 5.

c. The principal of the note plus interest is due on June 4.

d. The maturity value of this note is $24,000.

Ans: c LO: 5, Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

142. A 5%, 120-day note receivable is received from a customer to settle an existing account receivable of $75,000. Assuming a 360 day year, the accounting entry for acquisition of the note will include a

a. debit to Notes Receivable for $75,000 and no entry for interest.

b. debit to Notes Receivable for $76,250.

c. debit to Notes Receivable for $78,720.

d. credit to Interest Revenue for $1,250.

Ans: a LO: 6, Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

143. On January 15, 2013, Craig Company received a two-month, 9%, $7,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on January 15, 2013 would include a:

a. debit of $7,105 to Notes Receivable.

b. debit of $7,000 to Notes Receivable.

c. credit of $7,105 to Accounts Receivable.

d. credit of $7,000 to Notes Receivable.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

144. On January 15, 2013, Craig Company received a two-month, 9%, $7,000 note from William Pentel for the settlement of his open account. The entry by Craig Company on March 15, 2013 if Pentel dishonors the note and collection is expected is:

a. Accounts Receivable—W. Pentel.................................... 7,000

Notes Receivable................................................... 7,000

b. Accounts Receivable—W. Pentel.................................... 7,105

Notes Receivable................................................... 7,000

Interest Revenue.................................................... 105

c. Accounts Receivable—W. Pentel.................................... 6,895

Interest Lost..................................................................... 105

Notes Receivable................................................... 7,000

d. Bad Debts Expense......................................................... 7,105

Notes Receivable................................................... 7,105

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

145. Notes receivable are recorded in the accounts at

a. cash (net) realizable value.

b. face value.

c. gross realizable value.

d. maturity value.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146. 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.

Ans: B, 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

147. 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.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

148. 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.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

149. Reck Company receives a $10,000, 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............................................................ 10,200

Accounts Receivable—Fey Company................... 10,200

b. Notes Receivable............................................................ 10,200

Accounts Receivable—Fey Company................... 10,000

Interest Revenue.................................................... 200

c. Notes Receivable............................................................ 10,000

Interest Receivable................................................. 200

Accounts Receivable—Fey Company................... 10,000

Interest Revenue.................................................... 200

d. Notes Receivable............................................................ 10,000

Accounts Receivable—Fey Company................... 10,000

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

150. 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.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

151. Short-term notes receivable are reported at

a. cash (net) realizable value.

b. face value.

c. gross realizable value.

d. maturity value.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

152. 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.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

153. 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.

Ans: D, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

154. Randie Company lends Luann Company $10,000 on April 1, accepting a four-month, 9% 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 ......................................................... 75

Interest Revenue ................................................... 75

c. Cash ................................................................................ 75

Interest Revenue ................................................... 75

d. Interest Receivable ......................................................... 300

Interest Revenue ................................................... 300

Ans: B, LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

155. 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.

Ans: B, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

156. On October 1, 2012, Vero Beach Financial lent Morgan Corporation $600,000, receiving in exchange a nine-month, 12% note receivable. Vero Beach Financial ends its fiscal year on December 31 and makes adjusting entries to accrue interest earned on all notes receivable. The interest earned on the note receivable from Morgan Corporation during 2013 will amount to

A. $13,500

B. $18,000

C. $44,500

D. $36,000

Ans: b LO: 8, Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

157. Flores Machinery has an accounts receivable turnover rate of 9. Which of the following statements is not true? (Assume 365 days in a year.)

a. Flores waits approximately 41 days to make collections of its credit sales.

b. Flores writes off accounts receivable as uncollectible if they are over 41 days old.

c. Flores' net credit sales are about nine times the amount of its average net accounts receivable.

d. Flores' accounts receivable are more liquid then a business whose accounts receivable turnover ratio is 5.

Ans: b LO: 9, Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

158. Joplin Industry's 2013 income statement reported net sales of $8,000,000, uncollectible accounts expense of $185,000 and net income of $740,000. Joplin's average net accounts receivable during 2013 amounted to $1,600,000. Using 365 days to a year, Joplin's

a. accounts receivable turnover rate is approximately 2.2 times.

b. average number of days to collect an account receivable is 73 days.

c. average number of days to collect account receivable is 3.4 days.

d. accounts receivable turnover ratio is approximately 4.4 times.

Ans: b LO: 9, Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

159. Assuming a 365 day year, Mobile Industries calculated an average of 65 days to collect its accounts receivable in 2013. Which of the following statement is true?

a. During 2013, Mobile's accounts receivable turnover ratio was equal to 65 times its average net accounts receivable.

b. During 2013, Mobile's accounts receivable turnover ratio was approximately 0.18.

c There is not enough information to calculate a turnover ratio.

d. During 2013, Mobile's accounts receivable turnover ratio was approximately 5.62.

Ans: d LO: 9, Bloom: K, Difficulty: Easy, Min: 1 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

160. Magneto Company had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000. 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 ratio?

a. 5.0

b. 6.7

c. 8.0

d. 10.0

Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

161. The average collection period for receivables is computed by dividing 365 days by

a. net credit sales.

b. average accounts receivable.

c. ending accounts receivable.

d. accounts receivable turnover ratio.

Ans: D, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

162. 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 ratio by 365 days.

d. 365 days by the accounts receivable turnover ratio.

Ans: D, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

163. The financial statements of Danielle Manufacturing Company report net sales of $600,000 and accounts receivable of $60,000 and $90,000 at the beginning and end of the year, respectively. What is the receivables turnover ratio for Danielle?

a. 4 times

b. 6.67 times

c. 8 times

d. 10 times

Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

164. The financial statements of Danielle Manufacturing Company report net sales of $600,000 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. 36.5

b. 45.6

c. 54.7

d. 91.3

Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

165. The financial statements of Gervais Manufacturing Company report net sales of $400,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively. What is the receivables turnover ratio for Gervais?

a. 5 times

b. 6.7 times

c. 8 times

d. 10 times

Ans: B, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

166. The financial statements of Gervais Manufacturing Company report net sales of $400,000 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. 40 times

b. 50 times

c. 54.7 times

d. 80 times

Ans: C, LO: 9, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

167. Which of the following are also called trade receivables?

a. Accounts receivable

b. Other receivables

c. Advances to employees

d. Income taxes refundable

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

168. On February 1, 2013, 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

Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

169. Writing off an uncollectible account under the allowance method requires a debit to

a. Accounts Receivable.

b. Allowance for Doubtful Accounts.

c. Bad Debts Expense.

d. Uncollectible Accounts Expense.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

170. 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.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

171. 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.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

172. Deborah Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $2,100,000 and $35,000 (Cr.), respectively. An aging of accounts receivable indicated that $126,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is

a. $91,000.

b. $126,000.

c. $161,000.

d. $210,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

173. In recording the sale of accounts receivable, the commission charged by a factor is recorded as

a. Bad Debts Expense.

b. Commission Expense.

c. Loss on Sale of Receivables.

d. Service Charge Expense.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

174. Schwartzman Co., makes a credit card sale to a customer for $600. 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 $480 at the end of the grace period, the interest charge is

a. $4.80.

b. $7.20.

c. $8.00.

d. $12.00.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

175. The interest rate specified on any note is for a

a. day.

b. month.

c. week.

d. year.

Ans: D, 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

176. On February 1, Ville Company received a $6,000, 10%, four-month note receivable. The cash to be received by Ville Company when the note becomes due is

a. $200.

b. $6,000.

c. $6,200.

d. $6,600.

Ans: C, 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

177. 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.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

178. 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.

Ans: A, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

179. The accounts receivable turnover ratio 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.

Ans: B, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Multiple Choice Questions

BRIEF EXERCISES

BE 180

Record the following transactions for Moon Company.

1. On August 4, Moon sold merchandise on account to Mullin Company for $610, terms 2/10, n/30.

2. On August 7, Moon granted Mullin a sales allowance and reduced the cost of the merchandise by $60 because some of the goods were slightly damaged.

3. On August 12, Mullin paid the account in full.

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 180 (6 min.)

1. Accounts Receivable.......................................................................... 610

Sales Revenue......................................................................... 610

2. Sales Returns and Allowances......................................................... 60

Accounts Receivable................................................................ 60

Solution 180 (Cont.)

3. Sales Discounts................................................................................. 11

Cash................................................................................................... 539

Accounts Receivable................................................................ 550

BE 181

At December 31, 2013, Bruce Company reported Accounts Receivable of $45,000 and Allowance for Doubtful Accounts of $3,500. On January 7, 2013, Robin Enterprises declares bankruptcy and it is determined that the receivable of $1,200 from Robin is not collectible.

1. What is the cash realizable value of Accounts Receivable at December 31, 2013?

2. What entry would Bruce make to write off the Robin account?

3. What is the cash realizable value of Accounts Receivable after the Robin account is written off?

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 181 (5 min.)

1. Cash realizable value = $45,000 – $3,500 = $41,500

2. Allowance for Doubtful Accounts...................................................... 1,200

Accounts Receivable—Robin................................................... 1,200

3. Cash realizable value = ($45,000 – $1,200) – ($3,500 – $1,200) = $41,500

BE 182

Ditka 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.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 182 (5 min.)

(a) Bad Debts Expense......................................................................... 10,600

Allowance for Doubtful Accounts ($15,000 – $4,400)........... 10,600

(To adjust the allowance account to total estimated uncollectible,

$150,000 × .10 = $15,000)

(b) Bad Debts Expense......................................................................... 19,400

Allowance for Doubtful Accounts ($15,000 + $4,400)........... 19,400

BE 183

Patel Co. sells Christmas angels. Patel determines that at the end of December, it has the following aging schedule of Accounts Receivable:

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).

Ans: N/A, 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

Solution 183 (5 min.)

Net Receivables = ($1,150 – $133 = $1,017)

BE 184

Picard 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.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 184 (5 min.)

Oct. 15 Cash.......................................................................................... 14,550

Service Charge Expense ($15,000 × 3%) .............................. 450

Accounts Receivable ................................................... 15,000

25 Cash.......................................................................................... 784

Service Charge Expense ($800 × 2%) .................................... 16

Sales Revenue............................................................. 800

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

Ans: N/A, 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

Dew Distributors has the following transactions related to notes receivable during the last two months of the year.

Dec. 1 Loaned $15,000 cash to K. Flood on a 1-year, 6% note.

16 Sold goods to F. Kingsley, receiving a $4,800, 60-day, 7% note.

31 Accrued interest revenue on all notes receivable.

Instructions

Journalize the transactions for Dew Distributors.

Ans: N/A, 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

Solution 186 (6 min.)

Dec 1 Notes Receivable— K. Flood................................................ 15,000

Cash.............................................................................. 15,000

(To record loan made to K. Flood)

Solution 186 (Cont.)

Dec 16 Notes Receivable— F. Kingsley............................................ 4,800

Sales Revenue............................................................. 4,800

(To record sale to F. Kingsley)

Dec. 31 Interest Receivable................................................................ 89

Interest Revenue*......................................................... 89

(To record accrued interest)

*Calculation of interest revenue

Flood note: $15,000 × 6% × 30/360 = $75

Kingsley note: 4,800 × 7% × 15/360 = 14

Total accrued interest $89

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 $____________.

Ans: N/A, 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

Solution 187 (5 min.)

1. Maturity value: $5,075

$5,000 × 6% × 3/12 = $75 + $5,000 = $5,075

2. Maturity value: $12,450

$12,000 × 9% × 150/360 = $450 + $12,000 = $12,450

BE 188

On February 7, Millard Company sold goods on account to Fillmore Enterprises for $5,200, terms 2/10, n/30. On March 9, Fillmore gave Millard 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 Millard Company.

Ans: N/A, 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, Fillmore gave Millard Company a 60-day, 12% promissory note for $5,200. Fillmore honors the note on May 9. Record the collection of the note and interest by Millard assuming that no interest has been accrued.

Ans: N/A, 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 189 (3 min.)

May 9 Cash.......................................................................................... 5,304

Interest Revenue.......................................................... 104

Note Receivable........................................................... 5,200

BE 190

On March 9, Fillmore gave Millard Company a 60-day, 12% promissory note for $5,200. Fillmore dishonors the note on May 9. Record the entry that Millard would make when the note is dishonored, assuming that no interest has been accrued.

Ans: N/A, 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

Solution 190 (3 min.)

May 9 Accounts Receivable—Fillmore.............................................. 5,304

Interest Revenue............................................................. 104

Note Receivable.............................................................. 5,200

BE 191

The following data exists for Data Company.

2013 2012

Accounts Receivable $ 50,000 $ 70,000

Net Sales 500,000 410,000

Calculate the receivables turnover ratio and the average collection period for accounts receivable in days for 2013.

Ans: N/A, LO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 191 (5 min.)

Receivables turnover ratio = = 8.3 times

Average collection period = = 44 days

EXERCISES

Ex. 192

Presented below are various receivable transactions entered into by Akron 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.

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 192 (10 min.)

a. Other Receivables

b. Note Receivable

c. Other Receivables

d. Accounts Receivable

e. Other Receivables

f. Other Receivables

Ex. 193

Prepare journal entries to record the following transactions entered into by Valente Company:

2012

June 1 Received a $10,000, 12%, 1-year note from Doreen Borke as full payment on her account.

Nov. 1 Sold merchandise on account to Lyleen, Inc. for $12,000, terms 2/10, n/30.

Nov. 5 Lyleen, Inc. returned merchandise worth $500.

Nov. 9 Received payment in full from Lyleen, Inc.

Dec. 31 Accrued interest on Borke's note.

2013

June 1 Doreen Borke honored her promissory note by sending the face amount plus interest. No interest has been accrued in 2013.

Ans: N/A, 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

Solution 193 (15 min.)

2012

June 1 Notes Receivable.................................................................. 10,000

Accounts Receivable—D. Borke.................................. 10,000

Nov. 1 Accounts Receivable—Lyleen, Inc....................................... 12,000

Sales Revenue............................................................. 12,000

Nov. 5 Sales Returns and Allowances............................................. 500

Accounts Receivable—Lyleen, Inc.............................. 500

Solution 193 (Cont.)

Nov. 9 Cash ...................................................................................... 11,270

Sales Discounts ($11,500 × .02)........................................... 230

Accounts Receivable—Lyleen, Inc.............................. 11,500

Dec. 31 Interest Receivable................................................................ 700

Interest Revenue.......................................................... 700

($10,000 × 12% × 7 ÷ 12 = $700)

2013

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 Hockey Company.

1. On April 12, sold $11,000 of merchandise to Hauser Inc., terms 2/10, n/30.

2. On April 15, Hauser returned $2,000 of merchandise.

3. On April 22, Hauser paid for the merchandise.

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 194 (7 min.)

1. Accounts Receivable......................................................................... 11,000

Sales Revenue...................................................................... 11,000

2. Sales Returns and Allowances......................................................... 2,000

Accounts Receivable............................................................. 2,000

3. Cash ($9,000 – $180)........................................................................ 8,820

Sales Discounts ($9,000 × 2%)......................................................... 180

Accounts Receivable ($11,000 – $2,000)............................. 9,000

Ex. 195

(a) On January 6, Stegner Co. sells merchandise on account to Molina Inc. for $7,000, terms 2/10, n/30. On January 16, Molina Inc. pays the amount due. Prepare the entries on Stegner's books to record the sale and related collection.

(b) On January 10, Jill Flynn uses her Calhoun Co. credit card to purchase merchandise from Calhoun Co. for $9,000. On February 10, Flynn is billed for the amount due of $9,000. On February 12, Flynn pays $4,000 on the balance due. On March 10, Flynn is billed for the amount due, including interest at 2% per month on the unpaid balance as of February 12. Prepare the entries on Calhoun Co.'s books related to the transactions that occurred on January 10, February 12, and March 10.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 195 (12 min.)

(a) Jan. 6 Accounts Receivable—Molina..................................... 7,000

Sales Revenue.................................................... 7,000

16 Cash ($7,000 – $140)................................................... 6,860

Sales Discounts (2% ´ $7,000).................................... 140

Accounts Receivable—Molina............................ 7,000

(b) Jan. 10 Accounts Receivable—Flynn....................................... 9,000

Sales Revenue.................................................... 9,000

Feb. 12 Cash ............................................................................ 4,000

Accounts Receivable—Flynn.............................. 4,000

Mar. 10 Accounts Receivable—Flynn....................................... 100

Interest Revenue................................................. 100

[2% ´ ($9,000 – $4,000)]

Ex. 196

Bullfrog 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, 2012, and December 31, 2013, appear below:

12/31/12 12/31/13

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 2013.

Aug. 10 Determined that the account of Sue Lang for $800 is uncollectible.

Sept. 12 Determined that the account of Tom Woods for $3,700 is uncollectible.

Oct. 10 Received a check for $500 as payment on account from Sue Lang, 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 Lang as payment on her account.

(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2013.

(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2013?

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 196 (20 min.)

(a) Aug. 10 Allowance for Doubtful Accounts................................. 800

Accounts Receivable—Sue Lang........................ 800

(To write off Sue Lang account)

Solution 196 (Cont.)

Sept. 12 Allowance for Doubtful Accounts................................. 3,700

Accounts Receivable—Tom Woods.................... 3,700

(To write off Tom Woods account)

Oct. 10 Accounts Receivable— Sue Lang................................ 800

Allowance for Doubtful Accounts........................ 800

(To reinstate Sue Lang account previously

written off)

Cash.............................................................................. 500

Accounts Receivable— Sue Lang....................... 500

(To record collection on account)

Nov. 15 Cash.............................................................................. 300

Accounts Receivable— Sue Lang....................... 300

(To record collection on account)

(b) Dec. 31 Bad Debts Expense ($500,000 × 1%).......................... 5,000

Allowance for Doubtful Accounts........................ 5,000

(To record estimate of uncollectible accounts)

(c) Balance of Allowance for Doubtful Accounts at December 31, 2013, is $6,500 ($5,200 – $800 – $3,700 + $800 + $5,000).

Ex. 197

Minquo Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31, 2013, 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

Instructions

(a) Prepare the adjusting entry on December 31, 2013, to recognize bad debts 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 2013 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.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 197 (20 min.)

(a) Bad Debts Expense......................................................................... 5,300

Allowance for Doubtful Accounts ($6,000 – $700)................ 5,300

(To adjust the allowance account to total estimated uncollectible)

(b) Bad Debts Expense......................................................................... 6,500

Allowance for Doubtful Accounts ($6,000 + $500)................ 6,500

(To adjust the allowance account to total estimated uncollectible)

(c) Bad Debts Expense ($550,000 × 1%)............................................. 5,500

Allowance for Doubtful Accounts.......................................... 5,500

(To record estimated bad debts for year)

Ex. 198

Compute bad debts expense based on the following information:

(a) FPU Company estimates that 2% of net credit sales will become uncollectible. Sales are $600,000, sales returns and allowances are $30,000, and the allowance for doubtful accounts has a $6,000 credit balance.

(b) FPU 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.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 198 (4 min.)

(a) Bad debts expense = $11,400 [($600,000 – $30,000) × .02]

(b) Bad debts expense = $10,500 [($100,000 × .10) + $500]

Ex. 199

The December 31, 2012 balance sheet of Sauron Company had Accounts Receivable of $400,000 and a credit balance in Allowance for Doubtful Accounts of $32,000. During 2013, 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 2013 transactions.

(b) If the company uses the percentage of sales basis to estimate bad debts expense and anticipates 3% of net sales to be uncollectible, what is the adjusting entry at December 31, 2013?

(c) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 8% of accounts receivable, what is the adjusting entry at December 31, 2013?

(d) Which basis would produce a higher net income for 2013 and by how much?

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 199 (20–30 min.)

(a) Accounts Receivable....................................................................... 1,500,000

Sales Revenue...................................................................... 1,500,000

(To record credit sales)

Sales Returns and Allowances........................................................ 50,000

Accounts Receivable............................................................. 50,000

(To record credits to customers)

Cash ............................................................................................... 1,250,000

Accounts Receivable............................................................. 1,250,000

(To record collection of receivables)

Allowance for Doubtful Accounts..................................................... 36,000

Accounts Receivable............................................................. 36,000

(To write off specific accounts)

Accounts Receivable....................................................................... 6,000

Allowance for Doubtful Accounts.......................................... 6,000

(To reverse write-off of account)

Cash ............................................................................................... 6,000

Accounts Receivable............................................................. 6,000

(To record collection of account)

(b) Percentage of sales basis:

Sales ............................................................................................... $1,500,000

Less: Sales Returns and Allowances............................................. 50,000

Net Sales............................................................................... 1,450,000

Bad debt percentage........................................................................ .03

Bad debt provision........................................................................... $ 43,500

Dec. 31 Bad Debts Expense .......................................................... 43,500

Allowance for Doubtful Accounts ............................. 43,500

(c) Percentage of receivables basis:

ALLOWANCE FOR DOUBTFUL

ACCOUNTS RECEIVABLE ACCOUNTS

400,000 50,000 36,000 32,000

1,500,000 1,250,000 6,000

6,000 36,000 Bal. 2,000

6,000

Bal. 564,000

Required balance ($564,000 × .08)................................................................ $45,120

Balance before adjustment............................................................................. 2,000

Adjustment required........................................................................................ $43,120

Dec. 31 Bad Debts Expense......................................................... 43,120

Allowance for Doubtful Accounts........................... 43,120

Solution 199 (Cont.)

(d) Percentage of sales basis............................................................................... $43,500

Percentage of receivables basis..................................................................... 43,120

Net income higher with percentage of receivables basis by.......................... $ 380

Ex. 200

Nikki's Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2013, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,800,000 during 2013. 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 debts 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.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 200 (15 min.)

(1) Percentage of sales basis:

The following adjusting entry would be the same regardless of the balance in the Allowance for Doubtful Accounts.

Bad Debts Expense ($3,800,000 × .01).......................................... 38,000

Allowance for Doubtful Accounts.......................................... 38,000

(2) Percentage of receivables basis:

(a) Bad Debts Expense ($40,000 – $3,200).................................. 36,800

Allowance for Doubtful Accounts.................................... 36,800

(b) Bad Debts Expense ($40,000 + $730)..................................... 40,730

Allowance for Doubtful Accounts.................................... 40,730

Ex. 201

The income statement approach to estimating uncollectible accounts expense is used by Landis 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 Brown for $6,100 was determined to be uncollectible and written off. However, on March 31, Brown received an inheritance and immediately paid her past due account in full.

Instructions

(a) Prepare the journal entries made by Landis 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.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 201 (15 min.)

(a) 1. Feb. 28 Bad Debts Expense ($3,000,000 × .01).................... 30,000

Allowance for Doubtful Accounts..................... 30,000

(To record the bad debts expense for

February)

2. Mar. 10 Allowance for Doubtful Accounts.............................. 6,100

Accounts Receivable—K. Brown..................... 6,100

(To write off K. Brown account deemed

uncollectible)

3. Mar. 31 Accounts Receivable—K. Brown.............................. 6,100

Allowance for Doubtful Accounts..................... 6,100

(To reinstate an account previously

written off)

Mar. 31 Cash .......................................................................... 6,100

Accounts Receivable—K. Brown..................... 6,100

(To record payment on account in full)

(b) $2,140 + $30,000 – $6,100 + $6,100 = $32,140.

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 Miles Winston for $2,000, terms n/15.

April 15 Received $600 from Miles Winston on account.

August 21 Wrote off as uncollectible the balance of the Miles Winston account when she declared bankruptcy.

October 5 Unexpectedly received a check for $300 from Miles Winston. It is not felt any more will be received from Winston

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 202 (10 min.)

January 5 Accounts Receivable—M. Winston.................................... 2,000

Sales Revenue.......................................................... 2,000

April 15 Cash ................................................................................... 600

Accounts Receivable—M. Winston........................... 600

August 21 Allowance for Doubtful Accounts....................................... 1,400

Accounts Receivable—M. Winston........................... 1,400

Solution 202 (cont.)

October 5 Accounts Receivable—M. Winston.................................... 300

Allowance for Doubtful Accounts.............................. 300

Cash ................................................................................... 300

Accounts Receivable—M. Winston........................... 300

Ex. 203

Avett Furniture Store has credit sales of $400,000 in 2013 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2013, $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, 2014, the credit manager authorizes a write-off of the $1,200 balance owed by B. Crawford.

Instructions

(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2013.

(b) Show the balance sheet presentation of accounts receivable on December 31, 2013.

(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 Crawford account. Also show the balance sheet presentation of accounts receivable before and after the write-off.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 203 (20 min.)

(a) Bad Debts Expense ($7,000 + $600).............................................. 7,600

Allowance for Doubtful Accounts.......................................... 7,600

(b) Accounts Receivable....................................................................... $130,000

Less: Allowance for Doubtful Accounts.......................................... 7,000 $123,000

(c) Allowance for Doubtful Accounts..................................................... 1,200

Accounts Receivable—B. Crawford...................................... 1,200

Before Write-off After Write-off

Accounts Receivable $160,000 $158,800

Less: Allowance for Doubtful Accounts 3,000 1,800

Cash Realizable Value $157,000 $157,000

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.)

27 Cash.......................................................................................... 1,000

Bad Debts Expense......................................................... 1,000

(Collection of account previously written off as

uncollectible under allowance method)

31 Bad Debts 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.

Ans: N/A, 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

Solution 204 (15 min.)

Dec. 17 Accounts Receivable............................................................. 60

Sales Discounts............................................................ 60

(To correct accounts for granting sales discount

when discount period had lapsed)

20 Interest Revenue................................................................... 280

Interest Receivable....................................................... 280

[To recognize collection of interest accrued through

November 30 ($18,000 × 8% × 70/360 = $280)]

27 Bad Debts Expense............................................................... 1,000

Allowance for Doubtful Accounts................................. 1,000

(To correct erroneous collection entry)

31 Bad Debts Expense............................................................... 5,400

Allowance for Doubtful Accounts................................. 5,400

[To adjust balance in Bad Debts Expense to

$6,000 (1% × $600,000)]

Ex. 205

Prepare the necessary journal entry for the following transaction. Francis Company sold $270,000 of its accounts receivables to a factor. The factor charges a 3% fee.

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 205 (3 min.)

Cash ($270,000 – $8,100)....................................................................... 261,900

Service Charge Expense ($270,000 × 3%)............................................ 8,100

Accounts Receivable................................................................... 270,000

Ex. 206

Wine 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 Horton 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.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 206 (12 min.)

(a) Aug. 1 Accounts Receivable........................................................... 130

Interest Revenue......................................................... 130

(To recognize finance charges—1% × $13,000)

15 Cash..................................................................................... 20,160

Service Charge Expense ($21,000 × 4%)........................... 840

Accounts Receivable.................................................. 21,000

(To record sale of receivables to Iron Factors)

28 Cash..................................................................................... 8,000

Accounts Receivable.................................................. 8,000

(To record collection of Horton receivables)

(b) Service Charge Expense is a selling expense. Interest Revenue is classified under Other Revenues and Gains.

Ex. 207

Listed below are two independent situations involving the disposition of receivables.

1. Gonzalez 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 Gonzalez 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.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 207 (7 min.)

1. Cash................................................................................................... 310,400

Service Charge Expense ($320,000 × .02)....................................... 9,600

Accounts Receivable................................................................ 320,000

2. Cash................................................................................................... 3,298

Service Charge Expense ($3,400 × .03)........................................... 102

Sales Revenue................................................................ 3,400

Ex. 208

Lamontague Stores accepts both its own and national credit cards. During the year the following selected summary transactions occurred.

Jan. 15 Made Lamontague 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 Lamontague credit card sales.

15 Added finance charges of 1% to Lamontague credit card balance.

Instructions

(a) Journalize the transactions for Lamontague Stores.

(b) Indicate the statement presentation of the financing charges and the credit card service charge expense for Lamontague Stores.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 208 (7 min.)

(a) Jan. 15 Accounts Receivable...................................................... 24,000

Sales Revenue........................................................... 24,000

20 Cash ($7,000 – $140)..................................................... 6,860

Service Charge Expense................................................ 140

($7,000 ´ 2%)

Sales Revenue.......................................................... 7,000

(b) Feb. 10 Cash................................................................................ 14,000

Accounts Receivable................................................. 14,000

20 Accounts Receivable ($10,000 ´ 1%)..................................... 100

Interest Revenue....................................................... 100

Solution 208 (Cont.)

(b) Interest Revenue is reported under other revenues and gains.

Service Charge Expense is a selling expense.

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 $____________.

Ans: N/A, 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

Solution 209 (10 min.)

1. Maturity date: July 20

Maturity value: $15,225

$15,000 × 6% × 3/12 = $225 + $15,000 = $15,225

2. Maturity date: Term of note 72 days

June (30–10) 20

July 31 51

Maturity date, August 21

Maturity value: $25,400

$25,000 × 8% × 72/360 = $400 + $25,000 = $25,400

3. Maturity date: Term of note 30 days

September (30–20) 10

Maturity date, October 20

Maturity value: $8,060

$8,000 × 9% × 30/360 = $60 + $8,000 = $8,060

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%

Ans: N/A, 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 210 (3 min.)

Maturity Date Interest

(a) June 16 $600 ($60,000 × .06 × 60/360)

(b) November 11 $1,600 ($80,000 × .08 × 3/12)

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

———————————————————————————————————————

Ans: N/A, 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

Solution 211 (10 min.)

(a) $10,000 ($40,000 × .10 × 2.5 years) = $10,000

(b) 8% ($120,000 × ? × 9 ÷ 12 = $7,200; ? = 8%)

(c) $60,000 (? × .10 × 90 ÷ 360 = $1,500; ? = $60,000)

(d) 4 months ($40,000 × .09 × ? = $1,200; ? = 4 ÷ 12)

Ex. 212

Cal's Supply Co. has the following transactions related to notes receivable during the last 2 months of 2012.

Nov. 1 Loaned $20,000 cash to Zoey Deschanel 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 Potter's outstanding accounts receivable.

31 Accrued interest revenue on all notes receivable.

Instructions

(a) Journalize the transactions for Cal's Supply Co.

(b) Record the collection of the Deschanel note at its maturity in 2013.

Ans: N/A, LO: 5,6, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 212 (10 min.)

(a) 2012

Nov. 1 Notes Receivable...................................................... 20,000

Cash....................................................................... 20,000

Dec. 11 Notes Receivable...................................................... 11,700

Sales Revenue...................................................... 11,700

16 Notes Receivable...................................................... 12,000

Accounts Receivable—Potter............................... 12,000

31 Interest Receivable.................................................... 497

Interest Revenue*................................................. 497

*Calculation of interest revenue:

Deschanel's note: $20,000 ´ 12% ´ 2/12 = $400

Phair's note: 11,700 ´ 8% ´ 20/360 = 52

Potter's note: 12,000 ´ 9% ´ 15/360 = 45

Total accrued interest $497

(b) 2013

Nov. 1 Cash........................................................................... 22,400

Interest Receivable................................................ 400

Interest Revenue*.................................................. 2,000

Notes Receivable.................................................. 20,000

*($20,000 ´ 12% ´ 10/12)

Ex. 213

Lissie Company had the following select transactions.

Apr. 1, 2012 Accepted Goulding Company's 1-year, 12% note in settlement of a $25,000 account receivable.

July 1, 2012 Loaned $15,000 cash to Jenny Lewis on a 9-month, 10% note.

Dec. 31, 2012 Accrued interest on all notes receivable.

Apr. 1, 2013 Received principal plus interest on the Goulding note.

Apr. 1, 2013 Jenny Lewis dishonored its note: Lissie expects it will eventually collect.

Instructions

Prepare journal entries to record the transactions. Lissie prepares adjusting entries once a year on December 31.

Ans: N/A, 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

Solution 213 (12 min.)

4/1/12 Notes Receivable.................................................. 25,000

Accounts Receivable—Goulding.................... 25,000

7/1/12 Notes Receivable.................................................. 15,000

Cash................................................................ 15,000

Solution 213 (Cont.)

12/31/12 Interest Receivable................................................ 2,250

Interest Revenue............................................. 2,250

($25,000 ´ 12% ´ 9/12)

Interest Receivable................................................ 750

Interest Revenue............................................. 750

($15,000 ´ 10% ´ 6/12)

4/1/13 Cash....................................................................... 28,000

Notes Receivable............................................ 25,000

Interest Receivable......................................... 2,250

Interest Revenue............................................. 750

($25,000 ´ 12% ´ 3/12 = $750)

Accounts Receivable............................................. 16,125

Notes Receivable............................................ 15,000

Interest Receivable......................................... 750

Interest Revenue............................................. 375

($15,000 ´ 10% ´ 3/12 = $375)

Ex. 214

Prepare the necessary journal entries for the following transactions for Natasha Co.

May 25 Natasha Co. received a $30,000, 2-month, 6% note from Khan Company in settlement of an account receivable.

July 25 Natasha Co. received payment on the Khan note.

Ans: N/A, 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

Solution 214 (5 min.)

May 25 Notes Receivable............................................................... 30,000

Accounts Receivable................................................. 30,000

July 25 Cash.................................................................................... 30,300

Notes Receivable...................................................... 30,000

Interest Revenue ($30,000 × .06 × 2/12).................. 300

Ex. 215

Record the following transactions in general journal form for Karen Elson Company.

July 1 Received a $20,000, 8%, 3-month note, dated July 1, from Laura Marling in payment of her open account.

Oct. 1 Received notification from Laura Marling that she was unable to honor her note at this time. It is expected that Marling will pay at a later date.

Nov. 15 Received full payment from Laura Marling for her note receivable previously dishonored.

Ans: N/A, 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

Solution 215 (15 min.)

July 1 Notes Receivable.................................................................. 20,000

Accounts Receivable—Laura Marling.......................... 20,000

(To record acceptance of Laura Marling note as

payment on account)

Oct. 1 Accounts Receivable— Laura Marling.................................. 20,400

Notes Receivable......................................................... 20,000

Interest Revenue ($20,000 × 8% × 3/12) .................... 400

(To record dishonored note, $20,000, plus interest)

Nov. 15 Cash....................................................................................... 20,400

Accounts Receivable—Laura Marling.......................... 20,400

(To record payment on account)

Ex. 216

Pine Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Pine Boat Company.

Feb. 12 Accepted a $25,000, 6%, 60-day note from Bob Weiss for a 24-foot motorboat built to his specifications.

April 14 Received notification from Bob Weiss 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 Weiss for the total amount owed.

June 10 Received notification by the bank that Bob Weiss check was being returned "NSF" and that Mr. Weiss had declared personal bankruptcy.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 216 (15 min.)

Feb. 12 Notes Receivable.................................................................. 25,000

Sales Revenue............................................................. 25,000

April 14 Accounts Receivable—B. Weiss........................................... 25,250

Notes Receivable......................................................... 25,000

Interest Revenue ($25,000 × 6% × 1/6)....................... 250

May 26 Cash....................................................................................... 25,250

Accounts Receivable—B. Weiss.................................. 25,250

June 10 Accounts Receivable—B. Weiss........................................... 25,250

Cash.............................................................................. 25,250

Allowance for Doubtful Accounts.......................................... 25,250

Accounts Receivable— B. Weiss................................. 25,250

Ex. 217

The following information is available for Sharon Jones Company.

Beginning accounts receivable $ 70,000

Ending accounts receivable 110,000

Net sales 990,000

Instructions

Compute the receivables turnover ratio and the average collection period.

Ans: N/A, LO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 217 (5 min.)

Receivables turnover = 11 times $990,000 ¸ [($70,000 + $110,000) ¸ 2]

Average collection period = 33.2 days (365 ¸ 11)

Ex. 218

Scully Company had accounts receivable of $100,000 on January 1, 2012. The only transactions that affected accounts receivable during 2012 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 ratio for 2013.

(c) Compute the average collection period in days.

Ans: N/A, LO: 9, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 218 (5 min.)

(a) Beginning accounts receivable................................... $ 100,000

Net credit sales............................................................ 1,200,000

Cash collections.......................................................... (1,000,000)

Accounts written off..................................................... (30,000)

Ending accounts receivable........................................ $ 270,000

(b) $1,200,000/[($100,000 + $270,000)/2] = 6.49

(c) 365/6.49 = 56.2 days

CHALLENGE EXERCISES

CE. 219

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.

CE. 219 (Cont.)

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?

Ans: N/A, 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 219

a)

March 1 Accounts Receivable - Grey Company.............................. 6,000

.................. Sales....................................................................... 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............................................................................ 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. 220

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.

Ans: N/A, 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 220

(a) Dec. 31 Bad Debt Expense............................................................. 2,400

Accounts Receivable - Barkley........................................................ 2,400

(b) (1) Dec. 31 Bad Debt Expense........................................................... 11,500

[($1,200,000 - $50,000) ´ 1%]

Allowance for Doubtful

Accounts............................................................................. 11,500

(2) Dec. 31 Bad Debt expense.................................................. 13,500

Allowance for Doubtful

Accounts...................................................... 13,500

[($170,000 ´ 10%) - $3,500

(c) (1) Dec. 31 Bad Debt Expense............................................................. 8,625

[($1,200,000 - $50,000) ´ .75%]

Allowance for Doubtful

Accounts........................................................................ 8,625

(2) Dec. 31 Bad Debt Expense........................................................... 10,570

Allowance for Doubtful

Accounts....................................................................... 10,570

[($170,000 ´ 6%) + $370]

CE. 221

Presley Supply Co. has the following transaction related to notes receivable during the last 2 months of 2012.

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 2013.

(c) Assume Ransey dishonors its note at its maturity in 2013; Presley expects to eventually collect the note. Record the dishonors of the Ransey note.

Ans: N/A, 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

Solution. 221

(a) 2012

Nov. 1 Notes Receivable............................................................. 30,000

Cash........................................................................................... 30,000

Dec. 11 Notes Receivable............................................................. 9,000

Sales Revenue................................................. 9,000

16 Notes Receivable....................................................................... 4,000

Accounts Receivable - Brock.......................... 4,000

Solution 221 (Cont.)

31 Interest Receivable........................................................... 396

Interest Revenue.............................................. 396*

Calculation of interest revenue:

Ransey's note: $30,000 ´ 10% ´ 2/12 = $500

Noland's note: 9,000 ´ 8% ´ 20/360 = 40

Brock's note: 4,000 ´ 9% ´ 15/360 = 15

Total accrued interest $565

(b) 2013

Nov. 1 Cash................................................................................ 33,000

Interest Receivable.................................................... 500

Interest Revenue........................................................ 2,500*

Notes Receivable....................................................... 30,000

*($30,000 ´ 10% ´ 10/12)

(c) 2013

Nov. 1 Accounts Receivable........................................................ 33,000

Interest Receivable............................................................ 500

Interest Revenue................................................................ 2,500*

Notes Receivable............................................................... 30,000

*($30,000 ´ 10% ´ 10/12)

COMPLETION STATEMENTS

222. Accounts receivable, which are also referred to as ______________ receivables, are amounts owed by customers on account.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

223. The three primary accounting problems associated with accounts receivable are (1) ______________, (2) _______________, and (3) ______________ of accounts receivable.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

224. In order to encourage prompt payment of a trade receivable, companies often offer ______________ to customers.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

225. When credit sales are made, _________________ expense is considered a normal and necessary risk of doing business on a credit basis.

Ans: N/A, 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

226. The two methods of accounting for uncollectible accounts are the ____________ method and the ______________ method.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

227. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

228. When the allowance method is used to account for uncollectible accounts, the ______________ is credited when an account is determined to be uncollectible.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

229. The _____________ basis of estimating uncollectibles provides a better _____________ of bad debt expense with sales revenue and therefore emphasizes income statement relationships.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

230. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value and therefore emphasizes balance sheet relationships.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

231. Sales resulting from the use of Visa and MasterCard are considered ______________ by the retailer.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

232. A finance company or bank that purchases receivables from businesses is known as a ______________.

Ans: N/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

233. A 75-day note receivable dated June 10 would mature on ______________.

Ans: N/A, 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

234. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

235. A note which is not paid on the maturity date is said to be ______________.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Answers to Completion Statements

222. trade 229. percentage of sales, matching

223. recognizing, valuing, disposing 230. percentage of receivables, cash realizable

224. cash discounts 231. cash sales

225. bad debts 232. factor

226. allowance, direct write-off 233. August 24

227. contra asset, deducted 234. Notes Receivable, Interest Revenue

228. Accounts Receivable 235. dishonored

MATCHING

236. 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 cycustomer, the retailer, and the credit card issuer.

_____ 3. Emphasizes the matching of express 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.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Answers to Matching

1. C 6. A

2. J 7. F

3. E 8. B

4. D 9. I

5. H 10. G

SHORT-ANSWER ESSAY QUESTIONS

S-A E 237

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 debts expense during the accounting period?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 237

The two bases available to calculate the estimated uncollectibles under the accrual based allowance method are: (a) percentage-of-sales basis and (b) percentageofreceivables basis. The percentageofsales basis emphasizes the income statement while the percentageofreceivables basis emphasizes the balance sheet. Under the percentageofsales basis the bad debts expense for the period is calculated directly as a percentageofnet credit sales without regard to any balance in the allowance account. Under the percentageofreceivables basis, the emphasis is on establishing the proper amount to carry as a balance in the allowance account; bad debts expense is indirectly determined to be the amount necessary to create the proper balance in the allowance account.

S-A E 238

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).

Ans: N/A, 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

Solution 238

The advantages of a retail store using its own credit card are the avoidance of a 2 to 6 percent charge by the national credit card and the ability to issue credit to the customers of its choice. In addition, with its own credit card operation the retailer earns the interest on the unpaid balances.

The disadvantages of a retail store using its own credit card are the risk of nonpayment (bad debts), the delay in receiving cash from the sales (cash is collected immediately from the national credit card company), and the costs of record keeping and managing (approving credit and collection) its own credit operation.

S-A E 239

Your friend Ellie has opened an office supply store. She will extend open credit to local businesses and is concerned about potential bad debts. What can Ellie do to reduce potential bad debts?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Solution 239

1. Establish a reasonable policy for extending credit. The company needs to consider the risks of having either a ‘too tight’ or ‘too loose’ credit policy. Potential credit customers should be screened appropriately.

2. The company should decide upon the required payment period and communicate it to customers and employees. This period should be in line with the ones established by competitors. Also, employees should enforce the collection period but yet exercise judgment in unusual circumstances.

3. The company should evaluate the relationship among sales, accounts receivable, and cash collections to monitor trends and watch for potential problems.

4. The company should prepare an accounts receivable aging schedule on a regular basis. The collection department should follow up on past due accounts in a timely and professional manner. There should be a clear company policy regarding collection efforts and when to write off accounts.

S-A E 240

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.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics

Solution 240

1. The use of bank credit cards increases sales. Many people want to use credit cards to make purchases. If a company does not offer this service, customers will buy from a competitor that does offer the services.

2. Bad debts are absorbed by the credit card company.

3. The company receives its cash (less the fees) immediately.

4. The company does not have to hire employees to approve credit and make collections for these sales.

S-A E 241

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?

Ans: N/A, 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

Solution 241

The reasons companies are selling their receivables are:

(1) Receivables may be sold because they may be the only reasonable source of cash.

(2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters.

S-A E 242

Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable.

Ans: N/A, 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

Solution 242

A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.

S-A E 243 (Ethics)

Pierce 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; Pierce 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 Pierce 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 Pierce Books act ethically in reinstating the debt of one client, and not the other? Explain.

Ans: N/A, 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

Solution 243

Yes, it is ethical to reinstate the debt of The Learning Center, especially since there was no evidence given that The Learning Center attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Pierce Books. Pierce Books' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable.

The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the state, and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Pierce Books can collect also because they apparently did not include interest in earlier bills sent to these clients, and because they stopped sending bills for some period of time.

Note that this solution is different from the case in which a debt is written off because of a bankruptcy. Had The Learning Center become bankrupt, Pierce Books could not have legally reinstated the debt, even if The Learning Center became solvent at some time in the future.

S-A E 244 (Communication)

Morrison Company received a letter from Mary Furman, a customer. Mary had purchased $425 worth of clothing from Morrison on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Morrison. Her total debt presently, with interest and late fees, is $351.13.

Mary sent a letter to Morrison 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 Morrison 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 Morrison write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Morrison were among the best she had ever owned, and that she "told everybody" that Morrison was definitely the best place to get clothes.

Required:

You are the accounting manager for Morrison. Write a short letter to Mary explaining why her debt cannot be written off.

Ans: N/A, 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

Solution 244

(letterhead)

(Date)

Ms. Mary Furman

123 College View Apartments, #717

Lakeland University

Lakeland, Michigan 60771

Dear Ms. Furman:

Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Morrison clothing, and we're glad you tell your friends about us.

As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form) is $351.13.

Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Morrison extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Morrison or to the customer.

We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider, and send your next payment today? If you need to renegotiate the size of the payments, you may contact Betty in the Credit Department to discuss the matter.

I look forward to receiving your payment.

Sincerely,

Jill Gates

Accounting Manager

IFRS QUESTIONS

245. 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 the above are essentially the same for IFRS and GAAP.

Ans: D, 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

246. 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 the above are essentially the same for IFRS and GAAP.

Ans: D, 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

247. 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.

Ans: B, 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

248. IFRS sometimes refers to allowances as

a. revenues.

b. discounts.

c. provisions.

d. reserves.

Ans: C, 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

249. 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.

Ans: A, 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

250. 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.

Ans: C, 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

251. 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.

Ans: C, 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

252. 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

Ans: A, 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

253. 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

Ans: D, 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

254. 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

Ans: D, 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

255. Which permits partial derecognition of receivables?

GAAP IFRS

a. yes no

b. yes yes

c. no no

d. no yes

Ans: D, 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