Accounting Ch 8

Front 1

What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?

Back 1

A note receivable
A note receivable represent claims for which formal instruments of credit are issued as evidence of the debt. The note normally requires the payment of the principal and interest on a specific date.

Front 2

Which of the following should be classified as an “other” receivable?

Back 2

Interest receivable
rade, accounts, and notes receivables are financial instruments typically accepted from customers for the value of a transaction. Interest receivable results because of the time value of money.

Front 3

What type of receivables result from sales transactions?

Back 3

Trade receivables
Accounts receivable and notes receivable resulting from sales transactions are called trade receivables.

Front 4

On June 15, Kersee Company sold merchandise on account to Eng Co. for $1,000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received on June 24?

Back 4

$686, he amount received on June 24 is $686. Because payment is made within the discount period of 10 days, the amount received is $700 ($1,000 – return of $300) minus the discount of $14 ($700 × 2%), for a cash amount of $686.

Front 5

When is a receivable recorded by a service organization?

Back 5

When service is provided on account
A receivable is recorded when the service is performed, not at some other specific date.

Front 6

Receivables are reported on the balance sheet at the cash amount owed by customers.

Back 6

false. While the balance of accounts receivable represents the amount owed by customers, the amount reported on the balance sheet is shown at their cash (net) realizable value. This is the amount the company expects to collect.

Front 7

Under the allowance method, the write off of an account receivable leaves the net realizable value of the receivables unchanged.

Back 7

True

Front 8

allowance for Doubtful Accounts is closed at the end of the fiscal year.

Back 8

false. Only nominal accounts are closed at the end of the fiscal period. Allowance for Doubtful Accounts is a real account and remains active and open from fiscal period to fiscal period.

Front 9

The direct write-off method violates the expense recognition principle.

Back 9

True;The direct write-off method waits until a receivable has declined in value and is determined to be uncollectible before it is written off. This usually occurs after the end of the fiscal period of the related sale, which violates the expense recognition principle.

Front 10

At what value are accounts receivable reported on the balance sheet?

Back 10

Cash (net) realizable value

Accounts receivable are reported at net realizable value. This value is the total amount due less an estimate for doubtful accounts.

Front 11

RyTronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $100,000 at year-end and the total credit sales were $800,000. Management estimates that 4% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment?

Back 11

Bad Debts Expense 3,200
Allowance for Doubtful Accounts 3,20

llowance for Doubtful Accounts needs an ending credit balance of 4% of $100,000 or $4,000. To increase the current credit balance of $800 to the required amount of $4,000, the account requires a credit of $3,200. The entry to estimate bad debts is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,200.

Under percentage-of-receivables method, the balance of the Allowance account must be considered in the determination of year end adjustment.

Front 12

When an uncollectible account is recovered after it has been written off, which of the following accounts will be credited in the process?

Back 12

Accounts Receivable and Allowance for Doubtful Accounts
When an uncollectible account is recovered after its has been written off, Allowance for Doubtful Accounts will be credited and Accounts Receivable will be debited in the first entry. The second entry requires a credit to Accounts Receivable and a debit to Cash.

Front 13

Which one of the following statements is true?

Back 13

Bad Debts Expense is a nominal account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period.

Bad Debts Expense is a nominal or temporary account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period.

Front 14

Obama Company has identified that Bill Clinton’s receivable account of $100 is uncollectible. What is the journal entry needed to write off the account under the allowance method?

Back 14

Allowance for Doubtful Accounts 100
Accounts Receivable 100
he proper journal entry debits Allowance for Doubtful Accounts and cr

Front 15

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

Back 15

$12,000
Because the estimate is based on a percentage of receivables, the $800 balance in the Allowance accounts must be considered. The ending balance required in the allowance account is 7.5% times $160,000, or $12,000. Since there is already a balance of $5,000 in the allowance account, the difference of $7,000 should be added, resulting in a balance of $12,000.

Front 16

During 2014, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2014, $30,000 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 $200,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014?

Back 16

$32,000
After the write-offs are recorded, Allowance for Doubtful Accounts will have a debit balance of $12,000 ($18,000 credit beginning balance combined with a $30,000 debit for the write-offs). The desired balance, using the percentage of receivables basis, is a credit balance of $20,000 ($200,000 × 10%). In order to have an ending balance of $20,000, a credit entry of $32,000 must be made to Allowance for Doubtful Accounts. Thus, the amount of the adjusting entry must be $32,000.
First, determine the balance in the Allowance account; then, determine the required ending balance. The difference is the adjustment required.

Front 17

If a company uses the allowance method for uncollectible accounts, then the entry to record $800 of estimated uncollectibles is

Back 17

Bad Debts Expense 800
he journal entry to record the estimate of uncollectible accounts is a debit to Bad Debts Expense and a credit to the Allowance for Doubtful Accounts.

Front 18

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method?

Back 18

Allowance for Doubtful Accounts is debited.
The debit account is Allowance for Doubtful Accounts, and Accounts Receivable is credited to remove the customer’s account

Front 19

Ryan Leaf Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end and the total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a credit balance of $200 before adjustment?

Back 19

Bad Debts Expense 1,600
Allowance for Doubtful Accounts 1,600

The Allowance for Doubtful Accounts needs an ending credit balance of 3% of $60,000 or $1,800. Since the preadjusted credit balance is $200, a credit of $1,600 will increase it to $1,800. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $1,600.

Front 20

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal the following data:

Accounts receivable $800,000
Allowance for doubtful accounts balance before adjustment (credit) 12,000
Amounts expected to become uncollectible 65,000

How much is the cash (net) realizable value of the accounts receivable at December 31, after adjustment?

Back 20

$735,000
The cash (net) realizable value of the accounts receivable is accounts receivable less the ending balance in the Allowance for Doubtful Accounts. In this case, accounts receivable is $800,000 and the ending balance in Allowance for Doubtful Accounts is $65,000. This results in cash (net) realizable value of $800,000 less $65,000, or $735,000.

Front 21

Short-term notes receivable are reported at their cash (net) realizable value.

Back 21

True;Like accounts receivable, short-term notes receivable are reported at cash (net) realizable value.

Front 22

Notes receivable are reported in the current assets section of the balance sheet at

Back 22

cash (net) realizable value.
Companies report accounts receivable, notes receivable, and other receivables in the current asset section of the balance sheet at their expected cash (net) realizable value.

Front 23

Which one of the following is not one of the five basic issues in accounting for notes receivable?

Back 23

Realizing notes receivable

he five basic issues in accounting for notes receivable are 1) determining the maturity date, 2) computing interest, 3) recognizing notes receivable, 4) valuing notes receivable and 5) disposing of notes receivable.

Front 24

A 90-day promissory note is issued on September 15. What is the note’s maturity date?

Back 24

December 14
The date the note is issued is omitted, while the due date is counted. September has 15 days beginning with September 16 through the 30. October has 31 days. November has 30 days. There are 14 days in December during the note’s term to total to 90 days.

Front 25

Which one of these statements about promissory notes is incorrect?

Back 25

A promissory note is not a negotiable instrument.


Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement.

Front 26

Michael Co. accepts a $4,000, 3-month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is

Back 26

Notes Receivable 4,000
Accounts Receivable 4,000
On the date Michael accepts the note, Notes Receivable is debited for $4,000 and Accounts Receivable is credited for $4,000. Interest is accrued only with the passage of time

Front 27

At what amount is a short-term notes receivable recorded on the issue date?

Back 27

Face value
Short-term notes receivable are recorded at face value, which is the principal amount of the note.

Front 28

How much accrued interest should be reported on the payee’s December 31 balance sheet on a $5,000, 8%, 9-month note receivable issued on June 1?

Back 28

233
Interest earned is calculated by multiplying the principal times the interest rate times the portion of the year that has passed since the note was issued ($5,000 × 8% × 7/12 = $233).

Front 29

On May 2, Wainwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What entry will Wainwright Company make when it receives the note on May 2?

Back 29

Notes Receivable 3,000
Accounts Receivable 3,000
On the date Wainwright accepts the note, it is recorded at face amount. Interest is accrued only with the passage of time. Notes Receivable will be debited for $3,000 and Accounts Receivable will be credited for $3,000.

Front 30

Butte Co. loaned $25,000 to Beavis Co. on June 1, at 12% interest for 3 months. What adjusting entry will Butte Co. have to make on June 30 before preparing the financial statements on June 30?

Back 30

Interest Receivable 250
Interest Revenue 250
Interest must be accrued from June 1 to June 30.

Front 31

Danta Company has a March 31 fiscal year end. What is the maturity value of a $25,000, 12%, 3-month note receivable dated March 1?

Back 31

$25,750
The maturity value is the face value plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. Interest = $25,000 × 12% × 3/12 = $750. Maturity value = $25,000 + $750 = $25,750.
Fist, calculate interest on note; then, calculate maturity value.

Front 32

What is the maturity value of a $25,000, 9%, 4-month note receivable issued on December 1 if the company has a fiscal year end on December 31?

Back 32

$25,750
The maturity value is the face value plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. Interest = $25,000 × 9% × 4/12 = $750. Maturity value = $25,000 + $750 = $25,750.
first, calculate interest on note; then, calculate maturity value.

Front 33

On the date a 90-day note is honored, how much cash will the payee receive?

Back 33

Face value plus 90 days of interest
The maturity value is equal to face value of the note (the principal) plus interest accrued for the 90-day term of the note.

Front 34

Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable?

Back 34

Accounts Receivable
The entry for debit of a dishonored note receivable in default includes a debit to Accounts Receivable and credit to Notes Receivable. The company will then pursue collection along with its other receivables.

Front 35

When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain?

Back 35

Two credits and one debit
The entry to record this transaction will have a debit to Cash, a credit to Notes Receivable and a credit to Interest Revenue.

Front 36

Schleis Co. holds Murphy Inc.’s $10,000, 120-day, 9% note. What is the entry to be made by Schleis Co. when the note is collected, assuming no interest has previously been accrued?

Back 36

Cash 10,300
Notes Receivable 10,000
Interest Revenue 300
When Schleis receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. Interest = $10,000 × 9% × 120/360 = $300. Total cash received = $10,000 + $300 = $10,300.
First, calculate total interest due on note; then, determine total amount which will be collected.

Front 37

A company holds a 120-day, 10%, $21,000 note which was not paid in full on the maturity date. Which of the following will the journal entry on the maturity date include?

Back 37

Debit to Accounts Receivable for $21,700

The journal entry will decrease Notes Receivable for the value of the note, recognize interest revenue for the term of the note, and increase the Accounts Receivable account for the total owed by the maker. The journal entry is:
Accounts Receivable 21,700 (debit)
Notes Receivable 21,000 (credit)
Interest Revenue 700 (credit)
($21,000 × 10% × 120/360 = $700)

When a note is dishonored, total amount due on the note is transferred to Accounts Receivable.

Front 38

Which of the following is the correct sequence to report receivables on the balance sheet?

Back 38

Accounts receivable, a 6-month note receivable, other receivables
Receivables are assets that must be reported in the order of liquidity. Those expected to be converted into cash more quickly are reported first.

Front 39

Which statement is true about reporting receivables on the balance sheet?

Back 39

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.
Allowance for Doubtful Accounts is a contra asset account that is shown as a deduction from Accounts Receivble on the balance sheet in the current asset section.

Front 40

Which one of the following is the correct presentation of Accounts Receivable and its contra account on the balance sheet?

Back 40

Accounts Receivable $642,000
Less: Allowance for Doubtful Accounts (2,000) $640,000
he contra asset account is deducted from Accounts Receivable resulting in the cash (net) realizable value.

Front 41

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do?

Back 41

Provide the customer a lengthy payment period to increase the chance of paying
Longer payment period will increase the chances the company will not pay. Companies might require risky customers to provide letters of credit or bank guarantees, require them to pay cash in advance, or ask for references from banks and suppliers to determine their payment history.

Front 42

What is often the most critical part of managing receivables?

Back 42

Determining who gets credit and who doesn’t
Managing accounts receivable involves five steps. The one that is considered the most critical is deciding on who gets credit and who doesn’t.

Front 43

Which of the following is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company?

Back 43

A concentration of credit risk
A threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company is called a concentration of credit risk.

Front 44

which one of the following is not one of the principles of managing accounts receivable?

Back 44

Determining from which vendor credit should be requested
Requesting credit from a vendor is a concern for dealing with accounts payable. Determining to whom to extend credit is a principle of managing accounts receivable.

Front 45

The accounts receivables turnover is computed by dividing net sales by accounts receivable.

Back 45

false. The accounts receivables turnover is computed by dividing net credit sales (net sales less cash sales) by average net accounts receivable.

Front 46

Eddy Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. How much is the accounts receivables turnover?

Back 46

6.4
The accounts receivable turnover is computed by dividing net credit sales by average net accounts receivable. $800,000/[($100,000 + $150,000)/2] = 6.4.

Front 47

Prall Corporation sells its goods on terms of 2/10, n/30. It has a receivables turnover ratio of 7.00. What is its average collection period (days)?

Back 47

52 days
The average collection period is computed by dividing the number of days in the year by the accounts receivable turnover or 365/7 = 52 days

Front 48

Net credit sales are $800,000, average net receivables total $150,000, average inventory totals $200,000, and the allowance for doubtful accounts totals $8,000. How much is the average collection period?

Back 48

68.5 days
The accounts receivable turnover is net credit sales ($800,000) divided by average net accounts receivable ($150,000), or 5.33 times. The average collection period is 365 divided by the accounts receivable turnover, which is 365/5.33 = 68.5 days.

Front 49

A captive finance company is one that is owned by the company selling the product.

Back 49

True;A captive finance company is one that is owned by the company selling the product.

Front 50

Which of these statements about Visa credit card sales is incorrect?

Back 50

The retailer must wait to receive payment from the issuer.
There is no wait for payment. The retailer receives payment at the time the credit card is accepted from the customer.

Front 51

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. Which of the following is/are the debit entry(ies) required to record this transaction by Good Stuff Retailers?

Back 51

Cash $48,000 and Service Charge Expense $2,000

The entry includes a credit to Sales for $50,000, a $48,000 debit to Cash, and a debit to Service Charge Expense for $2,000.

Front 52

Which one of the following is not a method used by companies to accelerate cash receipts?

Back 52

Writing off receivables
Management can accelerate the collection of cash from receivables by selling its receivables, by allowing customers to pay with bank credit cards, and by offering discounts for early payment.

Front 53

Which of the following accounts is debited when a company factors its accounts receivable?

Back 53

Service Charge Expense
Service Charge Expense and Cash are the two accounts debited when accounts receivable are factored.

Front 54

Laurel Company factors $300,000 of receivables to Hardy Factors. Hardy assesses a 3% fee on the amount of receivables sold. Laurel Co. factors its receivables to Hardy regularly. What journal entry does Laurel make when the factoring occurs?

Back 54

Cash 291,000
Service Charge Expense 9,000
Accounts Receivable 300,000

his entry records the receipt of cash as a debit for $291,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $9,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $300,000.

Front 55

Kerrison Company sold $6,000 of merchandise to customers who charged their purchases with a bank credit card. Kerrison's bank charges it a 4% fee. Which one of the following is part of the journal entry to record the credit card sales?

Back 55

Debit to Cash for $5,760
The fee is 4% times $6,000, or $240. Kerrison will receive the difference between the face amount of the receivables and the fee, or $5,760. The journal entry includes a debit to cash for $5,760, a debit to Service Charge Expense for $240, and credit to sales for $6,000.

Front 56

Factoring is the process of

Back 56

selling accounts receivable at a discount to another party.