56. Interest is usually associated with
a. accounts receivable.
b. notes receivable.
c. doubtful accounts.
d. bad debts.
B
57. 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.
B
58. 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
C
59. 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.
C
60. 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.
A
61. Receivables are
a. one of the most liquid assets and thus are always considered current assets.
b. claims that are expected to be collected in cash.
c. shown on the income statement at cash realizable value.
d. always the result of revenue recognition.
B
62. Non-trade receivables should be reported separately from trade receivables. Why is this statement either true or false?
a. It is true because trade receivables are current assets and non-trade receivables are long term.
b. It is false because all current receivables must be grouped together in one account.
c. It is true because non-trade receivables do not result from business operations and should not be included with accounts receivable.
d. It is false because management can decide how to report receivables.
C
63. M. Cornett is a corporation that sells breakfast cereal. Based on the accounts listed below, what are M. Cornett’s total trade receivables?
Income tax refund due $ 500
Advance due to the company from
the company president 300
3-month note due from M. Cornett’s main customer 2,000
Interest due this month on the above note 100
Due and unpaid from this month’s sales 7,000
Due and unpaid from last month’s sales 1,000

a. $8,000
b. $10,000
c. $9,000
d. $10,900

B

Solution: $2,000 + $7,000 + $1,000 = $10,000

64. Which of the following would probably be the most significant type of a claim held by a company?
a. notes receivable
b. non-trade receivables
c. accounts receivable
d. interest receivable
C
65. Dorman Company had the following items to report on its balance sheet:
Employee advances
$ 1,580
Amounts owed by customers for the sale of services (due in 30 days)
3,050
Refundable income taxes
1,120
Interest receivable
950
Accepted a formal instrument of credit for services (due in 18 months)
2,220
A loan to company president
8,000
Dishonored a note for principal and interest which will eventually be collected
1,380

Based on this information, what amount should appear in the “Other Receivables” category?
a. $18,300
b. $11,650
c. $13,030
d. $15,250

B

Solution: $1,580 + $1,120 + $950 + $8,000 = $11,650

66. On January 15, Nifty Company sells merchandise on account to Martinez Associates for $3,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $600 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received?
a. $2,400
b. $2,328
c. $2,310
d. $1,680
B

Solution: ($3,000 ? $600) ? .97 = $2,328

67. Wilton sells softball equipment. On November 14, they shipped $3,000 worth of softball uniforms to Paola Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas High School for $1,800 worth of custom printed bats to be produced in December. On November 30, Paola Middle School returned $300 of defective merchandise. Wilton 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. $4,800
b. $4,500
c. $3,000
d. $2,700
D

Solution: $3,000 ? $300 = $2,700

68. Which one of the following is not an accounting problem (issue) associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Accelerating cash receipts from accounts receivable
A
69. Accounts receivable are valued and reported on the balance sheet
a. in the investments section.
b. at gross amounts less sales returns and allowances.
c. at cash realizable value.
d. only if they are not past due.
C
70. Three accounting issues associated with accounts receivable are
a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting.
c. recognizing, valuing, and accelerating collections.
d. accrual, bad debts, and accelerating collections.
C
71. Carson Company on July 15 sells merchandise on account to Tayler Co. for $2,000, terms 2/10, n/30. On July 20 Tayler Co. returns merchandise worth $800 to Carson Company. On July 24 payment is received from Tayler Co. for the balance due. What is the amount of cash received?
a. $1,200
b. $1,176
c. $1,160
d. $2,000
B

Solution: ($2,000 ? $800) ? .98 = $1,176

72. The Allowance for Doubtful Accounts is necessary because
a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.
b. uncollectible accounts that are written off must be accumulated in a separate account.
c. a liability results when a credit sale is made.
d. management needs to accumulate all the credit losses over the years.
A
73. The account Allowance for Doubtful Accounts is classified as a(n)
a. liability.
b. contra account of Bad Debt Expense.
c. expense.
d. contra account to Accounts Receivable.
D
74. Under the allowance method, Bad Debt Expense is recorded
a. when an individual account is written off.
b. when the loss amount is known.
c. for an amount that the company estimates it will not collect.
d. several times during the accounting period.
C
75. The expense recognition
a. requires that all credit losses be recorded when an individual customer cannot pay.
b. necessitates the recording of an estimated amount for bad debts.
c. results in the recording of a known amount for bad debt losses.
d. is not involved in the decision of when to expense a credit loss.
B
76. 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.
A
77. 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.
A
78. 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.
B
79. If the amount of uncollectible account expense is understated at year end
a. net income will be understated.
b. stockholders’ equity will be understated.
c. Allowance for Doubtful accounts will be overstated.
d. net Accounts Receivable will be overstated.
D
80. If the amount of uncollectible account expense is overstated at year end
a. net income will be overstated.
b. stockholders’ equity will be overstated.
c. Allowance for Doubtful accounts will be understated.
d. net Accounts Receivable will be understated.
D
81. The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded
a. in the same period as allowed for tax purposes.
b. in the period of the sale.
c. for an exact amount.
d. in the period of the loss.
B
82. 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.
C
83. When an account becomes uncollectible and must be written off
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debt Expense should be credited.
d. Sales Revenue should be debited.
B
84. 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.
D
85. The direct write-off method of accounting for uncollectible accounts
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.
D
86. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Allowance for Doubtful Accounts for $3,300.
c. debit to Bad Debt Expense for $3,300.
d. credit to Allowance for Doubtful Accounts for $4,500.
C

Solution: $4,500 ? $1,200 = $3,300

87. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 debit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Bad Debt Expense for $6,100.
c. debit to Bad Debt Expense for $2,900.
d. credit to Allowance for Doubtful Accounts for $4,500.
B

Solution: $4,500 + $1,600 = $6,100

88. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Allowance for Doubtful Accounts for $2,900.
c. debit to Bad Debt Expense for $2,900.
d. credit to Allowance for Doubtful Accounts for $4,500.
C

Solution: $4,500 ? $1,600 = $2,900

89. An aging of a company’s accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $4,500.
b. debit to Allowance for Doubtful Accounts for $5,700.
c. debit to Bad Debt Expense for $5,700.
d. credit to Allowance for Doubtful Accounts for $4,500.
C

Solution: $4,500 + $1,200 = $5,700

90. 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 receivables method of estimating bad debts is used.
B
91. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible.
D
92. An alternative name for Bad Debt Expense is
a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.
B
93. Bad Debt Expense is considered
a. an avoidable cost in doing business on a credit basis.
b. an internal control weakness.
c. a necessary risk of doing business on a credit basis.
d. avoidable unless there is a recession.
C
94. 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.
D
95. 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.
B
96. Bad Debt Expense is reported on the income statement as
a. part of cost of goods sold.
b. an expense subtracted from net sales to determine gross profit.
c. an operating expense.
d. a contra revenue account.
C
97. When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded
a. in the year after the credit sale is made.
b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.
B
98. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. debit to Loss on Credit Sales and a credit to Accounts Receivable.
B
99. Under the allowance method of accounting for uncollectible accounts,
a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off.
b. Bad Debt Expense is debited when a specific account is written off as uncollectible.
c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.
C
100. When using the balance sheet approach, the balance in Allowance for Doubtful Accounts must be considered prior to the end of period adjustment when using which of the following methods?
a. Net realizable method
b. Direct write-off method
c. Accrual method
d. Allowance method
D
101. 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 deducted from accounts receivable.
D
102. When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase.
b. net accounts receivable will decrease.
c. allowance account will increase.
d. net accounts receivable will stay the same.
D
103. 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.
D
104. You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to
a. debit Allowance for Doubtful Accounts and credit Bad Debt Expense.
b. debit Allowance for Doubtful Accounts and credit Accounts Receivable.
c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts.
d. debit Bad Debt Expense and credit Accounts Receivable.
B
105. 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.
C
106. Under the allowance method, when a specific account is written off
a. total assets will be unchanged.
b. net income will decrease.
c. total assets will decrease.
d. total assets will increase.
A
107. 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.
A
108. Nichols Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Nichols Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?
a. Bad Debt Expense 8,000
Allowance for Doubtful Accounts 8,000
b. Bad Debt Expense 6,000
Allowance for Doubtful Accounts 6,000
c. Bad Debt Expense 6,000
Accounts Receivable 6,000
d. Bad Debt Expense 8,000
Accounts Receivable 8,000
B

Solution: ($200,000 ? .04) ? $2,000 = $6,000

109. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment what is the balance after adjustment?
a. $45,000
b. $11,000
c. $56,000
d. $34,000
A

Solution: $45,000 estimated uncollectible accounts

110. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment what is the amount of bad debt expense for that period?
a. $45,000
b. $11,000
c. $56,000
d. $34,000
C

Solution: $45,000 + $11,000 = $56,000

111. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $30,000. If the balance of the Allowance for Doubtful Accounts is $4,000 credit before adjustment what is the amount of bad debt expense for that period?
a. $30,000
b. $26,000
c. $34,000
d. $4,000
B

Solution: $30,000 ? $4,000 = $26,000

112. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $30,000. If the balance of the Allowance for Doubtful Accounts is $4,000 debit before adjustment what is the balance after adjustment?
a. $30,000
b. $34,000
c. $26,000
d. $4,000
A

Solution: $30,000 estimated uncollectible accounts

113. Kinsler Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Kinsler Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?
a. Bad Debt Expense 14,000
Allowance for Doubtful Accounts 14,000
b. Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000
c. Bad Debt Expense 10,000
Allowance for Doubtful Accounts 10,000
d. Bad Debt Expense 8,000
Accounts Receivable 8,000
C

Solution: ($200,000 ? .06) ? $2,000 = $10,000

114. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $34,000. If the balance of the Allowance for Doubtful Accounts is $9,000 debit before adjustment what is the amount of bad debt expense for that period?
a. $34,000
b. $ 9,000
c. $43,000
d. $25,000
C

Solution: $34,000 + $9,000 = $43,000

115. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts
a. total assets decrease.
b. total assets are unchanged.
c. net income is unchanged.
d. liabilities decrease.
A
116. One might infer from a debit balance in Allowance for Doubtful Accounts that
a. a posting error has been made.
b. more accounts have been written off than had been estimated.
c. the direct method is being used.
d. Bad Debt Expense has been overestimated.
B
117. Using the allowance method, the uncollectible accounts for the year are estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the balance after adjustment?
a. $9,000
b. $31,000
c. $40,000
d. $49,000
C

Solution: $40,000 estimated uncollectible accounts

118. Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the amount of bad debt expense for the period?
a. $9,000
b. $31,000
c. $40,000
d. $49,000
B

Solution: $40,000 ? $9,000 = $31,000

119. Using the allowance method, the uncollectible accounts for the year is estimated to be $40,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period?
a. $9,000
b. $31,000
c. $40,000
d. $49,000
D

Solution: $40,000 + $9,000 = $49,000

120. In reviewing the accounts receivable, the cash receivable value is $21,000 before the write-off of a $1,500 account. What is the cash receivable value after the write-off?
a. $21,000
b. $1,500
c. $22,500
d. $19,500
A

Solution: $21,000 before and after write-off

121. In 2014 the Golic Co. had net credit sales of $600,000. On January 1, 2014, the Allowance for Doubtful Accounts had a credit balance of $15,000. During 2014, $24,000 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 $160,000 what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014?
a. $16,000.
b. $25,000.
c. $31,000.
d. $24,000.
B

Solution: ($160,000 ? .10) + ($24,000 ? $15,000) = $25,000

122. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record Bad Debt Expense
a. is relevant when using the percentage-of-receivables basis.
b. is relevant when using the direct write-off method.
c. is relevant to both the percentage-of-receivables basis and the direct write-off method.
d. will never show a debit balance at this stage in the accounting cycle.
A
123. 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.
C
124. Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of write-off.
b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off.
c. balance sheet relationships are emphasized.
d. bad debt expense is always recorded in the period in which the revenue was recorded.
B
125. A company has an ending accounts receivable balance of $900,000 and it estimates that uncollectible accounts will be 2% of the receivable balance. 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. $20,000.
b. $18,000.
c. $17,960.
d. $16,000.
B

Solution: $900,000 ? .02 = $18,000

126. Net credit sales for the month are $750,000. The accounts receivable balance is $160,000. The allowance is calculated as 5% of the receivables balance using the percentage-of-receivables basis. If the Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the balance after adjustment?
a. $ 8,000
b. $ 3,000
c. $13,000
d. $ 8,250
A

Solution: $160,000 ? .05 = $8,000

127. In 2014 Wilkinson Company had net credit sales of $1,500,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $36,000. During 2014, $60,000 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 $400,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2014?
a. $ 40,000
b. $150,000
c. $ 64,000
d. $ 60,000
C

Solution: ($400,000 ? .10) + ($60,000 ? $36,000) = $64,000

128. An analysis and aging of the accounts receivable of Watts Company at December 31 reveal these data:
Accounts receivable $ 2,400,000
Allowance for doubtful accounts per books before adjustment (credit) 150,000
Amounts expected to become uncollectible 195,000

What is the cash realizable value of the accounts receivable at December 31 after adjustment?
a. $2,055,000
b. $2,250,000
c. $2,400,000
d. $2,205,000

D

Solution: $2,400,000 ? $195,000 = $2,205,000

129. The bookkeeper recorded the following journal entry
Allowance for Doubtful Accounts 1,000
Accounts Receivable – Richard James 1,000

Which one of the following statements is false?
a. This entry is only prepared on the last day of the accounting period.
b. There should be written authorization for this transaction from someone who does not have responsibilities related to recording cash.
c. There could be a violation of internal control policies.
d. James’ account was written off because it was determined to be uncollectible.

A
130. The following information is related to December 31, 2013 balances.
Accounts receivable $700,000
Allowance for doubtful accounts (credit) (60,000)
Cash realizable value 640,000

During 2014 sales on account were $195,000 and collections on account were $115,000. Also, during 2014 the company wrote off $11,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $72,000. The change in the cash realizable value from the balance at 12/31/13 to 12/31/14 was
a. $68,000 increase.
b. $80,000 increase.
c. $57,000 increase.
d. $69,000 increase.

C

Solution: ($700,000 + $195,000 ? $115,000 ? $11,000) ? $72,000 ? $640,000 = $57,000

131. The following information is related to December 31, 2013 balances.
Accounts receivable $700,000
Allowance for doubtful accounts (credit) (60,000)
Cash realizable value 640,000

During 2014 sales on account were $195,000 and collections on account were $115,000. Also, during 2014 the company wrote off $11,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $72,000. Bad debt expense for 2014 is:
a. $23,000.
b. $12,000.
c. $72,000.
d. $ 1,000.

A

Solution: $72,000 ? ($60,000 ? $11,000) = $23,000

132. During 2014 Sedgewick Inc. had sales on account of $264,000, cash sales of $108,000, and collections on account of $168,000. In addition, they collected $2,900 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable balance indicates a
a. $201,100 increase.
b. $ 96,000 increase.
c. $ 93,100 increase.
d. $204,000 increase.
B

Solution: $264,000 ? $168,000 = $96,000

133. Thompson Corporation’s unadjusted trial balance includes the following balances (assume normal balances):
Accounts receivable $1,492,000
Allowance for doubtful accounts $ 28,400

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?
a. $89,520
b. $61,120
c. $59,416
d. $91,224

B

Solution: ($1,492,000 ? .06) ? $28,400 = $61,120

134. The following information is related to December 31, 2013 balances.
Accounts receivable $2,100,000
Allowance for doubtful accounts (credit) (180,000)
Cash realizable value $1,920,000

During 2014 sales on account were $580,000 and collections on account were $344,000. Also during 2014 the company wrote off $32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $216,000. The change in the cash realizable value from the balance at 12/31/13 to 12/31/14 was a
a. $200,000 increase.
b. $236,000 increase.
c. $168,000 increase.
d. $204,000 increase.

C

Solution: ($2,100,000 + $580,000 ? $344,000 ? $32,000) ? $216,000 ? $1,920,000 = $168,000

135. The following information is related to December 31, 2013 balances.
Accounts receivable $2,100,000
Allowance for doubtful accounts (credit) (180,000)
Cash realizable value $1,920,000

During 2014 sales on account were $580,000 and collections on account were $344,000. Also during 2014 the company wrote off $32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $216,000. Bad debt expense for 2014 is
a. $ 68,000.
b. $ 36,000.
c. $216,000.
d. $ 4,000.

A

Solution: $216,000 ? ($180,000 ? $32,000) = $68,000

136. During 2014 Wheeler Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,800 which had been written off as uncollectible in 2013. As a result of these transactions the change in the accounts receivable indicates a
a. $402,200 increase.
b. $192,000 increase.
c. $186,200 increase.
d. $408,000 increase.
B

Solution: $528,000 ? $336,000 + $5,800 ? $5,800 = $192,000

137. Smithson Corporation’s unadjusted trial balance includes the following balances (assume normal balances):
Accounts Receivable $3,357,000
Allowances for Doubtful Accounts $ 63,900

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?
a. $201,420
b. $137,520
c. $133,686
d. $205,254

B

Solution: ($3,357,000 ? .06) ? $63,900 = $137,520

138. A write off of a specific accounts receivable under the allowance method
a. increases bad debt expense for the accounting period.
b. should occur on the last day of the accounting period.
c. decreases the cash realizable value of accounts receivable.
d. should be formally approved by an authorized employee.
D
139. The direct write-off method is acceptable for financial reporting purposes only if the bad debt losses are insignificant.
a. This is a false statement because the direct write-off method violates the matching principle.
b. This is a true statement based on the concept of materiality.
c. This is a false statement because the direct write-off method can only be used for tax reporting.
d. This is a true statement because companies can choose either the direct write-off or the allowance method for financial reporting, as long as they consistently apply the method.
B
140. Under the allowance method of accounting for bad debts, why must uncollectible accounts receivable be estimated at the end of the accounting period?
a. To allow the collection department to schedule work for the next accounting period.
b. To determine the gross realizable value of accounts receivable.
c. The IRS rules require the company to make the estimate.
d. To match bad debt expense to the period in which the revenues were earned.
D
141. 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.
B
142. 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.
A
143. 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.
C
144. 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.
C
145. The interest on a $5,000, 10%, 1-year note receivable is
a. $5,000.
b. $500.
c. $5,500.
d. $5,450.
B

Solution: $5,000 ? .10 = $500

146. The interest on a $10,000, 6%, 60-day note receivable is
a. $680.
b. $100.
c. $200.
d. $300.
B

Solution: $10,000 ? .06 ? 60/360 = $100

147. The interest on a $6,000, 6%, 90-day note receivable is
a. $360.
b. $180
c. $90.
d. $270.
C

Solution: $6,000 ? .06 ? 90/360 = $90

148. The interest on a $9,000, 10%, 1-year note receivable is
a. $9,000.
b. $75.
c. $900.
d. $9,900.
C

Solution: $9,000 ? .10 = $900

149. The interest on a $7,000, 6%, 60-day note receivable is
a. $35.
b. $420
c. $210.
d. $70.
D

Solution: $7,000 ? .06 ? 60/360 = $70

150. The interest on a $4,000, 9%, 90-day note receivable is
a. $90.
b. $360.
c. $30.
d. $60.
A

Solution: $4,000 ? .09 ? 90/360 = $90

151. 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.
B
152. When a company receives an interest-bearing note receivable, it 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.
C
153. 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. at which the note receivable is recorded.
d. remaining after a service charge has been deducted.
C
154. Rosen Company receives a $5,000, 3-month, 6% promissory note from Bay Company in settlement of an open accounts receivable. What entry will Rosen Company make upon receiving the note?
a. Notes Receivable 5,075
Accounts Receivable—Bay Company 5,075
b. Notes Receivable 5,075
Accounts Receivable—Bay Company 5,000
Interest Revenue 75
c. Notes Receivable 5,000
Interest Receivable 75
Accounts Receivable—Bay Company 5,000
Interest Revenue 75
d. Notes Receivable 5,000
Accounts Receivable—Bay Company 5,000
D

Solution: $5,000 face value

155. Doane Company receives a $7,000, 3-month, 6% promissory note from Ray Company in settlement of an open accounts receivable. What entry will Doane Company make upon receiving the note?
a. Notes Receivable 7,035
Accounts Receivable—Ray Company 7,035
b. Notes Receivable 7,105
Accounts Receivable—Ray Company 7,000
Interest Revenue 105
c. Notes Receivable 7,000
Interest Receivable 105
Accounts Receivable—Ray Company 7,000
Interest Revenue 105
d. Notes Receivable 7,000
Accounts Receivable—Ray Company 7,000
D

Solution: $7,000 face value

156. Short-term notes receivable
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.
C
157. A 90-day note dated June 30, 2014, would mature on:
a. September 30, 2014.
b. September 27, 2014.
c. September 28, 2014.
d. September 29, 2014.
C

Solution: $90 ? (1 + 31 + 31) = 27

158. The interest rate for a three-month loan would normally be stated in terms of which of the following rates of interest?
a. Daily
b. Monthly
c. Quarterly
d. Annual
D
159. Ramos Company has a 90-day note that carries an annual interest rate of 8%. If the amount of the total interest on the note is equal to $700, then what is the principal of the note?
a. $8,750
b. $35,000
c. $50,400
d. $22,400
B

Solution: P ? .08 ? 90/360 = $700; P = ($700 ? 360/90) ? .08 = $35,000

160. Douglas Company has a $51,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $3,400, then what is the duration of the note in months?
a. 6 months
b. 4 months
c. 12 months
d. 8 months
D

Solution: $3,400 ? ($51,000 ? .10) = 666; .666 ? 12 = 8

161. Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9-month, 12% interest note. If Young prepares it financial statements as of December 31, 2014, what adjusting entry must it make?
a. Interest Receivable 2,000
Interest Revenue 2,000
b. Accounts Receivable 2,000
Interest Receivable 2,000
c. Cash 2,000
Interest Revenue 2,000
d. Notes Receivable 2,000
Interest Revenue 2,000
A

Solution: $40,000 ? .12 ? 5/12 = $2,000

162. Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9-month, 12% interest note. If Young accrued interest at its December 31, 2014 year-end, what entry must it make to record the collection of the note and interest at its maturity date?
a. Cash 43,600
Notes Receivable 40,000
Interest Revenue 3,600
b. Cash 43,600
Notes Receivable 43,600
c. Notes Receivable 40,000
Interest Receivable 2,000
Interest Revenue 1,600
Cash 43,600
d. Cash 43,600
Notes Receivable 40,000
Interest Receivable 2,000
Interest Revenue 1,600
D

Solution: $40,000 ? .12 ? 5/12 = $2,000; $40,000 ? .12 ? 4/12 = $1,600

163. Young Company lends Dobson industries $40,000 on January 1, 2014, accepting a 9-month, 12% interest note. If Dobson dishonors the note and does not pay it in full at maturity but Young expects that it will eventually be able to collect the debt, which of the following entries should most likely be made by Young Company?
a. Cash 40,000
Notes Receivable 40,000
b. Accounts Receivable 40,000
Notes Receivable 40,000
c. Accounts Receivable 43,600
Notes Receivable 40,000
Interest Revenue 3,600
d. Accounts Receivable 43,600
Notes Receivable 40,000
Interest Receivable 3,600
C

Solution: $40,000 ? .12 ? 9/12 = $3,600

164. Which of the following is a way of disposing of a note receivable?
a. Honoring it on maturity date.
b. Selling it to receive cash before the maturity date.
c. Default by the maker.
d. All of these are ways to dispose of notes receivable.
D
165. A dishonored note receivable
a. Is no longer negotiable.
b. Must be written off by the lender.
c. Creates a claim against the maker for the amount of principal only.
d. Is one that is not paid in full within 10 days of maturity.
A
166. The maturity value of a $40,000, 9%, 40-day note receivable dated July 3 is
a. $40,000.
b. $44,000.
c. $43,600.
d. $40,400.
D

Solution: $40,000 + ($40,000 ? .09 ? 40/360) = $40,400

167. Barber Company lends Monroe Company $30,000 on April 1, accepting a four-month, 6% interest note. Barber Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared?
a. Note Receivable 30,000
Cash 30,000
b. Interest Receivable 150
Interest Revenue 150
c. Cash 150
Interest Revenue 150
d. Interest Receivable 450
Interest Revenue 450
B

Solution: $30,000 ? .06 ? 1/12 = $150

168. The maturity value of a $5,000, 6%, 60-day note receivable dated February 10th is
a. $5,050.
b. $5,025.
c. $5,000.
d. $5,300.
A

Solution: $5,000 + ($5,000 ? .06 ? 60/360) = $5,050

169. When a note is dishonored, the payee’s entry includes a
a. debit to Interest Revenue.
b. credit to Accounts Receivable.
c. debit to Interest Expense.
d. credit to Notes Receivable.
D
170. A note receivable is executed in December. When the note is paid the following February, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a
a. credit to Interest Receivable.
b. credit to Cash.
c. debit to Notes Receivable.
d. debit to Interest Income.
A
171. The maturity value of a $40,000, 12%, 3-month note receivable is
a. $41,200.
b. $40,480.
c. $44,800.
d. $40,400.
A

Solution: $40,000 + ($40,000 ? .12 ? 3/12) = $41,200

172. Nance Co. holds Gant Inc.’s $25,000, 120 day, 9% note. The entry made by Nance Co. when the note is collected, assuming no interest has previously been accrued is:
a. Cash 25,000
Notes Receivable 25,000
b. Accounts Receivable 25,750
Notes Receivable 25,000
Interest Revenue 750
c. Cash 25,750
Notes Receivable 25,000
Interest Revenue 750
d. Accounts Receivable 25,750
Notes Revenue 25,000
Interest Revenue 700
C

Solution: $25,000 ? .09 ? 120/360 = $750

173. All of the following statements regarding the financial statement presentation of receivables are true except:
a. Short-term receivables are reported in the current assets section of the balance sheet.
b. The gross amount of receivables less the allowance for doubtful accounts is equal to the net receivables.
c. Short-term receivables are reported above the short-term investments in the balance sheet.
d. Companies report bad debts expense under “Selling Expenses” in the operating expenses section of the income statement.
C
174. Which of the following is least likely to help a company minimize losses as credit standards are relaxed?
a. Require potential customers to provide bank guarantees.
b. Ask a potential customer for references regarding payment history.
c. Increase the estimate of uncollectible accounts at the end of each period.
d. Check a potential customer’s credit rating.
C
175. Which one of the following is not a principle of sound accounts receivable management?
a. Determine to whom to extend credit.
b. Delay cash receipts from receivables if necessary.
c. Monitor collections.
d. Determine a payment period.
B
176. The accounts receivable turnover is computed by dividing
a. total sales by average receivables.
b. total sales by ending receivables.
c. net credit sales by average receivables.
d. net credit sales by ending receivables.
C
177. The accounts receivable turnover is used to analyze
a. profitability.
b. liquidity.
c. risk.
d. long-term solvency.
B
178. A high accounts receivable turnover ratio indicates
a. the company’s sales are increasing.
b. a large proportion of the company’s sales are on credit.
c. customers are making payments very quickly.
d. customers are making payments slowly.
C
179. The accounts receivable turnover is needed to calculate
a. the average collection period in days.
b. market risk.
c. return on assets.
d. current ratio.
A
180. 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.
D
181. The financial statements of the Nelson Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Nelson?
a. 3.8 times
b. 6 times
c. 10.0 times
d. 7.5 times
D

Solution: $300,000 ? ($50,000 + $30,000) ? 2 = 7.5

182. The financial statements of the Melton Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?
a. 96.1
b. 48.7
c. 36.5
d. 60.8
Bs

Solution: $300,000 ? ($50,000 + $30,000) ? 2 = 7.5; 365 ? 7.5 = 48.7

183. The financial statements of the Phelps Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Phelps?
a. 8.3 times
b. 12.5 times
c. 6.3 times
d. 4.2 times
A

Solution: $500,000 ? ($80,000 + $40,000) ? 2 = 8.3

184. The financial statements of the Belfry Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?
a. 29.2 times
b. 86.9 times
c. 44.0 times
d. 57.9 times
C

Solution: $500,000 ? ($80,000 + $40,000) ? 2 = 8.3; 365 ? 8.3 = 44

185. A popular variation of the accounts receivable turnover is the
a. credit risk ratio.
b. concentration of credit risk.
c. bad debts ratio.
d. average collection period.
D
186. The accounts receivable turnover
a. Is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period.
b. Can be used to compute the average collection period.
c. Is a method of evaluating the solvency of net accounts receivable.
d. Is only important to internal users of accounting information.
B
187. Leary Corporation had net credit sales during the year of $900,000 and cost of goods sold of $540,000. The balance in receivables at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover?
a. 6.0
b. 7.5
c. 5.0
d. 3.6
A

Solution: $900,000 ? ($120,000 + $180,000) ? 2 = 6.0

188. Windsor Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 8. What is its average collection period (days)?
a. 80
b. 30
c. 46
d. 36
C

Solution: 365 ? 8 = 46

189. All of the following statements are true regarding the average collection period except:
a. it is a popular variant of the accounts receivable turnover .
b. it is used to assess the effectiveness of a company’s credit and collection policies.
c. it should generally exceed the credit term period.
d. its increase may suggest a decline in the financial health of customers.
C
190. In the table below the information for four companies is provided.
Company
Accounts Receivable turnover
Average collection period
Martin
13.9
26.3
Lewis
13.3
27.4
Danforth
10.4
35.1
Garner
14.5
25.2
Industry Average
13.0
28.1

If Garner’s net credit sales are $290,000, what are its average net accounts receivable?
a. $11,508
b. $20,000
c. $42,050
d. $73,080

B

Solution: $290,000 ? 14.5 = $20,000

191. In the table below the information for four companies is provided.
Company
Accounts Receivable turnover
Average collection period
Martin
13.9
26.3
Lewis
13.3
27.4
Danforth
10.4
35.1
Garner
14.5
25.2
Industry Average
13.0
28.1

Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?
a. Martin
b. Lewis
c. Danforth
d. Garner

D
192. Simonic Retailers accepted $90,000 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 Simonic Retailers will include a credit to Sales Revenue of $90,000 and a debit(s) to
a. Cash $86,400 and Service Charge Expense $3,600.
b. Accounts Receivable $86,400 and Service Charge Expense $3,600.
c. Cash $86,400 and Interest Expense $3,600.
d. Accounts Receivable $90,000.
A

Solution: 90,000 ? .04 = $3,600

193. Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30
a. represent common business practices.
b. represent ways to accelerate receivables collections.
c. result in collections that are less than the gross accounts receivable.
d. All of these answer choices are correct.
D
194. Factoring arrangements
a. are ways to accelerate receivable collections.
b. involve no commissions or service charges because the factor is guaranteed collections on the due date.
c. are generally used by businesses that are insolvent.
d. are mainly used in the textile and furniture industries.
A
195. ABC Company accepted a national credit card for a $7,000 purchase. The cost of the goods sold is $5,600. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?
a. Increase by $1,358.
b. Increase by $1,400.
c. Increase by $1,190.
d. Increase by $6,790.
C

Solution: ($7,000 ? $5,600) ? ($7,000 ? .03) = $1,190

196. XYZ Company accepted a national credit card for a $7,500 purchase. The cost of the goods sold is $6,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?
a. Increase by $1,455.
b. Increase by $1,500.
c. Increase by $1,275.
d. Increase by $7,275.
C

Solution: ($7,500 ? $6,000) ? ($7,500 ? .03) = $1,275

197. A company sells $900,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should not include a
a. debit to Interest Expense for $18,000.
b. debit to Cash for $882,000.
c. debit to Service Charge Expense for $18,000.
d. credit to Accounts Receivable for $900,000.
A

Solution: $900,000 ? .02) = $18,000

198. 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 captive finance company.
d. can be a quick way to generate cash for operating needs.
D
199. 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.
A
200. The sale or transfer of accounts receivable in order to raise funds is called
a. pledging.
b. factoring.
c. leasing.
d. collateralizing.
B
201. 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.
A
202. A captive finance company refers to
a. a finance company that is owned by individuals who borrow money from the company.
b. finance companies that won’t allow early repayment of loans.
c. a company that is wholly owned by another company and provides financing to purchasers of its owner company’s goods.
d. any company that issues a major credit card.
C
203. 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.
C
204. 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 expenses section of the income statement will increase each time accounts are sold.
C
205. Gipson Furniture factors $500,000 of receivables to Kwik Factors, Inc. Kwik Factors assesses a 3% service charge on the amount of receivables sold. Gipson Furniture factors its receivables regularly with Kwik Factors. What journal entry does Gipson make when factoring these receivables?
a. Cash 485,000
Loss on Sale of Receivables 15,000
Accounts Receivable 500,000
b. Cash 485,000
Accounts Receivable 485,000
c. Cash 500,000
Accounts Receivable 485,000
Gain on Sale of Receivables 15,000
d. Cash 485,000
Service Charge Expense 15,000
Accounts Receivable 500,000
D

Solution: $500,000 ? (1 ? .03) = $485,000

206. 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.
B
207. On April 5 Donna’s Boutique accepted a Visa card for a $600 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a
a. credit to Cash of $588.
b. debit to Cash of $600.
c. debit to Service Charge Expense of $12.
d. credit to Service Charge Expense of $12.
C

Solution: $600 ? .02 = $12

208. Schofield Retailers accepted $60,000 of Silver Bank MasterCard credit card charges for merchandise sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by Schofield Retailers will include a credit to Sales Revenue of $60,000 and a debit(s) to
a. Cash for $57,600 and Service Charge Expense for $2,400.
b. Accounts receivable for $57,600 and Service Charge Expense for $2,400.
c. Cash for $60,000.
d. Accounts Receivable for $60,000.
A

Solution: $60,000 ? (1 ? .04) = $57,600

209. The retailer considers Visa and MasterCard sales as
a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.
A
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