Deck 7: Accounting for Receivables

Question 1

Federal laws prohibit the selling of accounts receivables to factors.

Answer 1

False

Question 2

A promissory note is a written promise to pay a specified amount of money either on demand or at a definite future date.

Answer 2

True

Question 3

If a customer owes interest on accounts receivable, Interest Receivable is debited and Accounts Receivable is credited.

Answer 3

False

Question 4

The formula for computing interest on a note is: Principal of the note × Annual interest rate × Time expressed in fraction of year.

Question 5

BizCom's customer, Redding, paid off an $8,300 balance on its account receivable. BizCom should record the transaction as a debit to Accounts Receivable-Redding and a credit to Cash.

Question 6

Installment Accounts Receivable are classified as non-current assets if the installment period is more than one year, even if the seller regularly offers customers such terms.

Question 7

A company borrowed $10,000 by signing a six month promissory note at 5% interest. The total amount of interest is $25.

Question 8

The maturity date of a note refers to the date the note must be repaid.

Question 9

Sellers generally prefer to receive notes receivable rather than accounts receivable when the credit period is long and the receivable is for a large amount.

Question 10

Companies can report credit card expense as a discount deducted from sales or as a selling expense.

Question 11

The person that borrows money and signs a promissory note is called the maker.

Question 12

The quality of receivables refers to the likelihood of collection without loss.

Question 13

The process of using accounts receivable as security for a loan is known as pledging accounts receivable.

Question 14

A company borrowed $16,000 by signing a 4-month promissory note at 12%. The total interest on the note is $640.

Question 15

Credit sales are recorded by crediting an Accounts Receivable.

Question 16

As long as a company accurately records total credit sales information, it is not necessary to have separate accounts for specific customers.

Question 17

A receivable is an amount due from another party.

Question 18

Since pledged accounts receivables only serve as collateral for a loan and are not sold, it is not necessary to disclose the pledging.

Question 19

A company factored $30,000 of its accounts receivable and was charged a 2% factoring fee. The journal entry to record this transaction would include a debit to Cash of $30,000, a debit to Factoring Fee Expense of $600, and credit to Accounts Receivable of $30,600.

Question 20

If a credit card sale is made, the seller can either debit Cash or debit Accounts Receivable at the time of the sale, depending on the type of credit card.

Question 21

Installment accounts receivable is another name for aging of accounts receivable.

Question 22

When using the allowance method of accounting for uncollectible accounts, the recovery of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.

Question 23

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

Question 24

The percent of sales method for bad debts estimation uses only income statement account balances to estimate bad debts.

Question 25

The accounts receivable turnover is calculated by dividing average accounts receivable by net sales.

Question 26

No attempt is made to estimate bad debts expense under the allowance method of accounting for uncollectible accounts receivable.

Question 27

The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible from the total accounts receivable or (2) aging accounts receivable.

Question 28

Companies follow both the matching principle and the materiality constraint when applying the direct write-off method.

Question 29

A high accounts receivable turnover in comparison with competitors suggests that the firm should tighten its credit policy.

Question 30

When using the allowance method of accounting for uncollectible accounts, the entry to record the estimated bad debts expense is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts.

Question 31

The advantage of the allowance method of accounting for bad debts is that it identifies the specific customers who will not pay their bills.

Question 32

The use of the direct write-off method is allowed under the materiality constraint.

Question 33

After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of reducing Accounts Receivable to its estimated realizable value.

Question 34

The percent of sales method for estimating bad debts assumes that a given percent of a company's credit sales for the period are uncollectible.

Question 35

Companies use two methods to account for uncollectible accounts, the direct write-off method and the allowance method.

Question 36

The aging of accounts receivable involves classifying each account receivable by how long it is past its due date and estimating the percent of each uncollectible class.

Question 37

When using the allowance method of accounting for uncollectible accounts, the entry to write off Macie's uncollectible account is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable-Macie.

Question 38

The matching principle requires use of the allowance method of accounting for bad debts.

Question 39

The accounts receivable turnover indicates how often accounts receivable are received and collected during the period.

Question 40

The matching principle permits the use of the direct write-off method of accounting for uncollectible accounts when bad debts are very large in relation to a company's other financial statement items such as sales and net income.

Question 41

Separate accounts receivable information for each customer is important because it reveals all of the following except:

A)How much each customer has purchased on credit.
B)How much each customer has paid.
C)How much each customer still owes.
D)The basis for sending bills to customers.
E)When the customer intends to pay outstanding balances.

Question 42

The interest accrued on $7,500 at 6% for 90 days is:

A)$450.00.
B)$37.50.
C)$112.50.
D)$11.25.
E)$1,800.00.

Question 43

For legal reasons, it is not advisable to accept a note receivable in exchange for an overdue account receivable.

Question 44

The aging method of determining bad debts expense is based on the knowledge that the longer a receivable is past due, the higher the likelihood of collection.

Question 45

The practice of placing dishonored notes receivable into accounts receivable keeps only notes that have not matured in the Notes Receivable account.

Question 46

The notes receivable account of a business should include both the notes that haven't matured and the dishonored notes.

Question 47

The percent of sales method of estimating bad debts focuses more on the realizable value of accounts receivable than on matching.

Question 48

The maturity date of a note receivable:

A)Is the day of the credit sale.
B)Is the day the note was signed.
C)Is the day the note is due to be repaid.
D)Is the date of the first payment.
E)Is the last day of the month.

Question 49

The matching principle requires that accrued interest on outstanding notes receivable be recorded at the end of each accounting period.

Question 50

A maker who dishonors a note is one who does not pay it at maturity.

Question 51

A company using the percentage of sales method for estimating bad debts has sales of $350,000 and estimates that 1.0% of its sales are uncollectible. The estimated amount of bad debts expense is $3,500.

Question 52

Reporting the details of notes is consistent with which accounting principle that requires financial statements (including footnotes) to report all relevant information?

A)Relevance.
B)Full disclosure.
C)Evaluation.
D)Materiality.
E)Matching.

Question 53

A promissory note received from a customer in exchange for an account receivable is recorded by the payee as:

A)A cash equivalent.
B)An account receivable.
C)A note receivable.
D)A short-term investment.
E)A note payable.

Question 54

A company has $80,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are uncollectible. The current credit balance (before adjustments) in the allowance for doubtful accounts is $1,200. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $4,800.

Question 55

A promissory note:

A)Is a short-term investment for the maker.
B)Is a written promise to pay a specified amount of money at a certain date.
C)Is a liability to the payee.
D)Is another name for an installment receivable.
E)Cannot be used in payment of an account receivable.

Question 56

A note that the maker is unable or refuses to pay at maturity is called a dishonored note.

Question 57

Which of the following is not true regarding a credit card expense?

A)Credit card expense may be classified as a "discount" deducted from sales to get net sales.
B)Credit card expense may be classified as a selling expense.
C)Credit card expense may be classified as an administrative expense.
D)Credit card expense is not recorded by the seller.
E)Credit card expense is a fee the seller pays for services provided by the card company.

Question 58

A company received a $15,000, 90-day, 10% note receivable. The journal entry to record receipt of the note includes a debit to Notes Receivable.

Question 59

If a company holds a large number of notes receivable it sometimes sets up a controlling account and a subsidiary ledger for notes.

Question 60

Notes receivable are classified as current liabilities regardless of the time to maturity.

Question 61

The quality of receivables refers to:

A)The creditworthiness of sellers.
B)The speed of collection.
C)The likelihood of collection without loss.
D)Sales turnover.
E)The interest rate.

Question 62

A company factored $45,000 of its accounts receivable and was charged a 4% factoring fee. The journal entry to record this transaction would include a:

A)Debit to Cash of $45,000, a debit to Factoring Fee Expense of $1,800, and credit to Accounts Receivable of $46,800.
B)Debit to Cash of $45,000 and a credit to Accounts Receivable of $45,000.
C)Debit to Cash of $43,200, a debit to Factoring Fee Expense of $1,800, and a credit to Accounts Receivable of $45,000.
D)Debit to Cash of $46,800 and a credit to Accounts Receivable of $46,800.
E)Debit to Cash of $45,000 and a credit to Notes Payable of $45,000.

Question 63

The matching principle, as applied to bad debts, requires:

A)That expenses be ignored if their effect on the financial statements is unimportant to users' business decisions.
B)The use of the direct write-off method for bad debts.
C)The use of the allowance method of accounting for bad debts.
D)That bad debts be disclosed in the financial statements.
E)That bad debts not be written off.

Question 64

On October 17 of the current year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Assuming the allowance method is used to account for bad debts, what effect will this write-off have on the company's net income and total assets?

A)Decrease in net income; no effect on total assets.
B)No effect on net income; no effect on total assets.
C)Decrease in net income; decrease in total assets.
D)Increase in net income; no effect on total assets.
E)No effect on net income; decrease in total assets.

Question 65

Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer,
A. Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins. On July 10, the entry or entries Gideon makes to record the recovery of the bad debt is:

A)
B)
C)
D)
E)

Question 66

A company borrowed $10,000 by signing a 180-day promissory note at 9%. The total interest due on the maturity date is:

A)$900
B)$75
C)$450
D)$300
E)$1,800

Question 67

The account receivable turnover measures:

A)How long it takes to sell accounts receivable to a factor.
B)How often, on average, receivables are received and collected during the period.
C)The relation of cash sales to credit sales.
D)How long it takes to sell merchandise inventory.
E)All of the options are correct.

Question 68

Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Co. Jasper's entry to record the collection of the note and interest at maturity should be:

A)Debit Cash for $25,000; credit Notes Receivable $25,000.
B)Debit Cash $25,437.50; credit Interest Revenue $437.50; credit Notes Receivable $25,000.
C)Debit Cash $25,437.50; credit Notes Receivable for $25,437.50.
D)Debit Notes Payable $25,000; Debit Interest Expense $1,750; credit Cash $26,750.
E)Debit Cash $26,750; credit Interest Revenue $1,750, credit Notes Receivable $25,000.

Question 69

A company has $90,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 4% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is an $800 debit. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for:

A)$3,600
B)$3,568
C)$3,632
D)$2,800
E)$4,400

Question 70

Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Co. The amount of interest that Jasper will collect on the loan is:

A)$1,750.
B)$145.83.
C)$437.50.
D)$19.44.
E)$875.00.

Question 71

Axle Co.'s accounts receivable turnover was 9.9 for this year and 11.0 for last year. Betterman's turnover was 9.3 for this year and 9.3 for last year. These results imply that:

A)Betterman has the better turnover for both years.
B)Axle has the better turnover for both years.
C)Betterman's turnover is improving.
D)Axle's credit policies are too loose.
E)Betterman is collecting its receivables more quickly than Axle in both years.

Question 72

If the credit balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt being written off, the entry to record the write-off against the allowance account results in:

A)An increase in the expenses of the current period.
B)A reduction in current assets.
C)A reduction in equity.
D)No effect on the expenses of the current period.
E)A reduction in current liabilities.

Question 73

On December 31 of the current year, the unadjusted trial balance of a company using the percent of receivables method to estimate bad debt included the following: Accounts Receivable, debit balance of $95,250; Allowance for Doubtful Accounts, credit balance of $921. What amount should be debited to Bad Debts Expense, assuming 6% of outstanding accounts receivable at the end of the current year will be uncollectible?

A)$5,715.
B)$6,636.
C)$4,794.
D)$5,770.
E)$5,660.

Question 74

A company ages its accounts receivables to determine its end of period adjustment for bad debts. At the end of the current year, management estimated that $15,750 of the accounts receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a debit balance of $375. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

A)
B)
C)
D)
E)

Question 75

Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer,
A. Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins. The entry or entries Gideon makes to record the write off of the account on May 3 is:

A)
B)
C)
D)
E)

Question 76

A method of estimating bad debts expense that involves a detailed examination of outstanding accounts and the length of time past due is the:

A)Direct write-off method.
B)Aging of accounts receivable method.
C)Percentage of sales method.
D)Aging of investments method.
E)Percent of accounts receivable method.

Question 77

A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts: $$\begin{array} { | l | r | } \hline \text { Accounts receivable } & \$ 375,000 \text { debit } \\\hline \text { Allowance for uncollecible accounts } & 500 \text { debit } \\\hline \text { Net Sales } & 800,000 \text { credit } \\\hline\end{array}$$ All sales are made on credit. Based on past experience, the company estimates 0.6% of credit sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

A)Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130.
B)Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630.
C)Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300.
D)Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800.
E)Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300.

Question 78

Factoring receivables is beneficial to a seller for all of the following reasons except:

A)Allows firms to receive cash earlier.
B)Passes ownership of the receivables to the factor.
C)There are no fees for factoring.
D)Seller avoids the cost of billing and accounting for receivables.
E)May transfer the risk of bad debts to the factor.

Question 79

A finance company or bank that purchases and takes ownership of another company's accounts receivable is called a:

A)Payer.
B)Pledger.
C)Factor.
D)Payee.
E)Pledgee.

Question 80

A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts: $$\begin{array} { | l | r | } \hline \text { Accounts receivable } & \$ 375,000 \text { debit } \\\hline \text { Allowance for uncollecible accounts } & 500 \text { debit } \\\hline \text { Net Sales } & 800,000 \text { credit } \\\hline\end{array}$$ All sales are made on credit. Based on past experience, the company estimates that 0.6% of credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?

A)$1,275
B)$1,775
C)$4,500
D)$4,800
E)$5,500