Deck 9: Accounting for Receivables

Question 1

A company borrowed $16,000 by signing a 4-month promissory note at 12%. The amount of interest to be paid at maturity is $640.

Answer 1

True

Question 2

Federal laws prohibit the selling of accounts receivables to factors.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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

Question 5

Credit sales are recorded by crediting Accounts Receivable.

Question 6

If a credit card sale is made, the seller debits Cash and credits Sales for the same amount.

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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 12

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

Question 13

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 14

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

Question 15

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

Question 16

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

Question 17

A receivable is an amount due from another party.

Question 18

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

Question 19

Companies can report credit card expense as a reduction in net sales or as a selling expense.

Question 20

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

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

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

Question 28

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

Question 29

A Company had net sales of $23,000, and its average account receivables were $5,700. Its accounts receivable turnover is 0.24.

Question 30

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

Question 31

The expense recognition (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 32

The expense recognition (matching)principle requires use of the allowance method of accounting for bad debts.

Question 33

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

Question 34

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 35

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 36

A company had net sales of $550,000 and an average accounts receivable of $110,000. Its accounts receivable turnover equals 5.0.

Question 37

Allowance for Doubtful Accounts is a contra asset; its balance is added to Accounts receivable.

Question 38

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

Question 39

The allowance method of accounting for bad debts matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.

Question 40

The realizable value refers to the expected proceeds from converting an asset into cash.

Question 41

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

Question 42

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 43

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

Question 44

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 unadjusted balance in Allowance for Doubtful Accounts is a $300 credit. The estimated amount of bad debts expense is $3,200

Question 45

The period of a note is the time from the note's (contract)date to its maturity date.

Question 46

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 debit 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 $6,000.

Question 47

The notes receivable account of a business should include both the notes that have not yet matured and the dishonored notes.

Question 48

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 49

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 50

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 51

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

Question 52

When a note receivable is dishonored, it reverts to an account receivable.

Question 53

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

Question 54

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

Question 55

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 56

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

Question 57

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

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

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

Question 60

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 61

A 90-day note issued on April 10 matures on:

A)July 10.
B)July 11.
C)July 12.
D)July 13.
E)July 9.

Question 62

A company receives a 10%, 120-day note for $1,500. The total interest due on the maturity date is: (Use 360 days a year.)

A)$150.00.
B)$37.50.
C)$75.00.
D)$87.50.
E)$50.00.

Question 63

A credit sale of $5,275 to a customer would result in which of the following?

A)A credit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the accounts receivable subsidiary ledger.
B)A debit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the accounts receivable subsidiary ledger.
C)A credit to Sales and a credit to the customer's account in the accounts receivable subsidiary ledger.
D)A credit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the accounts receivable subsidiary ledger.
E)A debit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the accounts receivable subsidiary ledger.

Question 64

The person who signs a note receivable and promises to pay the principal and interest is the:

A)Maker.
B)Owner.
C)Payee.
D)Holder.
E)Receiver.

Question 65

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

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

Question 66

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

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

Question 67

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)Expense recognition (matching).
C)Full disclosure.
D)Evaluation.
E)Materiality.

Question 68

The interest accrued on $7,500 at 6% for 90 days is: (Use 360 days a year.)

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

Question 69

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 a 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 $45,000 and a credit to Notes Payable of $45,000.
E)Debit to Cash of $46,800 and a credit to Accounts Receivable of $46,800.

Question 70

Sellers allow customers to use credit cards for all of the following reasons except:

A)To speed up receipt of cash from the credit sale.
B)To lessen the risk of extending credit to customers who cannot pay.
C)To avoid having to evaluate a customer's credit standing for each sale.
D)To be able to charge more due to fees and interest.
E)To increase total sales volume.

Question 71

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

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

Question 72

The maturity date of a note receivable:

A)Is the last day of the month.
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 day of the credit sale.

Question 73

A company borrowed $10,000 by signing a 180-day promissory note at 9%. The maturity value of the note is: (Use 360 days a year.)

A)$11,800
B)$10,075
C)$10,900
D)$10,300
E)$10,450

Question 74

A promissory note:

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

Question 75

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

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

Question 76

The banker's rule simplifies interest computations by treating a year as having 365 days.

Question 77

A company borrowed $10,000 by signing a 180-day promissory note at 9%. The total interest due on the maturity date is: (Use 360 days a year.)

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

Question 78

When posting a dishonored note to a customer's account, an explanation is included so as not to misinterpret the debit as a sale on account.

Question 79

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

Question 80

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

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