Deck 7: Receivables and Investments

Question 1

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

Answer 1

True

Question 2

The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period.

Answer 2

False

Question 3

The accounts receivable turnover ratio is a measure of how well a company manages its receivables.

Answer 3

True

Question 4

Accounts receivable are shown on the balance sheet at their net realizable value.

Question 5

If Ash Company had sales during the year of $10,000,000,an average accounts receivable of $2,000,000,and net income of $500,000,its accounts receivable turnover ratio would be 0.25.

Question 6

Because the allowance method results in better matching,accounting standards require its use rather than the direct write-off method,unless bad debts are immaterial.

Question 7

The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.

Question 8

If accounts receivable are turned over faster,this means that fewer days are required to collect receivables.

Question 9

Bad Debts Expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.

Question 10

Lewisburg Corp.had sales during the year of $15,000,000 and an average accounts receivable of $5,000,000.Its accounts receivable turnover ratio is 0.33 times.

Question 11

Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

Question 12

The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.

Question 13

Under the allowance method of accounting for bad debts,the company estimates the amount of bad debts before those debts actually occur.

Question 14

An aging schedule typically categorizes the various accounts by the length of time each invoice is outstanding.

Question 15

The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for Doubtful Accounts.

Question 16

Typically,the lower the accounts receivable turnover ratio,the better.

Question 17

The maker of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

Question 18

One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching principle.

Question 19

Selling on credit protects a company from the risk that some of its receivables will never be collected.

Question 20

A high accounts receivable turnover ratio could mean that the company's credit policies may be too stringent.

Question 21

The alternate term for a credit card draft is an invoice.

Question 22

When a note is discounted at a bank,it is normally done with recourse.

Question 23

Promissory notes are non-negotiable.

Question 24

When a company discounts a promissory note at the bank,it receives cash at the same time it would if it held the note to maturity.

Question 25

A note discounted with recourse means that if the original customer fails to pay the bank the total amount due on the maturity date of the note,the company that transferred the note to the bank is liable for the full amount.

Question 26

The payee of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

Question 27

Purchases and sales of cash equivalents are reported as investing activities on a statement of cash flows.

Question 28

The maker of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

Question 29

Whether investments are reported as current or noncurrent assets depends on the company's intent.

Question 30

A company invests excess cash in a certificate of deposit.At the end of an accounting period before the CD matures,the company will recognize interest expense.

Question 31

An increase in accounts receivable is reported on the statement of cash flows under the indirect method as an addition.

Question 32

A subsidiary is a separate legal entity that is owned or controlled by another entity.

Question 33

Baggs buys $100,000 of Vista Company bonds on January 1,2017,at face value.The bonds pay 10% interest semiannually on June 30 and December 31.If Baggs sells the bonds at 99 on July 1,2017,there will be a loss reported on the income statement.

Question 34

The equity method of accounting is used if the investor owns at least 20% of the investee and the investor is able to secure influence over the investee.

Question 35

A decrease in accounts receivable represents an increase in a company's cash flow from operating activities.

Question 36

Both stock and bond investments have maturity dates.

Question 37

When Company X buys stock in Company Y,Company X is referred to as the investee.

Question 38

The payee of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

Question 39

If a company accepts a major credit card such as VISA from a customer,then the company is responsible for the amount of the sale in case of nonpayment from a cardholder.

Question 40

Securities issued by corporations as a form of ownership in the business,such as common and preferred stock,are called equity securities.

Question 41

Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad debts expense with revenue on the income statement?

A)The percentage of accounts receivable approach
B)The percentage of net credit sales approach
C)The direct write-off method
D)The uncollectible approach

Question 42

Fenchurch Corp.uses the direct write-off method to account for bad debts.What are the effects of the adjustment to record the write-off of a customer's account balance?

A)Assets and liabilities decrease.
B)Assets and stockholders' equity decrease.
C)Stockholders' equity decrease and liabilities increase.
D)No effect;assets increase and decrease by the same amount.

Question 43

The data presented below are for Falconi,Inc.for 2017.
$\begin{array}{lr}\text { Credit sales during the year } & \$ 2,100,000 \\\text { Accounts receivable-December } 31,2017 & 395,000 \\\text { Allowance for doubtful accounts-December } 31,2017 & 20,000 \\\text { Bad debts expense for the year } & 17,000\end{array}$


-What amount will Falconi show on its year-end balance sheet for the net realizable value of its accounts receivable?

A)$378,000
B)$375,000
C)$358,000
D)$ 20,000

Question 44

Which one of the following statements is true?

A)When a company uses a subsidiary ledger,the balance in the control account,Accounts Receivable,shows only the amount the company expects to collect from the accounts receivable,net of any expected uncollectible accounts.
B)An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers.
C)The balance in the control account,Accounts Receivable,should be equal to the sum of the balances in the subsidiary ledger for accounts receivable.
D)A subsidiary ledger takes the place of the control account for some companies.

Question 45

Which one of the following is not an accurate description of Allowance for Doubtful Accounts?

A)Contra account
B)Balance sheet account
C)Income statement account
D)Current asset account

Question 46

The direct write-off method estimates the amount of bad debts before they occur.

Question 47

Lynx Corp.
The data presented below for Lynx Corp.are for the year ended December 31,2017:
?
$$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts receivable (December 31,2017) } & 170,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\quad \text { (before adjustment at December } 31,2017 ) & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$ ?

-See the data for Lynx Corp. If Lynx Corp.estimates its bad debt to be 1% of net credit sales,what will be the balance in Allowance for Doubtful Accounts after the adjustment for bad debts?

A)$1,300
B)$9,700
C)$8,400
D)$11,000

Question 48

Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long?

A)The company may need to borrow to acquire operating cash.
B)The company may offer trade discounts to lengthen the collection period.
C)Cash flows from operations may be higher than expected for the company's sales.
D)The company should expand operations with its excess cash.

Question 49

Lynx Corp.
The data presented below for Lynx Corp.are for the year ended December 31,2017:
?
$$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts receivable (December 31,2017) } & 170,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\quad \text { (before adjustment at December } 31,2017 ) & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$ ?

-See the data for Lynx Corp. If Lynx Corp.uses the aging of accounts receivable approach to estimate its bad debts,what amount will be reported as bad debts expense for 2017?

A)$12,700
B)$13,700
C)$14,000
D)$15,300

Question 50

Cash flows from purchases,sales,and maturities of investments are usually classified as operating activities.

Question 51

Which one of the following is an accurate description of Allowance for Doubtful Accounts?

A)Contra account
B)Liability account
C)Revenue account
D)Expense account

Question 52

If a company uses the allowance method of accounting for bad debts,which one of the following statements is true?

A)It will report accounts receivable on the balance sheet at their net realizable value.
B)It will record bad debts only when an account is determined to be uncollectible.
C)It will reduce the accounts receivable at the end of the accounting period for estimated uncollectible accounts.
D)It violates the matching principle.

Question 53

On January 15,2017,the accounts receivable balance was $7,000 and the balance in Allowance for Doubtful Accounts was $700.On January 16,2017,a $200 uncollectible account was written off.The net realizable value of accounts receivable on January 16 immediately after the write-off is

A)$6,300.
B)$6,800.
C)$6,500.
D)$7,900.

Question 54

If a company uses the direct write-off method of accounting for bad debts,

A)it is applying the matching principle.
B)it will record bad debts expense only when an account is determined to be uncollectible.
C)it will reduce the Accounts Receivable account at the end of the accounting period for estimated uncollectible accounts.
D)it will report accounts receivable on the balance sheet at their net realizable value.

Question 55

The following information was presented on the balance sheet of Gloria Company as of December 31,2017: ?
$\begin{array}{llr} \text {Trade accounts receivable, net of allowance for } &\\ \text { uncollectibles of \( \$ 100,000 \) } &\$1,600,000\\\end{array}$
Which one of the following statements is true?

A)Gloria expects that $1,700,000 of accounts receivable will be collected after year-end.
B)The balance in the Accounts Receivable account in Gloria's general ledger is $1,600,000.
C)The net realizable value of Gloria's accounts receivable is $1,600,000.
D)Gloria expects to collect only $1,500,000 from its customers.

Question 56

Lynx Corp.
The data presented below for Lynx Corp.are for the year ended December 31,2017:
?
$$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts receivable (December 31,2017) } & 170,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\quad \text { (before adjustment at December } 31,2017 ) & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$ ?

-See the data for Lynx Corp. If Lynx Corp.estimates its bad debts at 1% of net credit sales,what amount will be reported as bad debts expense for 2017?

A)$9,560
B)$9,700
C)$1,700
D)None of these are correct

Question 57

The data presented below are for Falconi,Inc.for 2017.
$\begin{array}{lr}\text { Credit sales during the year } & \$ 2,100,000 \\\text { Accounts receivable-December } 31,2017 & 295,000 \\\text { Allowance for doubtful accounts-December } 31,2017 & 28,000 \\\text { Bad debts expense for the year } & 17,000\end{array}$


-What is the effect on net accounts receivable when Falconi records its estimate for bad debts expense using the allowance method?

A)Net accounts receivable decrease.
B)Net accounts receivable increase.
C)Net accounts receivable stay the same.
D)Net accounts receivable both increase and decrease.

Question 58

The most common type of receivables is accounts receivable.

Question 59

If a company uses the allowance method to account for bad debts,when will the company's owners' equity decrease?

A)At the date a customer's account is written off
B)At the end of the accounting period when an adjustment for bad debts is recorded
C)At the date a customer's account is determined to be uncollectible
D)When the accounts receivable amount becomes past due

Question 60

Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net realizable value of accounts receivable on the balance sheet?

A)The percentage of accounts receivable approach
B)The percentage of net credit sales approach
C)The direct write-off method
D)The uncollectible approach

Question 61

On January 1,2017,Accounts Receivable and Allowance for Uncollectible Accounts for Darius Company carried balances of $20,000 and $550,respectively.During the year,the company reported $70,000 of credit sales.There were $400 of receivables written off as uncollectible in 2017.Cash collections of receivables amounted to $74,700.The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance. ​
The amount of bad debts expense recognized in the 2017 income statement will be:

A)$545.
B)$595.
C)$745.
D)$795.

Question 62

Music Corporation
The data below are for Music Corporation for 2017.
?
$$\begin{array} { l r } \text { Accounts receivable-January 1,2017 } & \$ 236,000 \\\text { Credit sales during 2017 } & 820,000 \\\text { Collections from credit customers during 2017 } & 590,000 \\\text { Customer accounts written off as uncollectible during 2017 } & 8,000 \\\text { Allowance for doubtful accounts -January 1, 2017 } & 8,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 9,600\end{array}$$

-Refer to the data for Music Corporation. If the aging approach is used to estimate bad debts,what amount should be recorded as bad debts expense for 2017?

A)$8,000
B)$8,100
C)$8,700
D)$8,900

Question 63

Music Corporation
The data below are for Music Corporation for 2017.
?
$$\begin{array} { l r } \text { Accounts receivable-January 1,2017 } & \$ 236,000 \\\text { Credit sales during 2017 } & 820,000 \\\text { Collections from credit customers during 2017 } & 590,000 \\\text { Customer accounts written off as uncollectible during 2017 } & 8,000 \\\text { Allowance for doubtful accounts -January 1, 2017 } & 8,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 9,600\end{array}$$

-Refer to the data for Music Corporation. ?
If the aging approach is used to estimate bad debts,what is the balance in Allowance for Doubtful Accounts after the bad debts expense adjustment?

A)$8,000
B)$8,100
C)$8,900
D)$9,600

Question 64

Which one of the following is not an accurate statement regarding the direct write-off method of accounting for bad debts?

A)The direct write-off method has some deficiencies when accounting for bad debts.
B)The direct write-off method ignores the possibility that partial collection of a company's outstanding accounts receivable may occur.
C)Under the direct write-off method,an expense is increased.
D)The allowance method for bad debts violates the matching principle,but the direct write-off method does not.

Question 65

Assuming a company uses the allowance method,the entry to recognize the write-off of the specific uncollectible accounts will

A)increase total assets and total equity.
B)increase total assets and decrease total equity.
C)decrease total assets and total equity.
D)not affect total assets or total equity.

Question 66

Benton Corporation
The data below are for Benton Corporation for 2017.
?
$$\begin{array} { l r } \text { Accounts Receivable-January 1,2017 } & \$ 334,000 \\\text { Credit sales during } 2017 & 850,000 \\\text { Collections from credit customers during 2017 } & 725,000 \\\text { Customer accounts written off as uncollectible during 2017 } & 12,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\text { (after write-off of uncollectible accounts) } & 1,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 13,200\end{array}$$ ?

-Refer to the data for Benton Corporation. If the aging approach is used to estimate bad debts,what should the balance in Allowance for Doubtful Accounts be after the bad debts adjustment?

A)$26,900
B)$14,900
C)$13,200
D)$11,500

Question 67

Music Corporation
The data below are for Music Corporation for 2017.
?
$$\begin{array} { l r } \text { Accounts receivable-January 1,2017 } & \$ 236,000 \\\text { Credit sales during 2017 } & 820,000 \\\text { Collections from credit customers during 2017 } & 590,000 \\\text { Customer accounts written off as uncollectible during 2017 } & 8,000 \\\text { Allowance for doubtful accounts -January 1, 2017 } & 8,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 9,600\end{array}$$

-Refer to the data for Music Corporation. What is the balance of Accounts Receivable at December 31,2017?

A)$336,000
B)$448,400
C)$458,000
D)$466,000

Question 68

When using the allowance method,what are the effects on the accounting equation when a company writes off a bad debt?

A)Assets and stockholders' equity increase.
B)Assets and stockholders' equity decrease.
C)Assets increase and stockholders' equity decreases.
D)There is no effect on overall assets or equity.

Question 69

Benton Corporation
The data below are for Benton Corporation for 2017.
?
$$\begin{array} { l r } \text { Accounts Receivable-January 1,2017 } & \$ 334,000 \\\text { Credit sales during } 2017 & 850,000 \\\text { Collections from credit customers during 2017 } & 725,000 \\\text { Customer accounts written off as uncollectible during 2017 } & 12,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\text { (after write-off of uncollectible accounts) } & 1,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 13,200\end{array}$$ ?

-Refer to the data for Benton Corporation. ?
What is the balance of Accounts Receivable at December 31,2017?

A)$209,000
B)$225,000
C)$447,000
D)$459,000

Question 70

Mellon Corporation
The data presented below are for Mellon Corporation for the year ended December 31,2017:
??
$\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts receivable (December 31, 2017) } & 250,000 \\\text { Allowance for doubtful accounts (credit balance) (before adjustment at December } & \\31,2017 & 3,000 \\\text { Estimated amount of uncoll ectible accounts based on an aging analysis } & 31,000\end{array}$

-Refer to the information for Mellon Corporation. ?
If Mellon uses the aging of accounts receivable approach to estimate its bad debts,what will be the net realizable value of its accounts receivable after the adjustment for bad debts expense?

A)$216,000
B)$219,000
C)$222,000
D)$250,000

Question 71

What are the effects on the accounting equation when a company makes the adjustment to record bad debts expense using the allowance method?

A)Assets and stockholders' equity increase.
B)Assets and stockholders' equity decrease.
C)Assets increase and stockholders' equity decreases.
D)Assets decrease and stockholders' equity increases.

Question 72

Lynx Corp.
The data presented below for Lynx Corp.are for the year ended December 31,2017:
?
$$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts receivable (December 31,2017) } & 170,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\quad \text { (before adjustment at December } 31,2017 ) & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$ ?

-See the data for Lynx Corp. If Lynx Corp.uses the aging of accounts receivable approach to estimate its bad debts,what will be the net realizable value of its accounts receivable after the adjustment for bad debts expense?

A)$140,000
B)$156,000
C)$167,000
D)$184,000

Question 73

Mellon Corporation
The data presented below are for Mellon Corporation for the year ended December 31,2017:
??
$\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts receivable (December 31, 2017) } & 250,000 \\\text { Allowance for doubtful accounts (credit balance) (before adjustment at December } & \\31,2017 & 3,000 \\\text { Estimated amount of uncoll ectible accounts based on an aging analysis } & 31,000\end{array}$

-Refer to the data for Mellon Corporation. ?
If Mellon estimates its bad debts at 2% of net credit sales,what amount will be reported as bad debts expense for 2017?

A)$25,800
B)$27,000
C)$28,800
D)$30,000

Question 74

The following data concern Wang Corporation for 2017: ?
$$\begin{array} { l r } \text { Credit sales during the year } & \$ 1,600,000 \\\text { Accounts receivable-December } 31,2017 & 235,000 \\\text { Allowance for doubtful accounts-December 31,2017 } & 18,000 \\\text { Bad debts expense for the year } & 11,000\end{array}$$ What amount will Wang show on its year-end balance sheet for the net realizable value of its accounts receivable?

A)$253,000
B)$235,000
C)$224,000
D)$217,000

Question 75

Mellon Corporation
The data presented below are for Mellon Corporation for the year ended December 31,2017:
??
$\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts receivable (December 31, 2017) } & 250,000 \\\text { Allowance for doubtful accounts (credit balance) (before adjustment at December } & \\31,2017 & 3,000 \\\text { Estimated amount of uncoll ectible accounts based on an aging analysis } & 31,000\end{array}$

-Refer to the data for Mellon Corporation. ?
If Mellon uses the aging of accounts receivable approach to estimate its bad debts,what amount will be reported as bad debts expense for 2017?

A)$28,000
B)$31,000
C)$34,000
D)$50,000

Question 76

Benton Corporation
The data below are for Benton Corporation for 2017.
?
$$\begin{array} { l r } \text { Accounts Receivable-January 1,2017 } & \$ 334,000 \\\text { Credit sales during } 2017 & 850,000 \\\text { Collections from credit customers during 2017 } & 725,000 \\\text { Customer accounts written off as uncollectible during 2017 } & 12,000 \\\text { Allowance for doubtful accounts (credit balance) } & \\\text { (after write-off of uncollectible accounts) } & 1,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 13,200\end{array}$$ ?

-Refer to the data for Benton Corporation. If the aging approach is used to estimate bad debts,what amount should be recorded as bad debts expense for 2017?

A)$2,900
B)$11,500
C)$23,500
D)$26,900

Question 77

Which of the following statements is true regarding the two allowance methods used to account for bad debts?

A)The percentage of net credit sales approach takes into account the existing balance in the Allowance for Doubtful Accounts account.
B)The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account.
C)The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.
D)The direct write-off method does a better job of matching revenues and expenses.

Question 78

Allowance for Doubtful Accounts represents

A)cash set aside to make up for bad debts losses.
B)the amount of uncollectible accounts written off to date.
C)the difference between total sales made on credit and the amount collected from those credit sales.
D)the difference between the gross amount of accounts receivable and the net realizable value of accounts receivable.

Question 79

Mellon Corporation
The data presented below are for Mellon Corporation for the year ended December 31,2017:
??
$\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts receivable (December 31, 2017) } & 250,000 \\\text { Allowance for doubtful accounts (credit balance) (before adjustment at December } & \\31,2017 & 3,000 \\\text { Estimated amount of uncoll ectible accounts based on an aging analysis } & 31,000\end{array}$

-Refer to the data for Mellon Corporation. ?
If Mellon uses 2% of net credit sales to estimate its bad debts,what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?

A)$33,000
B)$31,800
C)$27,000
D)$25,800

Question 80

The entry required to recognize the bad debts expense for 2017 will

A)increase total assets and retained earnings.
B)decrease total assets and retained earnings.
C)decrease total assets and increase net income.
D)increase total assets and decrease net income.