Deck 7: Reporting and Analyzing Receivables

Question 1

A company borrowed $10,000 by signing a 180-day promissory note at 5% interest. The total amount of interest is $25.
$10,000 * .05 * 180/360 = $250

Answer 1

False

Question 2

Credit sales are recorded by crediting an Accounts Receivable.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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 7

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 8

A company borrowed $16,000 by signing a 120-day promissory note at 12%. The total interest on the note is $640.
$16,000 * 0.12 * 120/360 = $640

Question 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

Federal laws prohibit the selling of accounts receivables to factors.

Question 17

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 18

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

Question 19

A receivable is an amount due from another party.

Question 20

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

Question 21

A Company had net sales of $23,000 million, and its average account receivables were $5,700 million. Its accounts receivable turnover is 0.24.
Accounts Receivable Turnover = Net Sales/Average Accounts Receivable
Accounts Receivable Turnover = $23,000/$5,700 = 4.0

Question 22

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

Question 23

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 24

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 25

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 26

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

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

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 35

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

Question 36

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

Question 37

A company had net sales of $550,000 and an average accounts receivable of $110,000. Its accounts receivable turnover equals 5.0.
Accounts Receivable Turnover = Net Sales/Average Accounts Receivable
Accounts Receivable Turnover = $550,000/$110,000 = 5.0

Question 38

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

Question 39

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

Question 40

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 41

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

Question 42

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

Question 43

Sellers allow customers to use credit cards to pay for products and services for all of the following reasons except:

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

Question 44

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

A)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.
B)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.
C)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.
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 credit to Sales and a credit to the customer's account in the accounts receivable subsidiary ledger.

Question 45

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.
$350,000 * 0.01 = $3,500

Question 46

If Taylor Corp. receives a $10,000, 120-day, 6% note on October 1, 2016, the amount of interest that should be accrued on December 31, 2016, the end of Taylor's accounting period, is $200.
$10,000 × .06 × 90/360 = $150; the remaining 30 days of interest will be recorded in the following year

Question 47

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

Question 48

Flack Company receives a $20,000, 8%, 180 day note receivable from a customer. The total interest on this note is $1,600.
$20,000 × .08 × 180/360 = $800

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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 55

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 56

Jaspreet Industries accepts a $5,000, 90-day, 5% note receivable from a customer on an overdue Accounts Receivable. The amount due upon maturity is $5,062.50.
Interest = $5,000 × .05 × 90/360 = $62.50
Maturity value = $5,000 + 62.50 = $5,062.50

Question 57

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

Question 58

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 59

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

Question 60

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

Question 61

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 62

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

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

Question 63

The accounts receivable turnover is calculated by:

A)Dividing net sales by average accounts receivable.
B)Dividing net sales by average accounts receivable and multiplying by 365.
C)Dividing average accounts receivable by net sales.
D)Dividing average accounts receivable by net sales and multiplying by 365.
E)Dividing net income by average accounts receivable.

Question 64

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 65

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 66

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 67

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 68

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 69

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

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

Question 70

A company has net sales of $1,200,000 and average accounts receivable of $400,000. What is its accounts receivable turnover for the period?

A)0.20
B)5.00
C)20.0
D)73.0
E)3.0

Question 71

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 72

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

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

Question 73

Pepperdine reported net sales of $8,600 million, net income of $126 million and average accounts receivable of $890 million. Its accounts receivable turnover is:

A)37.8.
B)9.7.
C)68.3.
D)7.1.
E)51.7.

Question 74

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 75

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 76

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 77

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 78

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 79

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

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

Question 80

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.