Deck 9: Accounting for Receivables

Question 1

A company had the following items and amounts in its unadjusted trial balance as of December 31 of the current year:

Answer 1

Prepare the adjusting entry to estimate bad debts under each of the following separate situations.
1. Bad debts are estimated to be 2.5% of credit sales.
2. An aging analysis estimates that 8% of the outstanding accounts receivable will be uncollectible.

Question 2

A company has the following unadjusted account balances at December 31, of the current year; Accounts Receivable of $185,700 and Allowance for Doubtful Accounts of $1,600 (credit balance). The company uses the aging of accounts receivable to estimate its bad debts. The following aging schedule reflects its accounts receivable at the current year-end:

Answer 2

1. Calculate the amount of the Allowance for Doubtful Accounts that should appear on the December 31, of the current year, balance sheet.
2. Prepare the adjusting journal entry to record bad debts expense for the current year.

Question 3

Timmons Company had a January 1, balance in its Allowance for Doubtful Accounts of $7,000 for the current year. The following transactions and events affected the Allowance for Doubtful Accounts during the current year:

Answer 3

What amount should appear in the allowance for doubtful accounts in the December 31, balance sheet for the current year?

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

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 6

A company reports the following results in its financial statements: Calculate the company accounts receivable turnover for Year 2 and Year 3. Compare these two results and give a possible explanation for any significant change.

Question 7

Bardo Company allows customers to make purchases on credit. The terms of all credit sales are 2/10, n/30, and all sales are recorded at the gross price. Other customers can use a bank credit card where the bank deducts a 4% service charge for credit card sales and credits the bank account of Bardo immediately when credit card receipts are deposited. Bardo uses the perpetual inventory method. Prepare journal entries to record the following selected transactions and events.

Question 8

The following data are taken from the comparative balance sheets of Gayle Company. Compute and interpret its accounts receivable turnover for Year 2. Competitors average a turnover of 7.5. How is the company doing in relation to its competitors?

Question 9

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

Question 10

The Connecting Company uses the percent of sales method of accounting for uncollectible accounts receivable. During the current year, the following transactions occurred:

Question 11

Loma Company estimates uncollectible accounts using the allowance method at December 31. It prepared the following aging of receivables analysis.

Question 12

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

Question 13

Prepare general journal entries for the following transactions of Viking Company, assuming they use the allowance method to account for uncollectible accounts.

Question 14

On April 30, Steinbeck Co. has $448,800 of accounts receivable. 1. Prepare journal entries to record the following selected May transactions. The company uses the perpetual inventory system. 2. Also prepare any footnotes to the May 31 financial statements that result from these transactions. 3. Calculate the balance in the Accounts Receivable account as of May 10.

Question 15

Installment accounts receivable are classified as current assets, even though the installment period is more than one year, if the seller regularly offers customers such terms.

Question 16

_______________ refers to the expected proceeds from converting an asset into cash.
________________________________________

Question 17

At December 31, Warren Company reports the following results for its calendar year from the adjusted trial balance.

Question 18

Accounts receivable occur from credit sales to customers.

Question 19

Credit sales are recorded by crediting an Accounts Receivable.

Question 20

A company uses the aging of accounts receivable method to estimate its bad debts expense. On December 31 of the current year an aging analysis of accounts receivable revealed the following:

Question 21

The matching principle requires use of the direct write-off method of accounting for bad debts.

Question 22

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

Question 23

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 24

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

Question 25

A company factored $35,000 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 $35,000, a debit to Factoring Fee Expense of $700, and credit to Accounts Receivable of $35,700.

Question 26

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

Question 27

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

Question 28

A company borrowed $6,000 by signing a 4-month promissory note at 12%. The total interest on the note is $720.
$6,000 x 0.12 x 4/12 = $240

Question 29

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

Question 30

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

Question 31

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

Question 32

The formula for computing interest on a note is principal of the note times the annual interest rate times time expressed in fraction of year.

Question 33

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 34

Receivables can be used to obtain cash by either selling them or using them as security for a loan.

Question 35

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

Question 36

A Company had net sales of $23,000 million, and its average account receivables were $5,860 million. Its accounts receivable turnover is 0.92.
$23,000/$5,860 = 3.9

Question 37

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

Question 38

A company had net sales of $500,000 and an average accounts receivable of $80,000. Its accounts receivable turnover equals 6.25.
$500,000/$80,000 = 6.25

Question 39

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

Question 40

A company borrowed $1,000 by signing a six month promissory note at 5% interest. The total amount of interest is $25.
$1,000 x .05 x 6/12 = $25

Question 41

The use of an allowance for bad debts is required under the materiality constraint.

Question 42

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

Question 43

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

Question 44

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

Question 45

A company has sales of $350,000 and estimates that 0.7% of its sales are uncollectible. The estimated amount of bad debts expense is $2,450.
$350,000 x .007 = $2,450

Question 46

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 47

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 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

Under the allowance method of accounting for uncollectible accounts receivable, no attempt is made to estimate bad debts expense.

Question 54

A company has $90,000 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 $800. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $7,000.

Question 55

The materiality constraint 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 56

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 57

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

Question 58

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 59

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

Question 60

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 61

All of the following are True regarding credit card expense except:

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 62

Notes receivable are classified as current liabilities.

Question 63

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 64

A payee of a note usually honors a note and pays it in full.

Question 65

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 66

A company receives a 10%, 90-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 67

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

Question 68

Accounts receivable information for specific customers is important because it reveals:

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) All of these.

Question 69

For legal reasons, it is always a good business practice to accept a note receivable in exchange for an overdue account receivable.

Question 70

A credit sale of $3,275 to a customer would result in:

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 71

Sellers allow customers to use credit cards:

A) To avoid having to evaluate a customer's credit standing for each sale.
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) All of these.

Question 72

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 73

The accounting principle that requires financial statements (including notes) to report all relevant information about the operations and financial condition of a company is called:

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

Question 74

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

Question 75

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 76

A company received a $1,000, 90-day, 10% note receivable. The journal entry to record receipt of the note includes a debit to Notes Receivable.

Question 77

A dishonored note receivable is usually reclassified as an account receivable.

Question 78

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

Question 79

A promissory note received from a customer in exchange for an account receivable:

A) Is a cash equivalent for the recipient.
B) Is an account receivable for the recipient.
C) Is a note receivable for the recipient.
D) Is a short-term investment for the recipient.
E) Is a note payable for the recipient.

Question 80

The interest accrued on $6,500 at 6% for 60 days is:

A) $36.
B) $42.
C) $65.
D) $180.
E) $420.