Question 1

Inventories of merchandising and manufacturing businesses are reported as current assets on the balance sheet.

Accepted Answer

Both merchandising and manufacturing businesses hold inventory as a current asset, as it is available for sale or used in the production process. Therefore, the statement is true.

Question 2

Allowance for Doubtful Accounts is a contra liability account.

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account, not a contra liability account. It is used to reduce the total amount of accounts receivable on the balance sheet to reflect the amount that is expected to be collected.

Question 3

The estimate of uncollectible accounts receivable based on the sales method violates the matching principle.

Accepted Answer

The sales method, which estimates uncollectible accounts based on a percentage of sales, adheres to the matching principle by matching the expense of bad debts to the same period in which the related sales are recorded, ensuring that revenues and expenses are recognized in the period they are incurred.

Question 4

The sum of the face amount and the interest that must be paid at the due date of the note is called maturity value.

Accepted Answer

This is correct. The maturity value is the total amount that must be paid at the due date of the note, which includes the face amount (the amount borrowed) and the interest that has accrued.

Question 5

Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

Accepted Answer

Both accounts receivable and notes receivable are types of assets that represent claims that a company has on its customers or other parties who owe it money. These claims are expected to be collected in cash at some point in the future, and are therefore considered to be sources of future cash inflows for the company.

Question 6

The due date of a 60-day note dated July 10 is September 9.

Accepted Answer

The due date of a 60-day note dated July 10 is September 8, because July has 31 days, so 21 days in July plus 31 days in August totals 52 days, leaving 8 days in September to reach 60 days.

Question 7

All receivables that are expected to be realized in cash within a year are presented in the current assets section of the balance sheet.

Accepted Answer

This statement is correct. Receivables that are expected to be collected within a year are classified as current assets on the balance sheet.

Question 8

The party promising to pay a note at maturity is the payee.

Accepted Answer

The party promising to pay a note at maturity is the maker or issuer, while the party receiving payment is the payee.

Question 9

When companies sell their receivables to other companies, the transaction is called factoring.

Accepted Answer

Factoring is the term used to describe the process by which a company sells its accounts receivable to another company, known as a factor, at a discount to gain immediate cash.

Question 10

Under the direct write-off method, an attempt is made to match Bad Debt Expense to sales revenues in the same accounting period.

Accepted Answer

The direct write-off method does not attempt to match Bad Debt Expense to sales revenues in the same accounting period. Instead, it simply writes off the uncollectible accounts when they are determined to be uncollectible. This method is not considered a GAAP-approved method and is only used by small businesses with no significant accounts receivable balances.

Question 11

At the end of a period before the accounts are adjusted, Allowance for Doubtful Accounts has a balance of $250, and net sales on account for the period total $500,000.If uncollectible accounts expense is estimated at 1% of net sales on account, the current provision to be made for uncollectible accounts expense is $4,997.50.

Accepted Answer

The provision for uncollectible accounts expense should be calculated as 1% of net sales on account, which is $500,000 * 1% = $5,000. The existing balance in the Allowance for Doubtful Accounts does not affect the calculation of the current period's expense provision.

Question 12

Receivables not expected to be collected within one year are reported in the fixed assets section of the balance sheet.

Accepted Answer

Receivables not expected to be collected within one year are reported in the non-current assets section of the balance sheet. Fixed assets refer to long-term tangible assets such as property, plant, and equipment.

Question 13

The difference between the total receivables and the balance in Allowance for Doubtful Accounts at the end of a period is referred to as the net realizable value of the receivables.

Accepted Answer

This statement is true. The net realizable value of receivables is the amount of receivables that a company expects to collect from its customers after considering the amount that is not going to be collected i.e. doubtful accounts. It is calculated by subtracting the balance in the allowance for doubtful accounts from the total receivables.

Question 14

The interest at 6%, on a 60-day note for $5,000 is $300.(Assume 360 days in a year)

Accepted Answer

The interest on a 60-day note for $5,000 at 6% per annum (assuming 360 days in a year) is calculated as follows: Interest = Principal × Rate × Time = $5,000 × 6% × (60/360) = $5,000 × 0.06 × (1/6) = $50.

Question 15

The due date of a 90-day note dated July 15 is October 13.(Assume 360 days in a year)

Accepted Answer

A 90-day note would mature on October 13 if it was dated on July 15, as there are 31 days in July, 31 days in August, and 30 days in September, totaling 90 days. Assuming 360 days in a year, this is correct.

Question 16

Net income is reduced when a specific receivable is written off under the analysis of receivables method.

Accepted Answer

Under the allowance method (also known as the analysis of receivables method), writing off a specific receivable affects only the balance sheet accounts (Accounts Receivable and Allowance for Doubtful Accounts) and does not impact the income statement or net income.

Question 17

The maturity value of a 12%, 60-day note for $1,000 is $1,020.(Assume 360 days in a year)

Accepted Answer

The formula to calculate the maturity value of a note is:

Maturity value = Principal + (Principal x Interest Rate x Time)

Using this formula, we can calculate the maturity value of the given note as:

Maturity value = $1,000 + ($1,000 x 0.12 x (60/360))

Maturity value = $1,000 + $20

Maturity value = $1,020

Therefore, the statement is true.

Question 18

Generally accepted accounting principles do not normally allow the use of the allowance method of accounting for uncollectible accounts.

Accepted Answer

Generally accepted accounting principles do require the use of the allowance method of accounting for uncollectible accounts in order to properly match expenses with revenues and report accurate financial statements.

Question 19

The direct write-off method records uncollectible accounts expense in the year the specific account receivable is determined to be uncollectible.

Accepted Answer

The direct write-off method writes off the uncollectible account as an expense in the same year it is determined to be uncollectible.

Question 20

The person who is to be paid when a note matures is called the payee.

Accepted Answer

This statement is true. The payee is the person or entity who will receive payment when a promissory note or other financial instrument reaches its maturity date.

Quiz 6: Receivables and Inventories