Question 1

Tabor Company had trade receivables of $450,000 and an allowance for doubtful accounts of $15,500 just prior to writing off as worthless a trade receivable from Fox Company of $5,000. What was the net realizable value of trade receivables as shown by the accounting record before and after the write-off? 
$\begin{array} { l r  r } && \text { Before } & \text { After } \\end{array}$
a) $\begin{array} { l r  r }  & 450,000 & 450,000 \\end{array}$
b)  $\begin{array} { l r  r } & 15,000 & 439,500 \\end{array}$
c) $\begin{array} { l r  r }  & 434,500 & 429,500 \\end{array}$
d) $\begin{array} { l r  r }  & 434,500 & 434,500 \\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

Before the write-off, the net realizable value of trade receivables is calculated by subtracting the allowance for doubtful accounts ($15,500) from the total trade receivables ($450,000), which equals $434,500. After the write-off of the $5,000 receivable from Fox Company, the allowance for doubtful accounts is reduced by $5,000, but this does not affect the net realizable value of the trade receivables, which remains at $434,500. The write-off reduces both the allowance for doubtful accounts and the total trade receivables by the same amount, leaving the net realizable value unchanged.

Question 2

-What is the annual interest rate of a sales discount of 2/10, n/30?
A) 24.3%
B) 24.8%
C) 36.5%
D) 37.2%

Accepted Answer

Calculation: [($2 ÷ $98) ÷ 20 days] × 365 days = .372.

Question 3

-When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis?
A) 18%.
B) 20%.
C) 30%.
D) 37%.

Accepted Answer

Calculation: [($2 ÷ $98) ÷ 25 days] × 365 days = .30.

Question 4

A Co. and G Co. are competitors in the biotechnology market. In 20X3, A Co. reported a gross proﬁt percentage of 86.3% while G Co's percentage was 80.7%. What is the most likely cause of G Co.'s lower gross proﬁt percentage?
A) Increased product selling prices
B) Decreased product costs
C) Smaller scale operations than A Co.
D) Larger scale operations than A Co.

Accepted Answer

C) Smaller scale operations than A Co. could lead to G Co. having a lower gross profit percentage due to less efficient production or higher per-unit costs compared to A Co.

Question 5

-If a company has the opportunity to take a discount of 2/10, n/30 but must borrow money at an annual rate of 16%, what would be the net advantage of taking the discount?
A) 8.3%
B) 8.8%
C) 20.5%
D) 21.2%

Accepted Answer

Calculation: {[($2 ÷ $98) ÷ 20 days] × 365 days} - .16 = .212.

Question 6

T Co's gross proﬁt percentage has been increasing in the three years from 20X1 through 20X3 from 36.5% to 39.8%. This change has most likely been caused by which of the following?
A) Higher product costs
B) Selling products with lower margins
C) Selling products for higher prices
D) Discounted prices

Accepted Answer

An increase in gross profit percentage is typically caused by selling products for higher prices, as this directly increases the margin between the cost to produce the goods and the selling price, without necessarily increasing the costs.

Question 7

Which of the following statements is true about the allowance method for uncollectible accounts?
A) The net realizable value of trade accounts receivable is greater before an account is written off than after it is written off.
B) Bad Debts Expense is debited when a speciﬁc account is written off as uncollectible.
C) The net realizable value of trade accounts receivable on the balance sheet is the same before and after an account is written off.
D) Allowance for Doubtful Accounts is closed each year to Income Summary.

Accepted Answer

The allowance method for uncollectible accounts involves estimating the amount of bad debt expense to be recognized in the period the revenue is earned, rather than when the specific account is deemed uncollectible. When an account is written off, it reduces both the Accounts Receivable and the Allowance for Doubtful Accounts by the same amount, leaving the net realizable value of trade accounts receivable unchanged.

Question 8

When an account is written off using the allowance method for uncollectible accounts, trade accounts receivable
A) is unchanged and the allowance account increases.
B) increases and the allowance account increases.
C) decreases and the allowance account decreases.
D) decreases and the allowance account increases.

Accepted Answer

When an account is written off using the allowance method, the trade accounts receivable decreases because the specific receivable is being removed from the books. Simultaneously, the allowance for doubtful accounts also decreases because this account had previously been set up to anticipate such losses, thus no impact on the overall financial position at the time of the write-off.

Question 9

An aging of a company's trade receivables indicates that $6,500 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a
A) debit to Bad Debts Expense for $6,500.
B) debit to Bad Debts Expense for $5,300.
C) debit to Allowance for Doubtful Accounts for $6,500.
D) debit to Bad Debts Expense for $7,700.

Accepted Answer

The correct adjustment is a debit to Bad Debts Expense for $7,700. This is because the existing $1,200 debit balance in the Allowance for Doubtful Accounts needs to be offset to reflect the new estimate of $6,500 being uncollectible, resulting in a total adjustment of $7,700 ($6,500 + $1,200).

Question 10

The balance in Allowance for Doubtful Accounts would have a debit balance when
A) the percentage of receivables basis is used.
B) an uncollectible account is later recovered.
C) write-offs during the year have been less than previous provisions.
D) write-offs during the year have exceeded previous provisions.

Accepted Answer

The Allowance for Doubtful Accounts typically has a credit balance, as it is a contra account to Accounts Receivable, reducing the net amount of receivables that the company expects to collect. However, if the actual write-offs during the year exceed the previous provisions (amounts set aside in the allowance account), the account could end up with a debit balance, indicating that the losses from uncollectible accounts were more than anticipated.

Question 11

In 20X3, T Co.'s gross proﬁt percentage was 39.8% while their competitor, WWW's percentage was 31.8%. What was the most likely reason for WWW's lower percentage?
A) Lower selling prices
B) Lower product cost as a percentage of sales
C) Ability to differentiate their product in consumers' eyes
D) Higher selling prices

Accepted Answer

Lower selling prices can lead to a lower gross profit percentage if the cost of goods sold does not decrease proportionately. This is because the gross profit percentage is calculated as (Sales - Cost of Goods Sold) / Sales. If sales decrease due to lower selling prices without a corresponding decrease in costs, the gross profit percentage will decline.

Question 12

To record estimated uncollectible accounts using the allowance method for uncollectible accounts, the adjusting entry would be a debit to?
A) Trade Accounts Receivable and a credit to Allowance for Doubtful Accounts.
B) Bad Debts Expense and a credit to Allowance for Doubtful Accounts.
C) Allowance for Doubtful Accounts and a credit to Trade Accounts Receivable.
D) Loss on Credit Sales and a credit to Trade Accounts Receivable.

Accepted Answer

The correct adjusting entry for recording estimated uncollectible accounts using the allowance method involves debiting Bad Debts Expense and crediting Allowance for Doubtful Accounts. This reflects the expected loss from uncollectible accounts as an expense and increases the allowance for doubtful accounts, which is a contra-asset account that reduces the total accounts receivable balance on the balance sheet.

Question 13

G Co., which is a biotechnology firm, reported the following revenues on their 20X3 income statement: Product sales $582.2 million, Royalties $214.7 million, Contract revenue $107.0 million and Interest income $64.1 million. Their cost of sales was reported as $104.5 million. What was their gross profit percentage?
A) 82.1%
B) 86.9%
C) 88.4%
D) 89.2%

Accepted Answer

Calculation: ($582.2 - $104.5) ÷ $582.2 = .821.

Question 14

Which of the following accounts is always treated as a contra revenue and not as a selling expense?
A) Net sales
B) Cash equivalents
C) Sales returns and allowances
D) Purchase returns and allowances

Accepted Answer

Sales returns and allowances are considered a contra revenue account because they directly reduce the total revenue from sales on the income statement, rather than being listed as an expense.

Question 15

During 20X1, Thomas Company recorded bad debt expense of $15,000 and wrote off an uncollectible trade receivable amounting to $5,000. Assuming a January 1, 20X1, credit balance in the allowance for doubtful accounts of $10,000, the December 31, 20X1, balance in the allowance account would be which of the following?
A) $5,000.
B) $15,000.
C) $20,000.
D) $25,000.

Accepted Answer

Calculation: $10,000 + $15,000 - $5,000 = $20,000.

Question 16

If an account is collected after having been previously written off,
A) the allowance account should be debited.
B) only the control account needs to be credited.
C) both statement of earnings and balance sheet accounts will be affected.
D) there will be both a debit and a credit to trade accounts receivable.

Accepted Answer

When an account previously written off is collected, it involves reversing the write-off by debiting accounts receivable and crediting allowance for doubtful accounts, followed by recording the cash collection by debiting cash and crediting accounts receivable.

Question 17

A company had the following partial list of account balances at year-end: $$\begin{array} { | l | r | } 
\hline \text { Sales returns and allowances } & \$ 500 \
\hline \text { Trade receivables } & 9,000 \
\hline \text { Sales discounts } & 700 \
\hline \text { Sales revenues } & 57,200 \
\hline \text { Allowance for doubtful accounts } & 300 \
\hline
\end{array}$$ 
-A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. What is the approximate annual rate?
A) 18%.
B) 25%.
C) 38%.
D) 56%.

Accepted Answer

Calculation: [($3 ÷ $97) ÷ 30 days] × 365 days = .38.

Question 18

School Supplies Company made the following journal entries (1) to write off an account judged to be uncollectible and (2) to record bad debt expense for 20X1: $\begin{array}{|l|l|r|r|}
\hline &&\mathrm{DR} & \mathrm{CR} \
\hline \text { A } & \begin{array}{l}
\text { Allowance for doubtful accounts } \
\text { Trade receivables }
\end{array} & 1,000 & \
&&&1,000\
\hline \mathrm{B} & \begin{array}{l}
\text { Bad debt expense } \
\text { Allowance for doubtful accounts }
\end{array} & 3,000 & \
&&&3,000\
\hline
\end{array}$
 As a result of the first entry only, the book value (net realizable value) of trade receivables was A; as a result of the second entry only, the book value (net realizable value) of trade receivable was B: $$\begin{array} { | l | l | l | } 
\hline & \text { A } & \text { B } \
\hline 1 & \text { Increased } & \text { Decreased } \
\hline 2 & \text { Decreased } & \text { Decreased } \
\hline 3 & \text { Unchanged } & \text { Unchanged } \
\hline 4 & \text { Unchanged } & \text { Decreased } \
\hline
\end{array}$$
A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Accepted Answer

The first entry, which writes off an account as uncollectible, does not change the book value of trade receivables because it moves the amount from trade receivables to allowance for doubtful accounts, both of which affect the net realizable value of receivables in the same way. The second entry, recording bad debt expense, decreases the book value because it increases the allowance for doubtful accounts without directly affecting the gross amount of trade receivables, thereby reducing the net realizable value.

Question 19

What is the impact of treating sales returns and allowances as a contra revenue but treating sales discounts and credit card discounts as selling expenses?
A) Gross margin is reduced by sales returns and allowances, sales discounts and credit card discounts.
B) Gross margin is reduced by sales returns and allowances but all three accounts cause a decrease in proﬁt from operations.
C) Gross margin is reduced by sales returns and allowance but operating proﬁt is only reduced by sales discounts and credit card discounts.
D) Gross margin is reduced by sales discounts and credit card discounts but all three accounts cause a decrease in proﬁt from operations.

Accepted Answer

Sales returns and allowances reduce gross margin, while all three accounts (sales returns and allowances, sales discounts, and credit card discounts) decrease profit from operations.

Question 20

In 20X3, C Co. reported net sales revenues of $19.8 billion and cost of goods sold for $6.0 billion. What was their gross profit percentage for 20X3?
A) 30.3%
B) 43.5%
C) 69.7%
D) 76.74%

Accepted Answer

Calculation: ($19.8 - $6.0) ÷ $19.8 = .697.

Quiz 6: Merchandising Operations and the Multistep Income Statement

-What is the annual interest rate of a sales discount of 2/10, n/30?

-When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis?

A Co. and G Co. are competitors in the biotechnology market. In 20X3, A Co. reported a gross proﬁt percentage of 86.3% while G Co's percentage was 80.7%. What is the most likely cause of G Co.'s lower gross proﬁt percentage?

-If a company has the opportunity to take a discount of 2/10, n/30 but must borrow money at an annual rate of 16%, what would be the net advantage of taking the discount?

T Co's gross proﬁt percentage has been increasing in the three years from 20X1 through 20X3 from 36.5% to 39.8%. This change has most likely been caused by which of the following?

Which of the following statements is true about the allowance method for uncollectible accounts?

When an account is written off using the allowance method for uncollectible accounts, trade accounts receivable

An aging of a company's trade receivables indicates that $6,500 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a

The balance in Allowance for Doubtful Accounts would have a debit balance when

In 20X3, T Co.'s gross proﬁt percentage was 39.8% while their competitor, WWW's percentage was 31.8%. What was the most likely reason for WWW's lower percentage?

To record estimated uncollectible accounts using the allowance method for uncollectible accounts, the adjusting entry would be a debit to?

Which of the following accounts is always treated as a contra revenue and not as a selling expense?

If an account is collected after having been previously written off,

What is the impact of treating sales returns and allowances as a contra revenue but treating sales discounts and credit card discounts as selling expenses?

In 20X3, C Co. reported net sales revenues of $19.8 billion and cost of goods sold for $6.0 billion. What was their gross profit percentage for 20X3?