Question 1

Notes receivable are assets and are reported in the balance sheet.

Accepted Answer

Notes receivable are assets and are typically reported in the balance sheet under the current or non-current assets section depending on the time frame of collection.

Question 2

From an income statement perspective,the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales)with their related expenses (bad debts).

Accepted Answer

The percentage-of-credit-sales method is designed to estimate the amount of bad debts based on the credit sales during the period. Since bad debts arise from credit sales, matching the expenses (bad debts) with the revenues (credit sales) using this method is more accurate than using other methods like the percentage-of-receivables method or the aging method. Therefore, from an income statement perspective, the percentage-of-credit-sales method is typically preferable.

Question 3

A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000.

Accepted Answer

The formula used to calculate interest in the question is incorrect. The correct formula is:
Interest = face value x annual interest rate x fraction of year
Using that formula: 
Interest = $10,000 x 0.10 x (6/12) = $500 
Therefore, the correct answer is B) False.

Question 4

The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method,because the estimate of bad debts is based on a balance sheet amount-accounts receivable.

Accepted Answer

The percentage-of-receivables method is indeed commonly referred to as the balance sheet method as it estimates bad debts based on the balance sheet amount of accounts receivable.

Question 5

Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument,or note.

Accepted Answer

Notes receivable are formal credit arrangements with a written debt instrument, while accounts receivable are the amount owed by customers for goods or services provided on credit.

Question 6

Accrued interest on a note receivable is interest earned by the end of the year but not yet received.

Accepted Answer

Accrued interest on a note receivable is the interest earned by the end of the year, but not yet received. Accrued interest is recognized as revenue in the accounting books, and it is shown as an asset on the balance sheet.

Question 7

The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method,because it always results in a higher amount of net income being reported in the income statement.

Accepted Answer

The percentage-of-credit-sales method is called the income statement method because it focuses on estimating bad debts based on sales, not because it results in higher net income. It does not inherently lead to higher net income.

Question 8

Under the direct write-off method,recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.

Accepted Answer

The first sentence is describing the allowance method, not the direct write-off method. Under the direct write-off method, uncollectible accounts are not estimated, but rather written off as they become uncollectible.

Question 9

A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers.

Accepted Answer

A higher receivables turnover ratio indicates that a company is collecting its accounts receivable more quickly, which is generally seen as more favorable management. A lower ratio would indicate that customers are taking longer to pay or that there are issues with collection efforts.

Question 10

From a balance sheet perspective,the percentage-of-receivables method is typically preferable because assets (net accounts receivable)are reported closer to their net realizable value.

Accepted Answer

The percentage-of-receivables method takes into account the estimated uncollectible accounts and records the net realizable value of accounts receivable, which is a more accurate representation of the value of the asset on the balance sheet. Therefore, it is typically preferred over the direct write-off method from a balance sheet perspective.

Question 11

On February 23,a company provides services on account to a customer for $4,500.The customer pays in full for those services on March 4.Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

Accepted Answer

The answer of On February 23,a company provides services on...

Question 12

The average collection period shows the approximate number of days the average accounts receivable balance is outstanding.

Accepted Answer

The average collection period is a well-known measure to evaluate the effectiveness of credit and collections policy. This ratio is calculated by dividing the total outstanding accounts receivable by the average daily sales. The result is a rough estimation of the number of days it takes to collect the average accounts receivable balance, which is expressed as a number of days (or times). Therefore, option A is correct.

Question 13

Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period.

Accepted Answer

The statement is true. The receivables turnover ratio measures how many times a company collects its average accounts receivable balance during a specific time period, while the average collection period measures the average number of days it takes for a company to collect its accounts receivable. Both ratios provide insights into a company's ability to manage its receivables effectively.

Question 14

Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts,the amount of bad debt expense reported in the income statement will always be the same under the two methods.

Accepted Answer

The methods use different accounts and formulas to calculate bad debt expense, so it is possible for the amounts to differ.

Question 15

Notes receivable typically arise from sales to customers.

Accepted Answer

The answer of Notes receivable typically arise from sales to...

Question 16

The percentage-of-credit-sales method (income statement method)is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method.

Accepted Answer

The percentage-of-credit-sales method is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method because the percentage-of-credit-sales method is a simplified method that is used when the amount of bad debts is not expected to be material.

Question 17

Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding.

Accepted Answer

This is the correct formula for calculating interest on a note receivable.

Question 18

The receivables turnover ratio equals average accounts receivable divided by net credit sales.

Accepted Answer

The receivables turnover ratio equals net credit sales divided by average accounts receivable, not the other way around.

Question 19

The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over").

Accepted Answer

The statement is true. The receivables turnover ratio is calculated by dividing net credit sales by the average accounts receivable balance. This shows how many times the accounts receivable balance is collected during a year, indicating the efficiency of the company's collections process.

Question 20

Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.

Accepted Answer

Accrued interest on a note receivable increases assets and increases revenue, not liabilities.

Quiz 5: Receivables and Sales