Question 1

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

Under the direct write-off method, Bad Debt Expense is only recognized when a specific customer's accounts receivable is deemed uncollectible, regardless of when the sale was made. Therefore, it does not attempt to match Bad Debt Expense to sales revenues in the same accounting period.

Question 2

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

Accepted Answer

To find the interest on the 60-day note, we can use the simple interest formula:

I = PRT

Where:
P = $1,000 (principal)
R = 12% (annual interest rate)
T = 60/360 (time in years)

Plugging these values in, we get:

I = $1,000 x 0.12 x 60/360
I = $20

So, the total amount due at maturity (maturity value) would be:

M = $1,000 + $20
M = $1,020

Therefore, the statement is true.

Question 3

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 assets that represent money owed to a company and are expected to be collected in cash in the future.

Question 4

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 5

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 allow the use of the allowance method of accounting for uncollectible accounts. This method is actually the preferred method for reporting accounts receivable on the balance sheet.

Question 6

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 is correct. The net realizable value of the receivables is the total amount of receivables that a company expects to collect from its customers after accounting for any potential bad debts or uncollectible accounts. It is calculated as the difference between the total receivables and the balance in the Allowance for Doubtful Accounts.

Question 7

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

Accepted Answer

This is true. Factoring is a transaction in which a company sells its accounts receivable (invoices) to another company (referred to as a factor) at a discounted price. The factor then collects payment from the customers who owe the invoices.

Question 8

Allowance for Doubtful Accounts is a contra equity account.

Accepted Answer

Allowance for Doubtful Accounts is a contra asset account, not a contra equity account. It is used to reduce the value of accounts receivable to their expected net realizable value.

Question 9

The maturity value of a 12%, 60-day note for $5,000 is $5,100. (Assume 360 days in a year)

Accepted Answer

The maturity value of a note can be calculated using the formula:

Maturity Value = Principal + (Principal x Rate x Time)

In this case, the principal is $5,000, the rate is 12%, and the time is 60/360 (since there are 360 days in a year).

So the maturity value would be:

Maturity Value = $5,000 + ($5,000 x 0.12 x 0.16667)

Maturity Value = $5,000 + $100

Maturity Value = $5,100

Therefore, the statement is true.

Question 10

The interest at 6%, on a 60-day note for $5,000 is $50. (Assume 360 days in a year)

Accepted Answer

We can use the formula I = Prt, where I is the interest, P is the principal, r is the interest rate per year (as a decimal), and t is the time in years. Since the note is for 60 days (or 60/360 = 1/6 of a year), we have:

I = Prt
50 = 5000 x 0.06 x (1/6)

Solving for P, we get:

P = I / (rt) = 50 / (0.06 x 1/6) = 5000

Therefore, the principal is indeed $5,000 and the answer is true.

Question 11

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 12

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 13

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 long-term assets section of the balance sheet, not the fixed assets section.

Question 14

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

Accepted Answer

Inventories are considered current assets because they are expected to be converted into cash within one year or one operating cycle, whichever is longer.

Question 15

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 of the note. The payee is the party who will receive payment at maturity.

Question 16

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

Accepted Answer

This is true as the payee is the recipient of the payment when a note reaches its maturity date.

Question 17

The due date of a 90-day note dated June 10 is September 8. (Assume 360 days in a year)

Accepted Answer

The due date of a 90-day note would be September 8, which is exactly 90 days after June 10. Therefore, the statement is true. Assuming 360 days in a year is a common practice in finance and accounting when calculating interest and dates.

Question 18

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 accounts as soon as they are identified and records the expense in the same year.

Question 19

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 true. Current assets include all assets that are expected to be turned into cash or used up within a year, and accounts receivable that are expected to be collected within a year fall under this category.

Question 20

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.

Quiz 6: Receivables and Inventories