Question 1

A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity date. Mild Max would debit:

Accepted Answer

When a note receivable is dishonored, the company would debit a receivable account to recognize that the expected cash inflow from the note will not be realized and needs to be reclassified as an account receivable again.

Question 2

When you use an aging schedule approach for estimating uncollectible accounts:

Accepted Answer

In the aging schedule approach, bad debts expense is determined based on the ending balance required in the allowance for uncollectible accounts, which is calculated directly by analyzing the age of receivables. This makes the bad debts expense an indirect calculation, as it is derived from the adjustment needed to reach the desired allowance balance.

Question 3

Priscilla's Exotic Pets discounted a note receivable without recourse and the sales criteria were met. The discounting is recorded as:

Accepted Answer

When a note receivable is discounted without recourse and the sales criteria are met, it is recorded as a sale. This means that Priscilla's Exotic Pets has transferred the ownership of the note to the discounting party and no longer has any rights or responsibilities associated with it. The proceeds received from the discounting are recorded as cash received from the sale. Therefore, option C is the correct answer. Options A and B are incorrect because they do not reflect the nature of the transaction. Option D is also incorrect because there is a clear accounting treatment for this type of transaction.

Question 4

Drebin Security Systems sold merchandise to a customer in exchange for a $50,000, 5-year, noninterest-bearing note when an equivalent loan would carry 10% interest. Drebin would record sales revenue on the date of sale equal to:

Accepted Answer

The company should record the present value of the note as revenue on the date of sale, which is the amount the company expects to receive in the future, discounted by the appropriate interest rate. Therefore, the present value of $50,000 using a 10% interest rate would be recorded as sales revenue.

Question 5

Rahal's 2009 bad debt expense is:

Accepted Answer

The answer of Rahal's 2009 bad debt expense is:
...

Question 6

Baker Inc. acquired equipment from the manufacturer on 10/1/09 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/10 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2009 year-end financial statements, what is its imputed annual interest rate?

Accepted Answer

The interest accrued of $9,000 was for 3 months in 2009. The note lasts for a total of 6 months, so the total interest for 6 months is $18,000. The rest is principal. Therefore, the imputed annual interest rate is $18,000/$900,000 = 2% for 6 months, or 4% annually. Therefore, the correct answer is B.

Question 7

At December 31, 2008, Gill Co reported accounts receivable of $216,000 and an allowance for uncollectible accounts of $8,400. During 2009, accounts receivable increased by $22,000 after a $7,800 write-off of bad debts. An analysis of Gill Co.'s December 31, 2009, accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. Bad debt expense for 2009 would be:

Accepted Answer

The answer of At December 31, 2008, Gill Co reported...

Question 8

Frasquita acquired equipment from the manufacturer on 6/30/09 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/10 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2009 year-end financial statements, what would the manufacturer record in its 2009 income statement for this transaction?

Accepted Answer

The manufacturer would record $15,000 of interest revenue and $525,000 of sales revenue in its 2009 income statement. The $15,000 interest accrued in 2009 represents only a portion of the total interest to be earned on the note, which lasts until April 30, 2010. Therefore, the manufacturer should recognize both the interest and principal portions of the transaction as revenue in its income statement.

Question 9

At December 31, 2009, Amy Jo's Appliances had unadjusted account balances in accounts receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2009 write-offs of $6,450 in bad debts. An analysis of Amy Jo's December 31, 2009, accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for 2009 should be:

Accepted Answer

The correct answer is C.The allowance for uncollectible accounts should be 2% of accounts receivable, or $6,220 ($311,000 * 2%). The bad debt expense for 2009 is the difference between the new allowance and the old allowance, or $5,250 ($6,220 - $970).

Question 10

Nontrade receivables do not include:

Accepted Answer

Nontrade receivables include financial transactions not directly related to the sale of goods and services to customers, such as loans to employees, income tax refunds receivable, and advances to affiliated companies. Sales to customers, however, are considered trade receivables, not nontrade receivables.

Question 11

Which of the following is recorded by a credit to Accounts receivable?

Accepted Answer

A write-off of bad debts reduces the Accounts Receivable balance, which is recorded as a credit.

Question 12

In Dinty's adjusting entry for bad debts at year-end, which of these would be included?

Accepted Answer

Bad debt expense is typically debited to recognize the estimated uncollectible accounts, while the allowance for uncollectible accounts is credited. The debit to accounts receivable is not part of the adjusting entry for bad debts.

Question 13

At January 1, 2009, Farley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on past experience, 2 percent of Farley's credit sales have been uncollectible. During 2009, Farley wrote off $650,000 of accounts receivable. Credit sales for 2009 were $18,000,000. In its December 31, 2009 balance sheet, what amount should Farley report as allowance for uncollectible accounts?

Accepted Answer

The allowance for uncollectible accounts should be calculated as the beginning balance plus the provision for the year minus the write-offs. The provision is 2% of $18,000,000, which is $360,000. The calculation is: $520,000 (beginning balance) + $360,000 (provision) - $650,000 (write-offs) = $230,000.

Question 14

Rahal's accounts receivable at December 31, 2009, are:

Accepted Answer

The answer of Rahal's accounts receivable at December 31, 2009,...

Question 15

Long-term notes receivable issued for noncash assets at an unrealistically low interest rate will be:

Accepted Answer

Long-term notes receivable issued for noncash assets at an unrealistically low interest rate violate the matching principle and the time value of money concept. Therefore, they will be discounted at an imputed interest rate to record them at their present value, which reflects the true economic substance of the transaction.

Question 16

If a company uses the balance sheet approach to estimate bad debt expense, bad debt expense for a period can be determined by:

Accepted Answer

The answer of If a company uses the balance sheet...

Question 17

Frankenstein Enterprises received two notes from customers for sales that it made to them in 2009. The notes included: Note A: Dated 5/31/09, principal of $120,000 and interest due 3/31/10.
Note B: Dated 7/1/09, principal of $200,000 and interest at 8% annually, due on 4/1/10.
Frankenstein had accrued interest receivable from these notes of $14,400 on its 12/31/09 balance sheet. What amount of interest revenue would Frankenstein earn on these notes during 2010?

Accepted Answer

The answer of Frankenstein Enterprises received two notes from customers...

Question 18

Frankenstein Enterprises received two notes from customers for sales that it made to them in 2009. The notes included: Note A: Dated 5/31/09, principal of $120,000 and interest due 3/31/10.
Note B: Dated 7/1/09, principal of $200,000 and interest at 8% annually, due on 4/1/10.
Frankenstein had accrued interest receivable from these notes of $14,400 in its 12/31/09 balance sheet. What is annual interest rate on Note A?

Accepted Answer

We calculated the annual interest rate on Note A to be 9.14%, which is option A. Option B is the interest rate for Note B, which is not relevant to the question. Options C and D are not calculated or mentioned in the solution. Therefore, the correct choice is A.

Question 19

Rahal's adjusted allowance for uncollectible accounts at December 31, 2009, is:

Accepted Answer

The answer of Rahal's adjusted allowance for uncollectible accounts at...

Question 20

Frasquita acquired equipment from the manufacturer on 6/30/09 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/10 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2009 year-end financial statements, at what amount would it record the equipment on its 6/30/09 balance sheet?

Accepted Answer

$525,000. $15,000 was interest for 6 months in 2009. The note lasts 10 months, so $15,000 × 10/6 = $25,000 is the total interest for 10 months; the rest ($550,000 - $25,000) is principal, which is the cost of the equipment purchased. Therefore, Frasquita would record the equipment at $525,000 on its 6/30/09 balance sheet.

Quiz 7: Cash and Receivables