Deck 8: Receivables

Question 1

The use of an allowance for bad debts is required under the materiality principle.

Answer 1

False

Question 2

The aging of accounts receivable examines each account receivable to estimate the amount that is uncollectible.

Answer 2

True

Question 3

Quality of receivables refers to the likelihood of collection without loss.

Answer 3

True

Question 4

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable at the time it is determined to be uncollectible.

Question 5

If the allowance method is used, the journal entry to record the reinstatement of an account previously written off in the current period includes a debit to Accounts Receivable and a credit to Bad Debt Expense.

Question 6

The direct write-off method does not use an allowance for doubtful accounts account.

Question 7

Accounts receivable arise from credit sales to customers by both retailers and wholesalers.

Question 8

TechCom customer RDA Electronics paid off an $8,300 balance on its account receivable. TechCom should record the transaction as a debit to Accounts Receivable-RDA Electronics and a credit to Cash.

Question 9

TechCom has $40,000 in outstanding accounts receivable. Past experience suggests that 5% of outstanding receivables are uncollectible. The current balance in the allowance for doubtful accounts is $2,500 debit. The required adjusting journal entry includes a debit to bad debt expense for $4,500.

Question 10

The percentage of sales approach for estimating bad debts is based on the idea that a percent of a company's credit sales for the period are uncollectible.

Question 11

The advantage of the allowance method of accounting for bad debts is that it identifies the customers who won't pay their bills.

Question 12

TechCom has sales of $350,000 and estimates that 0.5% of its sales are uncollectible. The amount of bad debt expense is $17,500.

Question 13

Credit sales are recorded by crediting an account receivable for a specific customer.

Question 14

The matching principle requires use of the direct write-off method.

Question 15

If a customer owes interest on a bill, Accounts Receivable is debited, and Interest Expense is credited.

Question 16

The accounts receivable approach uses income statement relationships to estimate bad debts.

Question 17

Installment accounts receivable is another name for aging accounts receivable.

Question 18

As long as a company accurately records credit sales information, it is not necessary to have accounts for specific customers.

Question 19

Companies must follow both the matching principle and the materiality principle when considering the use of the direct write-off method.

Question 20

The direct write-off method satisfies generally accepted accounting principles.

Question 21

Notes receivable are classified as current liabilities.

Question 22

The maturity date of a note is the day the note is signed.

Question 23

A dishonoured note receivable is reclassified as an account receivable.

Question 24

Notes receivable do not require a subsidiary ledger.

Question 25

A payee of a note usually honours a note and pays it in full.

Question 26

The formula for computing interest on a note receivable is principal multiplied by interest rate multiplied by time.

Question 27

It is a bad business practice to accept a note receivable in exchange for an overdue account receivable.

Question 28

Phuong Vo borrowed $5,000 and signed a 3-month promissory note at 10%. The total interest on the note is $125.

Question 29

The practice of placing dishonoured notes receivable into Accounts Receivable keeps only current notes receivable in the Notes Receivable account.

Question 30

The materiality principle is justification for using the direct-write-off method.

Question 31

The person that borrows money and signs a promissory note is called the payee.

Question 32

A promissory note is a written promise to pay a specified amount of money either on demand or at a definite future date.

Question 33

The direct write-off method is used because it is simpler than the allowance method.

Question 34

TechCom received a $1,000, 90-day, 10% note receivable from Danny Outlaw. The journal entry to record the note includes a debit to notes receivable.

Question 35

The allowance method complies with the generally accepted accounting principle of matching.

Question 36

Receivables can be converted to cash by either selling them or using them as security for a loan.

Question 37

A company can raise cash by borrowing money, and then factoring its accounts receivable as security for the loan.

Question 38

Augusto Diaz borrowed $1,000 and signed a 6-month promissory note at 11% interest. The total amount of interest is $110.00.

Question 39

A maker who dishonours a note does not pay it at maturity.

Question 40

The matching principle requires that accrued interest on outstanding accounts receivable be recorded at the end of an accounting period.

Question 41

A high accounts receivable turnover rate in comparison with that of competitors' suggests that the firm should tighten its credit policy.

Question 42

Z-Mart had $12,000 in accounts receivable and $320,000 in net sales for the period. To one decimal, Z-Mart's days' sales uncollected was 13.7 days.

Question 43

Which accounting principle requires reporting expenses in the same period as the sales they helped to produce?

A) Materiality
B) Going concern
C) Matching
D) Cost
E) Business entity

Question 44

A credit sale of $2,500 to a customer would result in

A) A credit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the Accounts Receivable Ledger
B) A debit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the Accounts Receivable Ledger
C) A debit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the Accounts Receivable Ledger
D) A credit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the Accounts Receivable Ledger
E) A credit to Sales and a credit to the customer's account in the Accounts Receivable Ledger

Question 45

Hasbro had $750 million in accounts receivable and $2,900 million in net sales for the period. Its days' sales uncollected was 29.8.

Question 46

The days' sales uncollected ratio measures a company's ability to manage its debt.

Question 47

Accounts receivable turnover is calculated by dividing net sales by average accounts receivable.

Question 48

Compaq had net sales of $10,500 million. Its average account receivables were $1,750 million. Its accounts receivable turnover was 6.

Question 49

TechCom factored $35,000 of its accounts receivable and was charged a 2% factoring fee. The journal entry to record this would include a debit to Cash of $35,000; a debit to Factoring Fee Expense of $700; and a credit to Accounts Receivable of $35,700.

Question 50

The matching principle requires

A) That bad debt expenses be reported in the same accounting period as the sales they helped generate
B) That bad debt expenses be reported in the same accounting period as the sales they helped generate and requires the use of the allowance method of accounting for bad debts
C) The use of the allowance method of accounting for bad debts
D) That bad debt expenses be reported in the same accounting period as the sales they helped generate and requires the use of the direct write-off method for bad debts
E) The use of the direct write-off method for bad debts

Question 51

Accounts receivable turnover shows how often a company converts its average accounts receivable balance into cash during the period.

Question 52

The days' sales uncollected ratio measures the liquidity of receivables.

Question 53

A company must have less than 30 days' sales uncollected to be adequately liquid.

Question 54

TechCom had net sales of $480,000 and average accounts receivable of $64,000. Its accounts receivable turnover was 7.5.

Question 55

Because pledged receivables only serve as collateral for a loan and are not sold, it is not necessary to disclose the pledging.

Question 56

The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales and multiplying the answer by 365.

Question 57

Accounts receivable accounts for specific customers are important because they show

A) How much each customer purchases
B) How much each customer has paid
C) How much each customer still owes
D) The basis for sending bills to customers
E) All of these

Question 58

A contingent liability is an obligation to make a future payment if an uncertain future event occurs.

Question 59

When a note is discounted to a bank without recourse, the bank assumes the risk of a bad debt loss and the original payee doesn't have a contingent liability.

Question 60

Firms maintain their own credit cards

A) To earn interest on any balances not paid within a specified period
B) To avoid the fees charged by credit card companies such as VISA
C) In order to speed up receipt of cash from the sale
D) To grant credit to approved customers
E) All of these

Question 61

A 90-day note issued on July 10 matures on

A) October 7
B) October 8
C) October 9
D) October 10
E) October 11

Question 62

The accounting principle that requires financial statements to report all contingent liabilities is called

A) Relevance
B) Evaluation
C) Full disclosure
D) Materiality
E) Matching

Question 63

The maturity date of a note receivable

A) Is the day of the credit sale
B) Is the day the note was signed
C) Is the day the note is due to be paid
D) Is the date of the first payment
E) Is the last day of the month

Question 64

The materiality principle

A) States that an amount can be ignored if its effect on financial statements is unimportant to the user and permits use of the direct write-off method
B) Permits use of the direct write-off method
C) Prohibits use of the direct write-off method
D) States that an amount can be ignored if its effect on financial statements is unimportant to the user
E) Both permits and prohibits use of the direct write-off method

Question 65

An accounting procedure that (1) estimates and reports bad debt expense from credit sales during the period of the sales and (2) reports accounts receivable at the amount of cash inflow that is expected from their collection is the

A) Allowance method of accounting for bad debts
B) Aging of accounts receivable
C) Adjustment method for uncollectible debts
D) Direct write-off method of accounting for bad debts
E) Cash basis method of accounting for bad debts

Question 66

A promissory note

A) Is an account receivable
B) Is a written promise to pay a specified amount of money at a certain date
C) Is a liability to the payee
D) Is a written promise to pay a specified amount of money at a certain date and is a liability to the payee
E) All of these

Question 67

A promissory note from a customer

A) Is a cash equivalent
B) Is an account receivable
C) Is a note receivable
D) Is a short-term investment
E) Is a note payable

Question 68

During the current year, TechCom concluded that a customer's $4,400 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on TechCom's current year net income and balance sheet assuming the allowance method is used to account for bad debts?

A) No effect on net income or on total assets
B) Decrease in net income; no effect on total assets
C) Decrease in net income; decrease in total assets
D) Increase in net income; no effect on total assets
E) No effect on net income; decrease in total assets

Question 69

The cash to be received at maturity on a $10,000, 8%, 90-day note receivable is

A) $197.26
B) $5,126.26
C) $6,187.26
D) $10,197.26
E) $12,297.26

Question 70

Failure by the maker of a promissory note to pay the amount due at maturity is known as

A) Protesting a note
B) Closing a note
C) Dishonouring a note
D) Discounting a note
E) Depreciating a note

Question 71

If the balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt being written off, the entry to record the write-off against the allowance account results in

A) No effect on the expenses of the current period
B) A reduction in current assets
C) A reduction in owner's equity
D) An increase in the expenses of the current period
E) A reduction in current liabilities

Question 72

The amount of bad debt expense can be estimated by

A) The percent of sales approach
B) The percent of accounts receivable approach
C) The aging of accounts receivable approach
D) Both the percent of sales approach and the percent of accounts receivable approach
E) All of these

Question 73

The person who signs a note receivable and promises to pay is the

A) Maker
B) Payee
C) Holder
D) Receiver
E) Owner

Question 74

When a maker of a note honours a note,

A) The note is signed.
B) The note is paid off.
C) The note is written.
D) The note is notarized.
E) The note is cosigned.

Question 75

On December 31 of the current year, TechCom's unadjusted trial balance included the following items: Accounts Receivable, debit balance of $107,250; Allowance for Doubtful Accounts, credit balance of $1,900. What amount should be debited to Bad Debt Expense, assuming 6% of outstanding accounts receivable as of December 31 of the current year, are estimated to be uncollectible?

A) $2,835
B) $3,755
C) $4,535
D) $6,435
E) $8,335

Question 76

Interest on $8,400 at 7% for 60 days is

A) $36.45
B) $41.42
C) $52.65
D) $65.25
E) $96.66

Question 77

A method of estimating bad debts expense that involves a detailed examination of outstanding accounts and that is usually the most reliable is the

A) Direct write-off method
B) Income statement method
C) Aging of accounts receivable method
D) Simplified balance sheet method
E) Accounts receivable method

Question 78

Electron borrowed $75,000 from TechCom by signing a promissory note and pledging $85,000 in accounts receivable as security. TechCom's entry to record the transaction should include a

A) Debit to Notes Receivable for $75,000
B) Debit to Accounts Receivable for $75,000
C) Credit to Notes Receivable for $75,000
D) Debit Notes Payable for $75,000
E) Credit to Sales for $75,000

Question 79

The buyer who pays cash for accounts receivable is called

A) Payor
B) Pledgor
C) Factor
D) Payee
E) Pledgee

Question 80

TechCom receives a 10%, 90-day note for $2,500. The interest on the note is

A) $36.99
B) $50.00
C) $58.79
D) $61.64
E) $87.50