Question 1

When customers make purchases with a national credit card the retailer

Accepted Answer

When customers make purchases with a national credit card, the retailer is not involved in the collection process. The credit card company handles the collection of payments from customers, relieving the retailer of this responsibility.

Question 2

Major advantages of credit cards to the retailer include all of the following except the

Accepted Answer

The other options are advantages for retailers. For example, when customers use credit cards, the issuer is responsible for verifying their creditworthiness and managing any default or non-payment issues. Additionally, when a customer pays with a credit card, the retailer receives the full amount of the sale from the card issuer, rather than taking a risk by extending credit themselves.

Question 3

A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables?

Accepted Answer

The answer of A company regularly sells its receivables to...

Question 4

Receivables might be sold to

Accepted Answer

Receivables may be sold to generate cash quickly. This is especially useful when a company needs immediate cash to meet its obligations, invest in growth opportunities, or cover unexpected expenses. The process of selling receivables is also known as factoring, and it involves selling the right to collect on the receivables to a third-party at a discounted rate in exchange for immediate cash. This can be a helpful strategy to improve a company's cash flow and liquidity.

Question 5

Maine Corporation's unadjusted trial balance includes the following balances (assume normal balances): $\begin{array}{lr}
\text { Accounts Receivable } & \$ 850,000 \
\text { Allowance for Doubtful Accounts } & 18,000
\end{array}$
 Bad debts are estimated to be 5% of outstanding receivables. What amount of bad debt expense will the company record?

Accepted Answer

The bad debt expense is calculated as 5% of the outstanding receivables ($850,000), which is $42,500. Since the Allowance for Doubtful Accounts already has a balance of $18,000, the additional amount needed to bring the allowance to the correct level is $42,500 - $18,000 = $24,500.

Question 6

Retailers generally consider sales from the use of national credit card sales as a

Accepted Answer

National credit cards, such as Visa or Mastercard, are considered a form of electronic payment and are processed as cash sales. This means the funds from the sale are deposited directly into the retailer's bank account within a few days, without any waiting period for the credit card issuer to pay. While the retailer may pay a small processing fee to the credit card company, they do not have to worry about collecting outstanding balances or dealing with bad debts as they would with credit or note receivables.

Question 7

The sale of receivables by a business

Accepted Answer

Selling receivables can be a quick way for a business to generate cash for operating needs without taking on new debt or equity. It is a common practice for businesses to sell their receivables to third-party investors, known as factors, in exchange for cash. This allows businesses to improve their cash flow and fund their day-to-day operations.

Question 8

Jere Retailers accepted $57000 of Maxibank Visa credit card charges for merchandise sold on July 1. Maxibank charges 3% for its credit card use. The entry to record this transaction by Jere Retailers will include a credit to Sales Revenue of $57000 and a debit(s) to

Accepted Answer

The correct entry includes debiting Cash for $55,290, which is the amount received after the service charge (3% of $57,000 = $1,710; $57,000 - $1,710 = $55,290), and debiting Service Charge Expense for $1,710 to record the cost of the credit card service.

Question 9

If a company sells its accounts receivables to a factor

Accepted Answer

When a company sells its accounts receivables to a factor, the seller typically pays a commission to the factor for this service. The factor then takes on the responsibility of collecting the receivables.

Question 10

Woulk Company has a debit balance of $8000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year Woulk estimates that $60000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is:

Accepted Answer

The correct amount of bad debt expense is $68,000. This is calculated by adding the existing debit balance of $8,000 in the Allowance for Doubtful Accounts to the new estimate of uncollectible receivables of $60,000. This adjustment ensures the allowance account reflects the estimated uncollectible amount accurately.

Question 11

Kirk Furniture factors $800000 of receivables to Sulu Factors Inc. Sulu Factors assesses a 4% service charge on the amount of receivables sold. Kirk Furniture factors its receivables regularly with Sulu Factors. What journal entry does Kirk make when factoring these receivables? a.
$\begin{array}{lrr}
  \text {  Cash} &768,000\
 \text {   Loss on Sale of Receivables} &32,000\
 \text {   Accounts Receivable} &&500,000
\end{array}$

b.
$\begin{array}{lrr}
  \text {  Cash} &768,000\
 \text {Accounts Receivable  } &&768,000\
\end{array}$

c.
$\begin{array}{lrr}
  \text { Cash } &800,000\
 \text { Accounts Receivable } &&768,000\
 \text { Gain on Sale of Recenables  } &&32,000
\end{array}$

d.
$\begin{array}{lrr}
  \text { Cash } &768,000\
 \text {  Service Charge Expens} &32,000\
 \text { Accounts Receivable } &&800,000
\end{array}$

Accepted Answer

The answer of Kirk Furniture factors $800000 of receivables to...

Question 12

Jill Company provides for bad debt expense at the rate of 3% of credit sales. The following data are available for 2016: $\begin{array}{ll}
  \text {Allowance for doubtful accounts, $ 1 / 1 / 16(\mathrm{Cr} $.)   } &\$15,000\
 \text { Accounts written off as uncollectible during 2016 } &9,000\
 \text {  Credit sales in 2016 } &1,000,000
\end{array}$

The Allowance for Doubtful Accounts balance at December 31 2016 should be

Accepted Answer

The allowance for doubtful accounts is calculated as the beginning balance plus bad debt expense minus accounts written off. Bad debt expense is 3% of $1,000,000, which is $30,000. The ending balance is $15,000 + $30,000 - $9,000 = $36,000.

Question 13

On October 1 2016 Beane Company sells (factors) $600000 of receivables to Milago Factors Inc. Milago assesses a service charge of 4% of the amount of receivables sold. The journal entry to record the sale by Beane will include

Accepted Answer

The service charge is 4% of $600,000, which is $24,000. Beane Company will record this as a debit to Service Charge Expense.

Question 14

The retailer considers Visa and MasterCard sales as

Accepted Answer

Retailers consider Visa and MasterCard sales as cash sales because the funds are typically deposited into the retailer's account by the card processor within a few days, similar to cash transactions.

Question 15

During 2016 Belfour Inc. had sales on account of $189000 cash sales of $78000 and collections on account of $162000. In addition they collected $1275 which had been written off as uncollectible in 2015. As a result of these transactions the change in the accounts receivable balance indicates a

Accepted Answer

The formula to calculate the change in accounts receivable balance is: Beginning accounts receivable + Credit sales - Collections - Write-offs + Adjustments = Ending accounts receivable.

Using the given data:
Beginning accounts receivable = unknown
Credit sales = $189000
Collections = $162000 + $1275 = $163275
Write-offs = $0 (since $1275 was already collected)
Adjustments = $0 (no information provided)

We can rearrange the formula to solve for Beginning accounts receivable:

Beginning accounts receivable = Ending accounts receivable - Credit sales + Collections + Write-offs - Adjustments

Assuming the ending accounts receivable balance is the same as the beginning balance, we can simplify the formula to:

Change in accounts receivable = Collections - Credit sales + Write-offs
Change in accounts receivable = $163275 - $189000 + $1275
Change in accounts receivable = -$2450

Since the result is negative, it means that the accounts receivable balance has decreased, not increased. Therefore, the only possible answer is B, $27000 increase, which is incorrect. This means there may be an error or missing information in the problem.

Question 16

If a retailer regularly sells its receivables to a factor the service charge of the factor should be classified as a(n)

Accepted Answer

Selling expenses include all direct and indirect costs associated with the selling process, including the service charge of a factor when a retailer sells its receivables. This is because factoring is often used as a means to accelerate cash flow and manage receivables, which are directly related to the sales process.

Question 17

On March 1 2016 Mike Dials purchased a suit at Lenny's Fine Apparel Store. The suit cost $800 and Mike used his Lenny's credit card. Lenny's charges 3% per month interest if payment on credit charges is not made within 30 days. On April 30 2016 Mike had not yet made his payment. What entry should Lenny's make on April 30th? a.
$\begin{array}{lrr}
  \text {Uncollectible Account  } &800\
 \text { Accounts Receivable } &&800\
\end{array}$
 
b. 
$\begin{array}{lrr}
  \text {  Bad Debt Expense} &776\
 \text { Interest Expense } &24\
 \text {Accounts Receivable  } &&800
\end{array}$

c. 
$\begin{array}{lrr}
  \text { Accounts Receivable  } &824\
 \text {  Interest Expense} &&24\
 \text {  Sales Revenue} &&800
\end{array}$

d. 
$\begin{array}{lrr}
  \text {  Accounts Receivable} &24\
 \text {  Interest Expense} &&24\
\end{array}$

Accepted Answer

The answer of On March 1 2016 Mike Dials purchased...

Question 18

Able Company accepted a national credit card for a $5000 purchase. The cost of the goods sold is $3000. The credit card company charges a 2% fee. What is the impact of this transaction on net operating income?

Accepted Answer

The net operating income increases by the sales revenue minus the cost of goods sold and the credit card fee: $5000 - $3000 - ($5000 * 2%) = $1900.

Question 19

In 2016 Yale Company had credit sales of $1050000 and granted sales discounts of $25000. On January 1 2016 Allowance for Doubtful Accounts had a credit balance of $26400. During 2016 $43000 of uncollectible accounts receivable were written off. Past experience indicates that 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31 2016?

Accepted Answer

The adjusted balance of Allowance for Doubtful Accounts at December 31, 2016, should be $14,150. This is calculated as follows:Beginning balance of Allowance for Doubtful Accounts: $26,400Add: Provision for doubtful accounts (3% of net credit sales): $31,500Less: Write-offs of uncollectible accounts receivable: $43,000Adjusted balance of Allowance for Doubtful Accounts: $14,150

Question 20

An analysis and aging of the accounts receivable of Downs Company at December 31 revealed the following data: $\begin{array}{lrr}
  \text { Accounts Receivable } &\$800,000\
 \text { Allowance for Doubtful Accounts per books } &\
 \text { before adjustment (Cr.) } &50,000\
 \text {Amounts expected to become uncollectible  } &53,000\
\end{array}$

The cash realizable value of the accounts receivable at December 31 after adjustment is:

Accepted Answer

The cash realizable value is calculated by subtracting the adjusted allowance for doubtful accounts from the total accounts receivable: $800,000 - $53,000 = $747,000.

Quiz 9: Accounting for Receivables