Question 1

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On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Assume that the Loudoun Corporation uses the direct write-off method.Which of the following correctly describes the effect of the write-off of the customer's account on Loudoun's financial statements?

Accepted Answer

If Loudoun uses the direct write-off method,the write-off will decrease assets (accounts receivable)and stockholders' equity (retained earnings).It increases expenses (uncollectible accounts expense),which decreases net income.It does not affect the statement of cash flows.

Question 2

Which of the following general journal entries would be used to recognize $7,500 of uncollectible accounts expense under the direct write-off method?

Accepted Answer

Using the direct write-off method,a write-off is recorded as a debit (increase)to uncollectible accounts expense and a credit (decrease)to accounts receivable.

Question 3

Buttercup Florist uses the allowance method to account for uncollectible accounts.Unable to collect a $150 account from a customer,Buttercup determined it was uncollectible.How would the write-off of this account affect the elements of the company's financial statements?

Accepted Answer

The write-off decreases assets (accounts receivable)and increases assets (decrease to allowance for doubtful accounts),resulting in no net change to total assets,total liabilities,or stockholders' equity.A write-off does not affect the statement of cash flows.

Question 4

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The Yankee Corporation has recently begun to accept credit cards. On July 7, Year 1, Yankee made a credit card sale of $600. The credit card company charges a fee of 3% for handling a credit card transaction.

-Which of the following correctly shows the effects of the sale on July 7?

Accepted Answer

The credit card sale increases total assets (accounts receivable-credit card company)and stockholders' equity (retained earnings)by $582 [or $600-($600 × 3%)].It increases revenue by $600 and increases expenses (credit card expense)by $18 (or $600 × 3%)and increases net income by $582 (or $600 - $18).The statement of cash flows is not affected.

Question 5

Which accounting concept can be used by some companies to justify the use of the direct write-off method?

Accepted Answer

The direct write-off method fails to match revenues with expenses and overstates accounts receivable on the balance sheet.It is easier to use,however,and is permitted by generally accepted accounting principles if the amount of uncollectible accounts expense is immaterial.

Question 6

Which of the following is a cost of extending credit to customers?

Accepted Answer

Two costs of extending credit to customers are uncollectible accounts expense and recordkeeping costs.

Question 7

If the allowance method is used,how do the two entries recorded in connection with the recovery of an uncollectible account affect the elements of the financial statements? (Hint: Consider the effect of both entries taken together.)

Accepted Answer

When a company receives payment on a previously written-off account,it must first reinstate the written-off account.The reinstatement increases assets (accounts receivable)and decreases assets (by increasing the allowance for doubtful accounts,a contra asset account),with no net effect on any of the elements of the financial statements.Then,the company records collection of the receivable,which increases assets (cash)and decreases assets (accounts receivable),again with no net effect on total assets,total liabilities,or stockholders' equity.The event is reported as a cash inflow for operating activities on the statement of cash flows.

Question 8

Which of the following is not a significant difference between the allowance method and the direct write-off method?

Accepted Answer

Both methods require writing off uncollectible accounts.The difference is the timing of when uncollectible accounts expense is recognized.

Question 9

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts?

Accepted Answer

Allowance for doubtful accounts is a contra asset account;thus,it is a permanent (rather than a temporary)account.Uncollectible accounts expense,which is reported on the income statement,is a temporary account.

Question 10

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1,Year 1.The one-year note carried a 6% rate of interest.What is the amount of interest revenue that Rosewood would report in Year 1 and Year 2,respectively?

Accepted Answer

Interest revenue = Principal × Annual interest rate × Time outstanding
Year 1 (April through December):
Interest revenue = $16,000 × 6% × 9/12 months = $720
Year 2 (January through March):
Interest revenue = $16,000 × 6% × 3/12 months = $240

Question 11

Which of the following is not an advantage of accepting credit cards from retail customers?

Accepted Answer

The fees associated with credit card sales are a disadvantage,not an advantage,of accepting credit cards.

Question 12

Which of the following best describes the percent of receivables method?

Accepted Answer

The percent of receivables method to estimate uncollectible accounts expense is frequently called the balance sheet approach because it uses a percentage of one balance sheet account (accounts receivable)to estimate another balance sheet account (allowance for doubtful accounts).

Question 13

When is it acceptable to use the direct write-off method?

Accepted Answer

The direct write-off method is permitted by generally accepted accounting principles only if the amount of uncollectible accounts expense is immaterial.

Question 14

Elliston Company accepted credit card payments for $10,000 of services provided to customers.The credit card company charges a 3% fee for handling the transaction.Which of the following describes the effect of this transaction?

Accepted Answer

The credit card sale increases total assets (accounts receivable - credit card company)and increases stockholders' equity (retained earnings)by $9,700 [or $10,000 - ($10,000 × 3%)].It increases revenue by $10,000,increases expenses (credit card expense)by $300 (or $10,000 × 3%),and increases net income by $9,700 (or $10,000 -$300).The statement of cash flows is not affected.

Question 15

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The Yankee Corporation has recently begun to accept credit cards. On July 7, Year 1, Yankee made a credit card sale of $600. The credit card company charges a fee of 3% for handling a credit card transaction.

-Which of the following correctly describes the effect of the collection of cash from the credit card company on the financial statements of Yankee Corporation?

Accepted Answer

Collecting the amount due ($582)from the credit card company increases assets (cash)and decreases assets (accounts receivable - credit card company),resulting in no net effect on total assets,total liabilities,or stockholders' equity.It is reported as a cash inflow for operating activities.

Question 16

Which of the following is (are)the term(s)used to describe the person responsible for making payment on the due date of a promissory note?

Accepted Answer

The maker is the person responsible for making payment on the due date.The maker may also be called the borrower or debtor.

Question 17

[The following information applies to the questions displayed below.]

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Which of the following correctly states the effect of Loudoun Company's February Year 2 entry to write off the customer's account?

Accepted Answer

The write-off increases assets by decreasing the allowance for doubtful accounts and decreases assets (accounts receivable),resulting in no net effect on total assets,total liabilities,or stockholders' equity.

Question 18

[The following information applies to the questions displayed below.]

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Which of the following correctly states the effect of the adjusting entry,dated December 31,Year 1,on the elements of the financial statements of the Loudoun Corporation?

Accepted Answer

Uncollectible accounts expense = Credit sales of $112,500 × 3% = $3,375
The adjusting entry decreases assets (by increasing the allowance for doubtful accounts)and decreases stockholders' equity (retained earnings).It increases expenses (uncollectible accounts expense),which decreases net income.It does not affect the statement of cash flows.

Question 19

[The following information applies to the questions displayed below.]

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Which of the following correctly states the effect of recording the collection of the reestablished receivable on April 4,Year 2?

Accepted Answer

Once the receivable is reestablished,the collection of the receivable is recorded as an increase to assets (cash)and a decrease to assets (accounts receivable),resulting in no net effect on total assets,total liabilities,or stockholders' equity.It is reported as a cash inflow for operating activities.

Question 20

[The following information applies to the questions displayed below.]

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Which of the following correctly states the effect of Loudoun's recording the reestablishment of the receivable on April 4,Year 2?

Accepted Answer

Reestablishing the receivable increases assets (accounts receivable)and decreases assets (increase to allowance for doubtful accounts),resulting in no net effect on total assets,total liabilities,or stockholders' equity.

Quiz 7: Accounting for Receivables

Which of the following general journal entries would be used to recognize $7,500 of uncollectible accounts expense under the direct write-off method?

Buttercup Florist uses the allowance method to account for uncollectible accounts.Unable to collect a $150 account from a customer,Buttercup determined it was uncollectible.How would the write-off of this account affect the elements of the company's financial statements?

Which accounting concept can be used by some companies to justify the use of the direct write-off method?

Which of the following is a cost of extending credit to customers?

If the allowance method is used,how do the two entries recorded in connection with the recovery of an uncollectible account affect the elements of the financial statements? (Hint: Consider the effect of both entries taken together.)

Which of the following is not a significant difference between the allowance method and the direct write-off method?

Which one of the following is not an accurate description of the Allowance for Doubtful Accounts?

Rosewood Company made a loan of $16,000 to one of the company's employees on April 1,Year 1.The one-year note carried a 6% rate of interest.What is the amount of interest revenue that Rosewood would report in Year 1 and Year 2,respectively?

Which of the following is not an advantage of accepting credit cards from retail customers?

Which of the following best describes the percent of receivables method?

When is it acceptable to use the direct write-off method?

Elliston Company accepted credit card payments for $10,000 of services provided to customers.The credit card company charges a 3% fee for handling the transaction.Which of the following describes the effect of this transaction?

Which of the following is (are) the term(s) used to describe the person responsible for making payment on the due date of a promissory note?