Chapter 7
Accounting for Receivables
True/False Questions
1. A receivable is an amount due from another party.
2. Credit sales are recorded by crediting an Accounts Receivable.
3. As long as a company accurately records total credit sales information, it is not necessary to
have separate accounts for specific customers.
4. If a customer owes interest on accounts receivable, Interest Receivable is debited and
Accounts Receivable is credited.
5. If a credit card sale is made, the seller can either debit Cash or debit Accounts Receivable at
the time of the sale, depending on the type of credit card.
6. Installment Accounts Receivable are classified as non-current assets if the installment
period is more than one year, even if the seller regularly offers customers such terms
7. Companies can report credit card expense as a discount deducted from sales or as a selling
expense.
8. BizCom’s customer, Redding, paid off an $8,300 balance on its account receivable. BizCom
should record the transaction as a debit to Accounts Receivable—Redding and a credit to
Cash.
9. The maturity date of a note refers to the date the note must be repaid.
10. A promissory note is a written promise to pay a specified amount of money either on
demand or at a definite future date.
11. The formula for computing interest on a note is: Principal of the note x Annual interest
rate x Time expressed in fraction of year.
12. The person that borrows money and signs a promissory note is called the maker.
13. A company borrowed $10,000 by signing a six month promissory note at 5% interest. The
total amount of interest is $25.
14. A company borrowed $16,000 by signing a 4-month promissory note at 12%. The total
interest on the note is $640.
15. Sellers generally prefer to receive notes receivable rather than accounts receivable when
the credit period is long and the receivable is for a large amount.
16. Federal laws prohibit the selling of accounts receivables to factors.
17. The process of using accounts receivable as security for a loan is known as pledging
accounts receivable.
18. Since pledged accounts receivables only serve as collateral for a loan and are not sold, it is
not necessary to disclose the pledging.
19. A company factored $30,000 of its accounts receivable and was charged a 2% factoring
fee. The journal entry to record this transaction would include a debit to Cash of $30,000, a
debit to Factoring Fee Expense of $600, and credit to Accounts Receivable of $30,600.
20. The quality of receivables refers to the likelihood of collection without loss.
21. The accounts receivable turnover indicates how often accounts receivable are received and
collected during the period.
22. A high accounts receivable turnover in comparison with competitors suggests that the firm
should tighten its credit policy.
23. The accounts receivable turnover is calculated by dividing average accounts receivable by
net sales.
24. A company had net sales of $550,000 and an average accounts receivable of $110,000. Its
accounts receivable turnover equals 5.0.
25. A Company had net sales of $23,000 million, and its average account receivables were
$5,700 million. Its accounts receivable turnover is 0.24.
26. The direct write-off method of accounting for bad debts records the loss from an
uncollectible account receivable when it is determined to be uncollectible.
27. The matching principle requires use of the allowance method of accounting for bad debts.
28. Companies follow both the matching principle and the materiality constraint when
applying the direct write-off method.
29. The use of the direct write-off method is allowed under the materiality constraint.
30. The advantage of the allowance method of accounting for bad debts is that it identifies the
specific customers who will not pay their bills.
31. Companies use two methods to account for uncollectible accounts, the direct write-off
method and the allowance method.
32. No attempt is made to estimate bad debts expense under the allowance method of
accounting for uncollectible accounts receivable.
33. The matching principle permits the use of the direct write-off method of accounting for
uncollectible accounts when bad debts are very large in relation to a company’s other financial
statement items such as sales and net income.
34. When using the allowance method of accounting for uncollectible accounts, the entry to
record the estimated bad debts expense is a debit to Bad Debts Expense and a credit to
Allowance for Doubtful Accounts.
35. After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of
reducing Accounts Receivable to its estimated realizable value.
36. When using the allowance method of accounting for uncollectible accounts, the entry to
write off Macie’s uncollectible account is a debit to Allowance for Doubtful Accounts and a
credit to Accounts Receivable—Macie.
37. When using the allowance method of accounting for uncollectible accounts, the recovery
of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.
38. The aging of accounts receivable involves classifying each account receivable by how
long it is past its due date and estimating the percent of each uncollectible class.
39. Installment accounts receivable is another name for aging of accounts receivable.
40. The accounts receivable method to estimate bad debts obtains the estimated balance in the
Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible
from the total accounts receivable or (2) aging accounts receivable.
41. The percent of sales method for estimating bad debts assumes that a given percent of a
company’s credit sales for the period are uncollectible.
42. The percent of sales method for bad debts estimation uses only income statement account
balances to estimate bad debts.
43. The aging method of determining bad debts expense is based on the knowledge that the
longer a receivable is past due, the higher the likelihood of collection.
44. A company has $80,000 in outstanding accounts receivable and it uses the allowance
method to account for uncollectible accounts. Experience suggests that 6% of outstanding
receivables are uncollectible. The current credit balance (before adjustments) in the allowance
for doubtful accounts is $1,200. The journal entry to record the adjustment to the allowance
account includes a debit to Bad Debts Expense for $4,800.
45. A company using the percentage of sales method for estimating bad debts has sales of
$350,000 and estimates that 1.0% of its sales are uncollectible. The estimated amount of bad
debts expense is $3,500.
46. The percent of sales method of estimating bad debts focuses more on the realizable value
of accounts receivable than on matching.
47. If a company holds a large number of notes receivable it sometimes sets up a controlling
account and a subsidiary ledger for notes.
48. Notes receivable are classified as current liabilities regardless of the time to maturity.
49. A company received a $15,000, 90-day, 10% note receivable. The journal entry to record
receipt of the note includes a debit to Notes Receivable.
50. For legal reasons, it is not advisable to accept a note receivable in exchange for an
overdue account receivable.
51. A note that the maker is unable or refuses to pay at maturity is called a dishonored note.
52. A maker who dishonors a note is one who does not pay it at maturity.
53. The notes receivable account of a business should include both the notes that haven’t
matured and the dishonored notes.
54. The practice of placing dishonored notes receivable into accounts receivable keeps only
notes that have not matured in the Notes Receivable account.
55. The matching principle requires that accrued interest on outstanding notes receivable be
recorded at the end of each accounting period.
56. Separate accounts receivable information for each customer is important because it reveals
all of the following except:
A. How much each customer has purchased on credit.
B. How much each customer has paid.
C. How much each customer still owes.
D. The basis for sending bills to customers.
E. When the customer intends to pay outstanding balances.
57. A credit sale of $5,275 to a customer would result in which of the following?
A. A debit to the Accounts Receivable account in the general ledger and a debit to the
customer’s account in the accounts receivable subsidiary ledger.
B. A credit to the Accounts Receivable account in the general ledger and a credit to the
customer’s account in the accounts receivable subsidiary 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 subsidiary 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 subsidiary ledger.
E. A credit to Sales and a credit to the customer’s account in the accounts receivable
subsidiary ledger.
58. Sellers allow customers to use credit cards for all of the following reasons except:
A. To be able to charge more due to fees and interest.
B. To lessen the risk of extending credit to customers who cannot pay.
C. To speed up receipt of cash from the credit sale.
D. To increase total sales volume.
E. To avoid having to evaluate a customer’s credit standing for each sale.
59. Which of the following is not true regarding a credit card expense?
A. Credit card expense may be classified as a “discount” deducted from sales to get net sales.
B. Credit card expense may be classified as a selling expense.
C. Credit card expense may be classified as an administrative expense.
D. Credit card expense is not recorded by the seller.
E. Credit card expense is a fee the seller pays for services provided by the card company.
60. A promissory note received from a customer in exchange for an account receivable is
recorded by the payee as:
A. A cash equivalent.
B. An account receivable.
C. A note receivable.
D. A short-term investment.
E. A note payable.
61. The person who signs a note receivable and promises to pay the principal and interest is
the:
A. Maker.
B. Payee.
C. Holder.
D. Receiver.
E. Owner.
62. Reporting the details of notes is consistent with which accounting principle that requires
financial statements (including footnotes) to report all relevant information?
A. Relevance.
B. Full disclosure.
C. Evaluation.
D. Materiality.
E. Matching.
63. A promissory note:
A. Is a short-term investment for the maker.
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 another name for an installment receivable.
E. Cannot be used in payment of an account receivable.
64. 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 repaid.
D. Is the date of the first payment.
E. Is the last day of the month.
65. The interest accrued on $7,500 at 6% for 90 days is:
A. $ 450.00
B. $ 37.50.
C. $ 112.50.
D. $ 11.25.
E. $1,800.00.
66. A 90-day note issued on April 10 matures on:
A. July 9.
B. July 10.
C. July 11.
D. July 12.
E. July 13.
67. A company receives a 10%, 120-day note for $1,500. The total interest due on the
maturity date is:
A. $ 50.00
B. $150.00.
C. $ 75.00.
D. $ 37.50.
E. $ 87.50.
68. A company borrowed $10,000 by signing a 180-day promissory note at 9%. The total
interest due on the maturity date is.
A. $900
B. $75
C. $450
D. $300
E. $1,800
69. A company borrowed $10,000 by signing a 180-day promissory note at 9%. The maturity
value of the note is:
A. $10,450
B. $10,900
C. $10,075
D. $11,800
E. $10,300
70. A finance company or bank that purchases and takes ownership of another company’s
accounts receivable is called a:
A. Payer.
B. Pledger.
C. Factor.
D. Payee.
E. Pledgee.
71. Factoring receivables is beneficial to a seller for all of the following reasons except:
A. Allows firms to receive cash earlier.
B. Passes ownership of the receivables to the factor.
C. There are no fees for factoring.
D. Seller avoids the cost of billing and accounting for receivables.
E. May transfer the risk of bad debts to the factor.
72. A company factored $45,000 of its accounts receivable and was charged a 4% factoring
fee. The journal entry to record this transaction would include a:
A. Debit to Cash of $45,000, a debit to Factoring Fee Expense of $1,800, and credit to
Accounts Receivable of $46,800.
B. Debit to Cash of $45,000 and a credit to Accounts Receivable of $45,000.
C. Debit to Cash of $43,200, a debit to Factoring Fee Expense of $1,800, and a credit to
Accounts Receivable of $45,000.
D. Debit to Cash of $46,800 and a credit to Accounts Receivable of $46,800.
E. Debit to Cash of $45,000 and a credit to Notes Payable of $45,000.
73. The quality of receivables refers to:
A. The creditworthiness of sellers.
B. The speed of collection.
C. The likelihood of collection without loss.
D. Sales turnover.
E. The interest rate.
74. The account receivable turnover measures:
A. How long it takes to sell accounts receivable to a factor.
B. How often, on average, receivables are received and collected during the period.
C. The relation of cash sales to credit sales.
D. How long it takes to sell merchandise inventory.
E. All of the options are correct.
75. The accounts receivable turnover is calculated by:
A. Dividing net sales by average accounts receivable.
B. Dividing net sales by average accounts receivable and multiplying by 365.
C. Dividing average accounts receivable by net sales.
D. Dividing average accounts receivable by net sales and multiplying by 365.
E. Dividing net income by average accounts receivable.
76. A company has net sales of $1,200,000 and average accounts receivable of $400,000.
What is its accounts receivable turnover for the period?
A. 0.20.
B. 5.00
C. 20.0
D. 73.0
E. 3.0
77. Pepperdine reported net sales of $8,600 million, net income of $126 million and average
accounts receivable of $890 million. Its accounts receivable turnover is:
A. 37.8.
B. 9.7.
C. 68.3.
D. 7.1.
E. 51.7.
78. Axle Co’s accounts receivable turnover was 9.9 for this year and 11.0 for last year.
Betterman’s turnover was 9.3 for this year and 9.3 for last year. These results imply that:
A. Betterman has the better turnover for both years.
B. Axle has the better turnover for both years.
C. Betterman’s turnover is improving.
D. Axle’s credit policies are too loose
E. Betterman is collecting its receivables more quickly than Axle in both years.
79. A company had net sales of $600,000, total sales of $750,000, and an average accounts
receivable of $75,000. Its accounts receivable turnover equals:
A. .13
B. .80
C. 7.75
D. 8.00
E. 10.00
80. A company had total sales of $600,000, net sales of $550,000, and an average accounts
receivable of $95,000. Its accounts receivable turnover equals:
A. 6.1
B. 63.0
C. 54.8
D. 1.1
E. 6.3
81. The matching principle, as applied to bad debts, requires:
A. That expenses be ignored if their effect on the financial statements is unimportant to users’
business decisions.
B. The use of the direct write-off method for bad debts.
C. The use of the allowance method of accounting for bad debts.
D. That bad debts be disclosed in the financial statements.
E. That bad debts not be written off.
82. The materiality constraint, as applied to bad debts:
A. Permits the use of the direct write-off method when bad debts expenses are relatively
small.
B. Requires use of the allowance method for bad debts.
C. Requires use of the direct write-off method.
D. Requires that bad debts not be written off.
E. Requires that expenses be reported in the same period as the sales they helped produce.
83. If the credit 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. An increase in the expenses of the current period.
B. A reduction in current assets.
C. A reduction in equity.
D. No effect on the expenses of the current period.
E. A reduction in current liabilities.
84. On October 17 of the current year, a company determined that a customer’s account
receivable was uncollectible and that the account should be written off. Assuming the
allowance method is used to account for bad debts, what effect will this write-off have on the
company’s net income and total assets?
A. Decrease in net income; no effect on total assets.
B. No effect on 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.
85. Gideon Company uses the allowance method of accounting for uncollectible accounts. On
May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer, A.
Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins.
The entry or entries Gideon makes to record the write off of the account on May 3 is:
A. Accounts Receivable—A. Hopkins 2,000
Allowance for Doubtful Accounts 2,000
B. Allowance for Doubtful Accounts 2,000
Bad debts expense 2,000
C. Accounts Receivable—A. Hopkins 2,000
Bad debts expense 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
D. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkins 2,000
E. Cash 2,000
Accounts Receivable—A. Hopkins 2,000
86. Gideon Company uses the allowance method of accounting for uncollectible accounts. On
May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer, A.
Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins.
On July 10, the entry or entries Gideon makes to record the recovery of the bad debt is:
A. Accounts Receivable—A. Hopkins 2,000
Allowance for Doubtful Accounts 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
B. Cash 2,000
Bad debts expense 2,000
C. Accounts Receivable—A. Hopkins 2,000
Bad debts expense 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
D. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkins 2,000
Accounts Receivable—A. Hopkins 2,000
Cash 2,000
E. Cash 2,000
Accounts Receivable—A. Hopkins 2,000
87. The allowance method based on the idea that a given percent of a company’s credit sales
for the period is uncollectible is:
A. The percent of sales method.
B. The percent of accounts receivable method.
C. The aging of accounts receivable method.
D. Direct write-off method.
E. Factoring method.
88. A method of estimating bad debts expense that involves a detailed examination of
outstanding accounts and the length of time past due is the:
A. Direct write-off method.
B. Aging of accounts receivable method.
C. Percentage of sales method.
D. Aging of investments method.
E. Percent of accounts receivable method.
89. Which of the following is an accounting procedure that (1) estimates and reports bad debts
expense from credit sales during the period the sales are recorded, and (2) reports accounts
receivable at the estimated amount of cash to be collected?
A. Allowance method of accounting for bad debts.
B. Aging of notes 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.
90. On December 31 of the current year, the unadjusted trial balance of a company using the
percent of receivables method to estimate bad debt included the following: Accounts
Receivable, debit balance of $95,250; Allowance for Doubtful Accounts, credit balance of
$921. What amount should be debited to Bad Debts Expense, assuming 6% of outstanding
accounts receivable at the end of the current year will be uncollectible?
A. $5,715.
B. $6,636.
C. $4,794.
D. $5,770.
E. $5,660.
91. A company ages its accounts receivables to determine its end of period adjustment for bad
debts. At the end of the current year, management estimated that $15,750 of the accounts
receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance
for Doubtful Accounts had a debit balance of $375. What adjusting entry should the company
make at the end of the current year to record its estimated bad debts expense?
A. Bad Debts Expense 15,750
Allowance for Doubtful Accounts 15,750
B. Bad Debts Expense 15,375
Allowance for Doubtful Accounts 15,375
C. Bad Debts Expense 16,125
Allowance for Doubtful Accounts 16,125
D. Accounts Receivable 15,750
Bad Debts Expense 375
Sales 16,125
E. Accounts Receivable 16,125
Allowance for Doubtful Accounts 16,125
92. A company uses the percent of sales method to determine its bad debts expense. At the
end of the current year, the company’s unadjusted trial balance reported the following selected
amounts:
Accounts
receivable………………………………………….. $375,000 debit
Allowance for uncollectible
accounts………………….. 500 debit
Net
Sales…………………………………………………………. 800,000 credit
All sales are made on credit. Based on past experience, the company estimates that 0.6% of
credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the
year-end adjusting entry is prepared?
A. $1,275
B. $1,775
C. $4,500
D. $4,800
E. $5,500
93. A company uses the percent of sales method to determine its bad debts expense. At the
end of the current year, the company’s unadjusted trial balance reported the following selected
amounts:
Accounts
receivable………………………………………… $375,000 debit
Allowance for uncollectible
accounts………………….. 500 debit
Net Sales……………………………………………………… 800,000 credit
All sales are made on credit. Based on past experience, the company estimates 0.6% of credit
sales to be uncollectible. What adjusting entry should the company make at the end of the
current year to record its estimated bad debts expense?
A. Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130.
B. Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630.
C. Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300.
D. Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800.
E. Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300
94. A company has $90,000 in outstanding accounts receivable and it uses the allowance
method to account for uncollectible accounts. Experience suggests that 4% of outstanding
receivables are uncollectible. The current balance (before adjustments) in the allowance for
doubtful accounts is an $800 debit. The journal entry to record the adjustment to the
allowance account includes a debit to Bad Debts Expense for:
A. $3,600
B. $3,568
C. $3,632
D. $2,800
E. $4,400
95. Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Co. Jasper’s entry to record the
transaction should be:
A. Debit Notes Receivable for $25,000; credit Cash $25,000.
B. Debit Accounts Receivable $25,000; credit Notes Receivable $25,000.
C. Debit Cash $25,000; credit Notes Receivable for $25,000.
D. Debit Notes Payable $25,000; credit Accounts Payable $25,000.
E. Debit Notes Receivable $25,000; credit Sales $25,000.
96. Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Co. The amount of interest that
Jasper will collect on the loan is:
A. $1,750.
B. $145.83.
C. $437.50.
D. $19.44.
E. $875.00.
97. Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Co. Jasper’s entry to record the
collection of the note and interest at maturity should be:
A. Debit Cash for $25,000; credit Notes Receivable $25,000.
B. Debit Cash $25,437.50; credit Interest Revenue $437.50; credit Notes Receivable $25,000.
C. Debit Cash $25,437.50; credit Notes Receivable for $25,437.50.
D. Debit Notes Payable $25,000; Debit Interest Expense $1,750; credit Cash $26,750.
E. Debit Cash $26,750; credit Interest Revenue $1,750, credit Notes Receivable $25,000.
98. Lemming makes an $18,750, 120-day, 8% cash loan to Notions Co. on November 2.
Lemming’s end-of-period adjusting entry on December 31 should be:
A. Debit Cash for $250; credit Notes Receivable $250.
B. Debit Interest Revenue $500; credit Notes Receivable $500.
C. Debit Interest Receivable $250; credit Interest Revenue $250.
D. Debit Interest Receivable $500; credit Interest Revenue $500.
E. Debit Notes Receivable $500; credit Interest Revenue $500.
99. The amount due on the maturity date of a $6,000, 60-day 4%, note receivable is:
A. $6,000.
B. $6,240.
C. $5,760.
D. $6,040.
E. $5,960.
100. Giorgio Italian Market bought $4,000 worth of merchandise from Food Suppliers and
signed a 90-day, 6% promissory note for the $4,000. Food Supplier’s journal entry to record
the sales transaction is:
A. Debit Accounts Receivable $4,000; credit Sales $4,000
B. Debit Notes Receivable $4,000; credit Sales $4,000
C. Debit Accounts Receivable $4,060; credit Sales $4,060
D. Debit Notes Receivable $4,060; credit Sales $4,060
E. Debit Notes Receivable $4,000; debit Interest Receivable $60; credit Sales $4,060
101. Giorgio Italian Market bought $4,000 worth of merchandise from Food Suppliers and
signed a 90-day, 6% promissory note for the $4,000. Food Supplier’s journal entry to record
the collection on the maturity date is:
A. Debit Cash $4,060; credit Notes Receivable $4,060
B. Debit Notes Receivable $4,000; credit Cash $4,000
C. Debit Cash $4,000; debit Interest Receivable $60; credit Sales $4,000
D. Debit Notes Receivable $4,060; credit Sales $4,060
E. Debit Cash $4,060; credit Interest Revenue $60; credit Notes Receivable $4,000
102. Jax Recording Studio purchased $7,800 in electronic components from Music World. Jax
signed a 60-day, 8% promissory note for $7,800. Music World’s journal entry to record the
sales transaction is:
A. Debit Accounts Receivable $7,800; credit Sales $7,800
B. Debit Accounts Receivable $7,904; credit Sales $7,904
C. Debit Notes Receivable $7,800; credit Sales $7,800
D. Debit Notes Receivable $7,904; credit Sales $7,904
E. Debit Notes Receivable $7,800; debit Interest Receivable $104; credit Sales $7,904
103. Jax Recording Studio purchased $7,800 in electronic components from Music World. Jax
signed a 60-day, 8% promissory note for $7,800. Music World’s journal entry to record the
collection on the maturity date is:
A. Debit Cash $7,800; credit Accounts Receivable $7,800
B. Debit Accounts Receivable $7,904; credit Notes Receivable $7,800; credit Interest
Receivable $104
C. Debit Notes Receivable $7,800; credit Cash $7,904; credit Interest Revenue $104
D. Debit Cash $7,904; credit Notes Receivable $7,800; credit Interest Revenue $104
E. Debit Cash $7,904; credit Notes Receivable $7,904
104. Honoring a note receivable indicates that the maker has:
A. Signed.
B. Paid in full.
C. Guaranteed.
D. Notarized.
E. Cosigned.
105. Failure by a promissory notes’ maker to pay the amount due at maturity is known as:
A. Protesting a note.
B. Closing a note.
C. Dishonoring a note.
D. Discounting a note.
E. Depreciating a note.
106. Uniform Supply accepted a $4,800, 90-day, 10% note from Tracy Janitorial on October
17. What entry should Uniform Supply make on January 15 of the next year when the note is
paid?
A. Debit Notes Receivable $4,800; debit Interest Receivable $120; credit Sales $4,920.
B. Debit Cash $4,920; credit Notes Receivable $4,920.
C. Debit Cash $4,920; credit Interest Revenue $100; credit Interest Receivable $20; credit
Notes Receivable $4,800.
D. Debit Cash $4,920; credit Interest Revenue $20; credit Interest Receivable $100; credit
Notes Receivable $4,800.
E. Debit Cash $4,920; credit Interest Revenue $120; credit Notes Receivable $4,800.
107. Uniform Supply accepted a $4,800, 90-day, 10% note from Tracy Janitorial on October
17.What entry should Uniform Supply make on December 31, to record the accrued interest
on the note?
A. Debit Cash $20; credit Notes Receivable $20.
B. Debit Cash $100; credit Notes Receivable $100
C. Debit Interest Receivable $20; credit Interest Revenue $20.
D. Debit Interest Receivable $100; credit Interest Revenue $100.
E. Debit Cash $120; credit Interest Revenue $100; credit Interest Receivable $20.
108. Uniform Supply accepted a $4,800, 90-day, 10% note from Tracy Janitorial on October
17.If the note is dishonored, what entry should Uniform Supply make on January 15 of the
next year?
A. Debit Notes Receivable $4,800; debit Interest Receivable $120; credit Sales $4,920.
B. Debit Cash $4,920; credit Notes Receivable $4,920.
C. Debit Cash $4,920; credit Interest Revenue $100; credit Interest Receivable $20, credit
Notes Receivable $4,800.
D. Debit Cash $4,920; credit Interest Revenue $20; credit Interest Receivable $100, credit
Notes Receivable $4,800.
E. Debit Accounts Receivable $4,920; credit Interest Revenue $20; credit Interest Receivable
$100, credit Notes Receivable $4,800.
109. Valley Spa purchased $7,800 in plumbing components from Tubman Co. Valley Spa
Studios signed a 60-day, 10% promissory note for $7,800. If the note is dishonored, what is
the amount due on the note?
A. $130
B. $7,800
C. $7,930
D. $8,050
E. $8,130
110. Valley Spa purchased $7,800 in plumbing components from Tubman Co. Valley Spa
Studios signed a 60-day, 10% promissory note for $7,800. If the note is dishonored, what is
the journal entry to record the dishonored note?
A. Debit Accounts Receivable $7,930; debit Bad Debt Expense $130; credit Notes Receivable
$7,800.
B. Debit Bad Debt Expense $7,930; credit Accounts Receivable $7,930.
C. Debit Bad Debt Expense $7,800; credit Notes Receivable $7,800.
D. Debit Accounts Receivable—Valley Spa $7,800; credit Notes Receivable $7,800.
E. Debit Accounts Receivable—Valley Spa $7,930, credit Interest Revenue $130; credit Notes
Receivable $7,800.
111. Which of the following is not true about the Allowance for Doubtful Accounts?
A. It is a contra asset account.
B. It is used instead of reducing accounts receivable directly.
C. It is debited when uncollectible accounts are written off.
D. It is a liability account.
E. It is credited when bad debts expense is estimated and recorded.
112. Jervis sells $75,000 of its accounts receivable to Northern Bank in order to obtain
necessary cash. Northern Bank charges a 5% factoring fee. What entry should Jervis make on
to record the transaction?
A. Debit Cash $71,250; debit Factoring Fee Expense $3,750; credit Accounts Receivable
$75,000
B. Debit Accounts Receivable $71,250; debit Factoring Fee Expense $3,750; credit Cash
$75,000.
C. Debit Cash $75,000; credit Factoring Fee Expense $3,750; credit Accounts Receivable
$75,000
D. Debit Cash $71,250; credit Accounts Receivable $71,250
E. Debit Accounts Receivable $75,000; credit Factoring Fee Expense $3,750; credit Cash
$71,250
113. Jervis accepts all major bank credit cards, including those issued by Northern Bank
(NB), which assesses a 3% charge on sales for using its card. On June 28, Jervis had $3,500 in
NB Card credit sales. What entry should Jervis make on June 28 to record the deposit?
A. Debit Cash $3,500; credit Sales $3,500
B. Debit Accounts Receivable $3,500; credit Sales $3,500
C. Debit Cash $3,605; credit Credit Card Expense $105; credit Sales $3,500
D. Debit Cash $3,395; debit Credit Card Expense $105; credit Sales $3,500
E. Debit Accounts Receivable $3,395; debit Credit Card Expense $105; credit Sales $3,500
114. Brinker accepts all major bank credit cards, including First Savings Bank’s, which
assesses a 2.5% charge on sales for using its card. On May 26, Brinker had $4,800 in First
Savings Bank Card credit sales. What entry should Brinker make on May 26 to record the
deposit?
A. Debit Accounts Receivable $4,800; credit Sales $4,800.
B. Debit Cash $4,680; debit Credit Card Expense $120; credit Sales $4,800.
C. Debit Cash $4,800; credit Sales $4,800.
D. Debit Cash $4,920; credit Credit Card Expense $120; credit Sales $4,800.
E. Debit Accounts Receivable $4,680; debit Credit Card Expense $120; credit Sales $4,800.
115. Craigmont uses the allowance method to account for uncollectible accounts. Its year-end
unadjusted trial balance shows Accounts Receivable of $104,500, allowance for doubtful
accounts of $665 (credit) and sales of $925,000. If uncollectible accounts are estimated to be
4% of accounts receivable, what is the amount of the bad debts expense adjusting entry?
A. $4,845
B. $4,180
C. $3,515
D. $3,700
E. $3,850
116. Craigmont uses the allowance method to account for uncollectible accounts. Its year-end
unadjusted trial balance shows Accounts Receivable of $104,500, allowance for doubtful
accounts of $665 (credit) and sales of $925,000. If uncollectible accounts are estimated to be
0.5% of sales, what is the amount of the bad debts expense adjusting entry?
A. $4,625
B. $3,960
C. $5,290
D. $4,750
E. $4,825
117. On July 9, Mifflin Company receives a $8,500, 90-day, 8% note from customer Payton
Summers as payment on account. Compute the maturity date for the note.
A. October 8
B. October 7
C. November 8
D. November 7
E. November 6
118. On July 9, Mifflin Company receives a $8,500, 90-day, 8% note from customer Payton
Summers as payment on account. Compute the amount due at maturity for the note.
A. $8,628
B. $8,192
C. $8,613
D. $8,500
E. $8,670
119. On July 9, Mifflin Company receives a $8,500, 90-day, 8% note from customer Payton
Summers as payment on account. What entry should be made on July 9 to record receipt of
the note?
A. Debit Accounts Receivable $8,500; credit Sales $8,500.
B. Debit Notes Receivable $8,670; credit Sales $8,670.
C. Debit Notes Receivable $8,500; credit Accounts Receivable $8,500.
D. Debit Notes Receivable $8,500; credit Sales $8,500.
E. Debit Notes Receivable $8,725; credit Interest Revenue $225; credit Accounts Receivable
$8,500.
120. On July 9, Mifflin Company receives a $8,500, 90-day, 8% note from customer Payton
Summers as payment on account. What entry should be made on the maturity date assuming
the maker pays in full?
A. Debit Notes Receivable $8,500; debit Interest Receivable $170; credit Sales $8,670.
B. Debit Cash $8,670; credit Interest Revenue $170; credit Notes Receivable $8,500.
C. Debit Cash $8,628; credit Interest Revenue $128; credit Notes Receivable $8,500.
D. Debit Cash $8,613; credit Interest Revenue $113; credit Notes Receivable $8,500
E. Debit Cash $8 500; credit Notes Receivable $8,500.
121. On November 19, Nicholson Company receives a $15,000, 60-day, 8% note from a
customer as payment on account. What adjusting entry should be made on the December 31
year-end?
A. Debit Interest Receivable $1,200; credit Interest Revenue $1,200.
B. Debit Interest Receivable $140; credit Interest Revenue $140.
C. Debit Interest Receivable $200; credit Interest Revenue $200.
D. Debit Interest Revenue $140; credit Interest Receivable $140.
E. Debit Interest Revenue $200; credit Interest Receivable $200.
122. On November 1, Orpheum Company accepted a $10,000, 90-day, 8% note from a
customer settle an account. What entry should be made on the November 1 to record the note
acceptance?
A. Debit Note Receivable $10,000; credit Cash $10,000.
B. Debit Note Receivable $10,000; credit Accounts Receivable $10,000.
C. Debit Note Receivable $10,000; credit Sales $10,000.
D. Debit Cash $10,000; credit Sales $10,000.
E. Debit Sales $10,000; credit Accounts Receivable $10,000.
123. The unadjusted trial balance at year-end for a company that uses the percent of
receivables method to determine its bad debts expense reports the following selected amounts:
Accounts receivable $435,000 Debit
Allowance for Doubtful Accounts 1,250 Debit
Net Sales 2,100,000 Credit
All sales are made on credit. Based on past experience, the company estimates 3.5% of ending
account receivable to be uncollectible. What adjusting entry should the company make at the
end of the current year to record its estimated bad debts expense?
A. Debit Bad Debts Expense $13,975; credit Allowance for Doubtful Accounts $13,975.
B. Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C. Debit Bad Debts Expense $16,475; credit Allowance for Doubtful Accounts $16,475.
D. Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E. Debit Bad Debts Expense $17,350; credit Allowance for Doubtful Accounts $17,350.
124. The following selected amounts are reported on the year-end unadjusted trial balance
report for a company that uses the percent of sales method to determine its bad debts expense.
Accounts receivable $435,000 Debit
Allowance for Doubtful Accounts 1,250 Debit
Net Sales 2,100,000 Credit
All sales are made on credit. Based on past experience, the company estimates 1% of credit
sales to be uncollectible. What adjusting entry should the company make at the end of the
current year to record its estimated bad debts expense?
A. Debit Bad Debts Expense $19,750; credit Allowance for Doubtful Accounts $19,750.
B. Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C. Debit Bad Debts Expense $22,250; credit Allowance for Doubtful Accounts $22,250.
D. Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E. Debit Bad Debts Expense $21,000; credit Allowance for Doubtful Accounts $21,000.
125. On February 1, a customer’s account balance of $2,300 was deemed to be uncollectible.
What entry should be recorded on February 1 to record the write-off assuming the company
uses the allowance method?
A. Debit Bad Debts Expense $2,300; credit Accounts Receivable $2,300.
B. Debit Allowance for Doubtful Accounts $2,300; credit Bad Debts Expense $2,300.
C. Debit Allowance for Doubtful Accounts $2,300; credit Accounts Receivable $2,300.
D. Debit Bad Debts Expense $2,300; credit Allowance for Doubtful Accounts $2,300.
E. Debit Accounts Receivable $250; credit Allowance for Doubtful Accounts $2,300.
126. All of the following statements regarding recognition of receivables under U.S. GAAP
and IFRS are true except:
A. U.S. GAAP and IFRS have similar asset criteria that apply to recognition of receivables.
B. Receivables that arise from revenue-generating activities are subject to broadly similar
criteria for U.S. GAAP and IFRS.
C. The realization principle under GAAP implies an arm’s length transaction occurs.
D. GAAP refers to the earnings process and IFRS refers to risk transfer and ownership
reward.
E. Differences arise mainly from industry-specific guidance under U.S. GAAP.
127. All of the following statements regarding valuation of receivables under U.S. GAAP and
IFRS are true except:
A. Both require the allowance method for uncollectibles unless uncollectibles are immaterial.
B. Both require that receivables be reported net of estimated collectibles.
C. Both require that the expenses for estimated collectibles be recorded in the same period
revenues generated from those receivables are recorded.
D. Both allow using percent of sales, percent of receivables, or aging of receivables to
estimate uncollectibles.
E. Both require that the expense related to uncollectibles be recorded when the receivable is
determined to be uncollectible.
128. Under IFRS, the term provision:
A. Refers to expense.
B. Usually refers to a liability whose amount or timing is uncertain.
C. Means establishing a provision for bad debts.
D. Means establishing a contra-asset account.
E. Means establishing an asset account.
129. Winkler Company borrows $85,000 and pledges its receivables as security. The journal
entry to record this transaction would be:
A. Debit Cash of $85,000 and credit Accounts Receivable $85,000.
B. Debit Cash of $85,000 and credit Accounts Payable $85,000.
C. Debit Note Receivable $85,000 and credit Accounts Receivable $85,000.
D. Debit Cash $85,000 and credit Notes Payable $85,000.
E. Debit Accounts Receivable $85,000 and credit Notes Payable $85,000.
130. Mullis Company sold merchandise on account to a customer for $625, terms n/30. The
journal entry to record this sale transaction would be:
A. Debit Cash of $625 and credit Sales $625.
B. Debit Cash of $625 and credit Accounts Receivable $625.
C. Debit Accounts Receivable $625 and credit Sales $625.
D. Debit Accounts Receivable $625 and credit Cash $625.
E. Debit Sales $625 and credit Accounts Receivable $625.
131. Mullis Company sold merchandise on account to a customer for $625, terms n/30. The
journal entry to record the collection on account would be:
A. Debit Cash of $625 and credit Sales $625.
B. Debit Cash of $625 and credit Accounts Receivable $625.
C. Debit Accounts Receivable $625 and credit Sales $625.
D. Debit Accounts Receivable $625 and credit Cash $625.
E. Debit Sales $625 and credit Accounts Receivable $625.
132. MacKenzie Company sold $300 of merchandise to a customer who used a Regional
Bank credit card. Regional Bank deducts a 1.5% service charge for sales on its credit cards
and credits MacKenzie’s account immediately when sales are made. The journal entry to
record this sale transaction would be:
A. Debit Cash of $300 and credit Sales $300.
B. Debit Cash of $300 and credit Accounts Receivable $300.
C. Debit Accounts Receivable $300 and credit Sales $300.
D. Debit Cash $295.50; debit Credit Card Expense $4.50 and credit Sales $300.
E. Debit Cash $295.50 and credit Sales $295.50.
133. MacKenzie Company sold $180 of merchandise to a customer who used a Regional
Bank credit card. Regional Bank deducts a 4% service charge for sales on its credit cards.
MacKenzie electronically remits the credit card sales receipts to the credit card company and
receives payment in approximately 5 days. The journal entry to record this sale transaction
would be:
A. Debit Cash of $180 and credit Sales $180.
B. Debit Cash of $180 and credit Accounts Receivable—Regional $180.
C. Debit Accounts Receivable—Regional $172.80; debit Credit Card Expense $7.20 and
credit Sales $180.
D. Debit Cash $172.80; debit Credit Card Expense $7.20 and credit Sales $180.
E. Debit Cash $172.80 and credit Sales $172.80.
134. MacKenzie Company sold $180 of merchandise to a customer who used a Regional
Bank credit card. Regional Bank deducts a 4% service charge for sales on its credit cards.
MacKenzie electronically remits the credit card sales receipts to the credit card company and
receives payment in approximately 5 days. The journal entry to record the collection from the
credit card company would be:
A. Debit Cash of $172.80 and credit Accounts Receivable—Regional $172.80.
B. Debit Cash of $180; credit Credit Card Expense $7.20 and credit Accounts Receivable
$172.80.
C. Debit Accounts Receivable—Regional $172.80; debit Credit Card Expense $7.20 and
credit Sales $180.
D. Debit Cash $172.80; debit Credit Card Expense $7.20 and credit Sales $180.
E. Debit Cash $172.80 and credit Sales $172.80.
135. Frederick Company borrows $63,000 from First City Bank and pledges its receivables as
security. Which of the following is true regarding this transaction:
A. First City Bank is the factor in this transaction.
B. Frederick Company’s financial statements must disclose the pledging of receivables.
C. Frederick Company no longer has the risk of bad debts.
D. First City Bank takes ownership of the receivables at the time of the pledge.
E. No journal entry is required for this event.
136. Majesty Productions accepted a $7,200, 120-day, 6% note from Swartz Studio on March
1. On the date the note matures, Swartz is unable to pay, but Majesty intends to continue
collection efforts. What entry should Majesty record on the maturity date for this dishonored
note?
A. Debit Accounts Receivable $7,200; credit Notes Receivable $7,200.
B. Debit Accounts Receivable $7,200; credit Allowance for Doubtful Accounts $7,200.
C. Debit Bad Debt Expense $7,344; credit Notes Receivable $7,344.
D. Debit Accounts Receivable $7,344; credit Interest Revenue $144; credit Notes Receivable
$7,200.
E. Debit Accounts Receivable $7,056; debit Interest Revenue $144; credit Notes Receivable
$7,200.
137. Match each of the following terms with the appropriate definitions.
A. Maker of a note
B. Bad debts
C. Aging of accounts receivable
D. Interest
E. Promissory note
F. Payee of a note
G. Accounts receivable
H. Allowance for doubtful accounts
I. Realizable value
J. Matching principle
____ 1. Amounts due from customers for credit sales.
____ 2. A process of classifying accounts receivable by how long it is past its due date for the
purpose of estimating the amount of uncollectible accounts.
____ 3. A written promise to pay a specified amount of money, usually with interest, either
on demand or at a definite future date.
____ 4. The expected proceeds from converting an asset into cash.
____ 5. The uncollectible accounts of credit customers who do not pay what they have
promised.
____ 6. The accounting principle that requires expenses to be reported in the same period as
the sales they helped to produce.
____ 7. The charge a borrower pays for using money borrowed.
____ 8. A contra asset account with a balance approximating the amount of accounts
receivable expected to be uncollectible.
____ 9. The party who signs a note and promises to pay it at maturity.
____10. The party to whom the promissory note is payable.
1. G; 2. C; 3. E; 4. I; 5. B; 6. J; 7. D; 8. H; 9. A; 10. F
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 07-C1
Learning Objective: 07-C2
Learning Objective: 07-P2
Topic: Accounts Receivable
Topic: Notes Receivable
Topic: Valuing Accounts Receivable—Allowance Method
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7-58
138. Match each of the following terms with the appropriate definitions.
A. Allowance method
B. Installment accounts receivable
C. Principal of a note
D. Full disclosure principle
E. Materiality constraint
F. Direct write-off method
G. Dishonoring a note
H. Accounts receivable turnover
I. Factoring accounts receivable
J. Pledging accounts receivable
____ 1. A measure of both the quality and liquidity of accounts receivable that indicates how
often, on average, receivables are received and collected during the period.
____ 2. Amounts owed by customers from credit sales for which payment is required in
periodic payments over an extended period of time.
____ 3. The accounting constraint that states that an amount can be ignored if its effect on
the financial statements is unimportant to its users.
____ 4. Refers to a note maker’s inability or refusal to pay a note at maturity.
____ 5. A method of accounting for bad debts that matches the estimated loss from
uncollectible accounts receivable against the sales they helped to produce.
____ 6. Selling all or a portion of accounts receivable to a finance company or bank.
____ 7. The accounting principle that requires financial statements (including the notes) to
report all relevant information about operations and financial condition.
____ 8. Committing accounts receivable as security for a loan.
____ 9. A method of accounting for bad debts that records the loss from an uncollectible
account receivable immediately upon determining it is uncollectible.
____10. The amount that the signer of a note agrees to pay back when the note matures, not
including interest.
139. Describe how accounts receivable arise and how they accounted for, including the use of
a subsidiary ledger and an allowance account.
140. Define a note receivable and explain how to calculate the interest due on a short-term
note receivable.
141. Explain the options a company may use to convert its receivables to cash before they are
due.
142. What is the accounts receivable turnover ratio? How is it calculated and how is it used to
assess financial condition?
143. Describe the differences in how the direct write-off method and the allowance method
are applied in accounting for uncollectible accounts receivables.
144. The allowance method of accounting for bad debts requires an estimate of bad debt
expense at the end of each accounting period. The two common methods to determine the
estimate amount are the percent of sales method and the percent of receivables method.
Explain the basic differences between the two methods.
145. Explain how to record the receipt (acceptance) of a note receivable.
146. Explain the difference between honoring and dishonoring a note receivable.
147. What are some of the considerations management should make when assessing the
accounts receivable turnover ratio?
148. A company allows its customers to use bank credit cards to charge purchases. When
customers use the credit cards, the net amount is deposited in the company’s checking
account, less a 2.5% service charge. Assume that on April 13, the company sold $20,000
worth of merchandise to customers who used credit cards. Prepare the company’s journal
entry to record the credit card sales for April 13 assuming the company deposited the receipts
that same day.
149. Gemstone Products allows customers to use bank credit cards to charge purchases. The
bank used by Gemstone Products processes all bank credit cards in exchange for a 3%
processing fee and all credit card receipts deposited are credited to the company account on
the day of deposit. Assume that on January 18, Gemstone Products sold and deposited
$18,000 worth of bank credit card receipts. Prepare the general journal entry to record this
transaction.
150. Mercks accepts the Discovery credit card for credit card sales. Mercks sends credit card
receipts to Discovery on a weekly basis. Discovery charges Mercks a 3% fee. Mercks usually
receives payment from Discovery within a week. Prepare journal entries to record the
following transactions.
March 11 Sold merchandise for $4,500 (that had cost $2,100) and accepted the
customer’s Discovery card. Transferred the credit card receipts to
Discovery, requesting payment.
March 20 Received Discovery’s check for the March 11 billing, less the service
charge.
151. Woods Co. accepts the World Express credit card from its customers. World Express
charges a 3.5% service fee and pays Woods the amount net of World Express charges once a
month. During February, Woods sold $24,000 worth of merchandise to customers using the
World Express charge card. On February 28, Woods sent the $24,000 worth of credit card
receipts to World Express. On March 4, Woods received cash proceeds from World Express
for the February credit sales less the service charge. Prepare the journal entries to record
February sales and the March 4 cash receipt.
152. What is the maturity date of a 120-day note receivable dated March 5?
153. Prudence Co. receives a $26,000, 90-day, 4% note receivable. What is the amount of
interest that is due at maturity?
154. Prudence Co. receives a $26,000, 90-day, 4% note receivable. What is maturity value of
the note?
155. Calculate the amount of interest that would be owed on a $18,000, 60-day, 8% note
receivable at maturity.
156. If a 90-day note receivable is dated July 12, what is the maturity date of the note?
157. If a 60-day note receivable is dated September 22, what is the maturity date of the note?
158. On May 31, a company had a balance in its accounts receivable of $103,200. Prepare
journal entries to record the following transactions for June.
June 2 Sold merchandise on account, $12,000. The cost of the merchandise was $7,200.
June 8 Sold $15,000 worth of accounts receivable to First Bank. First Bank charged a 4%
factoring fee.
June 20 Borrowed $30,000 cash from Second National Bank, pledging $31,500 worth of
accounts receivable as collateral for the loan.
159. Orman Co. sold $80,000 of accounts receivable to First Savings and incurred a 3%
factoring fee. Prepare the journal entry for Orman Co. to record the sale.
160. Flax had net sales of $7,875 and its average accounts receivables is $1,250. Calculate
Flax’s accounts receivable turnover:
161. Morgan had net sales of $310,000 and average accounts receivable of $75,600. Its
competitor, Stanley, had net sales of $290,000 and average accounts receivables of $61,350.
Calculate the accounts receivable turnover for both companies. Which company is doing a
better job of managing its accounts receivables?
162. A company reports the following results in its financial statements:
Year 3 Year 2 Year 1
Net Sales…………….
……………………. $2,500,000 $2,100,000 $1,900,000
Accounts receivable, Ending
Balance……. 172,000 167,000 165,000
Calculate the company accounts receivable turnover for Year 2 and Year 3. Compare these
two results and give a possible explanation for any significant change.
163. The Links Company uses the percent of sales method of accounting for uncollectible
accounts receivable. During the current year, the following transactions occurred:
Sept 7 Links Company determined that the $8,000 account receivable of the Rainier
Company was uncollectible, and wrote it off.
Oct 15 Links Company determined that the $3,500 account receivable of the
Olympic Company was uncollectible and wrote it off.
Nov 9 Rainier Company paid $6,000 of the amount owed to the Links
Company. Links Company does not expect further collections from the Rainier
Company.
Dec 31 Links Company estimates that 1% of its $1,900,000 of credit
sales would be uncollectible.
1. Prepare the general journal entries to record these transactions.
2. If the balance of the allowance for uncollectible accounts was a $4,000 credit on January 1
of the current year, determine the balance of the allowance for uncollectible accounts at
December 31 of the current year. Assume that the transactions above are the only transactions
affecting the allowance for uncollectible accounts during the year.
2. Calculation: $4,000 – $8,000 – $3,500 + $6,000 + $19,000 = $17,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 07-P2
Topic: Valuing Accounts Receivable—Allowance Method
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7-72
164. The Branson Company uses the percent of sales method of accounting for uncollectible
accounts receivable. During the current year, the following transactions occurred:
Mar 7 Branson Company determined that the $2,000 account receivable of the Bing
Company was uncollectible, and wrote it off.
Jun 9 Bing Company paid $1,500 of the amount owed to the Branson
Company. Branson Company does not expect further collections from the Bing
Company.
Dec 31 Branson Company estimates that 1.5% of its $900,000 of credit
sales will be uncollectible.
Prepare the general journal entries to record these transactions.
165. Thatcher Company had a January 1, credit balance in its Allowance for Doubtful
Accounts of $4,000 for the current year. The following transactions and events affected the
Allowance for Doubtful Accounts during the current year:
Apr 15 Bean’s account receivable of $2,700 was deemed uncollectible.
July 1 Cho paid the full amount of a previously written–off account receivable. This
receivable of $1,300 had been written off in the prior year.
Dec 31 Bad debts expense of $4,500 was recorded.
What amount should appear in the allowance for doubtful accounts in the December 31,
balance sheet for the current year?
166. Owens Company uses the direct write-off method of accounting for uncollectible
accounts receivable. On December 6, Year 1, Owens sold $6,300 of merchandise to the Valley
Company. On August 8, Year 2, after numerous attempts to collect the account, Owens
determined that the account of the Valley Company was uncollectible.
a. Prepare the journal entry required to record the transactions on August 8.
b. Assuming that the $6,300 is material, explain how the direct write-off method violates the
matching principle in this case.
167. At December 31 of the current year, a company reported the following:
Total sales for the current year: $980,000 includes $160,000 in cash sales
Accounts receivable balance at Dec. 31, end of current year: $160,000
Allowance for Doubtful Accounts balance at January 1, beginning of current year: $7,300
credit
Bad debts written off during the current year: $5,800.
Prepare the necessary adjusting entries to record bad debts expense assuming this company’s
bad debts are estimated to equal 5% of accounts receivable.
168. At December 31 of the current year, a company reported the following:
Total sales for the current year: $980,000 includes $160,000 in cash sales
Accounts receivable balance at Dec. 31, end of current year: $160,000
Allowance for Doubtful Accounts balance at January 1, beginning of current year: $7,300
Bad debts written off during the current year: $5,800.
Prepare the necessary adjusting entries to record bad debts expense assuming this company’s
bad debts are estimated to equal 1.5% of credit sales:
169. A company has the following unadjusted account balances at December 31, of the
current year; Accounts Receivable of $185,700 and Allowance for Doubtful Accounts of
$1,600 (credit balance). The company uses the aging of accounts receivable to estimate its bad
debts. The following aging schedule reflects its accounts receivable at the current year-end:
Account Age Balance
Estimated
Uncollectible
Percentage
Current (not yet due) $96,000 1.0%
1—30 days past due 64,000 2.5%
30—60 days past due 16,000 11.0%
61—90 days past due 6,500 37.0%
Over 90 days past due 3,200 70.0%
Total $185,700
1. Calculate the amount of the Allowance for Doubtful Accounts that should appear on the
December 31, of the current year, balance sheet.
2. Prepare the adjusting journal entry to record bad debts expense for the current year .
1. Bad Debts Expense…………………………………………..….. 7,365
Allowance for Doubtful Accounts…..…….………….…….....…. 7,365
Desired balance in allowance account: $ 8,965 credit
Current balance in allowance account: 1,600 credit
Amount of adjustment $ 7,365 credit
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 07-P2
Topic: Valuing Accounts Receivable—Allowance Method
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170. A company has the following unadjusted account balances at December 31, of the
current year; Accounts Receivable of $183,400 and Allowance for Doubtful Accounts of
$1,600 (credit balance). The company uses the aging of accounts receivable to estimate its bad
debts. The following aging schedule reflects its accounts receivable at the current year-end:
Account Age Balance
Estimated
Uncollectible
Percentage
Current (not yet due) $106,000 2.0%
1—30 days past due 54,000 4.0%
30—60 days past due 12,000 10.0%
61—90 days past due 8,500 25.0%
Over 90 days past due 2,900 75.0%
Total $183,400
Calculate the amount of the Allowance for Doubtful Accounts that should appear on the
December 31, of the current year, balance sheet.
171. A company had the following items and amounts in its unadjusted trial balance as of
December 31 of the current year:
Debit Credit
Cash sales……………………………………………….. $188,000
Credit sales……………………………………………… 275,000
Accounts receivable…………………………………….. $76,000
Allowance for doubtful accounts……………………….. 1,000
Prepare the adjusting entry to estimate bad debts assuming an aging analysis estimates that
8% of the outstanding accounts receivable will be uncollectible.
172. A company had the following items and amounts in its unadjusted trial balance as of
December 31 of the current year:
Debit Credit
Cash sales……………………………………………….. $188,000
Credit sales……………………………………………… 275,000
Accounts receivable…………………………………….. $76,000
Allowance for doubtful accounts……………………….. 1,000
Prepare the adjusting entry to estimate bad debts assuming bad debts are estimated to be 2.5%
of credit sales.
1. Bad Debts Expense…………………………………………..…………… 6,875
Allowance for Doubtful Accounts………………………………………….………..6,875
$275,000 * .025 = $6,875
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium: 07-P2
Topic: Valuing Accounts Receivable—Allowance Method
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173. A company uses the aging of accounts receivable method to estimate its bad debts
expense. On December 31 of the current year an aging analysis of accounts receivable
revealed the following:
Account Age Balance
Estimated
Uncollectible
Percentage
Current (not yet due) $620,000 0.5%
1—30 days past due 270,000 2.0%
30—60 days past due 145,000 8.0%
61—90 days past due 55,000 20.0%
90—120 days past due 32,000 50.0%
Over 120 days past due 18,000 70.0%
Total $1,140,00
0
Required:
a. Calculate the amount of the Allowance for Doubtful Accounts that should be reported on
the current year-end balance sheet.
b. Calculate the amount of the Bad Debts Expense that should be reported on the current
year’s income statement, assuming that the balance of the Allowance for Doubtful Accounts
on January 1 of the current year was $41,000 and that accounts receivable written off during
the current year totaled $43,200.
c. Prepare the adjusting entry to record bad debts expense on December 31 of the current year.
d. Show how Accounts Receivable will appear on the current year-end balance sheet as of
December 31.
174. On December 31, of the current year, Spectrum Company’s unadjusted trial balance
revealed the following: Accounts receivable of $185,600; Sales Revenue of $1,280,000; (75%
were on credit), and Allowance for Doubtful Accounts of $1,600 (credit balance).
Prepare the adjusting journal entry to record Spectrum’s estimate for bad debts assuming:
1. 6.0% of the accounts receivable balance is assumed to be uncollectible.
2. Bad debts expense is estimated to be 1.5% of credit sales.
3. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on
the balance sheet after adjustment assuming the percentage of sales method is used.
4. Prepare the entry to write off a $1,500 account receivable on January 1 of the next year.
5. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on
the balance sheet immediately after writing off the account in part 4 assuming the percentage
of sales method is used.
1.
Dec. 31
Bad Debts Expense………………………………………………………..
9,536
Allowance for Doubtful Accounts…………………………………
9,536
2.
Dec. 31
Bad Debts Expense………………………………………………………..
14,400
Allowance for Doubtful Accounts…………………………………
14,400
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$1,280,000 * .75 * .015 =$14,400
3.
Accounts receivable…………………………………………..………….
$185,600
Less: Allowance for Doubtful accounts*..…..........................
16,000
$169,600
*($1,280,000 * .75 * .015) + $1,600 = $16,000
4.
Jan 1
Allowance for Doubtful Accounts…………….…..............…......
1,500
Accounts Receivable……………………………………….………
1,500
5.
Accounts receivable ($185,600 – $1,500)…….………..............
$184,100
Less: Allowance for Doubtful accounts ($16,000 – $1,500). .
14,500
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$169,600
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 07-P2
Topic: Valuing Accounts Receivable—Allowance Method
175. Each December 31, Kimura Company ages its accounts receivable to determine the
amount of its adjustment for bad debts. At the end of the current year, management estimated
that $16,900 of the accounts receivable balances would be uncollectible. The Allowance for
Doubtful Accounts account had a debit balance of $1,200 before any year-end adjustment for
bad debts. Prepare the adjusting journal entry that Kimura Company should make on
December 31, of the current year, to estimate bad debts expense.
176. A company that uses the percent of sales to account for its bad debts had credit sales of
$740,000 in Year 1, including a $720 sale to Marshall Fresh. On December 31, Year 1, the
company estimated its bad debts at 1.5% of its credit sales. On June 1, Year 2, the company
wrote off, as uncollectible, the $720 account of Marshall Fresh. On December 21, Year 2,
Marshall Fresh unexpectedly paid his account in full. Prepare the necessary journal entries:
(a) On December 31, Year 1, to reflect the estimate of bad debts expense.
(b) On June 1, Year 2, to write off the bad debt.
(c) On December 21, Year 2, to record the unexpected collection.
177. The following series of transactions occurred during Year 1 and Year 2, when Foxworth
Co. sold merchandise to Kevin Lewis. Foxworth’s annual accounting period ends on
December 31.
10/01/Yr 1 Sold $12,000 of merchandise to K. Lewis, terms 2/10, n/30.
11/15/Yr 1 Lewis reports that he cannot pay the account until early next year. He agrees to exchange
the account for a 120-day, 12% note receivable.
12/31/Yr 1 Prepared the adjusting journal entry to record accrued interest on the note.
03/15/Yr 2 Foxworth receives a check from Lewis for the maturity value (with interest) of the note.
03/22/Yr 2 Foxworth receives notification that Lewis’ check is being returned for nonsufficient
funds (NSF).
12/31/Yr 2 Foxworth writes off Lewis’ account as uncollectible.
Prepare Foxworth Co.’s journal entries to record the above transactions. The company uses the
allowance method to account for its bad debt expense.
178. Prepare general journal entries for the following transactions of Norman Company,
assuming they use the allowance method to account for uncollectible accounts.
Apr 01 Sold $3,500 of merchandise to Lance Co., receiving an 8%, 90-day,
$3,500 note.
15 Wrote off $1,500 owed by Guy Co. from a previous period sale.
30 Received a $5,000, 6%, 30-day note receivable from James Co. as
settlement for its $5,000 account receivable.
May 30 The note received from James on April 30 was collected in full.
Jun 30 Lance Co. was unable to pay the note on the due date.
Jul 15 Guy Co. paid $1,000 of the amount written off on April 15.
179. Jordan Co. uses the allowance method of accounting for uncollectible accounts. Jordan
Co. accepted a $5,000, 12%, 90-day note dated May 16, from Beckam Co. in exchange for its
past-due account receivable. Make the necessary general journal entries for Jordan Co. on
May 16 and the August 14 maturity date, assuming that the:
a. Note is held until maturity and collected in full at that time.
b. Note is dishonored; the amount of the note and its interest are written off as uncollectible.
180. Prepare general journal entries for the following transactions for the current year:
Apr. 25 Sold $4,500 of merchandise to Dunn Corp., receiving a 10%, 60-day. $4,500 note receivable.
June 24 The note of Dunn Corp., received on April 25 was dishonored.
181. The following data are taken from the comparative balance sheets of Grayling Company.
Compute and interpret its accounts receivable turnover for Year 2. Competitors average a
turnover of 7.5. How is the company doing in relation to its competitors?
= Net Sales/Average Accounts Receivable
Accounts Receivable Turnover = $1,500,750/[(180,230 + 220,450)/2] = 7.5times
Grayling’s turnover is the same as the industry average. The company is doing the same as
competitors in receivables turnover for the year. The turnover should also be compared with prior
years’ results for the company to determine if the company is making improvement internally.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: 3 Hard
Learning Objective: 07-A1
Topic: Accounts Receivable Turnover
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Year 2 Year 1
Accounts receivable, net 180,230 220,450
182. On July 31, Orwell Co. has $448,800 of accounts receivable.
Required:
1. Prepare journal entries to record the following selected August transactions. The company
uses the perpetual inventory system.
2. Also prepare any footnotes to the August 31 financial statements that result from these
transactions.
3. Calculate the balance in the Accounts Receivable account as of August 10.
Aug 3 Sold $250,000 of merchandise (that cost $122,000) to customers on credit.
Aug 5
Sold $300,000 of accounts receivable to Cash Solutions. Cash Solutions charges a 7%
factoring fee.
Aug 8 Received $165,200 from customers in payment on their accounts.
Aug 9
Borrowed $50,000 cash from State Bank, pledging $65,000 of accounts receivable as
security for the loan. The note is a 90-day, 9% note.
2. Orwell should include the following note with its statements:
Accounts receivable of $65,000 are pledged as security for a $50,000 note payable.
3. Accounts receivable balance: $233,600
Blooms: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 07-C1
Learning Objective: 07-C3
Topic: Accounts Receivable
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Topic: Disposal of Receivables
183. On September 30, Waldon Co. has $540,250 of accounts receivable. Waldon uses the
allowance method of accounting for bad debts and has an existing credit balance in the
allowance for doubtful accounts of $13,750.
1. Prepare journal entries to record the following selected October transactions. The company
uses the perpetual inventory system. 2. Show how Accounts Receivable and the Allowance for
Doubtful Accounts appear on its October 31 balance sheet.
a. Sold $305,000 of merchandise (that cost $178,500) to customers on credit.
b. Received $395,100 cash in payment of accounts receivable.
c. Wrote off $15,700 of uncollectible accounts receivable.
d. In adjusting the accounts on October 31, its fiscal year-end, the company estimated that
4.0% of accounts receivable will be uncollectible.
2.
Current assets
Accounts Receivable $434,450
Less: Allowance for Doubtful Accounts 19,328 $415,122
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Blooms: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AIPCA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 07-C1
Learning Objective: 07-P2
Topic: Accounts Receivable
Topic: Valuing Accounts Receivable—Allowance Method
184. Bonita Company estimates uncollectible accounts using the allowance method at
December 31. It prepared the following aging of receivables analysis.
Days Past Due
Total Current 1 to 30 31 to 60 61 to 90 Over 90
Accounts receivable $110,000 68,000 17,000 10,000 8,000 7,000
Percent uncollectible 1% 2% 5% 8% 13%
a. Estimate the balance of the Allowance for Doubtful Accounts using the aging of accounts
receivable method.
b. Prepare the adjusting entry to record Bad Debts Expense using the estimate from part a.
Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $550 credit.
c. Prepare the adjusting entry to record Bad Debts Expense using the estimate from part a.
Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $300 debit.
185. On May 31, Cray has $375,800 of accounts receivable. Cray uses the allowance method
of accounting for bad debts and has an existing credit balance in the allowance for doubtful
accounts of $14,250.
1. Prepare journal entries to record the following selected May transactions. The company
uses the perpetual inventory system.
2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its
May 31 balance sheet.
a. Sold $415,200 of merchandise (that cost $249,000) to customers on credit.
b. Received $465,800 cash in payment of accounts receivable.
c. Wrote off $15,800 of uncollectible accounts receivable.
d. In adjusting the accounts on May 31, its fiscal year-end, the company estimated that 4.0%
of accounts receivable will be uncollectible.
2. Current assets
Accounts Receivable $309,400
Less: Allowance for Doubtful Accounts 13,926 $295,474
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 07-P2
Topic: Valuing Accounts Receivable—Allowance Method
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McGraw-Hill Education.
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186. At December 31, Yarrow Company reports the following results for its calendar year
from the adjusted trial balance.
Credit sales $2,300,000
Cash sales 1,050,000
Accounts Receivable 295,000
Allowance for doubtful accounts (credit balance) 750
a. Prepare the adjusting entry to record Bad Debts Expense assuming uncollectibles are
estimated to be 1.1% of credit sales.
b. Prepare the adjusting entry to record Bad Debts Expense assuming uncollectibles are
estimated to be .8% of total sales.
c. Prepare the adjusting entry to record Bad Debts Expense assuming uncollectibles are
estimated to be 7.0% of year-end accounts receivable.
187. White Company allows customers to make purchases on credit. The terms of all credit
sales are 2/10, n/30, and all sales are recorded at the gross price. Other customers can use a
bank credit card where the bank deducts a 4% service charge for credit card sales and credits
the bank account of White immediately when credit card receipts are deposited. White uses
the perpetual inventory method. Prepare journal entries to record the following selected
transactions and events.
June 4 Sold $12,000 of merchandise (cost $7,000) on credit to Grant.
6 Sold $17,000 of merchandise (cost $9,350) to customers who used a bank credit
card, receipts were processed and deposited the same day.
8 Sold $8,500 of merchandise (cost $4,500) on credit to Emma Company.
10 Accepted a $6,700, 45-day, 6% note dated this day in granting Cory Tam a time
extension on his past-due account receivable.
12 Received Grant’s check in full payment of the purchase on June 4.
15 Wrote off the account of Z. Westmore against the Allowance for Doubtful
Accounts. The $1,580 balance stemmed from a credit sale in January.
20 Accepted a $6,240, 30-day, 10% note dates this day in granting F. Potter a time
extension on his past-due account receivable.
July 17 Received the amount previously written-off from Z. Westmore.
20 F. Potter dishonored his note when presented for payment.
25 Received payment of principal plus interest from Cory Tam.
188. A supplementary record created to maintain a separate account for each customer is
called the ________________________.
189. A ____________________ is a signed agreement to pay a specified amount of money
either on demand or at a definite future date.
190. The person to whom a note is payable is known as the ______________.
191. ____________________ is the charge for using borrowed money until its due date.
192. The ____________________ of a note is the day the principle plus interest of a note
must be repaid.
193. Converting receivables to cash before they are due is usually done by either (1)
_______________________ or (2) ________________________________.
194. The accounts receivable turnover is calculated by dividing _________________ by
________________.
195. The_________________ method of accounting for bad debts records the loss from an
uncollectible account receivable at the time it is determined to be uncollectible (and not
before).
196. ____________________________ are amounts owed by customers from credit sales
where payment is required in periodic amounts over an extended time period.
197. To write off an uncollectible account receivable when the allowance method of
accounting for uncollectible accounts is used, a company should debit
_______________________ and credit accounts receivable.
198. The _________________________ method of computing uncollectible accounts uses
income statement relationships to estimate bad debts and is based on the idea that a given
percent of a company’s credit sales for a period are uncollectible.
199. The ________________________ methods of computing uncollectible accounts use
balance sheet relations to estimate bad debts—mainly the relation between accounts
receivable and the allowance amount.
200. The _______________________ method uses both past and current receivables to
estimate the allowance amount, and assumes that the longer an amount is past due, the more
likely it is to be uncollectible.
201. Felton Corporation purchased $4,000 in merchandise from Marita Co. Felton signed a
60-day, 10%, $4,000 promissory note. Marita should record the sale with a journal entry
debiting ____________________ for $ ________ and crediting __________________ for $
________.
202. When the maker of a note is unable or refuses to pay at maturity, the note is said to be
___________________.
203. _______________ refers to the expected proceeds from converting an asset into cash.