35) A business maintains subsidiary accounts for each of its customers. On April 7, the business provides
$2,500 in services to Anne Hill on account. The business sells $4,000 (sales price) of merchandise
inventory to Ron Wilson on account.
The full amount was collected from each customer on April 26.
Prepare the journal entries for April 7 and April 26. Ignore Cost of Goods Sold and omit explanations.
Date
Debit
Credit
Date
Debit
Credit
4/7
Accounts Receivable – Hill
2,500
Service Revenue
2,500
4/7
Accounts Receivable – Wilson
4,000
Sales Revenue
4,000
4/26
Cash
6,500
Accounts Receivable – Hill
2,500
Accounts Receivable -Wilson
4,000
Diff: 3
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Sales on Credit
36) By accepting credit and debit cards, companies are able to attract more customers.
37) When businesses accept payment by credit and debit cards, there is almost always a fee to the
purchaser to cover the processing costs charged by the card issuer.
38) Sales through credit or debit cards transfer the risk of collection of receivables from the seller to the
card issuer.
39) When businesses accept payment by credit and debit cards, the costs of processing fees are greater
than the benefits of transferring the risk of not being able to collect from the customer and avoiding the
costs associated with credit customers.
40) Credit cards reduce the customer‘s bank account immediately but allow the customer to pay
electronically instead of with currency or writing a check.
41) Factoring occurs when a business sells its receivables to a finance company or bank.
42) When a business factors its receivables, it uses the receivables as security for a loan.
43) When a business factors its receivables, the factor collects cash on the receivables.
44) Factoring is an option available to a business to reduce the risk of uncollectible accounts receivable.
45) When a business pledges its accounts receivable, it transfers the right to collect cash from customers to
the bank.
46) When a business factors its accounts receivables, the business ________.
A) uses the receivables as security for a loan
B) no longer has to deal with the collection of the receivables from the customers
C) receives the total amount of the receivables from the factor
D) receives cash, less an applicable fee, after the factor collects from the customers
47) Which of the following is a disadvantage when a business accepts credit cards or debit cards from
customers?
A) The business bears the responsibility of collecting cash from the customer.
B) The business bears the risk of nonpayment by the customer.
C) The business pays a processing fee.
D) The business checks customers’ credit ratings.
48) A business that accepts payments by credit and debit cards ________.
A) is usually unable to attract more customers
B) must check each customer‘s credit rating
C) generally receives proceeds from credit and debit card transactions 30-45 days after the sale
D) almost always pays a fee to the processor to cover the processing costs
49) Provide a brief definition of each of the following terms.
Term
Brief Definition
Debtor
Pledging Receivables
Accounts Receivable
takes on an obligation/payable.
Pledging Receivables
Using receivables as security
(collateral) for a loan.
Accounts Receivable
future from customers for
50) Provide a brief definition of each of the following terms.
Term
Brief Definition
Factoring Receivables
Receivable
Maturity Date
company or bank.
business or an individual.
Maturity Date
The date when a note is due.
2) Accounts receivable that are uncollectible must remain on the books because the customer may
eventually pay.
3) Bad debt expense is a cost to the seller of extending credit.
4) The two methods of accounting for uncollectible accounts receivable are ________.
A) the direct write-off method and the liability method
B) the asset method and the sales method
C) the allowance method and the liability method
D) the allowance method and the direct write-off method
5) The direct write-off method of accounting for uncollectible receivables is primarily used by small,
nonpublic companies.
6) The following information is from the records of Mountainview Camera Shop:
$80,000 (debit)
160,000
16,000
42,000
The company uses the direct write-off method for bad debts. What is the amount of bad debts expense?
A) $80,000
B) $42,000
C) $64,000
D) $16,000
7) Under the direct write-off method, the entry to write off an uncollectible account will include ________.
A) a debit to Bad Debts Expense account
B) a debit to the customer’s Account Receivable
C) a credit to the Allowance for Bad Debts
D) No entry is made to write off uncollectible accounts.
8) Under the direct write-off method, which of the following is included in the entry to write off an
uncollectible account?
A) a credit to the Allowance for Bad Debts
B) a credit to the customer’s Account Receivable
C) a debit to Allowance for Uncollectible Accounts
D) No entry is made to write off uncollectible accounts.
9) When a company is using the direct write-off method, and an account is written off, the journal entry
consists of a ________.
A) debit to Accounts Receivable and a credit to Cash
B) credit to Accounts Receivable and a debit to Bad Debts Expense
C) debit to the Allowance for Bad Debts and a credit to Accounts Receivable
D) credit to Accounts Receivable and a debit to Interest Expense
10) Uptown, Inc. has determined that an account receivable of $125 is uncollectible. The company uses
the direct write-off method. Which of the following entries is required to record the write-off?
A)
Bad Debts Expense
125
Accounts Receivable
125
B)
Cash
125
Accounts Receivable
125
C)
Allowance for Bad Debts
125
Accounts Receivable
125
D)
Accounts Receivable
125
Bad Debts Expense
125
11) On January 1, Five Star Services has the following balances:
Accounts Receivable $24,000 (debit)
Bad Debts Expense $0
Five Star Services has the following transactions during January: Credit sales of $120,000, collections of
credit sales of $86,000, and write-offs of $20,000. Five Star Services uses the direct write-off method. At the
end of January, the balance of Accounts Receivable is ________.
A) $14,333
B) $38,000
C) $27,907
D) $58,000
12) On January 1, All City Services has the following balances:
Accounts Receivable $25,000
Bad Debts Expense $0
All City has the following transactions during January: Credit sales of $120,000, collections of credit sales
of $81,000, and write-offs of $18,000. All City uses the direct write-off method. The amount of Bad Debts
Expense for January is ________.
A) $25,000
B) $26,667
C) $12,150
D) $18,000