Chapter 7
1. If an event or transaction leads to the recognition of revenue, firms match the consumption of any assets (the
expense), in time, with the revenue recognized.
2. Notes receivable is the amount owed to a seller by customers who have purchased goods and services on
credit.
3. If the firm has received a promise of payment but cannot measure this promise with reasonable reliability,
and U.S. GAAP would permit revenue to be recognized, but IFRS would not permit revenue to be recognized.
4. Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.
5. The Accounts Receivable, Gross amount less the Allowance for Uncollectibles yields Accounts Receivable,
Net, which reflects the amount of cash the firm expects to collect.
6. When a firm decides that a particular customer account is uncollectible, it removes that account by debiting
the Allowance for Uncollectibles and crediting Accounts Receivable, Gross. This process is called writing off
the account.
7. The write-off of specific customers’ accounts using the allowance method has no effect on the income
statement.
8. The write-off of specific customers’ accounts has no effect on Accounts Receivable, Net, because the
write-off amount decreases Accounts Receivable, Gross, and its contra account, the Allowance for
Uncollectibles, by exactly the same amount.
9. A debit balance in the Allowance for Uncollectibles appears on the balance sheet.
10. U.S. GAAP and IFRS require that firms disclose sufficient information to allow the reader of financial
statements to calculate Accounts Receivable, Gross, Allowance for Uncollectibles, and Accounts Receivable,
Net.
11. The U.S. Internal Revenue Service requires that firms recognize bad debt expense only when they conclude
an account is not collectible.
12. U.S. GAAP permits firms to use the installment method or the cost recovery method only when receivables
is/are collectible over an extended period and the seller has no reasonable basis for estimating the amount of
cash that it will collect.
13. The cost recovery method matches the costs of generating revenue with cash receipts until the seller
recovers all its costs.
14. The percentage-of-completion method provides information about the seller’s performance during the
contract period; in contrast, the completed contract method reports all profit only when seller completes the
contract.
15. Firms that reduce the price charged to a customerafter the firm has delivered the goods and the customer has
found them to be unsatisfactory or damaged issue a sales allowance.
16. Both U.S. GAAP and IFRS do not require the allowance method for uncollectible accounts, which involves
estimating the amount of uncollectible accounts receivable associated with each accounting period’s credit
sales.
17. The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume
of credit business. The firm estimates the appropriate percentage by studying its own experience or by inquiring
into the experience of similar firms. Default rates generally fall within the range of .01% to .02% of credit
sales.
18. The percentage-of-completion method measures the proportion of total work carried out during the
accounting period either from engineers’ estimates of the degree of completion or from the ratio of costs
incurred to date to the total costs expected for the entire contract.
19. The method of revenue recognition where the seller collects part of the selling price in cash and at the same
time recognizes as expenses each period the same portion of the cost of goods or services sold as the portion of
total revenues recognized is called the direct payment method.
20. The financial statements contain information for analyzing the collectibility of accounts receivable and the
adequacy of the expense for uncollectible accounts. Typical ratios used for this analysis include the accounts
receivable turnover ratio, days receivables outstanding, and write-off percentage.
21. Which of the following is true regarding income recognition?
22. Pete’s Wholesale Corporation
Pete’s Wholesale Corporation (“Pete’s”) operates discount retail stores. To shop in a Pete’s store, customers
must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card.
A customer purchases an annual membership from Pete’s for $120, a 20-pack of paper towels for $10.99, and
four new tires for $480. The tire purchase includes mounting and aligning by a Pete’s tire technician at the time
of initial installation and alignment and tire rotation services for three years afterward. The customer pays with
an American Express card.
Using the Pete’s Wholesale Corporation example, when should Pete’s recognize the $120 membership fee as
revenue?
23. Pete’s Wholesale Corporation
Pete’s Wholesale Corporation (“Pete’s”) operates discount retail stores. To shop in a Pete’s store, customers
must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card.
A customer purchases an annual membership from Pete’s for $120, a 20-pack of paper towels for $10.99, and
four new tires for $480. The tire purchase includes mounting and aligning by a Pete’s tire technician at the time
of initial installation and alignment and tire rotation services for three years afterward. The customer pays with
an American Express card.
When should Pete’s recognize revenue from selling the tires plus mounting, alignment, and rotation services?
24. When should Pete’s recognize revenue from selling the paper towels?
25. Conceptual guidance in U.S. GAAP refers to the selling entity having earned the revenues (that is, having
completed the earnings process). IFRS refers to
26. When the customer pays with a credit card
27. Five Points Vineyards processes grapes into champagne, which it bottles, corks, and places on shelves in
underground caverns to age for several years. During the aging process, the winemakers hand-turn the bottles a
quarter rotation every few months; also, at fixed intervals, they release yeast gases to preclude unwanted
fermentation. Assume that Five Points contracts to sell a quantity of champagne to a customer for €30 million.
Under the terms of the contract, Five Points will store the champagne in its caverns and perform all necessary
functions associated with the aging process (for example, turning the bottles and releasing yeast gases). The
selling price includes the costs of producing the champagne and providing services during the aging process.
The customer pays Five Points €15 million at the beginning of the aging and storage process, and agrees to pay
the remainder in five years upon delivery of the champagne.When should Five Points Vineyards recognize
revenue from selling the champagne?
28. Marshall Software Corporation sells Hijack Me Again to customers, who receive the software and have
access to postdelivery telephone support and the right to receive certain upgrades and enhancements if and
when Marshall Software develops them. Marshall Software sells Hijack Me Again for approximately $100;
customers pay cash or with a credit card. When should Marshall Software recognize revenue from selling
Hijack Me Again?
29. Rio de Janeiro Trains Inc., incorporated in Brazil, manufactures high-speed trains. In this industry, the time
to manufacture products usually exceeds one year. Assume that Rio de Janeiro Trains recently signed a €8
billion contract to provide 10 new high-speed trains to a customer in the European Union. The customer has
paid a deposit of €500 million and will pay the remainder in equal installments over the next four years. When
should Rio de Janeiro Trains recognize the revenue from this contract?
30. Wigs and Torys Plc. is a leading operator of pubs and pub restaurants in the United Kingdom. It operates
and franchises about 10 wine restaurants under the name Bottoms Up Bar, primarily in London. Suppose that in
contracting with a franchisee of an Bottoms Up Bar wine restaurant, Wigs and Torys agrees to provide services,
including site selection, décor design, marketing, advertising, and recruiting; and the franchisee agrees to pay
Wigs and Torys £100,000. It is common in the industry to permit the franchisee to pay in equal installments
over several years. When should Wigs and Torys recognize revenue from the franchisee contract?
31. As long as the amount collected from credit sales to a given group of customers exceeds the cost of goods
sold and the other costs of serving that group of customers, including the costs of _____ accounts, the retailer
will be better off selling to that group rather than losing the sales.
32. An accounting issue for accounts receivable is measurement of the amount on the balance sheet. With
regard to measurement, both U.S. GAAP and IFRS require that sellers report accounts receivable _____.
33. An accounting issue for accounts receivable is the timing of recognition of the reduction in income caused
by the uncollectibility of some accounts. With regard to timing, both U.S. GAAP and IFRS require that a seller
recognize an expense for estimated uncollectible accounts receivable in the _____.
34. Greenlawn Maintenance Company
Greenlawn Maintenance Company started a lawn services business on January 1, 2009. It sends invoices to its
customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30
days. During 2009, Greenlawn Maintenance billed its customers a total of $2,000,000 for services rendered
during the year. It made journal entries at the end of each month.
The aggregate effect of these entries during 2009 is as follows:
35. Greenlawn Maintenance Company
Greenlawn Maintenance Company started a lawn services business on January 1, 2009. It sends invoices to its
customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30
days. During 2009, Greenlawn Maintenance billed its customers a total of $2,000,000 for services rendered
during the year. It made journal entries at the end of each month.
Assume that Greenlawn Maintenance estimates that it will not collect 2% of total credit sales in a given month.
At the end of each month, it makes an adjusting entry. The aggregate effect of these entries during 2009 is as
follows:
36. Greenlawn Maintenance Company
Greenlawn Maintenance Company started a lawn services business on January 1, 2009. It sends invoices to its
customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30
days. During 2009, Greenlawn Maintenance billed its customers a total of $2,000,000 for services rendered
during the year. It made journal entries at the end of each month.
If Greenlawn Maintenance’s customers remitted $1,900,000 in cash during 2009, it would make the following
journal entries with the following aggregated amounts:
37. Greenlawn Maintenance Company
Greenlawn Maintenance Company started a lawn services business on January 1, 2009. It sends invoices to its
customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30
days. During 2009, Greenlawn Maintenance billed its customers a total of $2,000,000 for services rendered
during the year. It made journal entries at the end of each month.
Greenleaf Maintenance deems uncollectible any customer account not paid after six months. This means that
every accounting period, Greenleaf Maintenance ascertains which accounts remained uncollected for six
months, and treats these customer accounts as uncollectible by writing them off. If, during 2009, Greenleaf
Maintenance identified accounts of specific customers totaling $20,000 with unpaid balances for six months and
wrote them off, the journal entry would be as follows:
38. Greenlawn Maintenance Company
Greenlawn Maintenance Company started a lawn services business on January 1, 2009. It sends invoices to its
customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30
days. During 2009, Greenlawn Maintenance billed its customers a total of $2,000,000 for services rendered
during the year. It made journal entries at the end of each month.
The 2009 year-end balance in Accounts Receivable, Gross, for Greenleaf Maintenance is $1,085,000 An
aging of these accounts receivable shows that the estimated uncollectible amount is $24,200. Before aging the
accounts, the Allowance for Uncollectibles has a debit balance of $15,000 from writing off actual accounts
during 2009. Greenleaf Maintenance would record the following adjusting entry at the end of 2009 to obtain a
credit balance in the Allowance for Uncollectibles of $24,200:
39. If the firm has received a promise of payment but cannot measure this promise with reasonable reliability,
and
40. Recognizing revenue before the seller collects cash requires estimating the amount of uncollectible accounts
with reasonable accuracy. Both U.S. GAAP and IFRS require the
41. Both U.S. GAAP and IFRS require the allowance method for uncollectible accounts, which involves
estimating the amount of uncollectible accounts receivable associated with
42. Bad Debt Expense is also called
43. Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.
Provision in this context refers to
44. Allowance for Uncollectibles contra account appears among the _____ on a firm’s balance sheet as a(n)
_____.
45. When a firm decides that a particular customer account is uncollectible, it removes that account by debiting
the _____ and crediting _____ This process is called writing off the account.
46. There are two approaches that management can use to estimate the amount of credit sales that would prove
to be uncollectible, the are the _____. Over time, the two methods, correctly used, will give the same
cumulative income and asset totals. U.S. GAAP and IFRS do not require firms to use one or the other, and some
firms use both methods.
47. The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume
of credit business. The firm estimates the appropriate percentage by studying its own experience or by inquiring
into the experience of similar firms. Default rates generally fall within the range of _____of credit sales.
48. After the firm estimates the amount of uncollectible accounts associated with the credit sales of each period,
it makes an adjusting entry to debit _____ and credit _____.
49. Under the _____ procedure, the firm estimates and recognizes its bad debt expense; the offsetting credit
increases the balance in the Allowance for Uncollectibles. Under the _____ procedure, the firm estimates the
ending balance in the Allowance for Uncollectibles account and makes a credit entry to bring the balance to this
amount; the offsetting debit is to Bad Debt Expense.
50. At the start of 2009, Colonial Designs’ Allowance for Uncollectibles balance is €120,000. During 2009,
Colonial Designs’ credit sales were €5,000,000; of this amount, it expected 2% will become uncollectible.
During 2009, Colonial Designs wrote off €70,000 of accounts receivable. At the end of 2009, Colonial Designs
estimates, based on an aging of accounts, that the ending balance in the Allowance for Uncollectibles should be
€130,000.
51. Which of the following is true regarding the U.S. Internal Revenue Service
52. The financial statements contain information for analyzing the collectibility of accounts receivable and the
adequacy of the expense for uncollectible accounts. Typical ratios used for this analysis include the
53. The accounts receivable turnover ratio captures the speed of cash collections from credit customers and is
calculated as follows:
54. Ratios used to evaluate the allowance for uncollectibles are
55. A firm that transfers its receivables in exchange for cash can
56. A firm may use its accounts receivable as collateral for a loan from a bank or other financial institution.
Which of the following is/are true?
57. A firm may factor its accounts receivable to a bank or other financial institution in exchange for
cash. Which of the following is not true?
58. The firm may transfer the accounts receivable to a legally separate entity that issues debt securities to
investors. Which of the following is/are true?
59. Sales returns affect net cash collections when a customer has the right to return a product for a refund, and
the firm can reasonably estimate the amount of returns at the time of sale, U.S. GAAP and IFRS
60. The MMI company provides substantial services after the time of product sale and this condition introduces
uncertainty. Which of the following is true?
61. When the seller has received cash, but has not earned all of the revenues represented by the cash by
providing goods and services, the seller has incurred an obligation to provide goods or services. These
liabilities
62. The cost recovery method
63. Firms extending credit to customers should
64. For U.S. companies, how do U.S. GAAP and income tax reporting compare in their treatment of
uncollectible accounts?
65. The direct write-off method
66. The method that recognizes losses from uncollectible accounts in the period when a firm decides that
specific customers’ accounts are uncollectible is called the
67. Which of the following is not a shortcoming of the direct write-off method?
68. The direct write-off method
69. An example of a firm’s use of a different set of accounting principles for financial reporting and for income
tax reporting is
70. Rock Aerospace Company
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated
costs for the contract are:
Year 4
$ 5,600,000
Year 5
$11,200,000
Year 6
$ 5,600,000
Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as
follows:
Year 4
$ 4,200,000
Year 5
$ 7,000,000
Year 6
$16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the
percentage-of-completion method is:
71. Rock Aerospace Company
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated
costs for the contract are:
Year 4
$ 5,600,000
Year 5
$11,200,000
Year 6
$ 5,600,000
Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as
follows:
Year 4
$ 4,200,000
Year 5
$ 7,000,000
Year 6
$16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the
cost-recovery-first method is:
72. Rock Aerospace Company
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated
costs for the contract are:
Year 4
$ 5,600,000
Year 5
$11,200,000
Year 6
$ 5,600,000
Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as
follows:
Year 4
$ 4,200,000
Year 5
$ 7,000,000
Year 6
$16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the installment
method is:
73. Rock Aerospace Company
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated
costs for the contract are:
Year 4
$ 5,600,000
Year 5
$11,200,000
Year 6
$ 5,600,000
Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as
follows:
Year 4
$ 4,200,000
Year 5
$ 7,000,000
Year 6
$16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the completed
contract method is: