978-1337276337 Test Bank Chapter 7 Part 3

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99. Verilux Company sold merchandise to Flight Corp. on November 1, 2017, for $10,000. Verilux accepted a promissory

note from Flight Corp. for $10,000. The note has a term of five months and a stated interest rate of 7%. Verilux’s

accounting period ends on December 31, 2017. What amount should Verilux recognize as interest revenue on December

31, 2017?

a. $0

b. $116.67

c. $291.67

d. $280.00

100. Verilux Company sold merchandise to Flight Corp. on November 1, 2017, for $10,000. Verilux accepted a

promissory note from Flight Corp. for $10,000. The note has a term of five months and a stated interest rate of 7%.

Verilux’s accounting period ends on December 31, 2017. What amount should Verilux recognize as interest revenue on

the maturity date of the note?

a. $0

b. $175.00

c. $291.67

d. $420.00

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101. Comfort Shoes received a promissory note from a customer on April 1, 2017. The face amount of the note is $2,000;

the terms are 12 months and 8% annual interest. How much total interest revenue will Comfort Shoes recognize for the

year ended December 31, 2017?

a. $40

b. $107

c. $120

d. $160

102. Comfort Shoes received a promissory note from a customer on April 1, 2017. The face amount of the note is $2,000;

the terms are 12 months and 8% annual interest. At the maturity date, the customer pays for the note and interest. Comfort

Shoes made the proper adjustment at the end of December for interest. The effect of recognizing the transaction on the

maturity date is a(n)

a. decrease to Cash.

b. increase to Notes Receivable.

c. increase to Discount on Notes Receivable.

d. decrease to Notes Receivable.

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103. Router Inc. lends $70,000 on a 120-day, 9% promissory note. The total interest that Router will receive at maturity is

a. $6,300.

b. $2,100.

c. $525.

d. $1,890.

104. Textbooks.com accepts VISA for payments of purchases made by students. The credit card drafts are deposited

directly in a bank account. VISA charges a 2% collection fee. Credit card drafts totaling $12,000 are deposited during

September. The effect of recording the sales and deposits will include an

a. increase in Cash for $12,000.

b. increase to Sales for $11,760.

c. increase to Accounts Receivable for $11,760.

d. increase in Collection Fee Expense for $240.

105. When a company discounts an interest-bearing note at a bank with recourse

a. the company is assured payment at maturity.

b. the company will receive the full amount of the note plus interest.

c. the company has a contingent liability from the time the note is discounted until its maturity date.

d. the bank assumes the credit risk on non-payment at the maturity date.

106. Discounting a note receivable

a. requires using an account called Discount on Notes Receivable.

b. is the process of lending money.

c. is the process of selling a promissory note.

d. slows the collection process.

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a. 33% of the debt securities of a second company.

b. 100% of the debt securities of a second company.

c. 15% of the equity securities of a second company.

d. None of these are correct.

114. The equity method of accounting for an investment is used when a company purchases

a. more than 20% of the debt securities of a second company.

b. 100% of the debt securities of a second company.

c. 15% of the equity securities of a second company.

d. more than 20% of the equity securities of a second company.

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115. Clarion Corp. invested cash in a six-month certificate of deposit (CD) on November 1, 2017. If Clarion Corp. has an

accounting period that ends on December 31, 2017, when should Clarion recognize interest revenue from the CD?

a. On December 31, 2017, only

b. On May 1, 2018, only

c. Both December 31, 2017, and May 31, 2018

d. On the date when its income tax return is filed

116. Toppson Corp. invested cash in a nine-month certificate of deposit (CD) on October 1, 2017. If Toppson has an

accounting period that ends on December 31, 2017, when would it most likely recognize interest revenue from the CD?

a. On December 31, 2017, only

b. On July 1, 2018, only

c. Both December 31, 2017 and July 1, 2018

d. On October 1, 2017

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117. Wagner’s Bookstore acquires a 6%, $12,000 certificate of deposit on September 1. The term of the CD is six months.

At that time, all principal and accrued interest will be paid in cash. Indicate the effect on the financial statements at

December 31.

a. Interest Receivable increases $240, Interest Revenue increases $240

b. Interest Receivable increases $360, Interest Revenue increases $360

c. Interest Receivable increases $480, Interest Revenue increases $480

d. Interest Receivable increases $720, Interest Revenue increases $720

118. What are the effects on the accounting equation from the purchase of a short-term investment?

a. Assets and stockholders’ equity decrease.

b. No effects—assets increase and decrease by the same amount.

c. Assets and liabilities decrease.

d. Stockholders’ equity decreases and liabilities increase.

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119. Samsing Inc. pays $18,000 to buy stock in another company and an additional $350 in commissions. Three months

later, Samsing sells the stock for $19,000. At the time of sale, Samsing will recognize a

a. $650 loss.

b. $1,000 gain.

c. $350 loss.

d. $650 gain.

120. When are consolidated financial statements prepared?

a. At the option of an investee company

b. At the option of an investor company

c. If one company owns more than 50% of another company

d. Only if one company owns 100% of another company

121. Significant influence of one company over another has been defined by the accounting profession as the ownership

of what minimum percent of the second company’s stock?

a. 20%

b. 50%

c. 100%

d. 30%

122. On July 1, 2017, Overlin Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually on June 30.

If the accounting year for Overlin ends at December 31, 2017, what will be reported with respect to the bonds on that

date?

a. The carrying value of the bonds will be $108,000.

b. The cash received in interest will be $8,000.

c. Interest income in the amount of $4,000 will be accrued.

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d. A loss on the bonds will be reported in the Other Income and Expense section of the 2017 income statement until

the entire amount of interest is paid on June 30, 2018.

123. On February 1, 2017, Vermont Corp. pays $50,000 for shares of Stream, Inc. common stock and another $1,000 in

commissions.

Assume that Vermont sells the Stream stock on May 20, 2017, for $53,000. In this case, Vermont recognizes a(n)

a. increase in assets and stockholders’ equity for $2,000.

b. decrease in assets and an increase in stockholders’ equity for $2,000.

c. increase and a decrease in assets by the same amount.

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124. Which of the following statements is true regarding dividend income?

a. Dividend income is accrued at year-end.

b. Dividend income is reported on the income statement.

c. Dividend income appears in the Stockholders’ Equity section of the balance sheet.

d. Dividend income is recognized by companies that own debt securities.

125. The comparative balance sheets for Flagler Co. for 2018 and 2017 indicate that accounts receivable decreased during

2018. Flagler uses the indirect method of preparing the Operating Activities section of its statement of cash flows. How

will the decrease in accounts receivable be reported on the statement of cash flows?

a. It will be included in the amount of cash and cash equivalents at the end of 2018.

b. It will be deducted from net income in the Operating Activities section.

c. It will be added to net income in the Operating Activities section.

d. It will be reported as a cash outflow in the Investing Activities section.

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126. The comparative balance sheets of Midnite Corp. for 2018 and 2017 indicate that short-term trade notes receivable

increased from $5,000 in 2016 to $75,000 in 2018. How will this change be reported on Midnite’s statement of cash flows,

if Midnite uses the indirect method?

a. It will be included in the amount of cash and cash equivalents at the end of 2018.

b. It will be reported as a deduction from net income in the Operating Activities section.

c. It will be reported as a cash outflow in the Investing Activities section.

d. It will be added to net income in the Operating Activities section.

127. What is the impact on the cash flow statement from an increase in short-term notes receivable, assuming the indirect

method is used?

a. A decrease in the cash flow from operating activities

b. An increase in the cash flow from operating activities

c. An increase in the cash flow from financing activities

d. An increase in the cash flow from investing activities

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128. What is the impact on the cash flow statement from a decrease in accounts receivable, assuming the indirect method

is used?

a. A decrease in the cash flow from operating activities

b. An increase in the cash flow from operating activities

c. An increase in the cash flow from financing activities

d. A decrease in accounts receivable has an impact only if the direct method is used

129. Which one of the following is an investing activity on the statement of cash flows?

a. Collection of accounts receivable

b. Purchase of long-term investments

c. Receipt of interest

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130. Sweetson Enterprises’ comparative balance sheets included accounts receivable of $220,300 at December 31, 2017,

and $200,900 at December 31, 2018. Sales reported on Sweetson’s 2018 income statement amounted to $2,350,000. What

is the amount of cash collections that Sweetson will report in the Operating Activities category of its 2018 statement of

cash flows assuming that the direct method is used?

a. $2,369,400

b. $2,350,000

c. $2,771,200

d. $2,330,600

Completion

131. The mechanism that keeps track of the balances owed by individual customers is called a(n) __________.

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132. A general ledger account that is supported by a subsidiary ledger is called a(n) __________.

133. The contra-asset account used to reduce accounts receivable to its net realizable value is __________.

134. Accountants use the __________ to overcome the deficiencies of the direct write-off method for bad debts.

135. The gross accounts receivable less the allowance for doubtful accounts is known as the __________.

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136. A(n) __________ categorizes the various accounts receivable amounts by the length of time outstanding.

137. The accounts receivable turnover ratio is computed by dividing __________ by average accounts receivable.

138. The __________ the accounts receivable turnover ratio, the quicker each dollar of accounts receivable can be

collected.

139. Over the life of a note, the maker of a note recognizes a __________ on the balance sheet and __________ on the

income statement.

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140. A(n) __________ is a written promise to repay a definite sum of money either upon demand or at a fixed or

determinable date in the future.

141. The party that agrees to repay is the ____________________ of the note.

142. A company that holds a promissory note from another company has an asset called a(n) __________.

143. The company that makes or gives a promissory note to another company has a liability called a(n) __________.

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144. The maker of a note recognizes __________ on its income statement.

145. The payee of a note recognizes __________ on its income statement.

146. The amount of money received, or the fair value of the products or services received by the maker when a

promissory note is issued, is called the __________.

147. The length of time a note is outstanding (that is, the period of time between the date it is issued and the date it

matures) is called the __________.

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148. The party that receives the payment due from a note is called the __________.

149. The date that a promissory note is due is the __________.

150. The difference between the principal amount of a note and its maturity value is called __________.

151. The amount of cash the maker is to pay the payee on the maturity date of the note is called the __________.

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152. The process of assigning a note due in the future to a bank before its maturity date is called __________.

153. If a company discounts a note at a bank, but still is contingently liable for the maturity value, then the note was

discounted with __________.

154. When an investor is able to secure significant influence over an investee, the __________ method of accounting is

used.

155. Securities issued by corporations as a form of ownership in the business, such as common or preferred stock, are

called __________.