978-1337276337 Test Bank Chapter 7 Part 4

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156. Bonds issued by corporations or governmental bodies as a form of borrowing are called __________.

157. Cash flows from purchases, sales, and maturities of investments are usually classified as __________ activities.

158. Changes in accounts receivable are reported in the __________ Activities section of a statement of cash flows

prepared using the indirect method.

159. When using the indirect cash flow method, a decrease in accounts receivable must be __________ to net income to

arrive at the increase or decrease in cash flows.

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Matching

For each item listed below, identify how it will be reported on the statement of cash flows under the indirect method.

a. Operating activity

b. Investing activity

c. Financing activity

d. Not reported separately on the cash flow statement

DIFFICULTY: Moderate

REFERENCES: pp. 345-347

LEARNING OBJECTIVES: FACC.PONO.18.07-06 – LO: 07–06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-12-Receivables Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

160. Write-off of a customer’s account receivable under the allowance method

161. Decrease in accounts receivable

162. Increase in short-term notes receivable

Select the term from the list below that matches each of the following six descriptions.

a. Interest

b. Maturity value

c. Principal

d. Payee

e. Discounting

f. Term

g. Recourse

h. Implicit

i. Maker

DIFFICULTY: Easy

REFERENCES: pp. 334-336 and pp. 336-339

LEARNING OBJECTIVES: FACC.PONO.18.07-03 – LO: 07–03

FACC.PONO.18.07-04 – LO: 07–04

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-12-Receivables Report

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

163. The sale of a note

164. The length of time a note is outstanding—the period of time between the date it is issued and the date it matures

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165. The party that receives payment due from a note

166. Transfer a note with a contingent liability

167. The difference between the principal amount of the note and its maturity value

168. The amount of cash the maker is to pay the payee on the maturity date of the note

Match the following definitions with their appropriate terms in Questions 169– 176.

a. A receivable arising from the sale of goods or services with a verbal promise to pay. b. A form used to

categorize the various individual accounts receivable according to the length of time each has been outstanding.

c. A method of estimating bad debts on the basis of either the net credit sales of the period or the accounts receivable at

the end of the period. d. A measure of the number of times receivables are

collected in a period.

e. The general ledger account that is supported by a subsidiary ledger. f. A contra-asset account used to reduce

accounts receivable to its net realizable value.

g. The detail for a number of individual items that collectively

make up a single general ledger account. h. The recognition of bad debts expense at the point an

account is written off as uncollectible.

169. Account receivable

170. Subsidiary ledger

171. Control account

172. Direct write-off method

173. Allowance method

174. Allowance for doubtful accounts

175. Aging schedule

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Match the following definitions with their appropriate terms in Questions 177– 190.

a. A liability resulting from the signing of a promissory note. b. A measure of how long it takes to collect

receivables.

c. A written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future. d.

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.

e. The party that will receive the money from a promissory note at some future date. f. The process of selling a

promissory note.

g. The date the promissory note is due. h. The amount of cash the maker is to pay the payee on the

maturity date of the note.

i. The difference between the principal amount of the note and its maturity value. j. An asset resulting from

the acceptance of a promissory note from another company.

k. Securities issued by corporations and governmental bodies as a form of borrowing. l. Securities issued by

corporations as a form of ownership in the business.

m. The party that agrees to repay the money for a promissory note at some future date. n. The amount of cash

received, or the fair value of the products or services received, by the maker when a promissory note is issued.

177. Promissory note

178. Maker

179. Payee

180. Note receivable

181. Note payable

182. Principal

183. Maturity date

184. Term

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185. Maturity value

186. Interest

187. Discounting

188. Number of days’ sales in receivables

189. Equity securities

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Subjective Short Answer

191. Murrysville Company had the following data available for 2017 (before making any adjustments):

Accounts receivable, December 31, 2017 $343,200 (Dr.)

Allowance for doubtful accounts 3,800 (Cr.)

Net credit sales, 2017 829,000 (Cr.)

Required

1. Analyze how bad debts will be recognized under the following assumptions:

(a) Bad debts expense is expected to be 3% of net credit sales for the year and

(b) Murrysville expects it will not be able to collect 7% of the balance in accounts receivable at year-end.

2. Assume instead that the balance in the allowance account is a $3,800 debit. How will this affect your answers to (1)?

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192. In its first year of business, Mariman Company has net income of $290,000, exclusive of any adjustment for bad

debts expense. The president of the company has asked you to calculate net income under each of two alternatives of

accounting for bad debts: the direct write-off method and the allowance method. The president would like to use the

method that will result in the higher net income. So far, no adjustments have been made to write off uncollectible accounts

or to estimate bad debts. The relevant data are as follows:

Write-offs of uncollectible accounts during the year $ 21,000

Net credit sales 750,000

Estimated percentage of net credit sales that will be uncollectible 5%

Required

1. Compute net income under each of the two alternatives.

2. Does Mariman have a choice as to which method to use? If so, should it base its choice on which method will result in

the higher net income? (Ignore income taxes.) Explain.

ANSWER:

1. Net income under each of the two alternatives is as follows:

2. The direct write-off method would result in a lesser amount of expense and therefore in a higher net income. However,

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193. Dillsburg Company sells on credit with terms of n/30. For the $800,000 of accounts at the end of the year 2017 that

are not overdue, there is a 92% probability of collection. For the $300,000 of accounts that are less than a month past due,

Dillsburg estimates the likelihood of collection going down to 75%. The probability of collecting the $150,000 of

accounts more than a month past due is estimated to be 30%.

Required

1. Prepare an aging schedule to estimate the amount of uncollectible accounts.

2. On the basis of the schedule in (1), analyze the impact of the adjustment as of December 31, 2017, to estimate bad

debts. Assume that the credit balance in Allowance for Doubtful Accounts is $30,000.

2. Analysis 2017:

2017

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194. Rural Ridge Company reported the following on its balance sheet at December 31, 2017:

Accounts receivable, less allowance of $12,400 $500,000

A) How much is the net realizable value of Rural Ridge’s receivables?

B) What is the balance of the Accounts Receivable account?

C) Are you able to determine whether Rural Ridge uses the allowance method or the direct write off method for

uncollectibles? Why or why not?

ANSWER:

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195. Star Corp. sold merchandise for $8,000 to MegaStore on May 15, 2017, with payment due in 30 days. Subsequent to

this, MegaStore experienced cash flow problems and was unable to pay its debt. On August 10, 2017, Star stopped trying

to collect the outstanding receivable from MegaStore and wrote off the account as uncollectible. On December 1, 2017,

MegaStore sent Star a check for $2,000 and offered to sign a two-month, 12%, $6,000 promissory note to satisfy the

remaining obligation. MegaStore paid the entire amount due Star, with interest, on January 31, 2018. Star ends its

accounting year on December 31 each year and uses the allowance method to account for bad debts.

Required

1. Analyze the adjustments needed on the books of Star Corp. from May 15, 2017 to January 31, 2018.

2. Why would MegaStore bother to send Star a check for $2,000 on December 1 and agree to sign a note for the balance,

given that such a long period of time had passed since the original purchase?

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196. Refer to the data for Cheswick Corp..

If bad debts are estimated at 1% of net sales, how much will Cheswick Corp. report as bad debts expense for 2017?

197. Refer to the data for Cheswick Corp.

If the aging approach is used to estimate bad debts, how much bad debts expense will Cheswick Corp. report for 2017?

198. Refer to the data for Cheswick Corp.

If the aging approach is used to estimate bad debts, how much is the net realizable value of the accounts receivable at

December 31, 2017?

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199. Refer to the data for Cheswick Corp..

Assume that the net realizable value is $170,000 after the adjustment for bad debts in 2017. How much is the net

realizable value of accounts receivable after a customer’s account of $2,500 is written off? Explain why.

200. Refer to the data for Cheswick Corp..

Determine the effect on Cheswick Corp.’ accounting equation of the year-end adjustment of bad debts using the aging

approach.

Balance Sheet Income Statement

Assets = Liabilities + Stockholders’

Equity Revenues – Expenses = Net Income

ANSWER: Balance Sheet Income Statement

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Beatrice Equipment

Beatrice Equipment sells merchandise only on credit. For the year ended December 31, 2017, the following data are

available:

Sales $2,400,000

Sales returns and allowances 60,000

Accounts Receivable—January 1, 2017 270,000

Allowance for doubtful accounts—January 1, 2017 25,600

Collections during 2017 2,426,300

Accounts written off as uncollectible during 2017 23,700

201. Refer to the data for Beatrice Equipment.

Determine the balance of Accounts Receivable at December 31, 2017.

202. Refer to the data for Beatrice Equipment.

Assume that Beatrice Equipment estimates bad debts at 1% of net credit sales.

A) What amount will Beatrice Equipment record as bad debts expense for 2017?

B) How much is the net realizable value of accounts receivable reported on Beatrice Equipment’s balance sheet at

December 31, 2017?

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203. Refer to the data for Beatrice Equipment.

Assume that Beatrice Equipment estimates bad debts on an aging analysis, and the aging schedule indicates that $28,000

of the December 31, 2017, accounts receivable will be uncollectible.

A) What amount will Beatrice Equipment recognize as bad debts expense for 2017?

B) How much is the net realizable value of the receivables to be reported on Beatrice Equipment’s balance sheet at

December 31, 2017?

204. If a company has a choice of acceptable methods to estimate bad debts, what factors should be considered in the

selection?

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205. Can a company use the direct write-off method rather than the allowance method to account for bad debts expense?

Explain.

206. Refer to the data for Sliders Company.

Determine the balance of Accounts Receivable at December 31, 2017.

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207. Refer to the data for Sliders Company.

The firm estimates that bad debts could be 1% of its net sales.

A) What amount will Sliders Company recognize as bad debts expense for the year?

B) Once this calculation is recorded, assume that the company has Accounts Receivable of $58,700 and Allowance

for Doubtful Accounts of $800. What will be the net realizable value once the adjustment from (A) is made?

208. Refer to the data for Sliders Company.

Assume the company estimates bad debts using an aging analysis and the aging schedule indicates that $3,600 of the year-

end Accounts Receivable will be uncollectible.

A) What amount will Sliders Company recognize as bad debts expense for the year?

B) If the ending balance of Accounts Receivables is $38,700, what is the net realizable value of Accounts Receivable

reported on December 31, 2017?

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209. Stream Media Inc. and Techtronics are competitors in the same industry.

The following information was summarized from a recent annual report of Stream Media Inc.:

(In millions)

Receivables:

December 31, 2018 $ 1,968

December 31, 2017 642

Revenue for the year ended:

December 31, 2018 46,980

December 31, 2017 40,023

The following information was summarized from a recent annual report of Techtronics:

(In millions)

Accounts and notes receivable, net

December 31, 2018 $ 246

December 31, 2017 264

Revenues for the year ended:

December 31, 2018 4,335

December 31, 2017 4,251

Required

1. Calculate the accounts receivable turnover ratios for Stream Media and Techtronics for the most recent year.

2. Calculate the average collection period, in days, for both companies for the most recent year. Comment on the

reasonableness of the collection periods for these companies considering the nature of their business.

3. Which company appears to be performing better? What other information should you consider in determining how

these companies are performing?

ANSWER: 1. Accounts receivable turnover ratios:

2. Average collection period:

3. Stream Media’s accounts receivable turnover ratio is higher than Techtronics’: 36 versus 17. However, it would be