21
21) Smith and Son’s Department Store has a policy that allows customers to return merchandise for up
to 45 days for a full refund. Based on prior experience, approximately 8% of merchandise sold will be
returned.
In November, the store’s total sales were $2,500,000, all for cash. The cost of the merchandise sold was
$1,600,000. No sales discount is offered for early payment.
In December, within the allowable return period, customers returned merchandise that retailed for
$100,000 and that cost $66,000 for a refund.
Prepare the journal entries for these transactions. Omit explanations
Date
Accounts
Debit
Credit
3 Learning Objective 5-3
1) The two major types of receivables are accounts receivable and trade receivables.
2) Accounts (trade) receivable are amounts to be collected from customers from the sale of goods or
services.
3) Accounts receivable represents a form of extending credit which requires customers to sign a promise
to pay the business a definite sum at the maturity date, plus interest.
4) The general ledger has a separate account receivable for each customer.
5) By selling on credit, companies run the risk of not collecting some receivables.
6) With regard to Accounts Receivable, a separate account for each customer is kept in a(n):
A) control account.
B) subsidiary ledger.
C) general ledger.
D) control ledger.
7) The most important internal control over cash is to:
A) have all customers pay by check.
B) separate cash-handling duties from cash-accounting duties.
C) separate cash-handling from the mailroom.
D) have an imprest petty cash fund.
8) The category “Other Receivables” on the balance sheet includes:
A) Accounts Receivable, Interest Receivable.
B) Notes Receivable, Accounts Receivable, Interest Receivable.
C) Interest Receivable, Dividend Receivable, Advances to Employees.
D) none of the above.
9) What is the benefit and cost of extending credit to customers?
A)
Benefit
Cost
Increased sales
Uncollectible-Account Expense
B)
Benefit
Cost
Increased profits
Increased assets
C)
Benefit
Cost
Increased sales
Decreased current ratio
D)
Benefit
Cost
More potential customers
Decreased working capital
10) With regard to notes receivable, which of the following statements is CORRECT?
A) Notes receivable are less formal contracts than accounts receivable.
B) Notes receivable are also called promissory notes because a written promise to pay is not required.
C) All notes receivable require the borrower to pledge collateral.
D) The borrower signs a written promise to pay the lender a definite sum at the maturity date, with
interest.
4 Learning Objective 5-4
1) Accounts receivable are reported on the balance sheet at their net realizable value.
2) Uncollectible-account expense is included in Cost of Goods Sold on the income statement.
3) Under the direct write-off method, the journal entry to record Uncollectible-Account Expense
includes a credit to Accounts Receivable.
4) Under the allowance method, companies are not allowed to use different methods to estimate
Uncollectible-Account Expense.
5) Generally Accepted Accounting Principles (GAAP) allow companies to use either the direct write-off
method or the allowance method to determine uncollectible–account expense.
6) Under the allowance method, Uncollectible–Account Expense is recorded in the same accounting
period as the sale.
7) The Allowance for Uncollectible Accounts has a normal debit balance because it is an asset account.
8) The net realizable value of accounts receivable is the difference between gross accounts receivable
and:
A) Sales Discounts.
B) Sales Returns and Allowances.
C) Uncollectible-Account Expense.
D) Allowance for Uncollectible Accounts.
9) When evaluating the collectability of accounts receivable:
A) the Uncollectible-Account Expense is a contra account.
B) the Allowance for Uncollectible Accounts is an operating expense in the selling, general and
administrative category.
C) the allowance method uses estimates developed from the company’s collection experience.
D) the direct write-off method uses the Allowance for Uncollectible Accounts to record bad debts.
10) The aging-of-receivables method of estimating uncollectible accounts is:
A) not an acceptable method of estimating bad debts.
B) a balance sheet approach, since it focuses on accounts receivable.
C) an income statement approach, since it focuses on the amount of expense to be reported on the
income statement.
D) is required to be used by all companies because it focuses on what should be the most relevant and
faithful representation of accounts receivable on the balance sheet.
11) Under the allowance method for estimating uncollectible accounts:
A) a company sets up an Allowance for Uncollectible Accounts to estimate the amount of the
receivables the company does not expect to collect.
B) the Allowance for Uncollectible Accounts is a contra account to gross Accounts Receivable.
C) the Allowance for Uncollectible Accounts will normally have a credit balance.
D) all of the above.
12) Estimating uncollectible accounts by analyzing receivables from specific customers according to
how long each has been outstanding is known as the:
A) direct write-off method.
B) percent-of-sales method.
C) allowance method.
D) aging-of-receivables method.
13) The Allowance for Uncollectible Accounts is classified as:
A) a contra-expense account.
B) a contra-revenue account.
C) a contra-asset account.
D) an asset account.
14) Which balance sheet account shows the amount of accounts receivable that the business does NOT
expect to collect?
A) Unearned Sales Revenue
B) Accounts Receivable
C) Allowance for Uncollectible Accounts
D) Uncollectible-Account Expense
15) Estimates are NOT used to record uncollectible accounts expense when using the ________ method.
A) allowance.
B) percent-of-sales.
C) aging-of-receivables.
D) direct write-off.
16) The percent–of-sales method of computing uncollectible accounts for Accounts Receivable is used by
most companies for:
A) interim statements because it ensures that Accounts Receivable are reported at net realizable value.
B) annual statements because it is more accurate than the aging method.
C) interim statements because it is easier than the aging method.
D) annual statements because it focuses on the amount of receivables that is uncollectible.
17) The percent–of-sales method for computing uncollectible accounts:
A) computes Uncollectible-Account Expense as a percent of accounts receivable.
B) takes a balance sheet approach.
C) employs the expense recognition (matching) concept.
D) will result in the same amount of estimated Uncollectible-Accounts Expense as the aging–of–
receivables method.
18) The entry to write off an Account Receivable under the allowance method:
A) reduces total assets and increases net income.
B) reduces net income and total assets.
C) has no effect on total assets and net income.
D) increases net income and total assets.
19) The aging-of-receivables method for estimating uncollectible accounts:
A) results in an immediate write-off of receivables that are more than 90 days past due.
B) focuses on the amount of receivables that will not be collected.
C) uses a balance sheet approach.
D) B and C.
20) Under the allowance method, when a company determines that a specific customer’s Accounts
Receivable will not be collected, its accounting department will debit:
A) Uncollectible-Account Expense and credit Accounts Receivable.
B) Accounts Receivable and credit Allowance for Uncollectible Accounts.
C) Allowance for Uncollectible Accounts and credit Uncollectible Account Expense.
D) Allowance for Uncollectible Accounts and credit Accounts Receivable.
21) Most companies will use:
A) the direct write-off method for interim statements and the allowance method at the end of the year.
B) the allowance method for interim statements and the direct write-off method at the end of the year.
C) the percent-of-sales method for interim statements and the aging–of-receivables method at the end of
the year.
D) the aging-of-receivables method for interim statements and the percent–of-sales method at the end of
the year.
22) The direct write-off method for uncollectible accounts receivable:
A) reports receivables at their net realizable value.
B) does not use an Allowance for Uncollectible Accounts.
C) is considered to follow Generally Accepted Accounting Principles.
D) estimates uncollectible accounts as a percentage of sales.
23) The direct-write off method for uncollectible accounts receivable may ________ net income and
________ total assets in the year of the sale:
A) understate; understate.
B) overstate; overstate.
C) understate; overstate.
D) overstate; understate.
24) Which of the following is a CORRECT statement regarding the direct write-off method for
uncollectible accounts?
A) Most companies use the direct-write off method for their financial statements.
B) Companies are required to use the direct write-off method for federal income tax purposes.
C) A company records the Uncollectible-Account Expense when it writes off an individual account
receivable.
D) B and C.
25) The direct write-off method records Uncollectible-Account Expense:
A) in the accounting period each sale occurs.
B) at the end of the accounting period.
C) when the specific account receivable is determined to be uncollectible.
D) in the accounting period one year after the sale date.
26) The allowance method records Uncollectible-Account Expense:
A) in the year of sale.
B) at the end of the accounting period.
C) when the specific account receivable is determined to be uncollectible.
D) A and B
27) The balance in the Allowance for Uncollectible Accounts is considered prior to the year-end
adjustment under:
A) the direct write-off method.
B) the percent-of-sales method.
C) the aging-of-receivables method.
D) both the percent-of-sales and aging-of–receivables methods.
28) Under the allowance method, the entry to write off a $3600 uncollectible account includes a:
A) debit to Uncollectible Account Expense for $3600 and credit to Allowance for Uncollectible Accounts
for $3600.
B) debit to Accounts Receivable for $3600 and credit to Uncollectible-Account Expense for $3600.
C) debit to Accounts Receivable for $3600 and credit to Allowance for Uncollectible Accounts for $3600.
D) debit to Allowance for Uncollectible Accounts for $3600 and credit to Accounts Receivable for $3600.
29) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the
following:
Days Outstanding
Est. Percent
Uncollectible
1-30 days
2%
31-60 days
4%
61-90 days
11%
Over 90 days
50%
Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $1000.
Under the aging-of-receivables method, the Uncollectible-Account Expense at year-end is:
A) $1240.
B) $8870.
C) $9870.
D) $10,870.
30) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the
following:
Days Outstanding
Est. Percent
Uncollectible
1-30 days
2%
31-60 days
5%
61-90 days
12%
Over 90 days
51%
Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $900.
Under the aging-of-receivables method, the balance in the Allowance for Uncollectible Accounts will be
________ after the adjusting entry is made.
A) $380
B) $8180
C) $9080
D) $9980
31) An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3410. The
Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $500. The Accounts
Receivable balance is $44,820. The amount of the adjusting entry for uncollectible accounts should be
for:
A) $500.
B) $2910.
C) $3910.
D) $3410.
32) Using the percentage–of-sales method, the estimated total uncollectible accounts are $6622. The
Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $2935. The Accounts
Receivable balance is $44,420. The amount of the adjusting entry for Uncollectible-Accounts Expense is:
A) $2935.
B) $3687.
C) $6622.
D) $9557.
33) The following item appeared on a balance sheet:
Accounts Receivable, less allowance of $58,104 …..$1,452,600
The gross balance in Accounts Receivable before the allowance was deducted was:
A) $1,394,496.
B) $1,452,600.
C) $1,510,704.
D) none of the above
34) The following account balances were extracted from the accounting records of Thomas Corporation
at the end of the year:
Accounts Receivable
$1,104,000
Allowance for Uncollectible Accounts (Credit)
$39,000
Uncollectible-Account Expense
$63,000
What is the net realizable value of the accounts receivable?
A) $1,065,000
B) $1,104,000
C) $1,143,000
D) $1,167,000
35) Jumpin Corporation uses the percent–of-sales method to estimate uncollectibles. Net credit sales for
the current year amount to $2,020,000, and management estimates 3% will be uncollectible. The
Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1600. The amount of
Uncollectible-Account Expense reported on the income statement will be:
A) $1600.
B) $59,000.
C) $60,600.
D) $62,200.
36) Jensen Corporation uses the percentage–of-sales method to estimate uncollectibles. Net credit sales
for the current year amount to $2,005,000 and management estimates 3% will be uncollectible. The
Allowance for Doubtful Accounts prior to adjustment has a debit balance of $17,000. After all adjusting
entries are made, the balance in Allowance for Uncollectible Accounts will be:
A) $17,000.
B) $17,510.
C) $43,150.
D) $60,150.
37) A company that uses the allowance method, writes–off a receivable of $7000. Prior to the journal
entry, the credit balance in the Allowance for Uncollectible Accounts was $18,432 and Accounts
Receivable were $2,001,000. After the entry to write-off the receivable is made, the net realizable value
of Accounts Receivable will be:
A) $1,975,568.
B) $1,982,568.
C) $1,994,000.
D) $2,001,000.
38) The balance in Accounts Receivable was $700,000 at the beginning of the year and $780,000 at the
end of the year. Credit sales for the year totaled $4,110,000. During the year, $430,000 in customer
accounts were written off. How much cash was collected from customers during the period?
A) $3,600,000
B) $4,030,000
C) $4,460,000
D) $4,620,000
39) Following Generally Accepted Accounting Principles, which method of estimating uncollectible
accounts is NOT acceptable?
A) allowance method
B) percent-of-sales method
C) aging-of-receivables method
D) direct write-off method
40) Under the direct write-off method, what journal entry is prepared when an account is determined to
be worthless or uncollectible?
A) debit Allowance for Uncollectible Accounts and credit Accounts Receivable
B) debit Accounts Receivable and credit Allowance for Uncollectible Accounts
C) debit Uncollectible-Account Expense and credit Allowance for Uncollectible Accounts
D) debit Uncollectible-Account Expense and credit Accounts Receivable
41) On December 31, 2017, James Company has an accounts receivable balance of $324,000 before any
year-end adjustments. The Allowance for Doubtful Accounts has a $1100 credit balance. The company
prepares the following aging schedule for accounts receivable:
Total Balance
1-30 days
31-60
days
61-90
days
over 90 days
$324,000
$157,000
$89,000
$51,000
$27,000
Percent uncollectible
1%
2%
4%
21%
What is the Uncollectible-Account Expense at December 31, 2017?
A) $1570
B) $9960
C) $11,060
D) $12,160
42) On December 31, 2017, Jerome Company has an accounts receivable balance of $319,000 before any
year-end adjustments. The Allowance for Doubtful Accounts has a $1200 credit balance. The company
prepares the following aging schedule for accounts receivable:
Total Balance
1-30 days
31-60
days
61-90
days
over 90 days
$319,000
$157,000
$83,000
$56,000
$23,000
Percent uncollectible
1%
2%
3%
22%
What is the Allowance for Uncollectible Accounts at December 31, 2017?
A) $1200
B) $8770
C) $9970
D) $11,170
43) An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3610. The
Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $300. The Accounts
Receivable balance is $44,820. The amount of the adjusting entry for uncollectible accounts should be
for:
A) $300
B) $3310
C) $3610
D) $3910
44) The balance in Accounts Receivable at the beginning of the year was $530,000. The balance in
Accounts Receivable at the end of the year was $740,000. Customer accounts of $410,000 were written
off. The company collected $4,100,000 from credit customers and $1,030,000 from cash customers. What
are credit sales for the year?
A) $4,300,000
B) $4,100,000
C) $4,510,000
D) $4,720,000
45) At the end of the year, Seidner Company has the following information available:
Credit sales
$1,000,000
Sales returns and allowances
10,000
Accounts Receivable
560,000
Allowance for Uncollectible Accounts(Debit)
42,000
The company uses the percent–of-sales method to estimate uncollectible accounts and has not prepared
the year-end adjusting entry for Uncollectible-Account Expense. What does the debit balance in the
Allowance for Uncollectible Accounts indicate?
A) The company overestimated the amount of uncollectible accounts at the end of the prior accounting
period.
B) The company underestimated the amount of uncollectible accounts at the end of the prior accounting
period.
C) Write-offs of uncollectible accounts increased dramatically in the current accounting period.
D) B and C
46) At the end of the year, Smith Company has the following information available:
Credit sales
$1,000,000
Sales returns and allowances
10,000
Accounts Receivable
560,000
Allowance for Uncollectible Accounts(Debit)
42,000
The company uses the percent–of-sales method to estimate uncollectible accounts and has not prepared
the year-end adjusting entry for Uncollectible-Account Expense. In the prior year, uncollectible accounts
were estimated at 1% of credit sales. What action should Smith Company take in regards to
uncollectible accounts at the end of the current year?
A) increase the percentage in the percent–of-sales method
B) reexamine credit policies
C) change to the direct write-off method
D) A and B
47) What amount does a company expect to collect from Accounts Receivable?
A) gross amount of Accounts Receivable
B) net realizable value of Accounts Receivable
C) gross amount of Accounts Receivable minus Allowance for Uncollectible Accounts
D) B and C
48) The income statement approach to estimating uncollectible accounts is called the ________ method.
The balance sheet approach to estimating uncollectible accounts is called the ________ method.
A) direct write-off; allowance
B) allowance; direct write-off
C) percent-of-sales; aging-of-receivables
D) aging-of-receivables; percent-of–sales
49) Tanya Company has the following information:
Accounts Receivable, January 1, 2017
$250,000
Accounts Receivable, December 31, 2017
450,000
Credit Sales
1,800,000
Cash Sales
1,000,000
Write-offs of uncollectible accounts
11,000
What are collections from customers during 2017?
A) $1,589,000
B) $1,600,000
C) $2,589,000
D) $2,600,000