Financial and Managerial Accounting, 8e (Wild)
Chapter 7 Accounting for Receivables
1) A receivable is an amount due from another party.
2) Credit sales are recorded by crediting Accounts Receivable.
3) As long as a company accurately records total credit sales information, it is not necessary to
have separate accounts for specific customers.
4) If a customer owes interest on accounts receivable, Interest Receivable is debited and
Accounts Receivable is credited.
5) If a sale is made with a bank credit card, the seller debits Cash and credits Sales for the same
amount.
6) An Installment Accounts Receivable is classified as a non-current asset if the installment
period is six months.
7) Companies can report credit card expense as a reduction in net sales or as a selling expense.
8) BizCom’s customer, Redding, paid off an $8,300 balance on its account receivable. BizCom
should record the transaction as a debit to Accounts Receivable—Redding and a credit to Cash.
9) The maturity date of a note refers to the date the note must be repaid.
10) A promissory note is a written promise to pay a specified amount of money either on demand
or at a stated future date.
11) The formula for computing interest on a note is: Principal of the note × Annual interest rate ×
Time expressed in fraction of year.
12) The person that borrows money and signs a promissory note is called the maker.
13) A company borrowed $10,000 by signing a six-month promissory note at 5% interest. The
amount of interest to be paid at maturity is $25.
14) A company borrowed $16,000 by signing a 4-month promissory note at 12%. The amount of
interest to be paid at maturity is $640.
15) Sellers generally prefer to receive notes receivable rather than accounts receivable when the
credit period is long and the receivable is for a large amount.
16) Federal laws prohibit the selling of accounts receivable to factors.
17) The process of using accounts receivable as security for a loan is known as pledging
accounts receivable.
18) Since pledged accounts receivables only serve as collateral for a loan and are not sold, it is
not necessary to disclose the pledging.
19) A company factored $30,000 of its accounts receivable and was charged a 2% factoring fee.
The journal entry to record this transaction would include a debit to Cash of $30,000, a debit to
Factoring Fee Expense of $600, and credit to Accounts Receivable of $30,600.
20) The quality of receivables refers to the likelihood of collection without loss.
21) The accounts receivable turnover indicates how often accounts receivable are collected
during the period.
22) A high accounts receivable turnover in comparison with competitors suggests that the firm
should tighten its credit policy.
23) The accounts receivable turnover is calculated by dividing average accounts receivable by
net sales.
24) A company had net sales of $550,000 and an average accounts receivable of $110,000. Its
accounts receivable turnover equals 5.0.
25) A Company had net sales of $23,000, and its average account receivables were $5,700. Its
accounts receivable turnover is 0.24.
26) The direct write-off method of accounting for bad debts records the loss from an
uncollectible account receivable when it is determined to be uncollectible.
27) The allowance method estimates bad debts expense at the end of each accounting period.
28) Companies follow both the expense recognition principle and the materiality constraint when
applying the direct write-off method.
29) The use of the direct write-off method is allowed under the materiality constraint.
30) The advantage of the allowance method of accounting for bad debts is that it identifies the
specific customers who will not pay their bills.
31) Companies use two methods to account for uncollectible accounts, the direct write-off
method and the allowance method.
32) No attempt is made to estimate bad debts expense under the allowance method of accounting
for uncollectible accounts receivable.
33) The expense recognition principle permits the use of the direct write-off method of
accounting for uncollectible accounts when bad debts are very large in relation to a company’s
other financial statement items such as sales and net income.
34) When using the allowance method of accounting for uncollectible accounts, the entry to
record the estimated bad debts expense is a debit to Bad Debts Expense and a credit to
Allowance for Doubtful Accounts.
35) After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of
reducing Accounts Receivable to its estimated realizable value.
36) When using the allowance method of accounting for uncollectible accounts, the entry to
write off Jeannie’s uncollectible account is a debit to Allowance for Doubtful Accounts and a
credit to Accounts Receivable—Jeannie.
37) The realizable value refers to the accounts receivable amount expected to be received.
38) Allowance for Doubtful Accounts is a contra asset; its balance is added to Accounts
receivable.
39) The allowance method of accounting for bad debts matches the estimated loss from
uncollectible accounts receivable against the sales they helped produce.
40) When using the allowance method of accounting for uncollectible accounts, the recovery of a
bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.
41) The aging of accounts receivable method involves classifying each account receivable by
how long it is past its due date and estimating the percent of each uncollectible class.
42) Installment accounts receivable is another name for aging of accounts receivable.
43) The accounts receivable method to estimate bad debts obtains the estimated balance in the
Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible
from the total accounts receivable or (2) aging accounts receivable.
44) The percent of sales method for estimating bad debts assumes that a given percent of a
company’s credit sales for the period are uncollectible.
45) The percent of sales method for estimating bad debts uses only income statement account
balances to estimate bad debts.
46) The aging method of determining bad debts expense is based on the knowledge that the
longer a receivable is past due, the higher the likelihood of collection.
47) A company has $80,000 in outstanding accounts receivable and it uses the allowance method
to account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are
uncollectible. The current credit balance (before adjustments) in the allowance for doubtful
accounts is $1,200. The journal entry to record the adjustment to the allowance account includes
a debit to Bad Debts Expense for $4,800.
48) A company has $80,000 in outstanding accounts receivable and it uses the allowance method
to account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are
uncollectible. The current debit balance (before adjustments) in the allowance for doubtful
accounts is $1,200. The journal entry to record the adjustment to the allowance account includes
a debit to Bad Debts Expense for $6,000.
49) A company using the percentage of sales method for estimating bad debts has sales of
$350,000 and estimates that 1.0% of its sales are uncollectible. The estimated amount of bad
debts expense is $3,500.
50) A company using the percentage of sales method for estimating bad debts has sales of
$350,000 and estimates that 1.0% of its sales are uncollectible. The unadjusted balance in
Allowance for Doubtful Accounts is a $300 credit. The estimated amount of bad debts expense is
$3,200
51) The percent of sales method of estimating bad debts focuses more on the realizable value of
accounts receivable than on expense recognition.
52) The period of a note is the time from the note’s (contract) date to its maturity date.
53) Notes receivable are classified as current liabilities regardless of the time to maturity.
54) A company received a $15,000, 90-day, 10% note receivable. The journal entry to record
receipt of the note includes a debit to Notes Receivable.
55) It is not advisable to accept a note receivable in exchange for an overdue account receivable.
56) A note that the maker does not pay at maturity is called a dishonored note.
57) A maker who dishonors a note is one pays at maturity.
58) When a note receivable is dishonored, it reverts to an account receivable.
59) The notes receivable account of a business should include both the notes that have not yet
matured and the dishonored notes.
60) The practice of placing dishonored notes receivable into accounts receivable keeps only
notes that have not yet matured in the Notes Receivable account.
61) Accrued interest on outstanding notes receivable should be recorded at the end of each
accounting period.
62) When posting a dishonored note to a customer’s account, an explanation is included so as not
to misinterpret the debit as a sale on account.
63) Dishonoring a note means the maker no longer has to pay.
64) Separate accounts receivable information for each customer is important because it reveals
all of the following except:
A) How much each customer has purchased on credit.
B) How much each customer has paid.
C) How much each customer still owes.
D) The basis for sending bills to customers.
E) When the customer intends to pay outstanding balances.
65) A credit sale of $5,275 to a customer would result in which of the following?
A) A debit to the Accounts Receivable account in the general ledger and a debit to the customer’s
account in the accounts receivable subsidiary ledger.
B) A credit to the Accounts Receivable account in the general ledger and a credit to the
customer’s account in the accounts receivable subsidiary ledger.
C) A debit to the Accounts Receivable account in the general ledger and a credit to the
customer’s account in the accounts receivable subsidiary ledger.
D) A credit to the Accounts Receivable account in the general ledger and a debit to the
customer’s account in the accounts receivable subsidiary ledger.
E) A credit to Sales and a credit to the customer’s account in the accounts receivable subsidiary
ledger.
66) Sellers allow customers to use bank (or third-party) credit cards for all of the following
reasons except:
A) To be able to charge more due to fees and interest.
B) To avoid the risk of customers not paying.
C) To speed up receipt of cash from the credit sale.
D) To increase total sales.
E) To avoid having to decide who gets credit and how much.
67) Which of the following is not true regarding a bank (or third party) credit card expense?
A) Credit card expense may be classified as a “discount” deducted from sales to get net sales.
B) Credit card expense may be classified as a selling expense.
C) Credit card expense may be classified as an administrative expense.
D) Credit card expense is not recorded by the seller.
E) Credit card expense is a fee the seller pays for services provided by the card company.
68) A promissory note received from a customer in exchange for an account receivable is
recorded by the payee as:
A) A cash equivalent.
B) An account receivable.
C) A note receivable.
D) A short-term investment.
E) A note payable.
69) The person who signs a note receivable and promises to pay the principal and interest is the:
A) Maker.
B) Payee.
C) Holder.
D) Receiver.
E) Owner.