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Chapter 7 Cash and Receivables
What amount should Halloran report for accounts receivable, before allowances, at December
31, 2016?
a. $1,040,000.
b. $ 970,000.
c. $ 760,000.
d. None of these answer choices are correct.
Use the following to answer questions 62–64:
Calistoga Produce estimates bad debt expense at ½% of credit sales. The company reported accounts
receivable and allowance for uncollectible accounts of $471,000 and $1,650, respectively, at
December 31, 2015. During 2016, Calistoga's credit sales and collections were $315,000 and
$319,000, respectively, and $1,720 in accounts receivable were written off.
62. Calistoga's accounts receivable at December 31, 2016, are:
a. $467,000.
b. $473,280.
c. $465,280.
d. $469,280.
63. Calistoga's 2016 bad debt expense is:
a. $1,720.
b. $1,650.
c. $1,505.
d. $1,575.
64. Calistoga's adjusted allowance for uncollectible accounts at December 31, 2016, is:
a. $1,575.
b. $1,505.
c. $1,650.
d. $1,720.
65. The balance in accounts receivable at the beginning of 2016 was $300. During 2016, $1,600
of credit sales were recorded. If the ending balance in accounts receivable was $250 and $100
in accounts receivable were written off during the year, the amount of cash collected from
customers during 2016 was:
a. $1,600.
b. $1,650.
c. $1,550.
d. $1,900.
Chapter 7 Cash and Receivables
Use the following to answer questions 66–68:
In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for
uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts receivable it
had attempted to collect and failed. Credit sales for the year were $2,200,000, and cash collections
from credit customers totaled $1,950,000.
66. What bad debt expense would Dinty report in its first-year income statement?
a. $ 50,000.
b. $ 82,000.
c. $114,000.
d. Can’t be determined from the given information
67. What accounts receivable balance would Dinty report in its first year-end balance sheet?
a. $196,000.
b. $218,000.
c. $230,000.
d. None of the above is correct.
68. In Dinty's adjusting entry for bad debts at year-end, which of these would be included?
a. Debit to bad debt expense for $114,000.
b. Credit to allowance for uncollectible accounts for $82,000.
c. Debit to accounts receivable for $32,000.
d. All of these answer choices are correct.
Chapter 7 Cash and Receivables
Use the following to answer questions 69–71:
For 2016, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company reported
accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively,
at December 31, 2015. During 2016, Rahal's credit sales and collections were $404,000 and $408,000,
respectively, and $2,340 in accounts receivable were written off.
69. Rahal's accounts receivable at December 31, 2016, are:
a. $90,500.
b. $88,160.
c. $82,500.
d. $80,160.
70. Rahal's 2016 bad debt expense is:
a. $2,100.
b. $2,340.
c. $4,080.
d. None of these answer choices are correct.
Chapter 7 Cash and Receivables
71. Rahal's adjusted allowance for uncollectible accounts at December 31, 2016, is:
a. $4,340.
b. $4,100.
c. $3,800.
d. $4,040.
72. The following information pertains to Jacobsen Co.'s accounts receivable at December 31,
2016:
Days Estimated %
Outstanding Amount Uncollectible
0-30 $420,000 2%
31-60 140,000 5%
61-120 100,000 10%
Over 120 120,000 20%
During 2016, Jacobsen wrote off $18,000 in receivables and recovered $6,000 that had been
written off in prior years. Jacobsen's December 31, 2015, allowance for uncollectible accounts
was $40,000. Under the aging method, what amount of allowance for uncollectible accounts
should Jacobsen report at December 31, 2016?
a. $28,000.
b. $31,400.
c. $55,400.
d. $49,400.
Chapter 7 Cash and Receivables
73. When you use an aging schedule approach for estimating uncollectible accounts:
a. Bad debts expense is measured indirectly, and the allowance for uncollectible accounts
balance is measured directly.
b. Bad debts expense is measured indirectly, and the allowance for uncollectible accounts
balance is measured indirectly.
c. Bad debts expense is measured directly, and the allowance for uncollectible accounts
balance is measured directly.
d. Bad debts expense is measured directly, and the allowance for uncollectible accounts
balance is measured indirectly.
74. Which of the following is recorded by a credit to accounts receivable?
a. Sale of inventory on account.
b. Estimating the annual allowance for uncollectible accounts.
c. Estimating annual sales returns.
d. Write-off of bad debts.
75. If a company uses the balance sheet approach to estimate bad debt expense, bad debt expense
for a period can be determined by:
a. Multiplying net credit sales by the bad debt experience ratio.
Chapter 7 Cash and Receivables
b. Adding the beginning balance in the allowance for uncollectible accounts to the provision
for uncollectible accounts and deducting the desired ending balance in the allowance for
uncollectible accounts.
c. Multiplying ending accounts receivable in each age category by the expected loss ratio for
each age category.
d. Taking the difference between the unadjusted balance in the allowance account and the
desired balance.
76. As of January 1, 2016, Farley Co. had a credit balance of $520,000 in its allowance for
uncollectible accounts. Based on experience, 2% of Farley’s credit sales have been
uncollectible. During 2016, Farley wrote off $650,000 of accounts receivable. Credit sales for
2016 were $18,000,000. In its December 31, 2016, balance sheet, what amount should Farley
report as allowance for uncollectible accounts?
a. $230,000.
b. $360,000.
c. $590,000.
d. $880,000.
77. San Mateo Company had the following account balances at December 31, 2016, before
recording bad debt expense for the year:
Accounts receivable $1,400,000
Allowance for uncollectible accounts (credit balance) 22,000
Credit sales for 2016 1,950,000
San Mateo is considering the following approaches for estimating bad debts for 2016:
• Based on 3% of credit sales
• Based on 6% of year-end accounts receivable
What amount should San Mateo charge to bad debt expense at the end of 2016 under each
method?
Chapter 7 Cash and Receivables
Percentage of credit sales Percentage of accounts receivable
a. $ 36,500 $62,000
b. $ 58,500 $62,000
c. $ 58,500 $84,000
d. $117,000 $95,000
78. As of December 31, 2015, Gill Co. reported accounts receivable of $216,000 and an
allowance for uncollectible accounts of $8,400. During 2016, accounts receivable increased by
$22,000, and $7,800 of bad debts were written off. An analysis of Gill Co.'s December 31,
2016, accounts receivable suggests that the allowance for uncollectible accounts should be 3%
of accounts receivable. Bad debt expense for 2016 would be:
a. $6,540.
b. $7,800.
c. $7,140.
d. None of these answer choices are correct.
Chapter 7 Cash and Receivables
79. As of December 31, 2016, Amy Jo's Appliances had unadjusted account balances in accounts
receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2016
write-offs of $6,450 in bad debts. An analysis of Amy Jo's December 31, 2016, accounts
receivable suggests that the allowance for uncollectible accounts should be 2% of accounts
receivable. Bad debt expense for 2016 should be:
a. $6,220.
b. $6,450.
c. $5,250.
d. None of these answer choices are correct.
80. Nontrade receivables do not include:
a. Sales to customers.
b. Loans to employees.
c. Income tax refund receivable.
d. Advances to affiliated companies.
81. Long-term notes receivable issued for noncash assets at an unrealistically low interest rate will
be:
a. Discounted at an imputed interest rate.
b. Recorded at the contract amount.
c. Recorded at an amount equal to the future cash flows.
d. Accounted for on the installment basis.
Chapter 7 Cash and Receivables
82. Priscilla's Exotic Pets discounted a note receivable without recourse and the sales criteria were
met. The discounting is recorded as:
a. A secured borrowing.
b. Only note disclosure of the arrangement is required.
c. A sale.
d. None of these answer choices are correct.
83. Drebin Security Systems sold merchandise to a customer in exchange for a $50,000, five-year,
noninterest-bearing note when an equivalent loan would carry 10% interest. Drebin would
record sales revenue on the date of sale equal to:
a. $50,000.
b. Zero.
c. The future value of $50,000 using a 10% interest rate.
d. The present value of $50,000 using a 10% interest rate.
84. A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity
date. Mild Max would debit:
a. A loss on dishonored receivable.
b. A receivable.
c. Dishonored note expense.
d. Interest expense.
85. Peecher accepted a three-year, noninterest-bearing note in exchange for merchandise sold.
Which of the following is true?
a. Peecher would credit a discount on note receivable when recording the sale.
b. Peecher would debit interest revenue over the life of the note.
c. Peecher would debit notes receivable when the note is collected
d. Peecher would multiply sales revenue by the effective interest rate to determine interest
revenue each period
86. Baker Inc. acquired equipment from the manufacturer on 10/1/2016 and gave a noninterest-
bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2017 to satisfy the
obligation in full. If Baker accrued interest of $9,000 on the note in its 2016 year-end
financial statements, what is its imputed annual interest rate?
a. 2%.
b. 4%.
c. 6%.
d. None of these answer choices are correct.
Use the following to answer questions 87 and 88:
Frasquita acquired equipment from the manufacturer on 6/30/2016 and gave a noninterest-
bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2017 to satisfy the
obligation in full.
87. If Frasquita accrued interest of $15,000 on the note in its 2016 year-end financial statements,
Chapter 7 Cash and Receivables
what amount would it record the equipment on its 6/30/2016 balance sheet?
a. $500,000.
b. $515,000.
c. $550,000.
d. $525,000.
88. If Frasquita accrued interest of $15,000 on the note in its 2016 year-end financial statements,
what would the manufacturer record in its 2016 income statement for this transaction?
a. $15,000 of interest revenue.
b. $25,000 of interest revenue.
c. $15,000 of interest revenue and $525,000 of sales revenue.
d. $550,000 of sales revenue.
Use the following to anser questions 89 and 90:
Frankenstein Enterprises received two notes from customers for sales that Frankenstein made
in 2016. The notes included:
Note A: Dated 5/31/2016, principal of $120,000 and interest due 3/31/2017.
Note B: Dated 7/1/2016, principal of $200,000 and interest at 8% annually, due on 4/1/2017.
Frankenstein had accrued a total of $14,400 interest receivable from these notes in its
12/31/2016 balance sheet.
89. The annual interest rate on Note A is closest to:
a. 9.14%.
b. 8%.
c. 9.74%.
d. 9.44%.
90. What amount of interest revenue would Frankenstein earn on these notes during 2017?
a. Above $12,000.
b. Between $7,000 and 10,000.
c. Less than $5000.
d. None of these answer choices are correct.
Use the following to answer questions 91 and 92:
Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2016. The note
was accepted as payment of a delinquent receivable of $2,500.
91. What is the correct entry to record the note?
a.
Notes receivable
2,500
Accounts receivable
2,500
b.
Notes receivable
2,800
Accounts receivable
2,500
Discount on note receivable
300
c.
Notes receivable
2,800
Reserve for delinquent accounts
2,500
Allowance for bad debts
300
d.
Notes receivable
2,800
Accounts receivable
2,500
Gain on delinquent account
300
Chapter 7 Cash and Receivables
92. The cash collection on July 1, 2016, would be recorded as:
a.
Discount on note receivable
300
Interest revenue
300
Cash
2,800
Note receivable
2,800
b.
Cash
2,500
Note receivable
2,500
c.
Cash
2,800
Accounts receivable
2,500
Interest revenue
300
d.
Cash
2,500
Discount on note receivable
300
Note receivable
2,800
Use the following to answer questions 93-95:
Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2016. The note was
accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%.
93. What is the correct entry to record the note
a.
Note receivable
605,000
Accounts receivable
605,000
b.
Note receivable
500,000
Accounts receivable
500,000
c.
Note receivable
605,000
Discount on note receivable
105,000
Sales revenue
500,000
d.
Note receivable
605,000
Interest revenue
105,000
Cost of sales
500,000
Chapter 7 Cash and Receivables
94. The entry to record interest on December 31, 2016 would be:
a.
Cash
50,000
Interest receivable
50,000
b.
Cash
50,000
Discount on note receivable
50,000
c.
Discount on note receivable
50,000
Note receivable
50,000
d.
Discount on note receivable
50,000
Interest revenue
50,000
95. The cash collection on December 31, 2017, would be recorded as:
a.
Discount on note receivable
55,000
Cash
605,000
Note receivable
605,000
Interest revenue
55,000
b.
Cash
605,000
Note receivable
605,000
c.
Cash
605,000
Note receivable
500,000
Discount on note receivable
105,000
d.
Cash
605,000
Discount on note receivable
105,000
Note receivable
605,000
Interest revenue
105,000
96. Which of the following is considered a sale of receivables?
a. Pledging receivables.
b. Assigning receivables.
c. Factoring receivables without recourse.
Chapter 7 Cash and Receivables
d. None of these answer choices are correct.
97. The transferor is considered to have surrendered control over its receivables if:
a. The transferred assets have been isolated from the transferor.
b. Each transferee has the right to pledge or exchange the assets it received.
c. The transferor does not maintain effective control over the transferred assets through
either repurchase or redemption agreements before maturity or the ability to cause the
transferee to return the assets.
d. All of these answer choices must occur.
98. Accounting for the pledging of accounts receivable as collateral for a loan requires:
a. Reporting the receivables net of the borrowed amount.
b. Removal of the pledged receivables from current assets and including them with
noncurrent investments.
c. Disclosure of the arrangement in notes to the financial statements.
d. None of these answer choices are correct.
99. In deciding whether financing with receivables is a secured borrowing or a sale under U.S.
GAAP, the critical element is the extent to which:
a. The transferee has received substantially all the risks and rewards of ownership.
b. The age of the receivables transferred differs from the average age of the receivables.
c. The transferor of the receivable surrenders control over the assets transferred.
d. The transferee relies on funds from the transferor to maintain operations.
Chapter 7 Cash and Receivables
100. In deciding whether financing with receivables is a secured borrowing or a sale under IFRS,
the critical element is the extent to which:
a. The transferee has received substantially all the risks and rewards of ownership.
b. The age of the receivables transferred differs from the average age of the receivables.
c. The transferor of the receivable surrenders control over the assets transferred.
d. The transferee relies on funds from the transferor to maintain operations.
101. The purpose of assigning accounts receivable is to:
a. Satisfy a court order.
b. Complete the legal prerequisites to record their sale.
c. Comply with form and content rules of bankruptcy proceedings.
d. Provide collateral for a loan.
102. Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2016.
The note, along with interest at 6%, is due on June 30, 2017. On September 30, 2016, Ireland
discounted the note at Cloverdale bank. The bank’s discount rate is 10%. What amount of cash
did Ireland receive from Cloverdale Bank?
a. $40,600.
b. $36,000.
c. $39,220.
d. $36,820.
Chapter 7 Cash and Receivables
103. On April 1 of the current year, Troubled Company factored receivables with a carrying value
of $85,000 for $60,000 in cash from Scrooge Lenders. The transfer was made without
recourse. On April 1, Troubled would:
a. Credit deferred interest expense for $25,000.
b. Credit factored accounts receivable for $85,000.
c. Debit discount on liability for $25,000.
d. Debit loss on sale of receivables for $25,000.
104. If a company adopts an accounts receivable factoring program, and accounts for the factoring
as a sale of receivables, which of the following is true in the period the company starts the
program (all else equal)?
a. The accounts receivable balance will increase.
b. Cash flow from operations may increase.
c. A retroactive restatement is necessary due to a change in accounting principle.
d. The factoring arrangement needs to be with a consolidated entity to qualify for sale
accounting.
105. Assume a company has been maintaining a receivables factoring program for the past five
Chapter 7 Cash and Receivables
years and has been experiencing the same level of sales, factoring, and bad debts over that
period. Customers typically pay their receivables within 60 days. Which of the following is
true with respect to the current period (all else equal)?
a. The accounts receivable balance will decrease.
b. Cash flow from operations is stable.
c. Net income is likely to decline.
d. Accounts receivable payable within 60 days cannot be factored.
106. Which of the following is not true regarding accounting for transfers of receivables under
IFRS?
a. Transfers of receivables sometimes are treated as a sale of receivables.
b. Transfers of receivables sometimes are treated as a secured borrowing.
c. Transfers of receivables can be treated as a sale if the transferee is a QSPE.
d. Transfer of substantially all the risk and rewards of ownership is an important
consideration.
107. A company's investment in receivables is influenced by several variables, including:
a. The level of sales.
b. The nature of the product or service sold.
c. The credit and collection policies.
d. All of these answer choices are correct.
Chapter 7 Cash and Receivables
Use the following to answer questions 99 and 100:
Excerpts from Huckabee Company's December 31, 2016 and 2015, financial statements are presented
below:
2016
2015
Accounts receivable
$ 80,000
$ 72,000
Merchandise inventory
58,000
72,000
Net sales
400,000
372,000
Cost of goods sold
240,000
220,000
108. Huckabee's 2016 receivables turnover (rounded) is:
a. 3.69.
b. 5.00.
c. 5.26.
d. 3.16.
109. Huckabee's 2016 average collection period (rounded) is:
a. 69 days.
b. 116 days.
c. 111 days.
d. 73 days.
