Chapter 7 Cash and Receivables
110. Alliance Software began 2016 with accounts receivable of $115,000. All sales are made on
credit. Sales and cash collections from customers for the year were $780,000 and $700,000,
respectively. Cost of goods sold for the year was $450,000. What was Alliance’s receivables
turnover ratio (rounded) for 2016?
a. 4.00.
b. 5.03.
c. 2.90.
d. 6.78.
Use the following to answer questions 111 and 112:
On July 1, 2016, Cromartie Furniture established a $150 petty cash fund. A check for $150 was made
out to the petty cash custodian. During July, the petty cash custodian paid the following bills from the
petty cash fund:
Office supplies $ 36
Postage 22
Delivery charges 40
Bottled water 28
Total $126
At the end of July the petty cash fund was replenished.
111. The journal entry to establish the petty cash fund includes:
a. A credit to petty cash and a debit to cash for $150.
b. A debit to petty cash and a credit to cash for $150.
c. A credit to cash and a debit to various expenses for $126.
d. A credit to petty cash and a debit to various expenses for $126.
112. The journal entry to replenish the petty cash fund includes:
Chapter 7 Cash and Receivables
a. A credit to petty cash and a debit to various expenses for $126.
b. A debit to petty cash and a credit to cash for $150.
c. A credit to cash and a debit to various expenses for $126.
d. None of these answer choices are correct.
113. Hazelton Manufacturing prepares a bank reconciliation at the end of every month. At the end
of May, the general ledger checking account showed a balance of $1,360 and the bank
statement showed a bank balance of $1,445. Outstanding checks totaled $350 and deposits in
transit were $150. The bank statement listed service charges of $30 and NSF checks totaling
$85. The corrected cash balance is:
a. $1,130.
b. $1,160.
c. $1,245.
d. $1,445.
114. Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the end
of July, the balance in the general ledger checking account was $2,750 and the bank balance
on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited
were $400. The bank statement revealed that a check written for $120 was incorrectly
recorded by Brockton as a $220 disbursement. The bank statement listed service charges and
NSF check charges totaling $150. The corrected cash balance is:
a. $2,270.
b. $2,550.
c. $2,470.
d. $2,700.
Chapter 7 Cash and Receivables
115. Which of the following is true about accounting for a troubled debt restructuring?
a. If a receivable becomes impaired, it is remeasured at the discounted present value of the
cash flows that were originally expected to be collected, but at a revised discount rate.
b. Receivables are not remeasured; instead, fair values are obtained from reliable factors.
c. If a receivable is continued, but with modified terms, a loss is typically recorded.
d. Receivables are never settled outright at the time of a restructuring.
116. Brewer Inc. is owed $200,000 by Carol Co. under a 10% note with two years remaining to
maturity. Due to financial difficulties Carol Co. did not pay the prior year’s interest. Brewer
agrees to settle the receivable (and accrued interest) in exchange for a cash payment of
$150,000. The journal entry that Brewer would make to record this transaction would include
a loss on troubled debt restructuring of:
a. $0.
b. $20,000.
c. $50,000.
d. $70,000.
117. The O’Hara Group is owed $1,000,000 by Hilton Enterprises under an 8% note with three
years remaining to maturity. The prior year of interest was unpaid. O’Hara agrees to
restructure the note under terms that yield a present value of $880,000. The journal entry that
O’Hara would make to record this transaction would include a loss on troubled debt
restructuring of:
a. $0.
b. $80,000.
Chapter 7 Cash and Receivables
c. $200,000.
d. $220,000.
118. Rebound Inc. reports under IFRS. In 2016 Rebound recognized an impairment of $200,000
due to a troubled debt restructuring. In 2017 Rebound was pleased to determine that more cash
flows would be received from the receivable than was previously thought, such that, if the
total impairment were to be calculated in 2017, it would be estimated as $150,000 rather than
$200,000. How should Rebound treat this in its 2017 income statement?
a. Rebound should ignore the change, given that recovery of its previous impairments is not
allowed under IFRS.
b. Rebound should make a prior period adjustment of 2016 income, given that the
impairment charge was in error.
c. Rebound should recognize an increase in 2017 net income of $50,000.
d. None of these answer choices are correct.
Chapter 7 Cash and Receivables
Matching Pair Questions
119. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Write-off of accounts receivable
Is of vital importance for good internal
control.
____
2. Sales returns
Has no effect on net receivables when using
the allowance method.
____
3. Separation of duties
Is a contra revenue account.
____
4. Balance sheet approach
Indirectly determines bad debt expense by
estimating realizable value.
____
5. Accounts receivable
Are reported at their net realizable value.
____
TERM
1. Write-off of accounts receivable
Is of vital importance for good internal
control.
2. Sales returns
Has no effect on net receivables when using
the allowance method.
3. Separation of duties
Is a contra revenue account.
4. Balance sheet approach
Indirectly determines bad debt expense by
estimating realizable value.
5. Accounts receivable
Are reported at their net realizable value.
Chapter 7 Cash and Receivables
120. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Interest-bearing note
The risk of uncollectibility is retained by the seller.
___
2. Direct write-off method
Requires payment of principal plus interest.
___
3. Factoring with recourse
Recognizes bad debts when accounts become
uncollectible.
___
4. Internal control
Includes separation of duties.
___
5. Income statement approach
Bad debt expense is a percentage of credit sales.
___
TERM
PHRASE
1. Interest-bearing note
The risk of uncollectibility is retained by the seller.
2. Direct write-off method
Requires payment of principal plus interest.
3. Factoring with recourse
Recognizes bad debts when accounts become
4. Internal control
Includes separation of duties.
5. Income statement approach
Bad debt expense is a percentage of credit sales.
Chapter 7 Cash and Receivables
121. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Cash discounts
Receivables used as collateral for debt.
____
2. Net method
The sale of accounts receivable to a financial
institution.
____
3. Factoring
Attempts to recognize bad debt expense in the
same period as the related sale.
____
4. Allowance method
Offered to induce prompt payment.
____
5. Pledging of accounts
receivable
Cash discount not taken is interest revenue.
____
Answer:
TERM
1. Cash discounts
Receivables used as collateral for debt.
2. Net method
The sale of accounts receivable to a financial
institution.
3. Factoring
Attempts to recognize bad debt expense in the same
period as the related sale.
4. Allowance method
Offered to induce prompt payment.
5. Pledging of accounts
receivable
Cash discount not taken is interest revenue.
Chapter 7 Cash and Receivables
122. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Average collection period
Deducted from list price.
____
2. Factoring
Average number of days that accounts receivable
are outstanding.
____
3. Trade discounts
The sale of accounts receivable to a financial
institution.
____
4. Compensating balance
The sale of a note receivable to a lender.
____
5. Discounting
An example of a restriction on cash.
____
TERM
1. Average collection period
Deducted from list price.
2. Factoring
Average number of days that accounts receivable
are outstanding.
3. Trade discounts
The sale of accounts receivable to a financial
institution.
4. Compensating balance
The sale of a note receivable to a lender.
5. Discounting
An example of a restriction on cash.
Chapter 7 Cash and Receivables
123. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms.
Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Direct write-off method
Bad debt expense determined by estimating net
realizable value.
____
2. Cash discount
Grouping accounts receivable depending on the
length of time outstanding.
____
3. Accounts receivable aging
schedule
Reduces the amount paid by a credit customer if
paid within a specified time.
____
4. Allowance method
When merchandise is returned for credit.
____
5. Sales returns
An example of a restriction on cash.
____
6. Balance sheet approach
Buyer assumes the risk of uncollectibility.
____
7. Income statement approach
Bad debt expense is recorded when receivables
are written off.
____
8. Compensating balance
Bad debt expense a % of credit sales.
____
9. Pledging
Using receivables as collateral for a loan.
____
10. Without recourse
An attempt to satisfy the matching principle for
bad debts.
____
Answer:
TERM
1. Direct write-off method
Bad debt expense determined by estimating net
realizable value.
3. Accounts receivable aging
schedule
Reduces the amount paid by a credit customer if
paid within a specified time.
4. Allowance method
When merchandise is returned for credit.
5. Sales returns
An example of a restriction on cash.
6. Balance sheet approach
Buyer assumes the risk of uncollectibility.
7. Income statement approach
Bad debt expense is recorded when receivables
8. Compensating balance
Bad debt expense a % of credit sales.
9. Pledging
Using receivables as collateral for a loan.
10. Without recourse
An attempt to satisfy the matching principle for
bad debts.
Chapter 7 Cash and Receivables
124. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms with respect to accounting under IFRS. Match each phrase with the number for the
correct term.
TERM
PHRASE
NUMBER
1. Available for sale
Can be netted against positive cash balances on the
balance sheet.
____
2. Overdraft
This accounting approach can be used for
receivables if elected upon initial recognition.
____
3. Impairment
Primary consideration for determining whether
transfer of a receivable is a sale.
____
4. Risks and rewards
Secondary consideration for determining whether
transfer of a receivable is a sale.
____
5. Control
Can be recovered to increase income if fair value
increases.
____
TERM
1. Available for sale
Can be netted against positive cash balances on the
balance sheet.
2. Overdraft
This accounting approach can be used for receivables
if elected upon initial recognition.
3. Impairment
Primary consideration for determining whether
transfer of a receivable is a sale.
4. Risks and rewards
Secondary consideration for determining whether
transfer of a receivable is a sale.
5. Control
Can be recovered to increase income if fair value
increases.
Chapter 7 Cash and Receivables
Problems
125. Costa Co. has the following cash balances at local banks as of 12/31/2016:
National Bank: $100,000
K&P Bank: 25,000
Insolvent Trust: ( 5,000)
Required:
1. Prepare the Current Assets and Current Liabilities section of Costa’s 2016 balance sheet,
assuming Parker reports under U.S. GAAP.
2. Prepare the Current Assets and Current Liabilities section of Costa’s 2016 balance sheet,
assuming Parker reports under IFRS.
Answer:
Chapter 7 Cash and Receivables
126. On May 12, 2016, Falwell Computing sold five computers to Computing Plus for $10,000,
subject to terms 3/10, n/30. Falwell uses the net method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on May 20, 2016.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on June 5, 2016.
Answer:
Chapter 7 Cash and Receivables
127. On July 18, 2016, Philly Furniture Factory sold 20 reclining rockers to Dave’s Discount
Furniture for $8,000, subject to terms 2/10, n/30. Philly uses the net method of accounting for
sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on July 26, 2016.
3. Prepare the journal entry to record receipt of the payment assuming the correct amount
was received on August 15, 2016.
Answer:
128. On March 12, 2016, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for $10,000,
subject to terms 2/10, n/30. Admiral uses the gross method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on March 20, 2016.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on April 5, 2016.
Answer:
Chapter 7 Cash and Receivables
129. On October 18, 2016, Flying Chicken sold 2,000 pounds of chicken to Healthier Grocery for
$3,400, subject to terms 2/10, n/30. Flying Chicken uses the gross method of accounting for
sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on October 26, 2016.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on November 15, 2016.
Answer:
130. On June 14, 2016, Rumsfeld Company sold 100 air-conditioning units to Powell Heating and
Cooling. The units list for $600 each, but Powell was granted a 25% trade discount. All of
Rumfeld’s sales are subject to terms 2/10, n/30. Rumsfeld uses the gross method of accounting
for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on June 22, 2016.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on July 10, 2016.
Answer:
Chapter 7 Cash and Receivables
131. On February 14, 2016, Prime Company sold 50 air-conditioning units to L&P Heating and
Cooling. The units list for $700 each, but L&P was granted a 30% trade discount. All of
Prime’s sales are subject to terms 2/10, n/30. Prime uses the net method of accounting for sales
discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on February 22, 2016.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount
was received on March 10, 2016.
Answer:
132. Beethoven Music Company started business in March 2016. Sales for its first year were
$400,000. Beethoven priced its merchandise to yield a 45% gross profit based on sales dollars.
Industry statistics suggest that 10% of the merchandise sold to customers will be returned.
Beethoven estimated its sales returns based on the industry average. During the year,
customers returned $30,000 in sales. Beethoven uses a perpetual inventory system.
Required:
Prepare summary journal entries to record (1) sales, (2) sales returns, and (3) the year-end
Chapter 7 Cash and Receivables
adjusting entry for estimated sales returns. Assume that cash has not yet been collected for
merchandise that could yet be returned.
Answer:
5,500
5,500
Use the following to answer questions 133–138:
The following note disclosure is taken from the 2016 annual report to shareholders of Winchester
International Corporation.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
The allowance for loan loss is maintained at a level to absorb probable losses inherent in the loan
portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on
loans previously charged off, and reduced by charge-offs on loans.
The following is a summary of the changes in the allowances for loan losses for three years:
At December 31,
(In thousands)
2016
2015
2014
Balance at beginning of year
$ 91,809
73,658
66,201
Allowances from purchase transactions
1,851
10,980
3,647
Provisions charged to operations
14,400
11,800
9,000
Subtotal
108,060
96,438
78,848
Charge-offs
(11,575
)
(6,816
)
(7,406
)
Recoveries
1,822
2,187
2,216
Chapter 7 Cash and Receivables
Net charge-offs
(9,753
)
(4,629
)
(5,190
)
Balance at end of year
$ 98,307
91,809
73,658
Winchester also reported (in thousands) in its comparative balance sheet that it held Loans receivable,
net, of $6,869,911 and $6,819,209 at December 31, 2016, and December 31, 2015, respectively.
133. What kind of account is the Allowance for Loan Losses in Winchester’s financial statements?
134. Using a T-account for the Allowance for Loan Losses, identify the changes in the account
during 2016.
135. How might a company with loan receivables like Winchester be able to manage earnings in
applying generally accepted accounting principles?
Chapter 7 Cash and Receivables
136. Is there any evidence in Winchester’s disclosures above that are consistent with earnings
management?
137. For each posted entry in the Allowance account during 2016, indicate the remaining entry(ies)
in other accounts.
138. If Winchester is using the balance sheet approach to determining loan losses and the
Allowance account balance, what percentage did it use in 2016?
Chapter 7 Cash and Receivables
Use the following to answer questions 139–146:
The following information is taken from the 2013 annual report to shareholders of Hewlett-Packard
(HP) Co.
For Fiscal 2013
For Fiscal 2012
Provision for doubtful
accounts
$ 23 million
$100 million
At Fiscal Year-end 2013
At Fiscal Year-end 2012
Accounts receivable, net
15,876 million
16,407 million
Accounts receivable, gross
16,208 million
16,871 million
139. What is the balance in HP’s allowance for doubtful accounts at the end of the fiscal years 2013
and 2012, respectively?
140. What kind of account is the provision for doubtful accounts in HP’s financial statements?
Chapter 7 Cash and Receivables
141. Using a T-account for the allowance for doubtful accounts, identify the changes in the account
during fiscal year 2013.
142. How could a company with receivables like HP be able to manage earnings in applying
generally accepted accounting principles?
143. Is there any evidence in HP’s disclosures above that are consistent with earnings management?