86) San Mateo Company had the following account balances at December 31, 2018, before
recording bad debt expense for the year:
Accounts receivable
$
1,400,000
Allowance for uncollectible accounts (credit balance)
22,000
Credit sales for 2018
1,950,000
San Mateo is considering the following approaches for estimating bad debts for 2018:
• 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 2018 under each
method?
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
A) Option A
B) Option B
C) Option C
D) Option D
87) As of December 31, 2017, Gill Co. reported accounts receivable of $216,000 and an
allowance for uncollectible accounts of $8,400. During 2018, accounts receivable increased by
$22,000 (that change includes $7,800 of bad debts that were written off). An analysis of Gill
Co.’s December 31, 2018, accounts receivable suggests that the allowance for uncollectible
accounts should be 3% of accounts receivable. Bad debt expense for 2018 would be:
A) $6,540.
B) $7,800.
C) $7,140.
D) None of these answer choices are correct.
88) As of December 31, 2018, Amy Jo’s Appliances had unadjusted account balances in accounts
receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2018
write-offs of $6,450 in bad debts. An analysis of Amy Jo’s December 31, 2018, accounts
receivable suggests that the allowance for uncollectible accounts should be 2% of accounts
receivable. Bad debt expense for 2018 should be:
A) $6,220.
B) $6,450.
C) $5,250.
D) None of these answer choices are correct.
89) Nontrade receivables do not include:
A) Sales to customers.
B) Loans to employees.
C) Income tax refund receivable.
D) Advances to affiliated companies.
90) 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.
91) 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.
92) 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.
93) 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.
94) 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.
95) Baker Inc. acquired equipment from the manufacturer on 10/1/2018 and gave a noninterest-
bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2019 to satisfy the
obligation in full. If Baker accrued interest of $9,000 on the note in its 2018 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.
96) Frasquita acquired equipment from the manufacturer on 6/30/2018 and gave a noninterest-
bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2019 to satisfy the
obligation in full.
If Frasquita accrued interest of $15,000 on the note in its 2018 year-end financial statements,
what amount would it record the equipment on its 6/30/2018 balance sheet?
A) $500,000.
B) $515,000.
C) $550,000.
D) $525,000.
97) Frasquita acquired equipment from the manufacturer on 6/30/2018 and gave a noninterest-
bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2019 to satisfy the
obligation in full.
If Frasquita accrued interest of $15,000 on the note in its 2018 year-end financial statements,
what would the manufacturer record in its 2018 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.
98) Frankenstein Enterprises received two notes from customers for sales that Frankenstein made
in 2018. The notes included:
Note A: Dated 5/31/2018, principal of $120,000 and interest due 3/31/2019.
Note B: Dated 7/1/2018, principal of $200,000 and interest at 8% annually, due on 4/1/2019.
Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2018
balance sheet.
The annual interest rate on Note A is closest to:
A) 9.14%.
B) 8%.
C) 9.74%.
D) 9.44%.
99) Frankenstein Enterprises received two notes from customers for sales that Frankenstein made
in 2018. The notes included:
Note A: Dated 5/31/2018, principal of $120,000 and interest due 3/31/2019.
Note B: Dated 7/1/2018, principal of $200,000 and interest at 8% annually, due on 4/1/2019.
Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2018
balance sheet.
Assume Frankenstein views the financing component of these sales to be significant. What
amount of interest revenue would Frankenstein earn on these notes during 2019?
A) Above $12,000.
B) Between $7,000 and 10,000.
C) Less than $5,000.
D) None of these answer choices are correct.
100) Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2018.
The note was accepted as payment of a delinquent receivable of $2,500.
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
101) Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2018.
The note was accepted as payment of a delinquent receivable of $2,500.
The cash collection on July 1, 2018, 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
102) Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2018.
The note was accepted as payment for merchandise with a fair value of $500,000. The effective
interest rate is 10%.
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
103) Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2018.
The note was accepted as payment for merchandise with a fair value of $500,000. The effective
interest rate is 10%.
The entry to record interest on December 31, 2018 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
104) Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2018.
The note was accepted as payment for merchandise with a fair value of $500,000. The effective
interest rate is 10%.
The cash collection on December 31, 2019, 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
105) Which of the following is considered a sale of receivables?
A) Pledging receivables.
B) Assigning receivables.
C) Factoring receivables without recourse.
D) None of these answer choices are correct.
106) 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.
107) 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.
108) 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.
109) 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.
110) 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.
111) Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2018.
The note, along with interest at 6%, is due on June 30, 2019. On September 30, 2018, 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.
112) 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.
113) 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.
114) Assume a company has been maintaining a receivables factoring program for the past five
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.
115) 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.
116) 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.
117) Excerpts from Huckabee Company’s December 31, 2018 and 2017, financial statements are
presented below:
2017
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
Huckabee’s 2018 receivables turnover (rounded) is:
A) 3.69.
B) 5.00.
C) 5.26.
D) 3.16.
118) Excerpts from Huckabee Company’s December 31, 2018 and 2017, financial statements are
presented below:
2017
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
Huckabee’s 2018 average collection period (rounded) is:
A) 69 days.
B) 116 days.
C) 111 days.
D) 73 days.
119) Alliance Software began 2018 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 2018?
A) 4.00.
B) 5.03.
C) 2.90.
D) 6.78.
120) On July 1, 2018, 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.
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.