CHAPTER 7
CASH AND RECEIVABLES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
Cash and Receivables
7 – 3
MULTIPLE CHOICE—Computational
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 4
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
BRIEF EXERCISES
BE7–152 Gross method entries.
BE7–153 Accounting for notes receivable.
BE7–154 Zero-interest-bearing note.
BE7–155 Accounts receivable assigned.
BE7–156 Factoring accounts receivable.
EXERCISES
Item Description
E7-157 Asset classification.
E7-158 Allowance for doubtful accounts.
E7-159 Entries for bad debt expense.
E7-160 Fair value option.
E7-161 Accounts receivable assigned.
PROBLEMS
Cash and Receivables
7 – 5
Item Description
P7-162 Entries for bad debt expense.
P7-163 Amortization of discount on note.
P7-164 Accounts receivable assigned.
*P7-165 Factoring accounts receivable.
*P7–166 Bank reconciliation.
CHAPTER LEARNING OBJECTIVES
1. Indicate how to report cash and related items.
2. Define receivables and explain accounting issues related to their recognition.
3. Explain accounting issues related to valuation of accounts receivable.
4. Explain accounting issues related to recognition and valuation of notes receivable.
5. Explain additional accounting issues related to accounts and notes receivable.
*6. Explain common techniques employed to control cash.
*7. Describe the estimation of the allowance based on expected cash flows.
8. Compa re the accounting procedures for cash and receivables under GAAP and IFRS.
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 6
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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TRUE-FALSE STATEMENTS
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MULTIPLE CHOICE QUESTIONS
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BRIEF EXERCISES
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EXERCISES
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PROBLEMS
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Cash and Receivables
7 – 7
TRUE-FALSE—Conceptual
1. Savings accounts are usually classified as cash on the balance sheet.
2. Certificates of deposit are usually classified as cash on the balance sheet.
3. Companies include postdated checks and petty cash funds as cash.
4. Cash equivalents are investments with original maturities of six months or less.
5. Bank overdrafts are always offset against the cash account in the balance sheet.
6. Short-term, highly liquid investments may be included with cash on the balance sheet.
7. All claims held against customers and others for money, goods, or services are reported as
current assets.
8. Trade receivables include notes receivable and advances to officers and employees.
9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.
10. In the gross method, sales discounts are reported as a deduction from sales.
11. The net amount reported for short-term receivables is not affected when a specific account
receivable is determined to be uncollectible.
12. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes
matching over valuation of accounts receivable.
13. The percentage-of-receivables approach requires companies to set up an aging schedule of
accounts receivable.
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 8
14. Companies value and report short-term receivables at the net amount expected to be
collected.
15. The percentage-of-receivables approach is used for impairment measurement and
reporting.
16. Companies record and report long-term notes receivable at the present value of the cash
they expect to collect.
17. When the stated rate of interest exceeds the effective rate, the present value of the note
receivable will be less than its face value.
18. The FASB believes that historical cost for financial instruments provides more relevant and
understandable information than fair value.
19. Recognition of a recourse liability will make a loss on sale of receivables larger than it would
otherwise have been.
20. When buying receivables with recourse, the purchaser assumes the risk of collectibility and
absorbs any credit loss.
21. For receivables sold with recourse, the seller guarantees payment to the purchaser if the
debtor fails to pay.
22. The accounts receivable turnover is computed by dividing net sales by the ending net
receivables.
23. GAAP permits the reversal of impairment losses recorded on receivables.
24. For a loan receivable, impairment loss is calculated as the difference between the
investment in the loan and the expected future cash flows discounted at the loan’s historical
effective interest rate.
Cash and Receivables
7 – 9
25. Companies must measure the loss on impairment at an undiscounted amount, not at a
present-value amount, when it records the loss.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
26. Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds on deposit
d. Postdated checks and I. O. U.’s
27. Which of the following is considered cash?
a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks
28. Travel advances should be reported as
a. supplies.
b. cash because they represent the equivalent of money.
c. investments.
d. receivables
P29. Which of the following items should not be included in the Cash caption on the balance
sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 10
30. All of the following may be included under the heading of “cash” except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.
31. In which account are post-dated checks received classified?
a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.
32. In which account are postage stamps classified?
a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.
33. What is a compensating balance?
a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing
arrangement.
34. Under which section of the balance sheet is “cash restricted for plant expansion”
reported?
a. Current assets.
b. Non-current assets.
c. Current liabilities.
d. Stockholders’ equity.
S35. A cash equivalent is a short-term, highly liquid investment that is readily convertible into
known amounts of cash and
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than its original cost
c. bears an interest rate that is at least equal to the prime rate of interest at the date of
liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest rates.
Cash and Receivables
7 – 11
36. Bank overdrafts, if material, should be
a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.
37. Deposits held as compensating balances
a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current
assets.
d. if separately restricted and held against long-term credit may be included as
noncurrent assets
38. When a company has cash available in another account in the same bank at which an
overdraft has occurred, the company will:
a. offset the overdraft against cash account.
b. report the same in the notes to the financial statements.
c. report the bank overdraft amount as account payable.
d. classify the bank overdraft as compensating balance.
39. Which of the following statements is correct regarding receivables?
a. Receivables are written promises of the purchaser to pay for goods or services.
b. Receivables are claims held against customers and others for money, goods, or
services.
c. Receivables are non-financial assets.
d. Receivables that are expected to be collected within a year are classified as
noncurrent.
40. The category “trade receivables” includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. amounts owed by customers for goods bought or services rendered
41. Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. Oral promises from customers to pay for good or services sold
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 12
S42. What is the preferable presentation of accounts receivable from officers, employees, or
affiliated companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets.
S43. When a customer purchases merchandise inventory from a business organization, she
may be given a discount which is designed to induce prompt payment. Such a discount is
called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.
P44. Trade discounts are
a. recorded as other revenues and gains.
b. used to induce prompt payment.
c. presented in terms such as 2/10, n/30.
d. used to avoid frequent changes in catalogs
45. If a company employs the gross method of recording accounts receivable from customers,
then sales discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of “other expense” in the income statement.
c. a deduction from accounts receivable in determining the accounts receivable amount
expected to be collected.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
46. Why do companies provide trade discounts?
a. To avoid frequent changes in catalogs only.
b. To induce prompt payment only.
c. To easily alter prices for different customers only.
d. To avoid frequent changes in catalogs and to easily alter prices for different
customers.
47. The accounting for cash discounts and trade discounts are
a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the account.
Cash and Receivables
7 – 13
48. Of the approaches to record cash discounts related to accounts receivable, which is more
theoretically correct?
a. Net approach.
b. Gross approach.
c. Allowance approach.
d. Contra revenue approach
49. All of the following are problems associated with the valuation of accounts receivable
except
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.
50. Why is the allowance method preferred over the direct write-off method of accounting for
bad debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.
51. Which of the following concepts relates to using the allowance method in accounting for
accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective
information.
b. Bad debt expense is based on the actual amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the receivables
aging.
d. Bad debt expense is management’s determination of which accounts will be sent to
the attorney for collection.
52. How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off.
b. Changing the percentage of receivables recorded as bad debt expense.
c. Using an aging of the accounts receivable balance to determine bad debt expense.
d. Reversing previous write-offs.
53. What is the normal journal entry for recording bad debt expense under the allowance
method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 14
54. What is the normal journal entry when writing-off an account as uncollectible under the
allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
55. Which of the following is included in the normal journal entry to record the collection of
accounts receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
56. Assuming that the ideal measure of short-term receivables in the balance sheet is the
discounted value of the cash to be received in the future, failure to follow this practice
usually does not make the balance sheet misleading because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
57. Which of the following methods of determining bad debt expense does not properly match
expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable
under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
58. Which of the following methods of determining annual bad debt expense does not satisfy
the matching concept?
a. Direct write-off.
b. Percentage of ending accounts receivable.
c. Aging of accounts receivable.
d. All of these methods satisfy the matching concept.
Cash and Receivables
7 – 15
59. Which of the following is a generally accepted method of determining the amount of the
adjustment to bad debt expense?
a. Actual losses from uncollectible accounts
b. A percentage of accounts receivable adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in
the allowance
60. The advantage of relating a company’s bad debt expense to its outstanding accounts
receivable is that this approach
a. gives a reasonably correct statement of receivables in the balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
61. At the beginning of 2019, Gannon Company received a three-year zero-interest-bearing
$1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon
reported this note as a $1,000 trade note receivable on its 2019 year-end statement of
financial position and $1,000 as sales revenue for 2019. What effect did this accounting
for the note have on Gannon’s net earnings for 2019, 2020, 2021, and its retained
earnings at the end of 2021, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. Overstate, understate, understate, zero
62. What is imputed interest?
a. Interest based on the stated interest rate.
b. Interest based on the implicit interest rate.
c. Interest based on the average interest rate.
d. Interest based on the coupon rate.
63. Antique Company has notes receivable that have a fair value of $920,000 and a carrying
amount of $710,000. Antique decides on December 31, 2020, to use the fair value option
for these recently-acquired receivables. The adjusting entry to record this change will
include a:
a. debit to Unrealized Holding Gain or Loss⎯Income for $210,000.
b. credit to Notes Receivable for $210,000.
c. credit to Unrealized Holding Gain or Loss⎯Income for $210,000.
d. debit to Notes Receivable for $920,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 16
64. Which of the following statements is not true of fair value option?
a. Receivables are recorded at fair value in the financial statements.
b. Unrealized holding gains and losses from fair value adjustments are reported as a
component of comprehensive income.
c. The Financial Accounting Standards Board believes that fair value measurement for
financial instruments provides more relevant and understandable information than
historical cost.
d. An unrealized holding gain or loss is the net change in the fair value of the receivable
from one period to another, exclusive of interest revenue.
65. Why would a company sell receivables to another company?
a. To improve the quality of its credit granting process.
b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.
66. When should a transfer of receivables be recorded as a sale?
a. The buyer surrenders control of the receivables to the seller.
b. The transferor maintains effective control over the transferred assets through an
agreement to repurchase or redeem them prior to their maturity.
c. The transferee cannot pledge or exchange the transferred assets.
d. The transferred assets are isolated from the transferor.
67. What is “recourse” as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case the debtor
fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor
fails to pay.
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor
returns the product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if all of the
receivables are collected.
68. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale,
depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting
the receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection
period of the receivables.
Cash and Receivables
7 – 17
S69. Which of the following statements is incorrect regarding the classification of accounts and
notes receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable
accounts.
S70. Of the following conditions, which is the only one that is not required if the transfer of
receivables with recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify those receivables that
are uncollectible.
b. The transferor surrenders control of the future economic benefits of the receivables.
c. The transferee cannot require the transferor to repurchase the receivables.
d. The transferor’s obligation under the recourse provisions can be reasonably
estimated.
P71. The accounts receivable turnover measures the
a. number of times the average balance of accounts receivable is collected during the
period.
b. percentage of accounts receivable turned over to a collection agency during the
period.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period.
72. The accounts receivable turnover is computed by dividing
a. gross sales by ending net receivables.
b. gross sales by average net receivables.
c. net sales by ending net receivables.
d. net sales by average net receivables.
73. Which of the following items should be included as part of accounts receivable reported
on the balance sheet?
a. Notes receivable.
b. Interest receivable.
c. Allowance for doubtful accounts.
d. Advances to related parties and officers.
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 18
74. How is days to collect accounts receivable determined?
a. 365 days divided by accounts receivable turnover.
b. Net sales divided by 365.
c. Net sales divided by average net trade receivables.
d. Accounts receivable turnover divided by 365 days.
75. What is a possible reason for accounts receivable turnover to increase from one year to
the next year?
a. Decreased credit sales during a recession.
b. Write-off uncollectible receivables.
c. Granting credit to customers with lower credit quality.
d. Improved collection process.
76. Which of the following is a general rule of classifying receivables?
a. Disclose gain contingencies that exist on the receivables.
b. Aggregate the various types of receivables.
c. Aggregate current and noncurrent receivables.
d. Disclose any receivables designated or pledged as collateral.
*77. Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a. Bank service charge.
b. Deposit in transit.
c. Bank interest.
d. Chargeback for NSF check.
*78. Which of the following statements is true?
a. An imprest petty cash system is more impractical than disbursement by check.
b. If cash proves out short the company credits the shortage to Cash Over and Short.
c. The company closes Cash Over and Short only at the end of the year.
d. The Petty Cash account is debited when the fund is replenished.
*79. A Cash Over and Short account
a. is not generally accepted.
b. is debited when the petty cash fund proves out over.
c. is debited when the petty cash fund proves out short.
d. is a contra account to Cash.
Cash and Receivables
7 – 19
*80. The journal entries for a bank reconciliation
a. are taken from the “balance per bank” section only.
b. may include a debit to Office Expense for bank service charges.
c. may include a credit to Accounts Receivable for an NSF check.
d. may include a debit to Accounts Payable for an NSF check.
*81. When preparing a bank reconciliation, bank credits are
a. added to the bank statement balance.
b. deducted from the bank statement balance.
c. added to the balance per books.
d. deducted from the balance per books.
Multiple Choice Answers—Conceptual
MULTIPLE CHOICE—Computational
82. Consider the following: Cash in Bank – checking account of $18,500, Cash on hand of
$500, Post-dated checks received totaling $3,500, and certificates of deposit totaling
$124,000. How much should be reported as cash in the balance sheet?
a. $ 18,500.
b. $ 19,000.
c. $ 22,500.
d. $136,500.
Test Bank for Intermediate Accounting, Seventeenth Edition
7 – 20
83. On January 1, 2020, Lynn Company borrows $3,000,000 from National Bank at 11%
annual interest. In addition, Lynn is required to keep a compensatory balance of $300,000
on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn
pays on its $3,000,000 loan is
a. 10.0%.
b. 11.0%.
c. 11.5%.
d. 11.7%.
84. Kennison Company has cash in bank of $20,000, restricted cash in a separate account of
$3,000, and a bank overdraft in an account at another bank of $1,000. Kennison should
report cash of
a. $19,000.
b. $20,000.
c. $22,000.
d. $23,000.
85. Kaniper Company has the following items at year–end:
Cash in bank $35,000
Petty cash 300
Short-term paper with maturity of 2 months 5,500
Postdated checks 1,400
Kaniper should report cash and cash equivalents of
a. $35,000.
b. $35,300.
c. $40,800.
d. $42,200.
86. Lawrence Company has cash in bank of $25,000, restricted cash in a separate account of
$4,000, and a bank overdraft in an account at another bank of $2,000. Lawrence should
report cash of
a. $23,000.
b. $25,000.
c. $28,000.
d. $29,000.