Chapter 7—Cash and Receivables Key
1. Which of the following would be included in cash and cash equivalents on the balance sheet?
2. Which of the following would not be considered a cash equivalent?
3. Items classified as “cash” on the balance sheet
4. In order to be classified as a cash equivalent, an investment must have a maturity date of
5. Cash control systems are the methods and procedures used to ensure
6. Compensating balance agreements that do not legally restrict the amount of funds shown on the balance sheet
should be reported in the
7. Which of the following statements concerning compensating balance agreements is not true?
A. A, B, C, and D
B. A, C, and D
C. A, B, and C
D. B, C, and D
11. Compensating balance agreements that legally restrict cash should
12. Given the following information:
Petty cash fund
$ 500
Postage stamps
24
Cash on hand
3,240
Traveler’s checks
201
Checking balance, First National Bank
20,400
Checking balance, Third National Bank
(1,000)
The total amount of cash that should appear on the balance sheet is
A. $24,365
B. $24,140
C. $23,140
D. $24,341
13. Which is not a key element of internal control over cash receipts?
14. All of the following are necessary components of internal control over cash except
15. All of the following are nontrade receivables except
16. Compensating balance agreements against short-term borrowings that legally restrict the amount of funds
shown on the balance sheet should be reported in the
17. Revenue from a credit sale may be deferred because
18. If the right of return exists, which of the criteria below would suggest that the revenue recognition be
deferred?
19. Which of the following is not one of the criteria that must be satisfied for a seller to recognize revenue at the
time of sale when the right of return exists?
20. Nontrade receivables, such as deposits with utility companies or advances to subsidiary companies, should
be
21. Most trade receivables are initially recorded at their
22. The most theoretically sound method of accounting for cash discounts on credit sales is the
23. Which of the following would not be reported on the financial statements?
24. Which of the following is an advantage of using the net price method for recording cash discounts on credit
sales?
25. When the net price method is used to record credit sales, the sales discounts not taken account is reported as
a(n)
26. Olympia Company sold merchandise on credit with a list price of $70,000. Terms were 2/10, n/30. Given
the indicated sales discounts methods in the responses, which entry is correct?
27. A disadvantage of using the gross price method to account for cash discounts extended by the seller to its
customer is that
28. In accounting for sales discounts, most companies use the
29. The sales returns and allowances account is reported as a
30. Theoretically, the amount of estimated future returns and allowances on credit sales should be recorded
during the period of the sale so as not to overstate sales and ending accounts receivable. In practice, these
estimates are rarely recorded because
31. When a company decides to sell its goods on credit, it should evaluate the effect on profit of
Additional
Additional
Expenses
Revenues
I.
No
No
II.
Yes
No
III.
No
Yes
IV.
Yes
Yes
32. When aging of accounts receivable is used, each age group is multiplied by its own estimated uncollectible
percentage to determine each age group’s estimated uncollectible amount. The sum of the amounts thus
determined
33. Which of the following methods may not be appropriate for estimating bad debt expense?
34. An advantage of basing bad debt expense on the historical relationship between bad debts and net credit
sales is that
35. When an uncollectible account is written off under the estimated bad debts method, it
36. Bad debt expense is normally reported on the income statement as a(n)
37. When a company writes off an account receivable using the direct write-off method, the effect of this
write-off on the financial statements is to
38. Which of the following is not a disadvantage of using the direct write-off method for recording uncollectible
accounts?
39. The estimate of bad debt expense may be based on the historical relationships between actual bad debts
incurred and
Accounts
Receivable
Sales
I.
Yes
No
II.
No
No
III.
No
Yes
IV.
Yes
Yes
40. During 2010, a company wrote off $6,000 in uncollectible accounts receivable. At the end of the year, they
estimated bad debt expense using a percent of gross sales. In 2011, the company recovered a $1,000 account
41. Marx Company estimates bad debt expense using a percentage of credit sales (4%). The company began its
current year with an $8,500 balance in the allowance account. During the current year, $10,500 of accounts
receivable were written off, and $1,200 of previously written off accounts were collected. Credit sales for the
year were $200,000. The bad debt expense for the year was
42. The method for estimating bad debts that results in current revenues and anticipated current expenses being
matched is the
43. Billings Corporation had total sales in the current year of $600,000 and credit sales of $550,000. The
Accounts Receivable balance was $350,000 on the balance sheet date and the Allowance for Doubtful Accounts
had a credit balance of $10,000 before adjusting entries. Bad debt expense is estimated as 2% of credit sales.
The adjusting entry to record estimated bad debt expense would include a
44. Under the allowance method of recording bad debts, which of the following entries, if any, would be made
to write off actual uncollectible accounts of $3,500?
45. Based on the following information:
Sales returns and allowances (credit sales)
$ 20,000
Cash sales
1,200,000
Unadjusted balance in Allowance for Doubtful Accounts
1,000
credit
Credit sales
2,550,000
If bad debts are estimated to be 2% of net credit sales, the adjusting entry to recognize uncollectible accounts will include a debit to expense for
46. When accounting for uncollectible accounts,
47. Which of the following is not a basic form of financing agreement to obtain cash from accounts receivable?
48. Which of the following would not be a valid contributing justification for expanding your selling model to
include selling goods on account?
49. Based on the following information:
Credit sales
$172,000
Collections on accounts receivable during the year
170,000
Cash sales
810,000
Unadjusted balance in Allowance for Doubtful Accounts
40
Sales returns and allowances for credit sales
2,000
Accounts receivable, beginning of the year
14,000
If bad debts are estimated to be 1 1/2% of ending accounts receivable, the adjusting entry to recognize bad debts will include a debit to Bad Debt
Expense for
50. A disadvantage of basing bad debt expense on the historical relationship between actual bad debts and the
outstanding accounts receivable balance at the end of the year is that
51. Prior to the adjusting entry for bad debt expense, Funnel, Inc.’s balances for Accounts Receivable and
Allowances for Doubtful Accounts were $720,000 (debit) and $3,500 (credit), respectively. After the bad debt
expense entry was posted, the net realizable value of accounts receivable was $650,000. Bad debt expense for
the year
52. Fred’s Fruit Smoothies began the year with a $3,200 credit balance in its Allowances for Doubtful Accounts.
During the year, it accrued $22,000 of bad debt expense and wrote off accounts totaling $27,000. At year-end, a
percentage of the outstanding accounts receivable indicated that a $4,800 allowance should be provided for on
that date. The year-end adjustment for bad debt expense should be
53. Transit Corporation estimates uncollectible accounts using a percentage of outstanding accounts receivable.
After the year-end adjustment for bad debt expense was made, the company’s records reflected the following
information (in 000’s):
Accounts written off
$ 1,600
Collection on accounts previously written off
300
Allowance for uncollectible accounts at January 1
1,700
Accounts receivable at December 31
100,000
Bad debt percentage
1.5%
The bad debt expense for the year was
54. The method for estimating bad debts that results in the accounts receivable being properly reported at its
estimated net realizable value is the
55. If a company usually sells its accounts receivable, it records any factoring commissions as a(n)
56. Which of the following conditions must be met by a company (the transferor) to record the transfer of
accounts receivable for which it surrenders control to another company as a sale?
57. Big Stores, Inc., accepts credit cards. The clearinghouse collection fee is 3%. If credit card sales are $75,000
for the current month, the correct summary journal entry is
58. When accounts receivable are assigned, the risk of ownership
59. What entry format is appropriate if sales returns and allowances occur on factored accounts?
60. The Steven Co. sells $50,000 of accounts receivable to a factor and receives 92% of the value of the
factored accounts less a 10% commission based on the gross amount of factored accounts receivable. After the
journal entry to record this factoring transaction is made, Steven Co.’s total assets will be
61. When pledging accounts receivable
62. O’Rourke Co. reports assigned accounts receivable of $90,000 that relate to an unpaid note payable of
$40,000. Correct balance sheet disclosure is
63. If the transferor of accounts receivable cannot meet all conditions for a sale, the transferor records the
proceeds received as a debit to Cash and records a corresponding credit to a(n)
64. Current GAAP requires a company to disclose the fair value of its financial instruments and to disclose all
significant concentrations of credit risk due to its financial instruments. The FASB’s rationale for this disclosure
includes allowing readers to
65. Short-term noninterest-bearing notes receivable are usually recorded at their
66. When a company discounts its notes receivable at a bank, the common practice is to record the discounted
notes in a(n)
67. Exhibit 7-1
Martin & Cox, Inc. accepted a $50,000, 8%, 90-day note receivable for services rendered to a client. Thirty days
later, Martin & Cox discounted the note at a bank at 10%. Assume interest has not been recognized for the first
month.
Refer to Exhibit 7-1. The entry to record the proceeds from the sale of the note would include a
68. Exhibit 7-1
Martin & Cox, Inc. accepted a $50,000, 8%, 90-day note receivable for services rendered to a client. Thirty days
later, Martin & Cox discounted the note at a bank at 10%. Assume interest has not been recognized for the first
month.
Refer to Exhibit 7-1. The entry to record the proceeds from the sale of the note would include a
69. On September 1, 2010, Elite Company received an $80,000, 12%, 120-day note from a credit customer
wishing to extend its repayment period. On October 1, 2010, thirty days after the note was received, Elite
discounted the note at the bank at 14%. How much cash did Elite Company receive from the bank?
70. On April 3, First State Bank loaned a customer $30,000 on a 60-day, 10% note, remitting the face value less
the interest to the customer. Which of the following journal entries would First State Bank use to record the
receipt of the note?
71. On June 11, Eugene, Inc. accepted a $7,000, 6%, 60-day note from a customer. On June 26, the company
discounted the note at the bank at 8%. The proceeds amounted to
72. On October 1, Bonnie’s Online Sales sold goods for $20,000 and accepted a six-month noninterest-bearing
note. Current interest rates were 12%. The December 31 adjusting entry should be
73. On May 17, Otay Olive Co. accepted a $6,500, 8%, 90-day note from a customer. On June 11, the note was
discounted at 10%. At maturity date, the note was dishonored and the bank charged a $25 protest fee. The
amount that Otay Olive Co. would debit to Notes Receivable Dishonored is
74. Which statement is not true?
75. The entry to replenish the petty cash fund for $100 of various minor expenditures would include a
76. Companies should use petty cash funds to
77. Which of the following reconciling items would require an adjusting journal entry on the company’s books?
78. Bedford Market’s accountant is preparing its May bank reconciliation and has collected the following data:
Per Books
Per Bank
May 1 balance
$11,600
$10,000
May deposits
24,600
21,200
May checks
27,800
29,000
Note collected (includes 10% interest)
—
4,400
May service charge
—
20
May 31 balance
8,400
6,580
Additionally, deposits in transit and outstanding checks from April’s reconciliation were $4,400 and $2,800, respectively.
79. On a bank reconciliation, customers’ checks that are returned for lack of funds would be
80. When preparing a bank reconciliation, outstanding checks would be
81. Plaza Bell, Inc. uses the bank reconciliation form that arrives at a corrected cash balance. Bank service
charges will be
82. Huntress, Inc. reported a balance of $141 in its cash account at the end of the month. There were $120 of
deposits in transit and $115 of checks outstanding. The bank statement showed a balance of $151, service
charges of $7, and the collection of a note plus interest. The note had a face value of $17. How much interest
did the bank collect for the company?
83. Although IFRS contain the same basic guidelines for accounting for cash and receivables as U.S. GAAP,
some differences exist. Which of the following accounting treatments differs under IFRS versus GAAP?
84. Emmet Co.’s records reveal the following data at year-end:
Commercial paper maturing in four months
$1,200
Uncashed tax refund check
550
Petty cash
100
Certificates of deposit
1,000
Balance in Union Savings and Loan savings account
2,500
Postage
50
Balance in United Bank checking account
(250)
Treasury notes maturing in six months
2,200
Cash on hand
500
Postdated customer check
125
Employee travel advance
75
Treasury bill maturing in one month
2,500
Required:
Compute the correct amount of cash and cash equivalents that will appear as a current asset on Emmet Co.’s balance sheet.
Cash ($550 + $100 + $2,500 + $500)
$3,650
Cash equivalents
2,500
Total
$6,150
85. Littleton Corporation reports the following information:
Balance in National Bank checking account
$13,002
Certificates of deposit
4,000
Petty cash
100
Cash on hand
2,580
Employees’ IOUs
226
Balance in Society Bank checking account
(300)
Customer’s postdated check
168
Balance in Peoples Savings and Loan savings account
9,000
Required:
Compute the correct amount of cash that will appear as a current asset on Littleton Corporation’s balance sheet.
86. Based on the following information as of December 31:
Postdated check
$ 700
Employee travel advance
500
Checking account balance
2,500
Savings account balance
1,500
Bank overdraft
400
Certificates of deposit
600
Cash on hand
2,000
Petty cash fund
200
Bank draft
1,000
Required:
Compute the total amount that will appear for current assets on the December 31 balance sheet.
87. The following are transactions of the Morris Company:
a.
On November 5, sold merchandise on account for $46,000 with terms of 3/15, n/30.
b.
On November 20, payment was received on $32,000 worth of merchandise sold on November 5.
c.
On December 5, further collections were made on $8,000 of merchandise sold on November 5.
d.
On December 8, merchandise sold for $4,000 on November 5 was returned by the purchaser and credit was granted by Morris
Company.
Required:
Record the appropriate amounts under the gross price, net price, and allowance methods in the spaces below. For each method, write the amount to
be debited or credited on the appropriate line for each account shown. Indicate that the amount is a debit or credit by placing a (d) or (c) after the
amount.
a. To record sale on Nov. 5:
Gross Price
Net Price
Allowance
Method
Method
Method
Cash
________
________
________
Accounts Receivable
________
________
________
Sales
________
________
________
Sales Discounts
________
________
________
Allowance for Sales Discounts
________
________
________
Sales Discounts Not Taken
________
________
________
Sales Returns and Allowances
________
________
________
b. To record payment received on Nov. 20:
Gross Price
Net Price
Allowance
Method
Method
Method
Cash
________
________
________
Accounts Receivable
________
________
________
Sales
________
________
________
Sales Discounts
________
________
________
Allowance for Sales Discounts
________
________
________
Sales Discounts Not Taken
________
________
________
Sales Returns and Allowances
________
________
________
c. To record payment received on Dec. 5:
Gross Price
Net Price
Allowance
Method
Method
Method
Cash
________
________
________
Accounts Receivable
________
________
________
Sales
________
________
________
Sales Discounts
________
________
________
Allowance for Sales Discounts
________
________
________
Sales Discounts Not Taken
________
________
________
Sales Returns and Allowances
________
________
________