Chapter 9
Accounting for Receivables
1. Accounts receivable occur from credit sales to customers.
2. Credit sales are recorded by crediting an Accounts Receivable.
3. As long as a company accurately records total credit sales information, it is not necessary to
have separate accounts for specific customers.
4. If a customer owes interest on accounts receivable, Interest Revenue is debited and
Accounts Receivable is credited.
5. If a credit card sale is made, the seller can either debit Cash or debit Accounts receivable at
the time of the sale depending on the type of credit card.
6. Installment accounts receivable are classified as current assets, even though the installment
period is more than one year, if the seller regularly offers customers such terms
7. Companies can report credit card expense as a discount deducted from sales or as a selling
expense.
8. TechCom’s customer, RDA, paid off an $8,300 balance on its account receivable. TechCom
should record the transaction as a debit to Accounts Receivable-RDA and a credit to Cash.
9. The maturity date of a note refers to the date the note must be repaid.
10. A promissory note is a written promise to pay a specified amount of money either on
demand or at a definite future date.
11. The formula for computing interest on a note is principal of the note times the annual
interest rate times time expressed in fraction of year.
12. The person that borrows money and signs a promissory note is called the payee.
13. A company borrowed $1,000 by signing a six month promissory note at 5% interest. The
total amount of interest is $25.
14. A company borrowed $6,000 by signing a 4-month promissory note at 12%. The total
interest on the note is $720.
15. Sellers generally prefer to receive notes receivable rather than accounts receivable when
the credit period is long and the receivable is for a large amount.
16. Receivables can be used to obtain cash by either selling them or using them as security for
a loan.
17. The process of using accounts receivable as security for a loan is known as factoring
accounts receivable.
18. Since pledged accounts receivables only serve as collateral for a loan and are not sold, it is
not necessary to disclose the pledging.
19. A company factored $35,000 of its accounts receivable and was charged a 2% factoring
fee. The journal entry to record this transaction would include a debit to Cash of $35,000, a
debit to Factoring Fee Expense of $700, and credit to Accounts Receivable of $35,700.
20. The quality of receivables refers to the likelihood of collection without loss.
21. The accounts receivable turnover indicates how often accounts receivable are received and
collected during the period.
22. A high accounts receivable turnover in comparison with competitors suggests that the firm
should tighten its credit policy.
23. The accounts receivable turnover is calculated by dividing net sales by average accounts
receivable.
24. A company had net sales of $500,000 and an average accounts receivable of $80,000. Its
accounts receivable turnover equals 6.25.
9-8
25. A Company had net sales of $23,000 million, and its average account receivables were
$5,860 million. Its accounts receivable turnover is 0.92.
26. The direct write-off method of accounting for bad debts records the loss from an
uncollectible account receivable when it is determined to be uncollectible.
27. The matching principle requires use of the direct write-off method of accounting for bad
debts.
28. Companies follow both the matching principle and the materiality constraint when
applying the direct write-off method.
29. The use of an allowance for bad debts is required under the materiality constraint.
30. The advantage of the allowance method of accounting for bad debts is that it identifies the
specific customers who will not pay their bills.
31. Companies use two methods to account for uncollectible accounts, the direct write-off
method and the allowance method.
32. Under the allowance method of accounting for uncollectible accounts receivable, no
attempt is made to estimate bad debts expense.
33. The materiality constraint permits the use of the direct write-off method of accounting for
uncollectible accounts when bad debts are very large in relation to a company’s other financial
statement items such as sales and net income.
34. When using the allowance method of accounting for uncollectible accounts, the entry to
record the bad debts expense is a debit to Bad Debts Expense and a credit to Accounts
Receivable.
35. After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of
reducing accounts receivable to its estimated realizable value.
9-11
36. When using the allowance method of accounting for uncollectible accounts, the entry to
write off Harold’s uncollectible account is a debit to Allowance for Doubtful Accounts and a
credit to Accounts Receivable – Harold.
37. When using the allowance method of accounting for uncollectible accounts, the recovery
of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.
38. The aging of accounts receivable involves classifying each account receivable by how
long it is past its due date and estimating the percent of each uncollectible class.
39. Installment accounts receivable is another name for aging of accounts receivable.
40. The accounts receivable method to estimate bad debts obtains the estimated balance in the
Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible
from the total accounts receivable or (2) aging accounts receivable.
41. The percent of sales method for estimating bad debts assumes that a given percent of a
company’s credit sales for the period are uncollectible.
42. The percent of accounts receivable method for bad debts estimation uses only income
statement account balances to estimate bad debts.
43. The aging method of determining bad debts expense is based on the knowledge that the
longer a receivable is past due, the lower the likelihood of collection.
44. A company has $90,000 in outstanding accounts receivable and it uses the allowance
method to account for uncollectible accounts. Experience suggests that 6% of outstanding
receivables are uncollectible. The current credit balance (before adjustments) in the allowance
for doubtful accounts is $800. The journal entry to record the adjustment to the allowance
account includes a debit to Bad Debts Expense for $7,000.
45. A company has sales of $350,000 and estimates that 0.7% of its sales are uncollectible.
The estimated amount of bad debts expense is $2,450.
46. The percent of sales method of estimating bad debts is focused more on realizable value of
accounts receivable than matching.
47. When a company holds a large number of notes receivable it sometimes sets up a
controlling account and a subsidiary ledger for notes.
48. Notes receivable are always classified as current liabilities.
49. A company received a $1,000, 90-day, 10% note receivable. The journal entry to record
receipt of the note includes a debit to Notes Receivable.
50. For legal reasons, it is always a good business practice to accept a note receivable in
exchange for an overdue account receivable.
51. A payee of a note always honors a note and pays it in full.
52. A maker who dishonors a note is one who does not pay it at maturity.
53. A dishonored note receivable is usually reclassified as an account receivable.
54. The practice of placing dishonored notes receivable into accounts receivable keeps only
notes that have not matured in the Notes Receivable account.
55. The matching principle requires that accrued interest on outstanding notes receivable be
recorded at the end of each accounting period.
56. Accounts receivable information for specific customers is important because it reveals:
A. How much each customer has purchased on credit.
B. How much each customer has paid.
C. How much each customer still owes.
D. The basis for sending bills to customers.
E. All of the options are valid reasons.
57. A credit sale of $3,275 to a customer would result in:
A. A debit to the Accounts Receivable account in the general ledger and a debit to the
customer’s account in the accounts receivable subsidiary ledger.
B. A credit to the Accounts Receivable account in the general ledger and a credit to the
customer’s account in the accounts receivable subsidiary ledger.
C. A debit to the Accounts Receivable account in the general ledger and a credit to the
customer’s account in the accounts receivable subsidiary ledger.
D. A credit to the Accounts Receivable account in the general ledger and a debit to the
customer’s account in the accounts receivable subsidiary ledger.
E. A credit to Sales and a credit to the customer’s account in the accounts receivable
subsidiary ledger.
58. Sellers allow customers to use credit cards:
A. To avoid having to evaluate a customer’s credit standing for each sale.
B. To lessen the risk of extending credit to customers who cannot pay.
C. To speed up receipt of cash from the credit sale.
D. To increase total sales volume.
E. All of the options are reasons for credit card use.
59. All of the following are true regarding credit card expense except:
A. Credit card expense may be classified as a “discount” deducted from sales to get net sales.
B. Credit card expense may be classified as a selling expense.
C. Credit card expense may be classified as an administrative expense.
D. Credit card expense is not recorded by the seller.
E. Credit card expense is a fee the seller pays for services provided by the card company.
60. A promissory note received from a customer in exchange for an account receivable:
A. Is a cash equivalent for the recipient.
B. Is an account receivable for the recipient.
C. Is a note receivable for the recipient.
D. Is a short-term investment for the recipient.
E. Is a note payable for the recipient.
61. The person who signs a note receivable and promises to pay the principal and interest is
the:
A. Maker.
B. Payee.
C. Holder.
D. Receiver.
E. Owner.
9-19
62. The accounting principle that requires financial statements (including notes) to report all
relevant information about the operations and financial condition of a company is called:
A. Relevance.
B. Full disclosure.
C. Evaluation.
D. Materiality.
E. Matching.
63. A promissory note:
A. Is a short-term investment for the maker.
B. Is a written promise to pay a specified amount of money at a certain date.
C. Is a liability to the payee.
D. Is another name for an installment receivable.
E. Cannot be used in payment of an account receivable.
64. The maturity date of a note receivable:
A. Is the day of the credit sale.
B. Is the day the note was signed.
C. Is the day the note is due to be repaid.
D. Is the date of the first payment.
E. Is the last day of the month.
65. The interest accrued on $6,500 at 6% for 60 days is:
A. $ 36.
B. $ 42.
C. $ 65.
D. $180.
E. $420.
66. A 90-day note issued on April 10 matures on:
A. July 9.
B. July 10.
C. July 11.
D. July 12.
E. July 13.