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107. Darby uses the allowance method to account for uncollectible accounts. Its year-end
unadjusted trial balance shows Accounts Receivable of $104,500, allowance for doubtful
accounts of $665 (credit) and sales of $925,000. If uncollectible accounts are estimated to be
.5% of sales, what is the amount of the bad debts expense adjusting entry?
A. $4,625
B. $3,960
C. $5,290
D. $4,750
E. $4,825
108. On August 9, Pierce Company receives a $8,500, 90-day, 8% note from customer Eric
Simms as payment on his account. Compute the maturity date for the note.
A. October 8
B. October 7
C. November 8
D. November 7
E. November 6
109. On August 9, Pierce Company receives a $8,500, 90-day, 8% note from customer Eric
Simms as payment on his account. Compute the amount due at maturity for the note.
A. $8,628
B. $8,192
C. $8,613
D. $8,500
E. $8,670
110. On August 9, Pierce Company receives a $8,500, 90-day, 8% note from customer Eric
Simms as payment on his account. What entry should be made on August 9 to record receipt
of the note?
A. Debit Accounts Receivable $8,500; credit Sales $8,500.
B. Debit Notes Receivable $8,670; credit Sales $8,670.
C. Debit Notes Receivable $8,500; credit Accounts Receivable $8,500.
D. Debit Notes Receivable $8,500; credit Sales $8,500.
E. Debit Notes Receivable $8,725; credit Interest Revenue $225; credit Accounts Receivable
$8,500.
111. On August 9, Pierce Company receives a $8,500, 90-day, 8% note from customer Eric
Simms as payment on his account. What entry should be made on the maturity date assuming
the maker pays in full?
A. Debit Notes Receivable $8,500; debit Interest Receivable $170; credit Sales $8,670.
B. Debit Cash $8,670; credit Interest Revenue $170; credit Notes Receivable $8,500.
C. Debit Cash $8,628; credit Interest Revenue $128; credit Notes Receivable $8,500.
D. Debit Cash $8,613; credit Interest Revenue $113; credit Notes Receivable $8,500
E. Debit Cash $8 500; credit Notes Receivable $8,500.
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112. On November 19, Hayes Company receives a $15,000, 60-day, 10% note from a
customer as payment on his account. What adjusting entry should be made on the December
31 year-end?
A. Debit Interest Receivable $175; credit Interest Revenue $175.
B. Debit Interest Receivable $250; credit Interest Revenue $250.
C. Debit Interest Receivable $75; credit Interest Revenue $75.
D. Debit Interest Revenue $175; credit Interest Receivable $175.
E. Debit Interest Revenue $250; credit Interest Receivable $250.
113. A company uses the percent of receivables method to determine its bad debts expense.
At the end of the current year, the company’s unadjusted trial balance reported the following
selected amounts:
Accounts receivable $435,000 Debit
Allowance for Doubtful Accounts 1,250 Debit
Net Sales 2,100,000 Credit
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All sales are made on credit. Based on past experience, the company estimates 3.5% of credit
sales to be uncollectible. What adjusting entry should the company make at the end of the
current year to record its estimated bad debts expense?
A. Debit Bad Debts Expense $13,975; credit Allowance for Doubtful Accounts $13,975.
B. Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C. Debit Bad Debts Expense $16,475; credit Allowance for Doubtful Accounts $16,475.
D. Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E. Debit Bad Debts Expense $17,350; credit Allowance for Doubtful Accounts $17,350.
114. A company used the percent of sales method to determine its bad debts expense. At the
end of the current year, the company’s unadjusted trial balance reported the following selected
amounts:
Accounts receivable $435,000 Debit
Allowance for Doubtful Accounts 1,250 Debit
Net Sales 2,100,000 Credit
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All sales are made on credit. Based on past experience, the company estimates 1% of credit
sales to be uncollectible. What adjusting entry should the company make at the end of the
current year to record its estimated bad debts expense?
A. Debit Bad Debts Expense $19,750; credit Allowance for Doubtful Accounts $19,750.
B. Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C. Debit Bad Debts Expense $22,250; credit Allowance for Doubtful Accounts $22,250.
D. Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E. Debit Bad Debts Expense $21,000; credit Allowance for Doubtful Accounts $21,000.
115. On September 1, a customer’s account balance of $2,300 was deemed to be
uncollectible. What entry should be recorded on September 1 to record the write-off assuming
the company uses the allowance method?
A. Debit Bad Debts Expense $2,300; credit Accounts Receivable $2,300.
B. Debit Allowance for Doubtful Accounts $2,300; credit Bad Debts Expense $2,300.
C. Debit Allowance for Doubtful Accounts $2,300; credit Accounts Receivable $2,300.
D. Debit Bad Debts Expense $2,300; credit Allowance for Doubtful Accounts $2,300.
E. Debit Accounts Receivable $250; credit Allowance for Doubtful Accounts $2,300.
116. All of the following statements regarding recognition of receivables under U.S. GAAP
and IFRS are true except:
A. U.S. GAAP and IFRS have similar asset criteria that apply to recognition of receivables.
B. Receivables that arise from revenue-generating activities are subject to broadly similar
criteria for U.S. GAAP and IFRS.
C. The realization principle under IFRS implies an arm’s length transaction occurs.
D. Both refer to the realization principle and an earnings process.
E. Differences arise mainly from industry-specific guidance under U.S. GAAP.
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117. All of the following statements regarding valuation of receivables under U.S. GAAP and
IFRS are true except:
A. Both require the allowance method for uncollectibles unless uncollectibles are immaterial.
B. Both require that receivables be reported net of estimated collectibles.
C. Both require that the expenses for estimated collectibles be recorded in the same period
revenues generated from those receivables are recorded.
D. Both allow using percent of sales, percent of receivables, or aging of receivables to
estimate uncollectibles.
E. Both require that the expense related to uncollectibles be recorded when the receivable is
determined to be uncollectible.
118. Under IFRS, the term provision:
A. Refers to expense.
B. Usually refers to a liability whose amount or timing is uncertain.
C. Means establishing a provision for bad debts.
D. Means establishing a contra-asset account.
E. Means establishing an asset account.
119. Match each of the following terms with the appropriate definitions.
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A. Maker of a note
B. Bad debts
C. Aging of accounts receivable
D. Interest
E. Promissory note
F. Payee of a note
G. Accounts receivable
H. Allowance for doubtful accounts
I. Realizable value
J. Matching principle
____ 1. Amounts due from customers arising from credit sales.
____ 2. A process of classifying accounts receivable by how long it is past its due date for the
purpose of estimating the amount of uncollectible accounts.
____ 3. A written promise to pay a specified amount either on demand or at a definite future
date.
____ 4. The expected proceeds from converting an asset into cash.
____ 5. The accounts of customers who do not pay what they have promised to pay a
company.
____ 6. The accounting principle that requires expenses to be reported in the same period as
the sales they helped to produce.
____ 7. The cost of borrowing money for a borrower, alternatively the profit from lending
money for a lender.
____ 8. A contra asset account with a balance approximating the amount of accounts
receivable expected to be uncollectible.
____ 9. One who signs a note and promises to pay it at maturity.
____10. The one to whom the promissory note is made payable.
120. Match each of the following terms with the appropriate definitions.
A. Allowance method
B. Installment accounts receivable
C. Principal of a note
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D. Full disclosure principle
E. Materiality constraint
F. Direct write-off
G. Dishonoring a note
H. Accounts receivable turnover
I. Factor
J. Maker of a note
____ 1. A measure of both the quality and liquidity of accounts receivable. It indicates how
often, on average, receivables are received and collected during the period.
____ 2. Amounts owed by customers from credit sales for which payment is required in
periodic payments over an extended period of time.
____ 3. The accounting constraint that states that an amount can be ignored if its effect on the
financial statements is unimportant to their users.
____ 4. Refers to a note maker’s inability or refusal to pay the note at maturity.
____ 5. A method of accounting for bad debts that matches the estimated loss from
uncollectible accounts receivable against the sales they helped to produce.
____ 6. A buyer of accounts receivable who charges the seller a fee and then receives cash
from the receivables as they come due.
____ 7. The accounting principle that requires the financial statements (including the notes) to
report all relevant information about operations and financial condition.
____ 8. One who signs a note and promises to pay it at maturity.
____ 9. A method of accounting for bad debts that records the loss from an uncollectible
account receivable when it is determined to be uncollectible.
____10. The amount that the signer of a note agrees to pay back when the note matures, not
including interest.
121. Describe how accounts receivable arise and how they accounted for, including the use of
a subsidiary ledger and an allowance account.
122. Define a note receivable and explain how to calculate the interest due on a short-term
note receivable.
123. Explain the options a company has to convert its receivables to cash.
124. What is the accounts receivable turnover ratio? How is it calculated? How is it used to
assess financial condition?
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125. How are the direct write-off method and the allowance method applied in accounting for
uncollectible accounts receivables?
126. Explain the basic difference between estimating the amount of uncollectible accounts
using the percent of sales method and the accounts receivable method.
127. Explain how to record the receipt of a note receivable.
128. Explain the difference between honoring and dishonoring a note receivable.
129. What areas related to accounts receivable management do business owners need to pay
attention to?
Problems
130. A company allows its customers to use bank credit cards to charge purchases. When
customers use the credit cards, the net amount is deposited in the company’s checking
account. The company also is charged a 2.5% service charge for these credit card sales.
Assume that on April 13, the company sold $25,000 worth of merchandise to customers who
used credit cards. Prepare the company’s journal entry to record the credit card sales for April
13 assuming the company deposited the receipts that same day.
131. Crystal Products allows customers to use bank credit cards to charge purchases. The
bank used by Crystal Products processes all bank credit cards in exchange for a 3%
processing fee. All credit card receipts deposited are credited to the company account on the
day of deposit. Assume that on January 18, Crystal Products sold and deposited $19,000
worth of bank credit card receipts. Prepare the general journal entry to record this transaction.
132. Tecom accepts the NOVA credit card for credit card sales. Tecom sends credit card
receipts to NOVA on a weekly basis. NOVA charges Tecom a 2% fee. Tecom usually
receives payment from NOVA within a week. Prepare journal entries to record the following
transactions of Tecom involving the NOVA credit card.
March 11Sold merchandise for $4,500 (that had cost $2,200) and accepted the customer’s
NOVA card. Transferred the credit card receipts to NOVA, requesting payment.
March 20Received NOVA’s check for the March 11 billing, less the service charge.
133. Outdoors Unlimited accepts the Explorer credit card from its customers. Explorer
charges a 3.5% service fee and pays Outdoors Unlimited the amount net of Explorer charges
once a month. During February, Outdoors Unlimited sold $27,000 worth of merchandise to
customers using the Explorer charge card. On February 28, Outdoor Unlimited sent the
$27,000 worth of credit card receipts to Explorer. On March 4, Outdoors Unlimited received
cash proceeds from Explorer for the February credit sales less the service charge. Prepare the
journal entries to record February sales and the March 4 cash receipt.
134. What is the maturity date of a 6-month note receivable dated February 5?
135. What is the amount of interest that is due on a $36,000, 90-day, 4% note receivable at
maturity?
136. Calculate the amount of interest that would be owed on a $9,000, 60-day, 9% note
receivable at maturity.
137. If a 90-day note receivable is dated June 12, what is the maturity date of the note?
138. If a 60-day note receivable is dated September 22, what is the maturity date of the note?
139. On May 31, a company had a balance in its accounts receivable of $103,895. Prepare
journal entries to record the following transactions for June.
June 2 Sold merchandise on account, $14,000
June 8 Sold $15,000 worth of accounts receivable to First Bank. First Bank charged a 3%
factoring fee.
June 20 Borrowed $30,000 cash from First Bank, pledging $31,500 worth of accounts
receivable as collateral for the loan.
140. ABC Co. sold $80,000 of accounts receivable to First Bank and incurred a 2% factoring
fee. Prepare the journal entry for ABC Co. to record the sale.
141. Hasbro had net sales of $7,875 and its average accounts receivables is $1,350. Calculate
Hasbro’s accounts receivable turnover:
142. Tecom had net sales of $315,000 and average accounts receivable of $75,600. Its
competitor, ZCom, had net sales of $299,000 and average accounts receivables of $81,350.
Calculate the accounts receivable turnover for both companies. Which company is doing a
better job of managing its accounts receivables?
143. A company reports the following results in its financial statements:
Year 3 Year 2 Year 1
Net Sales………… ……………………. $2,500,000 $2,050,000 $1,900,000
Accounts receivable, Ending Balance……. 175,000 167,000 165,000
Calculate the company accounts receivable turnover for Year 2 and Year 3. Compare these
two results and give a possible explanation for any significant change.
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144. The Connecting Company uses the percent of sales method of accounting for
uncollectible accounts receivable. During the current year, the following transactions
occurred:
Sept 7 Connecting Company determined that the $8,100 account receivable of the Helena
Company was uncollectible, and wrote it off.
Oct 15 Connecting Company determined that the $2,500 account receivable of the Tree
Company was uncollectible and wrote it off.
Nov 9 Helena Company paid $6,000 of the amount owed to the Connecting
Company. Connecting Company does not expect further collections from the Helena Company.
Dec 31 Connecting Company estimates that 0.5% of its $1,900,000 of credit
sales would be uncollectible.
1. Prepare the general journal entries to record these transactions.
2. If the balance of the allowance for uncollectible accounts was $8,000 on January 1 of the
current year, determine the balance of the allowance for uncollectible accounts at December
31 of the current year. Assume that the transactions above are the only transactions affecting
the allowance for uncollectible accounts during the year.
145. Timmons Company had a January 1, balance in its Allowance for Doubtful Accounts of
$7,000 for the current year. The following transactions and events affected the Allowance for
Doubtful Accounts during the current year:
Apr 15 Bard’s account receivable of $5,700 was deemed uncollectible.
July 1 Drake paid the full amount of a previously written-off account receivable. This
receivable of $2,300 had been written off in the prior year.
Dec 31 Bad debts expense of $7,500 was recorded.
What amount should appear in the allowance for doubtful accounts in the December 31,
balance sheet for the current year?
146. Griggs Company uses the direct write-off method of accounting for uncollectible
accounts receivable. On December 6, Year 1, Griggs sold $6,300 of merchandise to the
Hillman Company. On August 8, Year 2, after numerous attempts to collect the account,
Griggs determined that the $6,300 account of the Hillman Company was uncollectible.
a. Prepare the journal entry required to record the transactions on August 8.
b. Assuming that the $6,300 is material, explain how the direct write-off method violates the
matching principle in this case.