Chapter 09 Accounting for Receivables
MULTIPLE CHOICE QUESTIONS
1)
A receivable is an amount due from another party.
A)
True
B)
False
2)
Credit sales are recorded by crediting Accounts Receivable.
A)
True
B)
False
3)
As long as a company accurately records total credit sales information, it is not necessary to have
separate accounts for specific customers.
A)
True
B)
False
4)
If a customer owes interest on accounts receivable, Interest Receivable is debited and Accounts
Receivable is credited.
A)
True
B)
False
5)
If a credit card sale is made, the seller debits Cash and credits Sales for the same amount.
A)
True
B)
False
6)
Installment Accounts Receivable are classified as non-current assets if the installment period is
more than one year, even if the seller regularly offers customers such terms.
A)
True
B)
False
7)
Companies can report credit card expense as a reduction in net sales or as a selling expense.
A)
True
B)
False
8)
BizCom’s customer, Redding, paid off an $8,300 balance on its account receivable. BizCom should
record the transaction as a debit to Accounts Receivable—Redding and a credit to Cash.
A)
True
B)
False
9)
The maturity date of a note refers to the date the note must be repaid.
A)
True
B)
False
10)
A promissory note is a written promise to pay a specified amount of money either on demand or at
a definite future date.
A)
True
B)
False
11)
The formula for computing interest on a note is: Principal of the note × Annual interest rate × Time
expressed in fraction of year.
A)
True
B)
False
12)
The person that borrows money and signs a promissory note is called the maker.
A)
True
B)
False
13)
A company borrowed $10,000 by signing a six-month promissory note at 5% interest. The amount
of interest to be paid at maturity is $25.
A)
True
B)
False
14)
A company borrowed $16,000 by signing a 4-month promissory note at 12%. The amount of
interest to be paid at maturity is $640.
A)
True
B)
False
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.
A)
True
B)
False
16)
Federal laws prohibit the selling of accounts receivables to factors.
A)
True
B)
False
17)
The process of using accounts receivable as security for a loan is known as pledging accounts
receivable.
A)
True
B)
False
18)
Since pledged accounts receivables only serve as collateral for a loan and are not sold, it is not
necessary to disclose the pledging.
A)
True
B)
False
19)
A company factored $30,000 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 $30,000, a debit to
Factoring Fee Expense of $600, and credit to Accounts Receivable of $30,600.
A)
True
B)
False
20)
The quality of receivables refers to the likelihood of collection without loss.
A)
True
B)
False
21)
The accounts receivable turnover indicates how often accounts receivable are received and
collected during the period.
A)
True
B)
False
22)
A high accounts receivable turnover in comparison with competitors suggests that the firm should
tighten its credit policy.
A)
True
B)
False
23)
The accounts receivable turnover is calculated by dividing average accounts receivable by net
sales.
A)
True
B)
False
24)
A company had net sales of $550,000 and an average accounts receivable of $110,000. Its accounts
receivable turnover equals 5.0.
A)
True
B)
False
25)
A Company had net sales of $23,000, and its average account receivables were $5,700. Its accounts
receivable turnover is 0.24.
A)
True
B)
False
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.
A)
True
B)
False
27)
The expense recognition (matching) principle requires use of the allowance method of accounting
for bad debts.
A)
True
B)
False
28)
Companies follow both the expense recognition (matching) principle and the materiality constraint
when applying the direct write-off method.
A)
True
B)
False
29)
The use of the direct write-off method is allowed under the materiality constraint.
A)
True
B)
False
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.
A)
True
B)
False
31)
Companies use two methods to account for uncollectible accounts, the direct write-off method and
the allowance method.
A)
True
B)
False
32)
No attempt is made to estimate bad debts expense under the allowance method of accounting for
uncollectible accounts receivable.
A)
True
B)
False
33)
The expense recognition (matching) principle 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.
A)
True
B)
False
34)
When using the allowance method of accounting for uncollectible accounts, the entry to record the
estimated bad debts expense is a debit to Bad Debts Expense and a credit to Allowance for
Doubtful Accounts.
A)
True
B)
False
35)
After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of reducing
Accounts Receivable to its estimated realizable value.
A)
True
B)
False
36)
When using the allowance method of accounting for uncollectible accounts, the entry to write off
Jeannie’s uncollectible account is a debit to Allowance for Doubtful Accounts and a credit to
Accounts Receivable—Jeannie.
A)
True
B)
False
37)
The realizable value refers to the expected proceeds from converting an asset into cash.
A)
True
B)
False
38)
Allowance for Doubtful Accounts is a contra asset; its balance is added to Accounts receivable.
A)
True
B)
False
39)
The allowance method of accounting for bad debts matches the estimated loss from uncollectible
accounts receivable against the sales they helped produce.
A)
True
B)
False
40)
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.
A)
True
B)
False
41)
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.
A)
True
B)
False
42)
Installment accounts receivable is another name for aging of accounts receivable.
A)
True
B)
False
43)
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.
A)
True
B)
False
44)
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.
A)
True
B)
False
45)
The percent of sales method for estimating bad debts uses only income statement account balances
to estimate bad debts.
A)
True
B)
False
46)
The aging method of determining bad debts expense is based on the knowledge that the longer a
receivable is past due, the higher the likelihood of collection.
A)
True
B)
False
47)
A company has $80,000 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 $1,200. The journal entry to record the adjustment to the allowance account includes a
debit to Bad Debts Expense for $4,800.
A)
True
B)
False
48)
A company has $80,000 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 debit balance (before adjustments) in the allowance for doubtful
accounts is $1,200. The journal entry to record the adjustment to the allowance account includes a
debit to Bad Debts Expense for $6,000.
A)
True
B)
False
49)
A company using the percentage of sales method for estimating bad debts has sales of $350,000
and estimates that 1.0% of its sales are uncollectible. The estimated amount of bad debts expense is
$3,500.
A)
True
B)
False
50)
A company using the percentage of sales method for estimating bad debts has sales of $350,000
and estimates that 1.0% of its sales are uncollectible. The unadjusted balance in Allowance for
Doubtful Accounts is a $300 credit. The estimated amount of bad debts expense is $3,200
A)
True
B)
False
51)
The percent of sales method of estimating bad debts focuses more on the realizable value of
accounts receivable than on expense recognition.
A)
True
B)
False
52)
The period of a note is the time from the note’s (contract) date to its maturity date.
A)
True
B)
False
53)
Notes receivable are classified as current liabilities regardless of the time to maturity.
A)
True
B)
False
54)
A company received a $15,000, 90-day, 10% note receivable. The journal entry to record receipt of
the note includes a debit to Notes Receivable.
A)
True
B)
False
55)
For legal reasons, it is not advisable to accept a note receivable in exchange for an overdue account
receivable.
A)
True
B)
False
56)
A note that the maker is unable or refuses to pay at maturity is called a dishonored note.
A)
True
B)
False
57)
A maker who dishonors a note is one who does not pay it at maturity.
A)
True
B)
False
58)
When a note receivable is dishonored, it reverts to an account receivable.
A)
True
B)
False
59)
The notes receivable account of a business should include both the notes that have not yet matured
and the dishonored notes.
A)
True
B)
False
60)
The practice of placing dishonored notes receivable into accounts receivable keeps only notes that
have not yet matured in the Notes Receivable account.
A)
True
B)
False