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Chapter 05 Receivables and Sales Answer Key
True / False Questions
1.
Credit sales transfer products and services to a customer today while bearing the risk of
collecting payment from that customer in the future.
2.
At the time of a credit sale, a company would record an increase in assets and an increase
in revenues.
3.
A sale on account is recorded as a debit to Service Revenue and a credit to Accounts
Receivable.
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4.
Accounts receivable represent the amount of cash owed to the company by its customers
from the sale of products or services on account.
5.
Trade discounts represent a discount offered to the purchasers for quick payment.
6.
When a company sells a $100 service with a 20% trade discount, $80 of revenue is
recognized.
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7.
A sales discount represents a reduction, not in the selling price of a product or service, but
in the amount to be paid by a credit customer if payment is made within a specified period
of time.
8.
A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will
get a $2 discount if payment is made within 10 days; otherwise, full payment is due within
30 days.
9.
The Sales Discounts account is an example of a contra revenue account.
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10.
The Sales Discounts account is an expense account.
11.
Sales returns and allowances occur when the buyer returns the goods or the seller
reduces the customer’s balance owed.
12.
A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales
Allowances.
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13.
The Sales Returns account is an expense account.
14.
If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of
$4,000, and sales allowances of $2,000, the income statement will report net revenues of
$91,000.
15.
Accounts receivable are reported at their net realizable value.
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16.
The net realizable value of accounts receivable is the full amount owed by customers.
17.
Customers’ accounts that we no longer consider collectible are referred to as uncollectible
accounts (or bad debts).
18.
The adjustment to account for future bad debts has the effect of (1) reducing assets and
(2) increasing liabilities.
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19.
The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a
credit to the Allowance for Uncollectible Accounts.
20.
The Allowance for Uncollectible Accounts is a contra asset account representing the
amount of accounts receivable that we do not expect to collect.
21.
Bad debt expense is the amount of the adjustment to the allowance for uncollectible
accounts that represents the cost of the estimated future bad debts.
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22.
If a company is owed $10,000 by its customers, but it expects that $1,000 will not be
collected, accounts receivable in the balance sheet are reported at the net amount of
$9,000.
23.
One disadvantage of the allowance method (over the direct write-off method) for
recording uncollectible accounts is that it generally matches bad debt expense with the
revenue it helped to generate.
24.
The direct write-off method involves recording an adjustment at the end of each period to
account for the possibility of future uncollectible accounts.
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25.
The percentage-of-receivables method for estimating uncollectible accounts is commonly
referred to as the balance sheet method, because the estimate of bad debts is based on a
balance sheet amount—accounts receivable.
26.
The aging method for estimating uncollectible accounts considers that a higher
percentage of “older” accounts will not be collected compared to “newer” accounts.
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27.
A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its
older accounts to be uncollectible. If the company has $40,000 of newer accounts and
$5,000 of older accounts, the total estimate of uncollectible accounts is $2,000.
28.
Under the allowance method, when a company writes off an account receivable as an
actual bad debt, it reduces total assets.
29.
Under the allowance method, when a company writes off an account receivable as an
actual bad debt, it records an expense.
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30.
Under the allowance method, the write-off of an actual bad debt is recorded with a debit
to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable.
31.
Under the allowance method, when a company collects cash from an account previously
written off, total assets increase.
32.
A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates
that last year’s estimate of uncollectible accounts may have been too high.
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33.
A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates
that last year’s estimate of uncollectible accounts was too low.
34.
Under the direct write-off method, bad debt expense is recorded at the time accounts are
known to be uncollectible.
35.
The direct write-off method is used for tax purposes but is generally not permitted for
financial reporting.
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36.
The direct write-off method violates the matching principle.
37.
Under the direct write-off method, recording an estimate of future uncollectible accounts
includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible
Accounts.
38.
Notes receivable are similar to accounts receivable but are more formal credit
arrangements evidenced by a written debt instrument, or note.
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39.
Notes receivable typically arise from sales to customers.
40.
Notes receivable are assets and are reported in the balance sheet.
41.
Interest on a note receivable is calculated as the face value of the note times the annual
interest rate stated on the note times the fraction of the year the note is outstanding.
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42.
A $10,000 note that has a stated interest rate of 10% and is due in six months would have
interest of $1,000.
43.
Accrued interest on a note receivable is interest earned by the end of the year but not yet
received.
44.
Accrued interest on a note receivable has the effects of increasing assets and increasing
liabilities.
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Topic: Accounting for Notes Receivable
45.
Two important ratios that help in understanding the company’s effectiveness in managing
receivables are the receivables turnover ratio and the average collection period.
46.
The receivables turnover ratio shows the number of times during a year that the average
accounts receivable balance is collected (or “turns over”).
47.
The receivables turnover ratio equals average accounts receivable divided by net credit
sales.
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48.
A lower receivables turnover ratio generally indicates more favorable management of
accounts receivable by company managers.
49.
The average collection period shows the approximate number of days the average
accounts receivable balance is outstanding.
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50.
The percentage-of-credit-sales method for estimating uncollectible accounts is commonly
referred to as the income statement method, because it always results in a higher amount
of net income being reported in the income statement.
51.
Even though the percentage-of-receivables method and the percentage-of-credit-sales
method use different accounts to estimate future uncollectible accounts, the amount of
bad debt expense reported in the income statement will always be the same under the two
methods.
52.
From an income statement perspective, the percentage–of-credit-sales method is typically
preferable because it better matches the revenues (credit sales) with their related
expenses (bad debts).
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53.
From a balance sheet perspective, the percentage-of-receivables method is typically
preferable because assets (net accounts receivable) are reported closer to their net
realizable value.
54.
The percentage-of-credit-sales method (income statement method) is allowed only if
amounts do not differ significantly from estimates using the percentage–of-receivables
method.
Multiple Choice Questions
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55.
Which of the following best describes credit sales?
56.
Credit sales are recorded as:
57.
A company provides services on account. Indicate how this transaction would affect (1)
assets, (2) stockholders’ equity, and (3) revenues.