Chapter 5—Sales and Receivables Key
1. Selling on credit protects a company from the risk that some of its receivables will never be collected.
2. Accounts receivable are shown on the balance sheet at their net realizable value.
3. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the
revenue of the period in which a sale on credit takes place.
4. A primary advantage of the allowance method to account for bad debts is that it supports the matching
principle.
5. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts
before those debts actually occur.
6. The account, “Allowance for Doubtful Accounts” is an expense account (the cost of making bad credit sales)
that is reported on the income statement.
7. Because the allowance method results in better matching, accounting standards require its use rather than the
direct write-off method, unless bad debts are immaterial.
8. The longer a customer’s account balance remains outstanding, the greater the likelihood that it will be
collected in the near future.
9. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts
receivable.
10. The higher the accounts receivable turnover the better because it indicates that the company is more quickly
collecting cash (through sales).
11. The lender (issuer) of a note recognizes a note payable on the balance sheet and interest expense on its
income statement.
12. The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income
statement.
13. If a company accepts a major credit card such as VISA from a customer, then the company is responsible
for the amount of the sale in a case of nonpayment from a cardholder.
14. The terms “realized” and “realizable” mean that the selling price is fixed and determinable and collectibility
is reasonably assured.
15. Net Sales = Total credit sales – Sales Discounts – Sales Returns and Allowances
16. Trade receivables represent a stronger legal claim against the debtor than do non-trade receivables.
17. The amount of interest paid is a function of three variables, the amount borrowed, the interest rate, and the
length of the loan period.
18. If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the
Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry for
bad debts.
19. A balance sheet approach to estimating bad debt expense is not permitted under GAAP (Generally Accepted
Accounting Principles).
20. A sale and its associated receivable are recorded only when the order, shipping, and billing documents are
all present.
21. The method of recording bad debts that results in a bad debt expense before the actual default is the
____________________.
22. According to the ____________________ principle, bad debt expense must be recorded in the period in
which the sale was made.
23. The ____________________ order is necessary for the buyer to be obligated to accept and pay for the
ordered goods.
24. The basis of accounting that recognizes revenue when it is realizable and earned is called the
____________________.
25. A(n) ____________________ categorizes the various accounts receivable amounts by the length of time
outstanding.
26. ____________________ are receivables that generally specify an interest rate and a maturity date at which
any interest and principal must be repaid.
27. The amount of money borrowed when a promissory note is issued is called the ____________________.
28. A(n) ____________________ is the buyer of receivables, who acquires the right to collect the receivables
and assumes the risk of uncollectibility.
29. Special forms of factoring are called ____________________.
30. Gross profit divided by net sales is called the ____________________ ratio.
31. The difference between the principal amount of a note and its maturity value is called
____________________.
32. To encourage prompt payment, sellers offer a(n) ____________________.
33. A sales invoice that bears the notation 2/10 means ____________________.
34. How efficiently a company is using the resources at its disposal is called ____________________.
35. Net sales is total sales less sales discounts and ________________.
36. Select the term that matches each of the following descriptions.
2. The difference between the principal amount of the note and
Fraction of
Maturity
5. The amount of cash the maker is to pay the payee on the
6. The length of time a note is outstanding—the period of time
between the date it is issued and the date the note is due to be
Maturity
37. Select the term that matches each of the following descriptions.
Sales
2. Reduction of price granted by the seller for a particular
Trade
38. Match each statement to the item listed below
Allowance for Doubtful
39. Match each statement to the item listed below
interest receivable).
6
3. A way to estimate bad debt expense.
4
2. Arise from transactions not involving inventory (e.g.,
4. Receivables that the company is not able to collect.
Percentage of
credit sales
3
deducting discounts and returns and allowances.
receivables
2
5. The amount of sales expected to be collectible after
Nontrade
the ordinary course of business
5
6. Money due from customers purchasing inventory in
40. Action Signs recorded credit sales of $10,000 on the gross method. Terms are 2/20, n/30. Select the correct
statement about the entry to record this sale.
41. A company receiving payment of a $20,000 accounts receivable within 10 days with terms of 2/10, n/30,
would record a sales discount of:
42. A company had sales of $40,000, sales discounts of $800, sales returns of $1,600 and commissions owed to
sales people of $600. Compute net sales.
1. Measure the return the company is earning on sales.
1
43. The following information was presented in the balance sheet of Acworth Pools as of December 31, 2012:
Trade accounts receivable, net of allowance for doubtful
accounts of $200,000
$1,700,000
Select the incorrect statement from the following.
44. What is the distinguishing characteristic between accounts receivable and notes receivable?
45. On December 15, 2012, the accounts receivable balance was $50,000 and the balance in the allowance for
doubtful accounts was $5,000. That morning, a $1,000 uncollected account was written-off. The net realizable
value of accounts receivable immediately after the write-off is:
46. Which one of the following is an accurate description of the Allowance for Doubtful Accounts?
47. If a company uses the direct write-off method of accounting for bad debts,
48. A company uses the direct write-off method to account for bad debts. What are the effects on the accounting
equation of the entry to record the write-off of a customer’s account balance?
49. All of the following are true for a company that uses the allowance method of accounting for bad debts,
EXCEPT:
50. Which one of the following statements is true if a company’s collection period for accounts receivable is
unacceptably long?
51. If a company uses the allowance method to account for doubtful accounts, when will the company’s
Stockholders’ equity decrease?
52. Which allowance method approach is considered to be an income statement approach to estimating bad
debts?
53. Which one of the approaches for the allowance procedure emphasizes the net realizable value of accounts
receivable on the balance sheet?
54. A company’s accounts receivable balance after posting net collections from customers for 2012 is $150,000.
Management feels that uncollected accounts should be based on the following aging of accounts receivable and
uncollected percentages. There are $100,000 that are 1-30 past due at 2% and $50,000 that are 31 to 60 days
past due at 10%. The net realizable value of the accounts receivable is
55. All Star Auto has an accounts receivable balance after posting net collections from customers for 2012 of
$180,000. The customers took advantage of sales discounts of $15,000. Management aged the accounts
receivable and estimate for uncollected account percentages as follows:
$90,000
Current at 2%
$50,000
1-30 days past due at 5%
$30,000
31-60 days past due at 10%
$10,000
60+ days past due at 25%
The net realizable value of the accounts receivable is
56. Beginning accounts receivable were $200,000 and ending accounts receivable were $300,000. Assuming
cash collections totaled $1,100,000, what were credit sales?
57. Alco Roofing Company’s beginning accounts receivable were $200,000 and ending accounts receivable
were $270,000. During the period, credit sales totaled $570,000, How much cash was collected from
customers?
58. A company had beginning accounts receivable of $175,000. All sales were on account and totaled $550,000.
Cash collected from customers totaled $650,000. Calculate the ending accounts receivable balance.
59. AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit)
$2,500,000
Sales returns and allowances
50,000
Accounts Receivable (December 31, 2012)
640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
20,000
Estimated amount of uncollected accounts based on aging analysis
45,000
Refer to AT&U Company. If the company estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt expense for
2012?
60. AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit)
$2,500,000
Sales returns and allowances
50,000
Accounts Receivable (December 31, 2012)
640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
20,000
Estimated amount of uncollected accounts based on aging analysis
45,000
Refer to AT&U Company. If the company estimates its bad debt to be 2% of net credit sales, what will be the balance in the Allowance for Doubtful
Accounts account after the adjustment for bad debts?
61. AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit)
$2,500,000
Sales returns and allowances
50,000
Accounts Receivable (December 31, 2012)
640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
20,000
Estimated amount of uncollected accounts based on aging analysis
45,000
Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as
bad debt expense for 2012?
62. AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit)
$2,500,000
Sales returns and allowances
50,000
Accounts Receivable (December 31, 2012)
640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
20,000
Estimated amount of uncollected accounts based on aging analysis
45,000
Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable
value of its accounts receivable after the adjustment for bad debt expense?
63. Allatoona Landing reported net credit sales of $1,250,000 and cost of goods sold of $900,000 for 2012. Its
beginning balance of Accounts Receivable was $175,000. The accounts receivable balance decreased by
$25,000 during 2012. Rounded to two decimal places, what is the company’s accounts receivable turnover rate
for 2012?
64. The Allowance for Doubtful Accounts represents:
65. Which of the following statements is true regarding the two allowance procedures used to estimate bad
debts?
66. A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year
$2,400,000
Accounts Receivable—December 31, 2012
410,000
Allowance for Doubtful Accounts—December 31, 2012
55,000
Bad debt expense for the year
70,000
Refer to A2Z Events. What amount will the company show on its year-end balance sheet for the net realizable value of its accounts receivable?
67. A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year
$2,400,000
Accounts Receivable—December 31, 2012
410,000
Allowance for Doubtful Accounts—December 31, 2012
55,000
Bad debt expense for the year
70,000
Refer to A2Z Events. What are the effects on the accounting equation when the company makes the adjustment to record bad debt expense using the
allowance method?
68. A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year
$2,400,000
Accounts Receivable—December 31, 2012
410,000
Allowance for Doubtful Accounts—December 31, 2012
55,000
Bad debt expense for the year
70,000
Refer to A2Z Events. What are the effects on the accounting equation when the company writes off a bad debt under the allowance method?
69. Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable—January 1, 2012
$ 350,000
Credit sales during 2012
1,200,000
Collections from credit customers during 2012
850,000
Customer accounts written off as uncollected during 2012
10,000
Allowance for doubtful accounts—January 1, 2012
35,000
Estimated uncollected accounts based on an aging analysis
50,000
Refer to Accelerated Solutions. What is the balance of Accounts Receivable at December 31, 2012?
70. Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable—January 1, 2012
$ 350,000
Credit sales during 2012
1,200,000
Collections from credit customers during 2012
850,000
Customer accounts written off as uncollected during 2012
10,000
Allowance for doubtful accounts—January 1, 2012
35,000
Estimated uncollected accounts based on an aging analysis
50,000
Refer to Accelerated Solutions. If the aging method is used to estimate bad debts, what amount should be recorded as bad debt expense for 2012?
71. Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable—January 1, 2012
$ 350,000
Credit sales during 2012
1,200,000
Collections from credit customers during 2012
850,000
Customer accounts written off as uncollected during 2012
10,000
Allowance for doubtful accounts—January 1, 2012
35,000
Estimated uncollected accounts based on an aging analysis
50,000
Refer to Accelerated Solutions. If the aging approach is used to estimate bad debts, find the balance in the Allowance for Doubtful Accounts after
the bad debt expense adjustment.
72. A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable—January 1, 2012
$455,000
Credit sales during 2012
900,000
Collections from credit customers during 2012
825,000
Customer accounts written off as uncollected during 2012
15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts)
2,100
Estimated uncollected accounts based on an aging analysis
29,200
Refer to A-One Construction. What is the balance of Accounts Receivable at December 31, 2012?
73. A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable—January 1, 2012
$455,000
Credit sales during 2012
900,000
Collections from credit customers during 2012
825,000
Customer accounts written off as uncollected during 2012
15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts)
2,100
Estimated uncollected accounts based on an aging analysis
29,200
Refer to A-One Construction. If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2012?
74. A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable—January 1, 2012
$455,000
Credit sales during 2012
900,000
Collections from credit customers during 2012
825,000
Customer accounts written off as uncollected during 2012
15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts)
2,100
Estimated uncollected accounts based on an aging analysis
29,200
Refer to A-One Construction. If the aging approach is used to estimate bad debts, what should the balance in the Allowance for Doubtful Accounts
be after the bad debts adjustment?
75. A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit)
$2,100,000
Sales returns
150,000
Accounts Receivable (December 31, 2012)
420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
25,000
Estimated amount of uncollected accounts based on an aging analysis
75,000
Refer to A&B Foods. If the company estimates its bad debts at 4% of net credit sales, what amount will be reported as bad debt expense for 2012?
76. A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit)
$2,100,000
Sales returns
150,000
Accounts Receivable (December 31, 2012)
420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
25,000
Estimated amount of uncollected accounts based on an aging analysis
75,000
Refer to A&B Foods. If the company uses 4% of net credit sales to estimate its bad debts, what will be the balance in the Allowance for Doubtful
Accounts account after the adjustment for bad debts?
77. A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit)
$2,100,000
Sales returns
150,000
Accounts Receivable (December 31, 2012)
420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
25,000
Estimated amount of uncollected accounts based on an aging analysis
75,000
Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad debts, what amount will be reported as bad
debt expense for 2012?
78. A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit)
$2,100,000
Sales returns
150,000
Accounts Receivable (December 31, 2012)
420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012)
25,000
Estimated amount of uncollected accounts based on an aging analysis
75,000
Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad debts, what will be the net realizable value of
its accounts receivable after the adjustment for bad debt expense?
79. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of
$40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were
$500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to $78,200.
The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.
Refer to the Ace Computing Company. The entry to recognize the write-off of the specific uncollected
accounts will act to:
80. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of
$40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were
$500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to $78,200.
The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.
Refer to the Ace Computing Company. The amount of bad debts expense recognized in the 2012 income
statement will be:
81. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of
$40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were
$500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to $78,200.
The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.
Refer to the Ace Computing Company. The entry required to recognize the bad debts expense for 2012 will act
to:
82. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of
$40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were
$500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to $78,200.
The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.
Refer to the Ace Computing Company. The net realizable value of receivables appearing on the 2012 balance
sheet will amount to:
83. On December 1, 2012, Anson’s Drug Store concluded that a customer’s $325 account receivable was
uncollected and that the account should be written off. What effect will this write-off have on the company’s
2012 net income and balance sheet totals assuming the direct write-off method is used to account for bad
debts?
84. During 2012, the accounts receivable turnover rate for Adaptive Equipment increased from 10 to 15 times
per year. Which one of the following statements is the most likely explanation for the change?
85. Allgood Pet Supplies reported net credit sales of $3,200,000 and cost of goods sold of $2,600,000 for 2012.
On January 1, 2012, accounts receivable was $450,000. Amounts owed by customers increased by $50,000
during 2012. Rounding to two decimal places, what is the company’s accounts receivable turnover rate for
2012?
86. The principal amount of a note receivable plus the interest due is referred to as the note’s
87. How will the lender of the promissory note record the note on its books?