Introduction to Financial Accounting, 10e (Horngren)
Chapter 6 Accounting for Sales
Learning Objective 6.1 Questions
6.1-1) Mason Manufacturing got a long term contract to provide services for the Medina Department of
Defense. In 20X6, the 4–year contract is set for 160 million dollars cash. Services are to be provided evenly
over 20X6 through 20X9.
A) In 20X6 Mason should recognize no revenue.
B) In 20X6 Mason should recognize 160 million in revenue.
C) In 20X7 Mason should recognize no revenue.
D) In 20X7 Mason should recognize 40 million in revenue.
E) In 20X7 Mason should recognize 160 million in revenue.
6.1-2) In order for revenue to be recognized,
A) goods or services must be delivered.
B) cash or an asset virtually assured of being converted into cash must be received.
C) goods or services must be delivered and cash or an asset virtually assured of being converted into cash
must be received.
D) cash must be received.
E) goods or services must be delivered and cash must be received.
6.1-3) Why is the timing of revenue recognition important?
A) The cash flow statement depends on proper timing.
B) Net income depends on proper timing.
C) Assets will be in error without proper timing of revenue.
D) Timing of revenue must be known in order to expense costs in advance of sales.
E) Investors need to know when gains and losses are taken.
6.1-4) Miller Publishing wants to apply the percentage of completion method to recognize magazine
subscriptions. However, the accountant is not sure whether Miller Publishing is meeting GAAP
expectations. It is appropriate for Miller Publishing to apply the percentage of completion method if all
EXCEPT which of the following are evident?
A) Progress measures are dependable.
B) Contract obligations are precise and clear.
C) The buyer has agreed to abide by this method of revenue recognition.
D) Both buyer and seller are expected to meet their obligations.
E) The seller has delivered the goods to the customer.
6.1-5) For a magazine company, revenues are recognized when cash is received from the customer before
delivery of the magazine.
6.1-6) Revenue is generally recognized at the point of sale.
6.1-7) Revenue recognition relies only on the principle of receiving cash or an asset virtually assured of
being converted into cash.
6.1-8) What are the major characteristics of sales revenue recognition?
Learning Objective 6.2 Questions
6.2-1) Assume the periodic inventory system. Jostle Juggling sold inventory to Clarsky Circus for $9,000
cash. Which of the following is the journal entry to be made by Jostle Juggling?
A) Cost of Goods Sold 9,000
Sales 9,000
B) Cash 9,000
Inventory 9,000
C) Accounts Receivable 9,000
Sales 9,000
D) Cash 9,000
Sales 9,000
E) Cash 9,000
Accounts Payable 9,000
6.2-2) Assume the periodic inventory system. Cayla Company sold inventory to Clarkson Company for
$2,000 with agreement from Clarkson that payment will be made at the end of the month. Which of the
following is the journal entry to be made by Cayla Company?
A) Cost of Goods Sold 2,000
Sales 2,000
B) Cash 2,000
Inventory 2,000
C) Accounts Receivable 2,000
Sales 2,000
D) Cash 2,000
Sales 2,000
E) Cash 2,000
Accounts Payable 2,000
6.2-3) Seaside Company gave inventory to Ocean Industries to settle short–term credit for $4,000. Which
of the following is the journal entry to be made by Seaside Company?
A) Accounts Payable 4,000
Sales 4,000
B) Cash 4,000
Sales 4,000
C) Accounts Receivable 4,000
Sales 4,000
D) Sales 4,000
Accounts Payable 4,000
E) Accounts Payable 4,000
Inventory 4,000
6.2-4) The difference between gross sales and net sales may include
A) bad debts expense.
B) sales returns.
C) trade discounts.
D) cost of goods sold.
E) purchase returns.
6.2-5) For a newspaper subscription, sales is always credited when cash is received from the customer.
6.2-6) Revenue is generally recognized at the point of sale with a debit.
6.2-7) If a good customer buys on credit and the firm records an increase to accounts receivable, there is
revenue recognition.
6.2-8) When recognizing and earning revenue, a company cannot accept goods or services for a sale since
the value of the good or service sold is not equivalent to the good or service received.
Learning Objective 6.3 Questions
6.3-1) What is one possible reason why the account Sales Returns and Allowances needs to be established
as a contra account?
A) So that managers can keep a running balance of returned goods in order to be able to sell the damaged
goods to the employees of the organization as an incentive
B) So that managers can produce more goods when goods get returned in order to hit monthly bonus
levels
C) So that managers can make adjustments to manufacturing when goods are returned for defective
reasons
D) So that factory foremen can manage when invoices are paid
E) So that factory foremen can control the amount of credit they grant customers
6.3-2) Assume the periodic inventory system. Madison Manufacturing gave a 4% trade discount to
Tristan Company when it sold inventory for cash that normally sells for $12,000. Which of the following
is the journal entry to be made by Madison Manufacturing?
A) Cash 11,520
Sales 11,520
B) Cash 11,520
Trade Discount 480
Sales 12,000
C) Cash 11,520
Trade Discount Payable 480
Sales 12,000
D) Cash 12,000
Trade Discount 480
Sales 11,520
E) Cash 12,000
Trade Discount Receivable 480
Sales 11,520
6.3-3) Assume the periodic inventory system. Krinkle Company sold inventory on account for $500 on
May 8, 20X9, with terms of 2/10, n/30. On May 16, 20X9, the appropriate payment was received from the
customer. Which of the following is the journal entry to record the March 16 transaction on Krinkle’s
books?
A) Cash 500
Accounts Receivable 500
B) Cash 490
Cash Discount on Sales 10
Accounts Receivable 500
C) Cash 490
Sales 10
Accounts Receivable 500
D) Cash 500
Cash Discount on Sales 10
Accounts Receivable 490
E) Cash 500
Sales 10
Accounts Receivable 490
6.3-4) Trade discounts
A) apply one or more reductions to the gross selling price for a particular class of customers in
accordance with a company’s management policies.
B) are offered in order to be competitive.
C) are offered to encourage certain customer behavior (to encourage early orders).
D) are not detailed on the income statement (gross sales revenue is shown net of trade discounts).
E) All of the above statements are true regarding trade discounts.
6.3-5) Assume the periodic inventory system. Sammy Company sold inventory on account for $300. A
week later, the inventory was returned and a full credit was given to the customer. Which of the
following would be Sammy’s journal entry to record the return of the inventory?
A) Cash 300
Accounts Receivable 300
B) Sales 300
Accounts Receivable 300
C) Sales Discounts 300
Accounts Receivable 300
D) Sales Returns & Allowances 300
Sales 300
E) Sales Returns & Allowances 300
Accounts Receivable 300
6.3-6) Assume the periodic inventory system. Nicolla Company sold inventory on account for $6,000. A
week later, the inventory was returned and a cash refund was given to the customer. Nicolla’s journal
entry to record the return of the inventory would be which of the following?
A) Cash 6,000
Accounts Receivable 6,000
B) Sales 6,000
Accounts Receivable 6,000
C) Sales Discounts 6,000
Cash 6,000
D) Sales Returns & Allowances 6,000
Sales 6,000
E) Sales Returns & Allowances 6,000
Cash 6,000
6.3-7) Wayne Company just purchased merchandise costing $700, which has payment terms of 2/10, n/45.
Wayne Company is uncertain whether to take advantage of the discount. What is the annual interest rate
implicit in the cash discount, assuming a 365–day year?
A) 2.0%
B) 3.0%
C) 16.2%
D) 20.9%
E) 21.3%
6.3-8) Payne Industries can borrow money from the local bank at 14%. The company just acquired
inventory costing $2,900, which has terms of 2/10, n/30. Assuming a 365–day year, which of the following
statements is true?
A) Do not pay within the discount period since the effective rate of the discount is 37.2%, while the cost to
borrow money is 14%.
B) Pay within the discount period since the effective rate of the discount is 37.2%, while the cost to
borrow money is 14%.
C) Do not pay within the discount period since the effective rate of the discount is 24%, while the cost to
borrow money is 14%.
D) Pay within the discount period since the effective rate of the discount is 24%, while the cost to borrow
money is 14%.
E) Do not pay within the discount period since the 2% discount is less than the 14% cost to borrow
money.
6.3-9) Which of the following statements is true?
A) Trade discounts and sales returns and allowances are listed on the income statement as deductions
from gross sales.
B) Reports to shareholders often omit the details of revenue and show only net revenue.
C) Cash discounts are listed on the income statement as an expense of doing business.
D) “Turnover” is commonly used in the United States to refer to net sales revenue.
E) Cash discounts must appear on cash flow statements.
6.3-10) Higgins Company accepts bank cards, which charge a fee of 4% on sales. The company had gross
sales of $60,000, of which 25% were cash sales and the remainder was credit sales that are solely
attributable to bank cards. Which of the following is the journal entry for Higgins Company?
A) Cash 58,200
Sales 58,200
B) Cash 15,000
Accounts Receivable 43,200
Sales 58,200
C) Cash 57,600
Cash discounts for Bank Cards 2,400
Sales 60,000
D) Cash 58,200
Cash Discounts for Bank Cards 1,800
Sales 60,000
E) Cash 15,000
Accounts Receivable 43,200
Cash Discounts on Bank Cards 1,800
Sales 60,000
6.3-11) Thompson Manufacturing sold inventory to a customer for $400. The customer used a VISA bank
card, which charges Thompson a 3% fee. What asset results from this sale?
A) Accounts Receivable of $388
B) Cash of $400
C) Cash of $388
D) Sales of $388
E) Sales of $400
6.3-12) White Enterprises sold $100,000 of sales in January, however customers returned $10,000 of goods
to White Enterprises during the month. In addition, White Enterprises gave cash discounts of $1,000 to its
customers. The beginning balance of the allowance for uncollectible accounts was $2,000 and the
company uses the aging of accounts receivable to account for uncollectible accounts. What is the net sales
figure for the month of January for White Enterprises?
A) $89,000
B) $90,000
C) $92,000
D) $91,000
E) $100,000
6.3-13) A sales return occurs when a buyer returns merchandise to the seller, and a sales allowance is
when the seller allows a lower price to be charged to the customer.
6.3-14) There are no contra accounts on the income statement.
6.3-15) Net sales is always equal to total sales revenue less sales returns and allowances.
6.3-16) Net sales is equal to total sales revenue plus sales returns and allowances and sales discounts.
6.3-17) If a company normally sells merchandise for $5,000, but allows a $200 trade discount, then the
company would state that its revenue on this transaction was $4,800.
6.3-18) The credit terms 2/4, n/30 means that the customers may take a 4% cash discount if they pay
within 30 days.
6.3-19) The credit terms 2/10, n/30 means that the customers may take a 2% cash discount if they pay
within 10 days.
6.3-20) Companies should always take advantage of cash discounts even if they have to borrow money
from the bank to do so.
6.3-21) Retailers accept bank cards such as VISA and Master Card in order to get cash immediately rather
than wait for the customers to pay in due course.
6.3-22) A company accepting a bank card such as VISA or Master Card does not have the responsibility of
collecting cash on account.
6.3-23) On February 27, 20X9, Best Appliances Ever agreed to sell 60 refrigerators to a local home
construction company. The sales contract stated that the normal selling price of the refrigerators was $500
each, but a 4% trade discount was given due to the size of the order. The terms of the sales are 2/10, n/30.
The refrigerators are to be delivered on March 20, 20X9. The invoice was dated March 20, 20X9. The
customer paid the appropriate amount on March 28.
A. What is the gross revenue that Best Appliances Ever should recognize in June 20X9?
B. What is the net revenue that Best Appliances Ever should recognize in June 20X9?
6.3-24) The following information pertains to results obtained during the month of October 20X9 for
Hawkins Hearing Center:
Sales Returns and Allowances $ 21,000
Gross Sales 720,000
Cash Discounts 15,000
Of the gross sales, $245,000 were sales made to customers who used their bank cards. The bank card
company charged Hawkins Hearing Center a 3% fee.
Prepare the revenue section of the income statement for Hawkins Hearing Center for the month ended
October 31, 20X9.
6.3-25) Our House is a manufacturer of furniture. On June 16, 20X9, Our House received an order from
Old Fashioned, Inc., for 15 living room sets at $1,500 per set. The furniture was delivered by Our House
to Old Fashioned, Inc., on June 30, 20X9, at which time Our House billed Old Fashioned under the terms
2/30, n/60. Old Fashioned, Inc., paid Our House on July 25. Assume Our House uses a periodic inventory
system.
Prepare the appropriate journal entries for Our House as of the following dates:
a. June 16
b. June 30
c. July 25
Learning Objective 6.4 Questions
6.4-1) Speyer Delivery, Inc., wishes to borrow $70,000 at 12% interest from the local bank. However, the
bank requires a compensating balance of 9%. The effective interest rate that Speyer Delivery, Inc., will
pay on the loan is which of the following?
A) 10.1%
B) 11.0%
C) 13.2%
D) 16.4%
E) 21.0%
6.4-2) Which of the following is not a procedure used to safeguard cash?
A) The serial numbers on the money are recorded and maintained.
B) The individuals who receive cash do not also disburse cash.
C) The individuals who handle cash do not have access to the accounting records.
D) Cash receipts are immediately recorded and deposited and are not used directly to make payments.
E) Disbursements are made by serially numbered checks and only upon proper authorization by
someone other than the person writing the check.
6.4-3) Which of the following statements is false?
A) Accepting credit will increase administrative costs.
B) Accepting credit will result in losses due to uncollectible accounts.
C) Most small retailers are unwilling to accept any level of credit risk.
D) Credit sales normally will cause an increase in sales revenue.
E) Credit risks can vary greatly among industries.
6.4-4) Okoye Landscaping is considering whether to accept credit sales. The company has determined
that by allowing credit sales, the additional revenue from the credit sales would be $60,000. Cash sales
will be unaffected. The company has a gross profit percentage of 30%. The additional administrative cost
associated with allowing credit sales is $10,000. The company expects bad debts to be 8% of credit sales.
Which of the following statements is true with respect to the decision to allow credit?
A) The company should allow credit sales because the company’s gross profit will increase by $18,000
while the costs of credit will be $14,800.
B) The company should not allow credit sales because the company’s revenue will increase by $60,000
while the costs of credit will be $14,800.
C) The company should not grant credit sales because the company’s profit will increase by $60,000 while
the costs of allowing credit will be $14,800.
D) The company should allow credit sales because the company’s revenue will increase by $60,000 while
the credit costs are $11,440.
E) The company should allow credit sales because the company’s profit will increase by $18,000 while the
credit costs will be $11,440.
6.4-5) Internal controls are often implemented to guard against theft of cash. To cover the theft of $500
cash, which journal entry might an accountant perform to best cover the theft?
A) Cash $500
Inventory $500
B) Petty Cash $500
Cash $500
C) Wage and Salary Expense $500
Cash $500
D) Cash $500
Wage and Salary Expense $500
E) Accounts Receivable $500
Cash $500
6.4-6) Apple Construction Company has several assets on its balance sheet. The accountant is trying to
decipher which assets belong in the Cash account. From the list of assets below, which asset should NOT
be included in the Cash account?
A) Corporate commercial paper due in 90 days from purchase
B) A certificate of deposit with a 60–day term
C) The company’s savings account
D) U.S. Treasury bills with a 120 day maturity
E) The company’s checking account
6.4-7) A compensating balance is the required minimum cash balance on deposit when money is
borrowed from the bank.
6.4-8) Cash equivalents are highly liquid long–term investments that can easily be converted into cash.
6.4-9) A bank reports a customer’s deposit as a credit to cash.
Learning Objective 6.5 Questions
6.5-1) Lola Industries has found that 2% of credit sales turn into bad debts and it costs the company
$2,000 in administration expenses per year to manage the bad debts. Lola Industries obtains $30,000 of
credit sales each year that it would not otherwise obtain if it did not offer credit. In addition, the $30,000
of credit sales earns Lola Industries $12,000 per year. What is the surplus (or deficit) of continuing to offer
credit to its customers?
A) $10,000
B) $12,000
C) $2,000
D) $9,400
E) $2,600
6.5-2) Kylo Company generated $100,000 in credit sales during 20X9. In February 2X10, Kylo realized that
$13,500 of the accounts receivable generated from the 20X9 credit sales were uncollectible. Kylo seldom
experiences bad debts losses; therefore, it used the specific write–off method. Using the matching
principle, what is the effect on 2X10 and 20X9 net income as a result of the write–off?
A) 2X10 net income is understated by $13,500, while 20X9 net income is overstated by $13,500.
B) 2X10 net income is overstated by $13,500, while 20X9 net income is understated by $13,500.
C) 2X10 net income is neither overstated nor understated, but 20X9 net income is understated by $13,500.
D) 2X10 net income is overstated by $13,500, but 20X9 net income is neither overstated nor understated.
E) There is no effect on either year’s net income as revenues and expenses are properly matched.
Table 6–1
Brooser Company has a December 31 year–end. On November 28, 20X9, the company sold inventory for
$600 on account with the terms 2/10, n/30. On February 28, 2X10, the company recognized the account as
uncollectible.
6.5-3) Referring to Table 6–1, if Brooser Company uses the specific write–off method, what can be said
with respect to the matching principle?
A) The matching principle is not violated using the specific write–off method.
B) 20X9 earnings are overstated by $600, and 2X10 earnings are understated by $600.
C) 20X9 earnings are understated by $600, and 2X10 earnings are overstated by $600.
D) 20X9 earnings are overstated by $600, and 2X10 earnings are overstated by $600.
E) 20X9 earnings are understated by $600, and 2X10 earnings are understated by $600.
6.5-4) Referring to Table 6–1, what is the journal entry for Brooser Company on February 28, 2X10, if the
company uses the specific write–off method?
A) Accounts Receivable 600
Bad Debts Expense 600
B) Allowance for Uncollectible Accounts 600
Accounts Receivable 600
C) Bad Debts Expense 600
Allowance for Uncollectible Accounts 600
D) Accounts Receivable 600
Allowance for Uncollectible Accounts 600
E) Bad Debts Expense 600
Accounts Receivable 600
6.5-5) Which of the following is not an attribute of the Allowance for Uncollectible Accounts?
A) The balance in the account increases when an uncollectible account is written off.
B) It is on the asset side of the balance sheet.
C) It is a contra account.
D) The balance in the account increases when the adjusting entry for bad debts expense is recorded.
E) It normally has a credit balance.
Table 6–2
Triangle Company has sales of $900,000, of which 25% are cash sales and the remainder is on credit. As of
year–end, but before the bad debts adjustment, the Allowance for Uncollectible Accounts has a credit
balance of $300, and accounts receivable has a debit balance of $60,000.
6.5-6) Referring to Table 6–2, if bad debts are estimated to be 1.5% of credit sales, what journal entry will
Triangle Company need to prepare in order to estimate bad debts?
A) Allowance for Uncollectible Accounts 10,125
Accounts Receivable 10,125
B) Bad Debts Expense 9,525
Allowance for Uncollectible Accounts 9,525
C) Bad Debts Expense 10,425
Allowance for Uncollectible Accounts 10,425
D) Bad Debts Expense 10,125
Allowance for Uncollectible Accounts 10,125
E) Bad Debts Expense 13,500
Accounts Receivable 13,500
6.5-7) Referring to Table 6–2, if it is determined that the company will not collect from Banner and from
Parks for the amounts of $425 and $700, respectively, what journal entry would Triangle need to prepare?
A) Allowance for Uncollectible Accounts 1,125
Accounts Receivable, Banner 425
Accounts Receivable, Parks 700
B) Bad Debts Expense 1,125
Accounts Receivable, Banner 425
Accounts Receivable, Parks 700
C) Bad Debts Expense 1,125
Allowance for Uncollectible Accounts 1,125
D) Accounts Receivable, Banner 425
Accounts Receivable, Parks 700
Allowance for Uncollectible Accounts 1,125
E) Accounts Receivable, Banner 425
Accounts Receivable, Parks 700
Bad Debts Expense 1,125
6.5-8) Which of the following statements associated with the allowance method for bad debts is false?
A) The write–off of an uncollectible account does not affect the accounts receivable subsidiary ledger.
B) The write–off of an uncollectible account does not affect the total amount of current assets.
C) The write–off of an uncollectible account does not affect current liabilities.
D) The write–off of an uncollectible account does not affect the income statement.
E) The write–off of an uncollectible account does not affect stockholders’ equity.
6.5-9) The estimation of bad debts expense, using the allowance method, has what effect on the balance
sheet?
A) It has no effect on assets and decreases stockholders’ equity.
B) It decreases assets and decreases stockholders’ equity.
C) It increases assets and increases stockholders’ equity.
D) It decreases assets and increases stockholders’ equity.
E) It increases assets and decreases stockholders’ equity.
6.5-10) The write–off of a specific account for bad debts has what effect on the balance sheet under the
allowance method?
A) It has no effect on total assets or stockholders’ equity.
B) It decreases assets and decreases stockholders’ equity.
C) It increases assets and decreases stockholders’ equity.
D) It decreases assets and has no effect on stockholders‘ equity.
E) It has no effect on assets and decreases owner’s equity.
6.5-11) A bad debts recovery has what effect on the balance sheet under the allowance method for bad
debts?
A) It has no effect on total assets or stockholders’ equity.
B) It decreases assets and decreases stockholders’ equity.
C) It increases assets and decreases stockholders’ equity.
D) It decreases assets and has no effect on stockholders‘ equity.
E) It has no effect on assets and decreases owner’s equity.
6.5-12) The accounts receivable subsidiary ledger
A) is not effected by the write–off of individual accounts.
B) provides the supporting detail (i.e., individual customer names and amounts owed) for the general
ledger account “Accounts Receivable.”
C) is kept for both the “Accounts Receivable” and the “Allowance for Uncollectible Accounts” accounts.
D) is only kept by companies that use the allowance method of estimating bad debts.
E) All of the above are true statements.
Table 6–3
Knapsack Company has performed the following year–end analysis of its accounts receivable:
Total 1–30 Days 31–60 Days 61–90 Days Over 90 Days
$72,000 $45,000 $14,000 $8,000 $5,000
The company had sales of $850,000, of which 20% were cash sales. As of year–end, the balance in
Allowance for Uncollectible Accounts before adjusting for bad debts was a $400 debit. Knapsack
Company has estimated the following bad debts percentages:
1–30 days 6%
31–60 days 15%
61–90 days 40%
Over 90 days 75%
Ending Accounts Receivable 10%
Total Credit Sales 1.5%
6.5-13) Referring to Table 6–3, what is the journal entry that Knapsack Company will make if it estimates
bad debts by using a percentage of credit sales?
A) Bad Debts Expense 9,800
Allowance for Uncollectible Accounts 9,800
B) Bad Debts Expense 10,200
Allowance for Uncollectible Accounts 10,200
C) Bad Debts Expense 10,600
Allowance for Uncollectible Accounts 10,600
D) Bad Debts Expense 12,350
Allowance for Uncollectible Accounts 12,350
E) Bad Debts Expense 12,750
Allowance for Uncollectible Accounts 12,750
6.5-14) Referring to Table 6–3, what is the balance in the Allowance for Uncollectible Accounts after
Knapsack Company estimates bad debts using a percentage of credit sales?
A) $9,800
B) $10,200
C) $10,600
D) $12,350
E) $12,750
6.5-15) Referring to Table 6–3, what is the balance in the Allowance for Uncollectible Accounts if
Knapsack Company estimates bad debts using a percentage of ending accounts receivable?
A) $6,800
B) $7,200
C) $7,600
D) $85,000
E) $84,600
6.5-16) McDermott Company had total credit sales for the past year of $800,000. As of year–end, but
before estimating bad debts, the company had a $70,000 debit balance in accounts receivable and a $600
debit balance in the Allowance for Uncollectible Accounts. Upon examination of the accounts receivable,
it was found that 55% of the balance was 1–30 days old, 30% was 31–60 days old, 9% were 61–90 days old,
and 6% were over 90 days old. McDermott Company estimates the following bad debts percentages:
1–30 days 10%
31–60 days 25%
61–90 days 40%
Over 90 days 80%
Which of the following is the journal entry necessary to estimate bad debts using the aging method?
A) Bad Debts Expense 14,380
Accounts Receivable 14,380
B) Bad Debts Expense 14,380
Allowance for Uncollectible Accounts 14,380
C) Bad Debts Expense 14,980
Allowance for Uncollectible Accounts 14,980
D) Bad Debts Expense 15,580
Allowance for Uncollectible Accounts 15,580
E) Bad Debts Expense 16,180
Allowance for Uncollectible Accounts 16,180