Chapter 6: Cash and Receivables
58. Theoretically, the amount of estimated future returns and allowances on credit sales should be recorded during the
period of the sale so as not to overstate sales and ending accounts receivable. In practice, these estimates are not
recorded by most companies because
a.
the amount of such returns and allowances tends to fluctuate too greatly from period to period.
b.
there is too much uncertainty surrounding such estimates.
c.
such estimates are not allowed according to generally accepted accounting principles.
d.
the amount of such returns and allowances is usually not material.
d
1
Challenging
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59. On August 1, Party Hearty Company sold merchandise on credit with a list price of $6,300. Terms were 2/10, n/30.
Which of the following entries correctly applies the indicated method to receive the appropriate customer payment on
August 15?
a.
Net Price Method
Cash 6,174
Sales Revenue 126
Accounts Receivable 6,300
b.
Gross Price Method
Cash 6,300
Accounts Receivable 6,300
c.
Net Price Method
Cash 6,174
Accounts Receivable 6,174
d.
Gross Price Method
Cash 6,300
Sales Revenue 126
Accounts Receivable 6,174
1
Challenging
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United States – BUSPROG – BUSPROG: Analytic
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b
60. February 1, Adams Company sold merchandise on credit with a list price of $8,400. Terms were 3/15, n/45. Which of
the following entries correctly applies the indicated method to receive the appropriate customer payment on February
12?
a.
b.
c.
d.
1
Challenging
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United States – BUSPROG – BUSPROG: Analytic
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c
61. When aging of accounts receivable is used, each age group is multiplied by its own estimated uncollectible percentage
to determine each age group’s estimated uncollectible amount. The sum of the amounts thus determined is the
a.
amount of bad debt expense for the year.
b.
required ending balance for the allowance for doubtful accounts.
c.
increase to the existing credit balance in the allowance for doubtful accounts.
d.
amount that should be written off as uncollectible for the year.
1
Moderate
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b
62. Which of the following methods is not an appropriate method for estimating bad debt expense for companies whose
uncollectible accounts are material?
a.
percentage of net credit sales
b.
percentage of outstanding accounts receivable
c.
aging of accounts receivable
d.
direct write-off method
d
1
Easy
ACCT.WHAL.16.6.5 – LO: 6.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
63. An advantage of basing bad debt expense on the historical relationship between bad debts and net credit sales is that
a.
it provides the best estimate of the net realizable value of accounts receivable.
b.
it provides the best information to the credit department to use in its collection activities.
c.
it best adheres to principle of cause and effect recognition.
d.
it considers the balance in the allowance account when making the bad debt expense estimate.
c
1
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64. When an uncollectible account is written off under the allowance method, the effect of the write-off is to
a.
decrease net income.
b.
increase working capital.
c.
increase the accounts receivable net realizable value.
d.
leave total assets unchanged.
d
1
Moderate
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United States – BUSPORG: Analytic
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65. Bad debt expense is normally reported on the income statement as a(n)
a.
operating expense.
b.
element of cost of goods sold.
c.
financial expense in the other items section.
d.
contra-revenue amount.
a
1
Easy
ACCT.WHAL.16.6.5 – LO: 6.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
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66. When a company writes off an account receivable using the direct write-off method, the effect of this write-off on the
financial statements is to
a.
increase the net realizable value of accounts receivable.
b.
reduce total expenses.
c.
reduce total assets.
d.
increase working capital.
c
1
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67. Which of the following is not a disadvantage of using the direct write-off method for recording uncollectible
accounts?
a.
Increases the cost of record keeping
b.
violates the expense recognition principle
c.
allows manipulation of earnings
d.
overstates the net realizable value of receivables
a
1
Easy
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United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
68. For any given company, the amount of bad debt expense may be based on the historical relationships between actual
bad debts incurred and
Accounts
Accounts
Set
Receivable
Sales
Payable
I.
Yes
No
No
II.
No
No
Yes
III.
No
Yes
No
IV.
Yes
Yes
No
a.
Set I
b.
Set II
c.
Set III
d.
Set IV
d
1
Moderate
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United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
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69. During 2016, a company wrote off $7,500 in uncollectible accounts receivable. At the end of the year, bad debt
expense was estimated using a percent of gross sales. In 2017, the company collected $1,500 from an account that was
written off in 2016. Recording this collection would include
a.
a debit to Retained Earnings.
b.
a credit to Allowance for Doubtful Accounts.
c.
a decrease to gross receivables.
d.
an increase to net receivables.
b
1
Moderate
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United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
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70. Trainor Company estimates bad debt expense using a percentage of credit sales (5%). The company began its current
year with an $8,500 balance in the allowance account. During the current year, $10,500 of accounts receivable were
written off, and $1,200 of previously written off accounts were collected. Credit sales for the year were $255,000. The
bad debt expense for the year was
a.
$12,750
b.
$11,550
c.
$10,500
d.
$8,500
a
1
Moderate
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United States – BUSPORG: Analytic
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71. Splitter Corporation had total sales in the current year of $750,000 and credit sales of $650,000. The Accounts
Receivable balance was $450,000 on the balance sheet date and the Allowance for Doubtful Accounts had a credit
balance of $10,000 before adjusting entries. Bad debt expense is estimated as 2% of credit sales. The adjusting entry
to record estimated bad debt expense would include a
a.
$13,000 debit to Bad Debt Expense.
b.
$13,000 debit to Allowance for Doubtful Accounts.
c.
$13,000 debit to Bad Debt Expense
d.
$13,000 credit to Allowance for Doubtful Accounts.
a
1
Easy
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United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
72. Under the allowance method of recording bad debts, which of the following entries, if any, would be made to write off
actual uncollectible accounts of $5,500?
a.
Allowance for Doubtful Accounts 5,500
Accounts Receivable 5,500
b.
Bad Debt Expense 5,500
Allowance for Doubtful Accounts 5,500
c.
Bad Debt Expense 5,500
Accounts Receivable 5,500
d.
No entry is needed.
a
1
Easy
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73. Based on the following information:
Sales returns and allowances (credit sales)
$ 25,000
Cash sales
1,200,000
Unadjusted balance in Allowance for Doubtful Accounts
1,000
credit
Credit sales
2,535,000
If bad debts are estimated to be 3% of net credit sales, the adjusting entry to recognize uncollectible accounts will
include a debit to expense for
a.
$76,020
b.
$75,270
c.
$76,050
d.
$75,300
d
1
Moderate
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United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
74. When accounting for uncollectible accounts,
a.
if the percentage of sales method is in use, any existing balance in the Allowance for Doubtful Accounts is the
amount used in the adjusting entry.
b.
in current accounting practice, the most frequently used method of recognizing bad debts is the direct write-off
method.
c.
writing off a specific receivable does not reduce the current ratio if the percentage of ending accounts
receivable method is in use.
d.
an aging analysis results in reporting accounts receivable at their historical cost on the balance sheet.
c
1
Moderate
ACCT.WHAL.16.6.5 – LO: 6.5
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
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75. Based on the following information:
Credit sales
$172,000
Collections on accounts receivable during the year
170,000
Cash sales
810,000
Unadjusted debit balance in Allowance for Doubtful Accounts
40
Sales returns and allowances for credit sales
2,000
Accounts receivable, beginning of the year
14,000
If expected bad debts are estimated to be 1 1/2% of ending accounts receivable, the adjusting entry to recognize bad
debts will include a debit to Bad Debt Expense for
a.
$170
b.
$190
c.
$210
d.
$250
d
1
Moderate
United States – BUSPORG: Analytic
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76. A disadvantage of basing bad debt expense on the historical relationship between actual bad debts and the
outstanding accounts receivable balance at the end of the year is that
a.
it may not recognize the cause and effect relationship between expenses and revenues.
b.
it may not result in a reasonable estimate of the net realizable value of receivables.
c.
it is not a generally accepted accounting procedure.
d.
it is an income statement approach.
a
1
Moderate
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77. During 2016, Blueberry, Inc. recovered and collected $4,200 from an account that had been written off for over a year.
At the end 2016, prior to the adjusting entry for bad debt expense, Blueberry, Inc.’s balances for Accounts Receivable
and Allowances for Doubtful Accounts were $750,000 (debit) and $5,500 (credit), respectively. After the bad debt
expense entry was posted, the net realizable value of accounts receivable was $675,000. Bad debt expense for the
2016 was
a.
$69,500
b.
$73,200
c.
$79,200
d.
$80,500
a
1
Challenging
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78. Pineapple’s Fruit Smoothies began the year with a $4,200 credit balance in its Allowances for Doubtful Accounts.
During the year, it accrued $21,500 of bad debt expense and wrote off accounts totaling $28,000. At year-end, a
percentage of the outstanding accounts receivable indicated that a $4,800 allowance should be provided for on that
date. The year-end adjustment for bad debt expense should be
a.
$7,100
b.
$4,800
c.
$3,000
d.
$2,300
a
1
Moderate
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United States – BUSPROG – BUSPROG: Analytic
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79. Wholesale Stuff, Inc. sells to retailers on account. Sales for the year totaled $9,900,000. The company uses the aging
method for determining bad debt expense. The aging report and related information includes:
Time
Outstanding
Gross
Balance
Percentage
Uncollectible
< 30 days
$660,000
1%
30-60 days
330,000
5%
< 60 days
110,000
10%
The unadjusted balance in the allowance account at year end is $1,700 credit. What is the amount of bad debt expense
for the year?
a.
$30,690
b.
$32,400
c.
$34,100
d.
$35,800
b
1
Moderate
United States – BUSPROG – BUSPROG: Analytic
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80. Wholesale Stuff, Inc. sells to retailers on account. Sales for the year totaled $9,900,000. The company uses the aging
method for determining bad debt expense. The aging report and related information includes:
Time
Outstanding
Gross
Balance
Percentage
Uncollectible
< 30 days
$660,000
1%
30-60 days
330,000
5%
< 60 days
110,000
10%
The unadjusted balance in the allowance account at year end is $1,700 credit. What is the estimated net realizable
value of receivables at year end?
a.
$1,098,300
b.
$1,067,600
c.
$1,065,900
d.
$1,064,200
c
1
Moderate
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81. Freeman Corporation estimates uncollectible accounts using a percentage of outstanding accounts receivable. After
the year-end adjustment for bad debt expense was made, the company’s records reflected the following information:
Accounts written off
$ 1,600
Collection on accounts previously written off
300
Allowance for uncollectible accounts at January 1
1,700
Accounts receivable at December 31
100,000
Credit sales
900,000
Bad debt percentage
1.5%
The bad debt expense for the year was
a.
$1,100
b.
$1,400
c.
$1,500
d.
13,500
a
1
Moderate
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United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
82. Which method for estimating uncollectible accounts receivable is considered to be income-statement oriented?
a.
aging of accounts receivable method
b.
percentage of net sales method
c.
Direct write-off method
d.
percentage of outstanding accounts receivable method
b
1
Moderate
ACCT.WHAL.16.6.5 – LO: 6.5
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83. Which method for estimating uncollectible accounts receivable is considered to be balance-sheet oriented?
a.
Aging of accounts receivable method
b.
Percentage of net sales method
c.
Direct write-off method
d.
Gross receivables method
a
1
Moderate
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84. Which of the following is not a basic form of financing agreement to obtain cash from accounts receivable?
a.
assigning
b.
pledging
c.
deferring
d.
Factoring
c
1
Easy
ACCT.WHAL.16.6.6 – LO: 6.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
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85. If a company usually sells its accounts receivable, it records any factoring commissions as a(n)
a.
loss.
b.
expense.
c.
receivable.
d.
liability.
b
1
Easy
ACCT.WHAL.16.6.6 – LO: 6.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
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86. A company can record the transfer of accounts receivable as a sale if all of the following are true except
a.
the transferee obtains the right to exchange.
b.
the transferred assets have been isolated from the transferor.
c.
the transferor can repurchase the transferred assets before their maturity.
d.
the transferee obtains the risks of ownership.
c
1
Moderate
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87. A company transfers ownership control of accounts receivable in all of the following financing arrangements except
a.
Factoring receivables.
b.
Selling receivables.
c.
Pledging receivables.
d.
Securitizing receivables.
c
1
Easy
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88. When a company factors its accounts receivable, it
a.
enters into a lending agreement with the institution to receive cash on specific customer accounts.
b.
sells individual accounts to a financial institution.
c.
uses these accounts only as a collateral for a loan.
d.
transfers the accounts but retains title of the accounts until the loan is paid.
b
1
Easy
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89. What is the difference between pledging receivables and assigning receivables.
a.
Pledging involves selling the receivables; assigning involves using the receivables as collateral for a loan.
b.
Receivables are pledged without recourse; receivables are assigned with recourse.
c.
Receivables are pledged with recourse; receivables are assigned without recourse.
d.
There is no difference; these are two terms for the same type of financing arrangement.
d
1
Easy
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90. Which of the following is an example of a factoring agreement?
a.
Selling an individual account receivable to a bank
b.
Selling financial securities that are collateralized by accounts receivable
c.
Pledging an single large account receivable to a bank
d.
Assigning a group of accounts receivable as collateral for a loan
a
1
Easy
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91. When accounts receivable are assigned, the risk of ownership
a.
and title pass to the financing company.
b.
and the title are retained by the borrowing company.
c.
passes to the financing company, but the title is retained by the borrowing company.
d.
is retained by the borrowing company, but the title is passed to the financing company.
b
1
Easy
ACCT.WHAL.16.6.6 – LO: 6.4
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92. What journal entry format is appropriate if sales returns and allowances occur on factored accounts?
a.
Sales Returns and Allowances XX
Receivable from Factor XX
b.
Receivable from Factor XX
Factoring Expense XX
c.
Sales Returns and Allowances XX
Factoring Expense XX
d.
Factoring Expense XX
Sales Returns and Allowances XX
a
1
Easy
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93. The Trey Co. sells $75,000 of accounts receivable to a factor and receives 90% of the value of the factored accounts
less a 15% commission based on the gross amount of factored accounts receivable. After the journal entry to record
this factoring transaction is made, Trey Co.’s total assets will be
a.
reduced by $67,500.
b.
reduced by $7,500.
c.
reduced by $11,250.
d.
increased by $41,000.
c
1
Moderate
ACCT.WHAL.16.6.6 – LO: 6.4
United States – BUSPORG: Analytic
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94. When pledging accounts receivable
a.
title to the receivables reverts to the lender.
b.
the pledges are usually made with recourse.
c.
the pledge arrangements become the new valuation methodology entered in the accounting records.
d.
collection responsibility reverts to the lender.
b
1
Easy
ACCT.WHAL.16.6.6 – LO: 6.4
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95. O’Tole Co. reports assigned accounts receivable of $190,000 that relate to an unpaid note payable of $75,000. Correct
balance sheet disclosure is
a.
Current assets:
Accounts receivable assigned $190,000
Less: Note payable <75,000>
Net realizable receivable assigned $115,000
b.
Current assets:
Equity in accounts receivable assigned $115,000
c.
Current assets:
Accounts receivable assigned $190,000
Current liabilities:
Note payable $75,000
d.
Current assets:
Net realizable receivable assigned $115,000
Current liabilities:
Note payable $75,000
Less: Accounts receivable assigned <75,000>
$ -0-
c
1
Moderate
ACCT.WHAL.16.6.6 – LO: 6.4
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96. If the transferor of accounts receivable cannot meet all conditions for a sale, the transferor records the proceeds
received as a debit to Cash and records a corresponding credit to a(n)
a.
deferred revenue account.
b.
deferred credit account.
c.
liability account.
d.
asset account.
c
1
Easy
ACCT.WHAL.16.6.6 – LO: 6.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
97. Current GAAP requires a company to disclose the fair value of its financial instruments and to disclose all significant
concentrations of credit risk due to its financial instruments. The FASB’s rationale for this disclosure includes
allowing readers to
a.
better identify major customers.
b.
compute each company’s risk.
c.
better determine a company’s financial flexibility.
d.
compute liquidity ratios.
c
1
Moderate
ACCT.WHAL.16.6.7 – LO: 6.1
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98. Short-term noninterest-bearing notes receivable are usually recorded at their
a.
present value.
b.
net realizable value.
c.
principal value.
d.
maturity value.
d
1
Easy
ACCT.WHAL.16.6.7 – LO: 6.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
99. Recording short-term noninterest-bearing notes receivable at their maturity value
a.
overstates interest income and understates sales revenue.
b.
overstates sales revenue and understates interest income.
c.
correctly states sales revenue and interest income.
d.
is prohibited by GAAP.
b
1
Easy
ACCT.WHAL.16.6.7 – LO: 6.1
United States – BUSPROG – BUSPROG: Analytic
United States – Ohio – Default City – AICPA – FN-Decision Modeling
Exhibit 6-1
O’Martin & Lowry, Inc. accepted a $150,000, 8%, 90-day note receivable for services rendered to a client. Thirty days
later, O’Martin & Lowry discounted the note at a bank at 10%. Assume interest has not been recognized for the first
month.
100. Refer to Exhibit 6-1. The entry to record the proceeds from the sale of the note would include a
a.
debit to Notes Receivable for $150,000.
b.
debit to Cash for $145,000.
c.
credit to Interest Receivable for $1,000.
d.
credit to Interest Revenue for $1,000.
d
1
Moderate
ACCT.WHAL.16.6.7 – LO: 6.1
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
101. Refer to Exhibit 6-1. The entry to record the proceeds from the sale of the note would include a
a.
debit to Cash for $150,150.
b.
debit to Cash for $150,450.
c.
credit to Interest Receivable for $1,000.
d.
credit to Interest Expense for $1,000.
b
1
Challenging
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United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
102. On September 1, 2015, Excellent Company received an $80,000, 12%, 120-day note from a credit customer wishing
to extend its repayment period. On October 1, 2015, thirty days after the note was received, Excellent discounted the
note at the bank at 14%. How much cash did Excellent Company receive from the bank?
a.
$80,800
b.
$80,749
c.
$80,288
d.
$79,317
c
1
Challenging
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United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
103. On June 11, Nathan, Inc. accepted a $8,000, 7%, 60-day note from a customer. On June 26, the company discounted
the note at the bank at 10%. The proceeds amounted to
a.
$8,101.17
b.
$7,992.16
c.
$8,093.33
d.
$8,000.00
b
1
Moderate
ACCT.WHAL.16.6.7 – LO: 6.1
United States – BUSPORG: Analytic