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CHAPTER 7: RECEIVABLES AND INVESTMENTS
1. Which one of the following is not an accurate description of Allowance for Doubtful Accounts?
a. Contra account
b. Balance sheet account
c. Income statement account
d. Current asset account
2. The data presented below is for Craft, Inc. for 2015.
Credit sales during the year
$2,100,000
Accounts receivable—December 31, 2015
295,000
Allowance for doubtful accounts—December 31, 2015
28,000
Bad debt expense for the year
17,000
What amount will Craft show on its year-end balance sheet for the net realizable value of its accounts receivable?
a. $295,000
b. $267,000
c. $250,000
d. $ 28,000
3. The data presented below is for Craft, Inc. for 2015.
Credit sales during the year
$2,100,000
Accounts receivable—December 31, 2015
295,000
Allowance for doubtful accounts—December 31, 2015
28,000
Bad debt expense for the year
17,000
What is the effect on liquidity when Craft records its estimate for bad debt expense using the allowance method?
a. Liquidity decreases
b. Liquidity increases
c. Liquidity stays the same
d. Liquidity both increases and decreases
Chapter 7: Receivables and Investments
4. The following information was presented in the balance sheet of Gloria Company as of December 31, 2014:
Trade accounts receivable, net of allowance for
uncollectibles of $100,000 $1,600,000
Which one of the following statements is true?
a. Gloria expects that $1,700,000 of accounts receivable will be collected after year end.
b. The balance in the Accounts Receivable account in Gloria’s general ledger is $1,600,000.
c. The net realizable value of Gloria’s accounts receivable is $1,600,000.
d. Gloria expects to collect only $1,500,000 from its customers.
5. On January 15, 2015, the accounts receivable balance was $7,000 and the balance in the allowance for doubtful
accounts was $700. On January 16, 2015, a $200 uncollectible account was written-off. The net realizable value
of accounts receivable on January 16 immediately after the write-off is:
a. $6,300
b. $6,800
c. $6,500
d. $7,900
6. Which one of the following is an accurate description of Allowance for Doubtful Accounts?
a. Contra account
b. Liability account
c. Revenue account
d. Expense account
7. Which one of the following statements is true?
a. When a company uses a subsidiary ledger, the balance in the control account, Accounts Receivable,
shows only the amount the company expects to collect from the accounts receivable, net of any expected
uncollectible accounts.
b. An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers.
c. The balance in the control account, Accounts Receivable, should be equal to the sum of the balances in
the subsidiary ledger for accounts receivable.
d. A subsidiary ledger takes the place of the control account for some companies.
8. If a company uses the direct write-off method of accounting for bad debts,
a. It is applying the matching principle.
b. It will record bad debt expense only when an account is determined to be uncollectible.
c. It will reduce the accounts receivable account at the end of the accounting period for estimated
uncollectible accounts.
d. It will report accounts receivable in the balance sheet at their net realizable value.
Chapter 7: Receivables and Investments
9. Fenchurch Corp. 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?
a. Assets and liabilities decrease.
b. Assets and owners’ equity decrease.
c. Owners’ equity decrease and liabilities increase.
d. No effect; assets increase and decrease by the same amount.
10. If a company uses the allowance method of accounting for bad debts, which one of the following statements
is true?
a. It violates the matching principle.
b. It will record bad debts only when an account is determined to be uncollectible.
c. It will reduce the accounts receivable at the end of the accounting period for estimated
uncollectible accounts.
d. It will report accounts receivable in the balance sheet at their net realizable value.
11. Which one of the following statements is true if a company's collection period for accounts receivable is
unacceptably long?
a. The company may need to borrow to acquire operating cash.
b. The company may offer trade discounts to lengthen the collection period.
c. Cash flows from operations may be higher than expected for the company's sales.
d. The company should expand operations with its excess cash.
12. If a company uses the allowance method to account for bad debts, when will the company's owners'
equity decrease?
a. At the date a customer's account is written off
b. At the end of the accounting period when an adjusting entry for bad debts is recorded
c. At the date a customer's account is determined to be uncollectible
d. When the accounts receivable amount becomes past due
13. Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad
debts expense with revenue on the income statement?
a. The percentage of accounts receivable approach
b. The percentage of net credit sales approach
c. The direct write-off method
d. The uncollectible approach
Chapter 7: Receivables and Investments
14. Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net
realizable value of accounts receivable on the balance sheet?
a. The percentage of accounts receivable approach
b. The percentage of net credit sales approach
c. The direct write-off method
d. The uncollectible approach
Pharma Corp.
The data presented below for Pharma Corp. is for the year ended December 31, 2015:
Sales (100% on credit)
$1,400,000
Sales returns
30,000
Accounts Receivable (December 31, 2015)
170,000
Allowance for Doubtful Accounts [Cr. Balance]
(Before adjustment at December 31, 2015)
1,300
Estimated amount of uncollectible accounts based on aging analysis
14,000
15. See the data for Pharma Corp.
If Pharma Corp. estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt
expense for 2015?
a. $12,400
b. $13,700
c. $14,000
d. $14,300
16. See the data for Pharma Corp.
If Pharma Corp. estimates its bad debt to be 1% of net credit sales, what will be the balance in the Allowance for
Doubtful Accounts account after the adjustment for bad debts?
a. $12,400
b. $13,700
c. $14,000
d. $15,000
Chapter 7: Receivables and Investments
17. See the data for Pharma Corp.
If Pharma Corp. uses the aging of accounts receivable approach to estimate its bad debts, what amount will be
reported as bad debt expense for 2015?
a. $12,700
b. $13,700
c. $14,000
d. $15,300
18. See the data for Pharma Corp.
If Pharma Corp.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?
a. $140,000
b. $156,000
c. $167,000
d. $184,000
19. Allowance for Doubtful Accounts represents:
a. Cash set aside to make up for bad debt losses
b. The amount of uncollectible accounts written off to date
c. The difference between total sales made on credit and the amount collected from those credit sales
d. The difference between the gross amount of accounts receivable and the net realizable value of accounts
receivable
20. Which of the following statements is true regarding the two allowance methods used to account for bad debts?
a. The percentage of net credit sales approach takes into account the existing balance in the Allowance
for Doubtful Accounts account.
b. The direct write-off method takes into account the existing balance in the Allowance for Doubtful
Accounts account.
c. The percentage of accounts receivable approach takes into account the existing balance in the
Allowance for Doubtful Accounts account.
d. The direct write-off method does a better job of matching revenues and expenses.
Chapter 7: Receivables and Investments
21. The following data concerns Wang Corporation for 2015:
Credit sales during the year
$1,600,000
Accounts Receivable—December 31, 2015
235,000
Allowance for Doubtful Accounts—December 31, 2015
18,000
Bad debt expense for the year
11,000
What amount will Wang show on its year-end balance sheet for the net realizable value of its accounts
receivable?
a. $253,000
b. $235,000
c. $224,000
d. $217,000
22. What are the effects on the accounting equation when a company makes the adjustment to record bad
debt expense using the allowance method?
a. Assets and owners' equity increase.
b. Assets and owners' equity decrease.
c. Assets increase and owners' equity decreases.
d. Assets decrease and owners' equity increases.
23. When using the allowance method, what are the effects on the accounting equation when a company writes off
a bad debt?
a. Assets and stockholders' equity increase.
b. Assets and stockholders' equity decrease.
c. Assets increase and stockholders' equity decreases.
d. No effect on overall assets or equity.
Chapter 7: Receivables and Investments
Music Corporation
The data below is for Music Corporation for 2015.
Accounts receivable - January 1, 2015
$236,000
Credit sales during 2015
820,000
Collections from credit customers during 2015
590,000
Customer accounts written off as uncollectible during 2015
8,000
Allowance for doubtful accounts - January 1, 2015
8,700
Estimated uncollectible accounts based on an aging analysis
9,600
24. Refer to the data for Music Corporation.
What is the balance of Accounts Receivable at December 31, 2015?
a. $336,000
b. $448,400
c. $458,000
d. $466,000
25. Refer to the data for Music Corporation.
If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense
for 2015?
a. $8,000
b. $8,100
c. $8,700
d. $8,900
26. Refer to the data for Music Corporation.
If the aging approach is used to estimate bad debts, what is the balance in the Allowance for Doubtful Accounts
after the bad debt expense adjustment?
a. $8,000
b. $8,100
c. $8,900
d. $9,600
Chapter 7: Receivables and Investments
Benton Corporation
The data below is for Benton Corporation for 2015.
Accounts Receivable—January 1, 2015
$334,000
Credit sales during 2015
850,000
Collections from credit customers during 2015
725,000
Customer accounts written off as uncollectible during 2015
Allowance for Doubtful Accounts [Credit Balance]
(After write-off of uncollectible accounts)
12,000
1,700
Estimated uncollectible accounts based on an aging analysis
13,200
27. Refer to the data for Benton Corporation.
What is the balance of Accounts Receivable at December 31, 2015?
a. $209,000
b. $225,000
c. $447,000
d. $459,000
28. Refer to the data for Benton Corporation.
If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for
2015?
a. $ 2,900
b. $11,500
c. $23,500
d. $26,900
29. Refer to the data for Benton Corporation.
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?
a. $26,900
b. $14,900
c. $13,200
d. $11,500
Chapter 7: Receivables and Investments
Mellon Corporation
The data presented below is for Mellon Corporation for the year ended December 31, 2015:
Sales (100% on credit)
$1,500,000
Sales returns
60,000
Accounts Receivable (December 31, 2015)
250,000
Allowance for Doubtful Accounts (Before adjustment at December 31, 2015)
3,000
Estimated amount of uncollectible accounts based on an aging analysis
31,000
30. Refer to the data for Mellon Corporation.
If Mellon estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt expense for
2015?
a. $25,800
b. $27,000
c. $28,800
d. $30,000
31. Refer to information for Mellon Corporation.
If Mellon uses 2% 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?
a. $33,000
b. $31,800
c. $27,000
d. $25,800
32. Refer to the data for Mellon Corporation.
If Mellon uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as
bad debt expense for 2015?
a. $28,000
b. $31,000
c. $34,000
d. $50,000
33. Refer to the information for Mellon Corporation.
If Mellon 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?
a. $216,000
b. $219,000
c. $222,000
d. $250,000
Chapter 7: Receivables and Investments
34. On January 1, 2014, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius Company
carried balances of $20,000 and $550 respectively. During the year, the company reported $70,000 of credit sales.
There were $400 of receivables written off as uncollectible in 2014. Cash collections of receivables amounted to
$74,700. The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance.
The amount of bad debts expense recognized in the 2014 income statement will be:
a. $545
b. $595
c. $745
d. $795
35. Assuming a company uses the allowance method, the entry to recognize the write-off of the specific uncollectible
accounts will act to:
a. Increase total assets and total equity
b. Increase total assets and decrease total equity
c. Decrease total assets and total equity
d. Not affect total assets or total equity
36. The entry required to recognize the bad debts expense for 2014 will act to:
a. Increase total assets and retained earnings
b. Decrease total assets and retained earnings
c. Decrease total assets and increase net income
d. Increase total assets and decrease net income
37. On January 1, 2014, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius Company
carried balances of $20,000 and $550 respectively. During the year, the company reported $70,000 of credit sales.
There were $400 of receivables written off as uncollectible in 2014. Cash collections of receivables amounted to
$74,700. The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance.
The net realizable value of receivables appearing on the 2014 balance sheet will amount to:
a. $14,105
b. $14,155
c. $14,900
d. $15,450
Chapter 7: Receivables and Investments
38. On November 2, 2014, Quaint General Store concluded that a customer’s $400 account receivable was
uncollectible and that the account should be written off. What effect will this write-off have on Quaint’s 2014 net
income and balance sheet totals assuming the allowance method is used to account for bad debts?
a. Decrease in net income; decrease in total assets
b. Increase in net income; no effect on total assets
c. No effect on net income; decrease in total assets
d. No effect on net income; no effect on total assets
39. What is the distinguishing characteristic between accounts receivable and notes receivable?
a. Accounts receivable are usually current assets while notes receivable are usually long-term assets.
b. Accounts receivable require payment of interest if not paid within the usual credit terms.
c. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable
result from credit sale transactions for service companies.
d. Notes receivable result from a written promise to pay within a specified amount of time.
40. Where can the amounts needed to compute the accounts receivable turnover ratio be found?
a. The income statement
b. The balance sheet
c. The statement of cash flows
d. Both (a) and (b).
41. What should a company do to improve its accounts receivable turnover rate?
a. Lower its selling prices.
b. Increase its sales force.
c. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
d. Reduce the number of employees working in the credit department.
42. Espat Corp. reported net sales (all on credit) of $1,600,000 and cost of goods sold of $1,100,000 for 2015. Its
beginning balance of Accounts Receivable was $150,000. The accounts receivable balance decreased by
$10,000 during 2015. Rounded to two decimal places, what is Espat’s accounts receivable turnover rate for
2015?
a. 7.59
b. 10.32
c. 10.67
d. 11.03
Chapter 7: Receivables and Investments
43. During 2014, the accounts receivable turnover rate for Cordner Company increased from 10 to 14 times per
year. Which one of the following statements is the most likely explanation for the change?
a. The company's credit department has followed up with customers whose account balances are past due
in order to generate quicker collections.
b. The company has decreased sales to its most credit worthy customers.
c. The company has increased the amount of time customers have to pay their accounts before they are
past due.
d. The company has extended credit to more risky customers in order to increase sales.
44. Lasiter Corp. reported net credit sales of $2,000,000 and cost of goods sold of $1,400,000 for 2014. On January 1,
2014, accounts receivable was $250,000. Amounts owed by customers increased by $20,000 during 2014.
Rounding to two decimal places, what is Lasiter’s accounts receivable turnover rate for 2014?
a. 8.33
b. 8.00
c. 7.69
d. 7.41
45. The party to a promissory note that agrees to repay money on the maturity date of the note is called the
a. Lender
b. Maker of the note
c. Payee of the note
d. Recipient of the note
46. How will the payee of the promissory note record the note on its books?
a. The promissory note will be recorded as an asset.
b. The promissory note will be recorded as a liability.
c. The promissory note will be recorded as revenue.
d. The promissory note will be recorded as an expense.
47. The total amount of interest calculated annually on a $7,000 promissory note payable for 3 years at 12% that is not
compounded is
a. $ 280
b. $ 840
c. $ 2,520
d. $ 8,260
Chapter 7: Receivables and Investments
48. On July 1, 2014, Falcon Company received a $20,000 promissory note from Jordyn Company. The annual
interest rate is 5%. Principal and interest are paid in cash at the maturity date of June 30, 2015.
If Falcon’s fiscal year ends September 30, 2014, an adjusting entry is needed to:
a. Increase interest revenue by $1,000
b. Increase notes receivable by $250
c. Increase interest receivable by $250
d. Increase notes receivable by $1,000
49. On July 1, 2014, Falcon Company received a $20,000 promissory note for services from Jordyn Company.
The annual interest rate is 5%. Principal and interest are paid in cash at the maturity date of June 30, 2013.
The effect on Falcon’s financial statements on July 1, 2014 is as follows
a. Assets increase; owners’ equity increases
b. Assets decrease and owners’ equity decreases
c. Assets decrease
d. No net change in assets
50. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a promissory note
for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah’s
accounting period ends on December 31.
What is the actual maturity date of the note?
a. December 31, 2014
b. January 29, 2015
c. February 28, 2015
d. March 1, 2015
51. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a promissory note
for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah’s
accounting period ends on December 31. What amount should Utah recognize as interest revenue on December
31, 2014 (if a 360 day year is assumed)?
a. $ -0-
b. $ 60
c. $120
d. $180
Chapter 7: Receivables and Investments
52. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a promissory note
for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah’s
accounting period ends on December 31. What amount should Utah recognize as interest revenue on the
maturity date of the note?
a. $ -0-
b. $ 60
c. $120
d. $180
53. Genuine Parts received a promissory note from a customer on March 1, 2015. The face amount of the note is
$8,000; the terms are 90 days and 9% interest. What is the total amount of interest that Genuine Parts will receive
when the note is paid?
a. $ 60
b. $ 90
c. $180
d. $720
54. Genuine Parts received a promissory note from a customer on March 1, 2015. The face amount of the note is
$8,000; the terms are 90 days and 9% interest. At the maturity date, the customer pays the amount due for the
note and interest. What entry is required on the books of Genuine Parts on the maturity date assuming none of the
interest had already been recognized?
a. Increase Cash, $8,000, and decrease Notes Receivable $8,000
b. Increase Cash, $8,180, increase Interest Revenue, $180, and decrease Notes Receivable, $8,000
c. Increase Cash $8,720, decrease Notes Receivable $8,000, and increase Interest Revenue, $720
d. No entry is required; the customer pays the amount due to the bank
55. Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted a
promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest rate of
7%. Verilux’s accounting period ends on December 31, 2014. What amount should Verilux recognize as
interest revenue on December 31, 2014?
a. $ -0-
b. $ 116.67
c. $ 291.67
d. $ 280.00
Chapter 7: Receivables and Investments
56. Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted a
promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest rate of
7%. Verilux’s accounting period ends on December 31, 2014. What amount should Verilux recognize as
interest revenue on the maturity date of the note?
a. $ -0-
b. $ 175.00
c. $ 291.67
d. $ 420.00
57. Comfort Shoes received a promissory note from a customer on April 1, 2014. The face amount of the note is
$2,000; the terms are 12 months and 8% annual interest. How much total interest revenue will Comfort Shoes
recognize for the year ended December 31, 2014?
a. $ 40
b. $ 107
c. $ 120
d. $ 160
58. Comfort Shoes received a promissory note from a customer on April 1, 2014. The face amount of the note is
$2,000; the terms are 12 months and 8% annual interest. At the maturity date, the customer pays for the note and
interest. Comfort Shoes made the proper adjustment at the end of December for interest. The effect of recognizing
the transaction on the maturity date is
a. A decrease to Cash
b. An increase to Notes Receivable
c. An increase to Discount on Notes Receivable
d. A decrease to Notes Receivable
59. Router Inc. lends $70,000 on a 120-day, 9% promissory note. The total interest that Router will receive at
maturity is
a. $6,300
b. $2,100
c. $525
d. $1,890
60. Textbooks.com accepts VISA for payments of purchases made by students. The credit card drafts are
deposited directly in a bank account. VISA charges a 2% collection fee. Credit card drafts totaling $12,000 are
deposited during September. The effect on the accounting equation to record the sales and deposits will include
a. An increase in Cash for $12,000
b. An increase to Sales for $11,760
c. An increase to Accounts Receivable for $11,760
d. An increase in Collection Fee Expense for $240
Chapter 7: Receivables and Investments
61. When a company discounts an interest-bearing note at a bank with recourse:
a. The company is assured payment at maturity.
b. The company will receive the full amount of the note plus interest.
c. The company has a contingent liability from the time the note is discounted until its maturity date.
d. The bank assumes the credit risk on non-payment at the maturity date.
62. Discounting a note receivable
a. Requires using an account called discount on notes receivable
b. Is the process of lending money
c. Slows the collection process
d. Is the process of selling a promissory note
63. When a note receivable has been discounted by a company
a. An account called discount on notes receivable is used.
b. It will be shown as an asset of the company.
c. It slows the collection process.
d. It may be shown as a contingent liability in the footnotes.
64. If Cable Inc. receives $23,825 from credit card collections and has an average rate of 4.7% charged by the credit
card company, its credit card sales during the period were:
a. $111,978
b. $50,691
c. $25,000
d. $22,705
65. Cushion Sports accepted a credit card account receivable in exchange for $5,000 of services provided to a
customer. The credit card company charges a 5% service charge. Recording the transaction in the company’s
accounting records will have what effect on the accounting equation?
a. Increase assets and equity by $4,750
b. Decrease assets and equity by $250
c. Increase assets by $5,000
d. Increase equity by $5,000
Chapter 7: Receivables and Investments
66. When one company purchases less than 50% of equity securities in a second company, which of the following
statements is true?
a. The purchaser is referred to as the parent.
b. The purchaser is referred to as the subsidiary.
c. The company whose securities are purchased is the subsidiary.
d. The company whose securities are purchased is the investee.
67. Why do businesses invest in short-term investments?
a. They are trying to gain control over the activities of other companies.
b. They are investing excess cash to meet future business operation or investment needs.
c. They are lending money to companies that cannot obtain bank loans.
d. More than one of the above is correct.
68. For what reason would a company buy 10% of the common stock of a second company?
a. The company has idle cash and wishes to have a higher return than that available from temporary money
market investments.
b. The company wishes to insure a steady source of goods from the second company.
c. The company wishes to prepare consolidated financial statements.
d. More than one of the above is correct.
69. A company is referred to as a parent if it owns
a. 33% of the debt securities of a second company
b. 100% of the debt securities of a second company
c. 15% of the equity securities of a second company
d. More than 50% of the equity securities of a second company
70. The equity method of accounting for an investment is used when a company purchases
a. More than 20% of the debt securities of a second company.
b. 100% of the debt securities of a second company.
c. 15% of the equity securities of a second company.
d. More than 20% of the equity securities of a second company.
Chapter 7: Receivables and Investments
71. Clarion Corp. invested cash in a 6-month certificate of deposit (CD) on November 1, 2015. If Clarion Corp. has
an accounting period that ends on December 31, 2015, when should Clarion recognize interest revenue from the
CD?
a. On December 31, 2015 only
b. On May 1, 2016 only
c. Both December 31, 2015 and May 31, 2016
d. On the date when its income tax return is filed
72. Davis Corp. invested cash in a 9-month certificate of deposit (CD) on October 1, 2015. If Davis has an
accounting period which ends on December 31, 2015, when would it most likely recognize interest revenue from
the CD?
a. On December 31, 2015 only
b. On July 1, 2016 only
c. Both Dec. 31, 2015 and July 1, 2016
d. On October 1, 2015
73. Wagner’s Bookstore acquires a 6% $12,000 certificate of deposit on September 1. The term of the CD is
six months. At that time, all principal and accrued interest will be paid in cash. Indicate the effect on the
financial statements at December 31.
a. Interest Receivable increases $240, Interest Revenue increases $240
b. Interest Receivable increases $360, Interest Revenue increases $360
c. Interest Receivable increases $480, Interest Revenue increases $480
d. Interest Receivable increases $720, Interest Revenue increases $720
74. What are the effects on the accounting equation from the purchase of a short-term investment?
a. Assets and stockholders’ equity decrease.
b. No effects—assets increase and decrease by the same amount.
c. Assets and liabilities decrease.
d. Stockholders' equity decreases and liabilities increase.
75. Meta Inc. pays $18,000 to buy stock in another company and an additional $350 in commissions. Three
months later, Meta sells the stock for $19,000. At the time of sale, Meta will recognize a:
a. A $650 loss
b. A $1,000 gain
c. A $350 loss
d. A $650 gain
Chapter 7: Receivables and Investments
76. When are consolidated financial statements prepared?
a. At the option of an investee company
b. At the option of an investor company
c. If one company owns more than 50% of another company
d. Only if one company owns 100% of another company
77. Significant influence of one company over another has been defined by the accounting profession as the
ownership of what minimum percent of the second company's stock?
a. 30%
b. 50%
c. 100%
d. 20%
78. On July 1, 2015, Frank Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually on June
30. If the accounting year for Frank ends at December 31, 2015, what will be reported with respect to the
bonds on that date?
a. The carrying value of the bonds will be $108,000.
b. The cash received in interest will be $8,000.
c. Interest income in the amount of $4,000 will be accrued.
d. A loss on the bonds will be reported in the Other Income and Expense section of the 2015 income
statement until the entire amount of interest is paid on June 30, 2016.
79. On February 1, 2015, Vermont Corp. pays $50,000 for shares of Stream, Inc. common stock and another $1,000
in commissions. Assume that Vermont sells the Stream stock on May 20, 2015, for $53,000. In this case,
Vermont recognizes
a. An increase in assets and stockholders' equity for $2,000.
b. An decrease in assets and an increase in stockholders' equity for $2,000.
c. An increase and decrease in assets by the same amount.
d. An increase in assets and stockholders' equity for $3,000.
80. Which of the following statements is true regarding dividend income?
a. Dividend income is accrued at year-end.
b. Dividend income is reported on the income statement.
c. Dividend income appears in the stockholders' equity section of the balance sheet.
d. Dividend income is recognized by companies that own debt securities.
Chapter 7: Receivables and Investments
81. The comparative balance sheets for Flagler Co. for 2015 and 2014 indicate that accounts receivable decreased
during 2015. Flagler uses the indirect method of preparing the operating activities section of its statement of
cash flows. How will the decrease in accounts receivable be reported on the statement of cash flows?
a. It will be included in the amount of cash and cash equivalents at the end of 2015.
b. It will be deducted from net income in the operating activities section.
c. It will be added to net income in the operating activities section.
d. It will be reported as a cash outflow in the investing activities section.
82. The comparative balance sheets of Midnite Corp. for 2015 and 2014 indicate that short-term trade notes
receivable increased from $5,000 in 2014 to $75,000 in 2015. How will this change be reported on Midnite's
statement of cash flows, if Midnite uses the indirect method?
a. It will be included in the amount of cash and cash equivalents at the end of 2015.
b. It will be reported as a deduction from net income in the operating activities section.
c. It will be reported as a cash outflow in the investing activities section.
d. It will be added to net income in the operating activities section.
83. What is the impact on the cash flow statement from an increase in short-term notes receivable, assuming
the indirect method is used?
a. A decrease in the cash flow from operating activities
b. An increase in the cash flow from operating activities
c. An increase in the cash flow from financing activities
d. An increase in the cash flow from investing activities
84. What is the impact on the cash flow statement from a decrease in accounts receivable, assuming the
indirect method is used?
a. A decrease in the cash flow from operating activities
b. An increase in the cash flow from operating activities
c. An increase in the cash flow from financing activities
d. None. A decrease in accounts receivable has an impact only if the direct method is used
85. Which one of the following is an investing activity on the statement of cash flows?
a. Collection of accounts receivable
b. Purchase of long-term investments
c. Receipt of interest
d. Receipt of dividends
