CHAPTER 8
ACCOUNTING FOR RECEIVABLES
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S
TAXONOMY
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True-False Statements
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Multiple Choice Questions
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S
TAXONOMY
Brief Exercises
180.
2
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3
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5,6
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Exercises
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Completion Statements
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Matching Statements
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
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Learning Objective 1
1.
TF
31.
TF
40.
MC
43.
MC
193.
Ex
235.
SA
2.
TF
38.
MC
41.
MC
156.
MC
219.
C
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SA
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TF
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Ex
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Learning Objective 2
4.
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Learning Objective 3
8.
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Ex
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BE
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SA
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TF
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Ex
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SA
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TF
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TF
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Ex
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SA
32.
TF
68.
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Ex
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 4
20.
TF
34.
TF
111.
MC
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MC
162.
MC
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Ex
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TF
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MC
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Ex
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TF
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BE
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Ex
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C
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TF
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SA
Learning Objective 5
25.
TF
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MC
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Ex
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C
26.
TF
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Ex
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TF
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BE
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Ex
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TF
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MC
129.
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BE
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Ex
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TF
125.
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130.
MC
135.
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187.
BE
213.
Ex
Learning Objective 6
136.
MC
139.
MC
141.
MC
143.
MC
188.
BE
215.
Ex
138.
MC
140.
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MC
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BE
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Ex
Learning Objective 7
144.
MC
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MC
Learning Objective 8
36.
TF
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MC
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BE
193.
Ex
214.
Ex
231.
C
137.
MC
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MC
189.
BE
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Ex
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Ex
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C
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Ex
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Ex
Learning Objective 9
29.
TF
150.
MC
154.
MC
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BE
30.
TF
151.
MC
155.
MC
217.
Ex
37.
TF
152.
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MC
218.
Ex
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MC
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168.
MC
Learning Objective 10
169.
MC
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MC
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177.
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MC
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MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Identify the different types of receivables. Receivables are frequently classified as (1)
accounts, (2) notes, and (3) other. Accounts receivable are amounts customers owe on
account. Notes receivable are claims for which lenders issue formal instruments of credit as
proof of debt. Other receivables include nontrade receivables such as interest receivable,
loans to company officers, advances to employees, and income taxes refundable.
2. Explain how companies recognize accounts receivable. Companies record accounts
receivable when they perform a service on account or at the point of sale of merchandise on
account. Account receivable are reduced by sales returns and allowances. Cash discounts
reduce the amount received on accounts receivable. When interest is charged on a past due
receivable, the company adds this interest to the accounts receivable balance and recognizes
it as interest revenue.
Test Bank for Financial Accounting, Ninth Edition
8 – 4
3. Distinguish between the methods and bases companies use to value accounts
receivable. There are two methods of accounting for uncollectible accounts: the allowance
method and the direct write-off method. Companies may use either the percentage-of-sales or
the percentage-of-receivables basis to estimate uncollectible accounts using the allowance
method. The percentage-of-sales basis emphasizes the expense recognition principle. The
percentage-of-receivables basis emphasizes the cash realizable value of the accounts
receivable. An aging schedule is often used with this basis.
4. Describe the entries to record the disposition of accounts receivable. When a company
collects an account receivable, it credits Accounts Receivable. When a company sells
(factors) an account receivable, a service charge expense reduces the amount collected.
5. Compute the maturity date of and interest on notes receivable. For a note stated in
months, the maturity date is found by counting the months from the date of issue. For a note
stated in days, the number of days is counted, omitting the issue date and counting the due
date. The formula for computing interest is Face value × Interest rate × Time.
6. Explain how companies recognize notes receivable. Companies record notes receivable
at face value. In some cases, it is necessary to accrue interest prior to maturity. In this case,
companies debit Interest Receivable and credit Interest Revenue.
7. Describe how companies value notes receivable. As with accounts receivable, companies
report notes receivable at their cash (net) realizable value. The notes receivable allowance
account is the Allowance for Doubtful Accounts. The computation and estimations involved in
valuing notes receivable at cash realizable value, and in recording the proper amount of bad
debt expense and related allowance, are similar to those for accounts receivable.
8. Describe the entries to record the disposition of notes receivable. Notes can be held to
maturity. At that time the face value plus accrued interest is due, and the note is removed
from the accounts. In many cases, the holder of the note speeds up the conversion by selling
the receivable to another party (a factor). In some situations, the maker of the note dishonors
the note (defaults), in which case the company transfers the note and accrued interest to an
account receivable or writes off the note.
9. Explain the statement presentation and analysis of receivables. Companies should
identify in the balance sheet or in the notes to the financial statements each major type of
receivable. Short-term receivables are considered current assets. Companies report the gross
amount of receivables and the allowance for doubtful accounts. They report bad debt and
service charge expenses in the multiple-step income statement as operating (selling)
expenses. Interest revenue appears under other revenues and gains in the nonoperating
activities section of the statement. Managers and investors evaluate accounts receivable for
liquidity by computing a turnover ratio and an average collection period.
TRUE-FALSE STATEMENTS
1. Trade receivables occur when two companies trade or exchange notes receivables.
2. Other receivables include nontrade receivables such as loans to company officers.
Accounting for Receivables
8 – 5
3. Both accounts receivable and notes receivable represent claims that are expected to be
collected in cash.
4. Receivables are valued and reported in the balance sheet at their gross amount less any
sales returns and allowances and less any cash discounts.
5. The three primary accounting problems with accounts receivable are: (1) recognizing, (2)
depreciating, and (3) disposing.
6. Accounts receivable are the result of cash and credit sales.
7. If a retailer assesses a finance charge on the amount owed by a customer, Accounts
Receivable is debited for the amount of the interest.
8. If a company uses the allowance method to account for uncollectible accounts, the entry
to write off an uncollectible account only involves balance sheet accounts.
9. The percentage of receivables basis of estimating expected uncollectible accounts
emphasizes income statement relationships.
10. Under the direct write-off method, no attempt is made to match bad debts expense to
sales revenues in the same accounting period.
11. Allowance for Doubtful Accounts is debited under the direct write-off method when an
account is determined to be uncollectible.
12. Allowance for Doubtful Accounts is a contra asset account.
13. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from
Net Sales.
14. Generally accepted accounting principles require that the direct write-off method be used
for financial reporting purposes if it is also used for tax purposes.
Test Bank for Financial Accounting, Ninth Edition
8 – 6
15. Under the allowance method, Bad Debts Expense is debited when an account is deemed
uncollectible and must be written off.
16. Under the allowance method, the cash realizable value of receivables is the same both
before and after an account has been written off.
17. The percentage of sales basis for estimating uncollectible accounts always results in more
Bad Debt Expense being recognized than the percentage of receivables basis.
18. An aging schedule is prepared only for old accounts receivables that have been past due
for more than one year.
19. An aging of accounts receivable schedule is based on the premise that the longer the
period an account remains unpaid, the greater the probability that it will eventually be
collected.
20. Sales resulting from the use of Visa and MasterCard are considered credit sales by the
retailer.
21. A factor purchases receivables from businesses for a fee and collects the remittances
directly from customers.
22. A major advantage of national credit cards to retailers is that there is no charge to the
retailer by the credit card companies for their services.
23. Receivables may be sold because they may be the only reasonable source of cash.
24. If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed
records of customer accounts.
25. A note receivable is a written promise by the maker to the payee to pay a specified
amount of money at a definite time.
Accounting for Receivables
8 – 7
26. The maturity date of a 1-month note receivable dated June 30 is July 30.
27. The two key parties to a note are the maker and the payee.
28. When the due date of a note is stated in months, the time factor in computing interest is
the number of months divided by 360 days.
29. The accounts receivable turnover is computed by dividing total sales by the average net
receivables during the year.
30. Both the gross amount of receivables and the allowance for doubtful accounts should be
reported in the financial statements.
31. Notes receivable represent claims for which formal instruments of credit are issued as
evidence of debt.
32. The two methods of accounting for uncollectible accounts are (a) percentage of sales and
(b) percentage of receivables.
33. The account Allowance for Doubtful Accounts is closed out at the end of the year.
34. In order to accelerate the receipt of cash from receivables, owners may sell the
receivables to another company for cash.
35. When counting the exact number of days to determine the maturity date of a note, the
date of issue is included but the due date is omitted.
36. A note is dishonored when it is not fully paid at maturity.
37. Short-term receivables are reported in the current assets section before temporary
investments.
Test Bank for Financial Accounting, Ninth Edition
8 – 8
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
1.
F
7.
T
13.
F
19.
F
25.
T
31.
T
37.
F
2.
T
8.
T
14.
F
20.
F
26.
T
32.
F
3.
T
9.
F
15.
F
21.
T
27.
T
33.
F
4.
F
10.
T
16.
T
22.
F
28.
F
34.
T
5.
F
11.
F
17.
F
23.
T
29.
F
35.
F
6.
F
12.
T
18.
F
24.
F
30.
T
36.
T
MULTIPLE CHOICE QUESTIONS
38. Claims for which formal instruments of credit are issued as proof of the debt are
a. accounts receivable.
b. interest receivable.
c. notes receivable.
d. other receivables.
39. Interest is usually associated with
a. accounts receivable.
b. notes receivable.
c. doubtful accounts.
d. bad debts.
40. The receivable that is usually evidenced by a formal instrument of credit is a(n)
a. trade receivable.
b. note receivable.
c. accounts receivable.
d. income tax receivable.
41. Which of the following receivables would not be classified as an “other receivable”?
a. Advance to an employee
b. Refundable income tax
c. Notes receivable
d. Interest receivable
42. Notes or accounts receivables that result from sales transactions are often called
a. sales receivables.
b. non-trade receivables.
c. trade receivables.
d. merchandise receivables.
Accounting for Receivables
8 – 9
43. The term “receivables” refers to
a. amounts due from individuals or companies.
b. merchandise to be collected from individuals or companies.
c. cash to be paid to creditors.
d. cash to be paid to debtors.
44. A cash discount is usually granted to all of the following except
a. retail customers.
b. retailers.
c. wholesalers.
d. All of these answers are correct.
45. Which one of the following is not a primary problem associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Disposing of accounts receivable
46. Trade accounts receivable are valued and reported on the balance sheet
a. in the investment section.
b. at gross amounts less sales returns and allowances.
c. at net realizable value.
d. only if they are not past due.
47. Three accounting issues associated with accounts receivable are
a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting.
c. recognizing, valuing, and disposing.
d. accrual, bad debts, and disposing.
48. Which of the following would require a compound journal entry?
a. To record merchandise returned that was previously purchased on account.
b. To record sales on account.
c. To record purchases of inventory when a discount is offered for prompt payment.
d. To record collection of accounts receivable when a cash discount is taken.
Test Bank for Financial Accounting, Ninth Edition
8 – 10
49. Which of the following would be considered as an unlikely occurrence?
a. Manufacturer offers a cash discount to a wholesaler.
b. Wholesaler offers a cash discount to a retailer.
c. Retailer offers a cash discount to a customer.
d. All of these answers are correct.
50. A customer charges a treadmill at Annie’s Sport Shop. The price is $4,000 and the
financing charge is 6% per annum if the bill is not paid in 30 days. The customer fails to
pay the bill within 30 days and a finance charge is added to the customer’s account.
What is the amount of the finance charge?
a. $8
b. $20
c. $80
d. $240
51. A customer charges a treadmill at Annie’s Sport Shop. The price is $4,000 and the
financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to
pay the bill within 30 days and a finance charge is added to the customer’s account.
The accounts affected by the journal entry made by Annie’s Sport Shop to record the
finance charge are
a. Accounts Receivable
Cash
b. Cash
Finance Receivable
c. Accounts Receivable
Interest Payable
d. Accounts Receivable
Interest Revenue
52. Which of the following practices by a credit card company results in lower interest charges
to the cardholder?
a. The card company states interest as a monthly percentage rather than an annual
percentage.
b. The card company allows a grace period before interest is accrued.
c. The card company allows cardholders to skip payments on their cards.
d. The card company calculates finance charges from the date of purchase to the date
the amount is paid.
Accounting for Receivables
8 – 11
53. If a department store fails to make the entry to accrue the finance charges due from
customers,
a. accounts receivable will be overstated.
b. interest revenue will be understated.
c. interest expense will be overstated.
d. interest expense will be understated.
54. Under the allowance method, writing off an uncollectible account
a. affects only balance sheet accounts.
b. affects both balance sheet and income statement accounts.
c. affects only income statement accounts.
d. is not acceptable practice.
55. The net amount expected to be received in cash from receivables is termed the
a. cash realizable value.
b. cash-good value.
c. gross cash value.
d. cash-equivalent value.
56. If a company fails to record estimated bad debts expense,
a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.
57. Lifetime sells softball equipment. On November 14, they shipped $3,000 worth of softball
uniforms to Palos Middle School, terms 2/10, n/30. On November 21, they received an
order from Tinley High School for $1,800 worth of custom printed bats to be produced in
December. On November 30, Palos Middle School returned $300 of defective merchandise.
Lifetime has received no payments from either school as of month end. What amount will
be recognized as net accounts receivable on the balance sheet as of November 30?
a. $2,700
b. $3,000
c. $4,500
d. $4,800
Test Bank for Financial Accounting, Ninth Edition
8 – 12
58. Syfy Company on July 15 sells merchandise on account to Eureka Co. for $5,000, terms
2/10, n/30. On July 20 Eureka Co. returns merchandise worth $2,000 to Syfy Company.
On July 24 payment is received from Eureka Co. for the balance due. What is the amount
of cash received?
a. $2,900
b. $2,940
c. $3,000
d. $5,000
59. The existing balance in Allowance for Doubtful Accounts is considered in computing bad
debt expense in the
a. direct write-off method.
b. percentage of receivables basis.
c. percentage of sales basis.
d. percentage of receivables and percentage of sales basis.
60. When the allowance method is used to account for uncollectible accounts, Bad Debt
Expense is debited when
a. a sale is made.
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles.
d. a customer’s account becomes past-due.
61. When an account becomes uncollectible and must be written off,
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debt Expense should be credited.
d. Sales Revenue should be debited.
62. The collection of an account that had been previously written off under the allowance
method of accounting for uncollectibles
a. will increase income in the period it is collected.
b. will decrease income in the period it is collected.
c. requires a correcting entry for the period in which the account was written off.
d. does not affect income in the period it is collected.
63. The percentage of sales basis of estimating expected uncollectibles
a. emphasizes the matching of expenses with revenues.
b. emphasizes balance sheet relationships.
c. emphasizes cash realizable value.
d. is not generally accepted as a basis for estimating bad debts.
Accounting for Receivables
8 – 13
64. An aging of a company’s accounts receivable indicates that $14,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the
adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $14,000.
b. debit to Allowance for Doubtful Accounts for $12,900.
c. debit to Bad Debt Expense for $12,900.
d. credit to Allowance for Doubtful Accounts for $14,000.
65. A debit balance in the Allowance for Doubtful Accounts
a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad
debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of sales method of estimating bad debts is used.
66. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt
Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible.
67. An alternative name for Bad Debt Expense is
a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.
68. A reasonable amount of uncollectible accounts is evidence
a. that the credit policy is too strict.
b. that the credit policy is too lenient.
c. of a sound credit policy.
d. of poor judgments on the part of the credit manager.
69. Bad Debt Expense is considered
a. an avoidable cost in doing business on a credit basis.
b. an internal control weakness.
c. a necessary risk of doing business on a credit basis.
d. avoidable unless there is a recession.
Test Bank for Financial Accounting, Ninth Edition
8 – 14
70. The best managed companies will have
a. no uncollectible accounts.
b. a very strict credit policy.
c. a very lenient credit policy.
d. some accounts that will prove to be uncollectible.
71. Two methods of accounting for uncollectible accounts are the
a. allowance method and the accrual method.
b. allowance method and the net realizable method.
c. direct write-off method and the accrual method.
d. direct write-off method and the allowance method.
72. The allowance method of accounting for uncollectible accounts is required if
a. the company makes any credit sales.
b. bad debts are significant in amount.
c. the company is a retailer.
d. the company charges interest on accounts receivable.
73. Bad Debt Expense is reported on the income statement as
a. part of cost of goods sold.
b. reducing gross profit.
c. an operating expense.
d. a contra-revenue account.
74. When the allowance method of accounting for uncollectible accounts is used, Bad Debt
Expense is recorded
a. in the year after the credit sale is made.
b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.
75. The method of accounting for uncollectible accounts that results in a better matching of
expenses with revenues is the
a. aging accounts receivable method.
b. direct write-off method.
c. percentage of receivables method.
d. percentage of sales method.
Accounting for Receivables
8 – 15
76. To record estimated uncollectible accounts using the allowance method, the adjusting
entry would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. debit to Loss on Credit Sales Revenue and a credit to Accounts Receivable.
77. Under the allowance method of accounting for uncollectible accounts,
a. the cash realizable value of accounts receivable is greater before an account is written
off than after it is written off.
b. Bad Debt Expense is debited when a specific account is written off as uncollectible.
c. the cash realizable value of accounts receivable in the balance sheet is the same
before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.
78. Allowance for Doubtful Accounts on the balance sheet
a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading “Other Assets.”
d. is offset against accounts receivable.
79. When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase.
b. cash realizable value of total accounts receivable will decrease.
c. allowance account will increase.
d. cash realizable value of total accounts receivable will stay the same.
80. If an account is collected after having been previously written off,
a. the allowance account should be debited.
b. only the control account needs to be credited.
c. both income statement and balance sheet accounts will be affected.
d. there will be both a debit and a credit to accounts receivable.
81. When an account is written off using the allowance method, accounts receivable
a. is unchanged and the allowance account increases.
b. increases and the allowance account increases.
c. decreases and the allowance account decreases.
d. decreases and the allowance account increases.
Test Bank for Financial Accounting, Ninth Edition
8 – 16
82. Two bases for estimating uncollectible accounts are:
a. percentage of assets and percentage of sales.
b. percentage of receivables and percentage of total revenue.
c. percentage of current assets and percentage of sales.
d. percentage of receivables and percentage of sales.
83. The percentage of receivables basis for estimating uncollectible accounts emphasizes
a. cash realizable value.
b. the relationship between accounts receivable and bad debt expense.
c. income statement relationships.
d. the relationship between sales and accounts receivable.
84. Haven Company uses the percentage of sales method for recording bad debt expense.
For the year, cash sales are $600,000 and credit sales are $2,700,000. Management
estimates that 1% is the sales percentage to use. What adjusting entry will Haven
Company make to record the bad debt expense?
a. Bad Debt Expense ………………………………………………. 33,000
Allowance for Doubtful Accounts ……………………. 33,000
b. Bad Debt Expense ………………………………………………. 27,000
Allowance for Doubtful Accounts ……………………. 27,000
c. Bad Debt Expense ………………………………………………. 27,000
Accounts Receivable ……………………………………. 27,000
d. Bad Debt Expense ………………………………………………. 33,000
Accounts Receivable ……………………………………. 33,000
85. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to
record estimated uncollectible accounts
a. is relevant when using the percentage of receivables basis.
b. is relevant when using the percentage of sales basis.
c. is relevant to both bases of adjusting for uncollectible accounts.
d. will never show a debit balance at this stage in the accounting cycle.
86. The direct write-off method of accounting for bad debts
a. uses an allowance account.
b. uses a contra-asset account.
c. does not require estimates of bad debt losses.
d. is the preferred method under generally accepted accounting principles.
Accounting for Receivables
8 – 17
87. Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of
write-off.
b. a specific account receivable is decreased for the actual amount of bad debt at the
time of write-off.
c. balance sheet relationships are emphasized.
d. bad debt expense is always recorded in the period in which the revenue was recorded.
88. An aging of a company’s accounts receivable indicates that $5,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $900 credit balance, the
adjustment to record bad debts for the period will require a
a. debit to Bad Debt Expense for $5,000.
b. debit to Allowance for Doubtful Accounts for $4,100.
c. debit to Bad Debt Expense for $4,100.
d. credit to Allowance for Doubtful Accounts for $5,000.
89. An aging of a company’s accounts receivable indicates that $3,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $800 debit balance, the adjustment
to record bad debts for the period will require a
a. debit to Bad Debt Expense for $2,200.
b. debit to Bad Debt Expense for $3,000.
c. debit to Bad Debt Expense for $3,800.
d. credit to Allowance for Doubtful Accounts for $800.
90. Using the percentage-of-receivables method for recording bad debt expense, estimated
uncollectible accounts are $32,000. If the balance of the Allowance for Doubtful Accounts
is $8,000 debit before adjustment, what is the amount of bad debt expense for that
period?
a. $8,000
b. $24,000
c. $32,000
d. $40,000
Test Bank for Financial Accounting, Ninth Edition
8 – 18
91. Using the percentage-of-receivables method for recording bad debt expense, estimated
uncollectible accounts are $15,000. If the balance of the Allowance for Doubtful Accounts
is $2,000 credit before adjustment, what is the amount of bad debt expense for that
period?
a. $2,000
b. $13,000
c. $15,000
d. $17,000
92. Using the percentage of receivables method for recording bad debt expense, estimated
uncollectible accounts are $14,000. If the balance of the Allowance for Doubtful Accounts
is $2,000 debit before adjustment, what is the balance after adjustment?
a. $2,000
b. $12,000
c. $14,000
d. $16,000
93. Using the percentage-of-receivables basis, the uncollectible accounts for the year is
estimated to be $38,000. If the balance for the Allowance for Doubtful Accounts is a
$7,000 credit before adjustment, what is the amount of bad debt expense for the period?
a. $7,000
b. $31,000
c. $38,000
d. $45,000
94. Using the percentage-of-receivables basis, the uncollectible accounts for the year is
estimated to be $38,000. If the balance for the Allowance for Doubtful Accounts is a
$7,000 debit before adjustment, what is the amount of bad debt expense for the period?
a. $7,000
b. $31,000
c. $38,000
d. $45,000
95. In reviewing the accounts receivable, the cash realizable value is $16,000 before the
write-off of a $1,500 account. What is the cash realizable value after the write-off?
a. $1,500
b. $14,500
c. $16,000
d. $17,500
Accounting for Receivables
8 – 19
96. In 2015, Warehouse 13 had net credit sales of $750,000. On January 1, 2015, Allowance
for Doubtful Accounts had a credit balance of $16,000. During 2015, $29,000 of
uncollectible accounts receivable were written off. Past experience indicates that the
allowance should be 10% of the balance in receivables (percentage of receivable basis).
If the accounts receivable balance at December 31 was $150,000, what is the required
adjustment to the Allowance for Doubtful Accounts at December 31, 2015?
a. $150,000
b. $29,000
c. $28,000
d. $31,000
97. A company has net credit sales of $750,000 for the year and it estimates that uncollectible
accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of
$2,000 prior to adjustment, its balance after adjustment will be a credit of
a. $13,000.
b. $15,000.
c. $15,040.
d. $17,000.
98. In 2015, Chandler Company had net credit sales of $1,125,000. On January 1, 2015,
Allowance for Doubtful Accounts had a credit balance of $27,000. During 2015, $42,000
of uncollectible accounts receivable were written off. Past experience indicates that the
allowance should be 10% of the balance in receivables (percentage of receivables basis).
If the accounts receivable balance at December 31 was $380,000, what is the required
adjustment to the Allowance for Doubtful Accounts at December 31, 2015?
a. $23,000
b. $38,000
c. $53,000
d. $97,500
Test Bank for Financial Accounting, Ninth Edition
8 – 20
99. Using the following information:
12/31/14
Accounts receivable $525,000
Allowance (35,000)
Cash realizable value $490,000
During 2015, sales on account were $145,000 and collections on account were $100,000.
Also during 2015, the company wrote off $4,000 in uncollectible accounts. An analysis of
outstanding receivable accounts at year end indicated that uncollectible accounts should
be estimated at $40,000.
The change in the cash realizable value from the balance at 12/31/14 to 12/31/15 was a
a. $36,000 increase.
b. $41,000 increase.
c. $44,000 increase.
d. $45,000 increase.
100. Using the following information:
12/31/14
Accounts receivable $525,000
Allowance (35,000)
Cash realizable value $490,000
During 2015, sales on account were $145,000 and collections on account were $100,000.
Also during 2015, the company wrote off $4,000 in uncollectible accounts. An analysis of
outstanding receivable accounts at year end indicated that uncollectible accounts should
be estimated at $40,000.
Bad debt expense for 2015 is
a. $4,000.
b. $5,000.
c. $9,000
d. $40,000.
101. During 2015, Alfred Inc. had sales on account of $198,000, cash sales of $81,000, and
collections on account of $126,000. In addition, they collected $2,175 which had been
written off as uncollectible in 2014. As a result of these transactions, the change in the
accounts receivable balance indicates a
a. $69,825 increase.
b. $72,000 increase.
c. $150,825 increase.
d. $153,000 increase.
Accounting for Receivables
8 – 21
102. Kill Corporation’s unadjusted trial balance includes the following balances (assume normal
balances):
Accounts Receivable $850,000
Allowance for Doubtful Accounts 15,000
Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt
expense will the company record?
a. $15,000
b. $36,000
c. $50,100
d. $51,000
103. Jack Company provides for bad debt expense at the rate of 2% of credit sales. The
following data are available for 2015:
Allowance for doubtful accounts, 1/1/15 (Cr.) ………………….. $ 12,000
Accounts written off as uncollectible during 2015 ……………… 9,000
Credit sales in 2015 ……………………………………………………… 1,200,000
The Allowance for Doubtful Accounts balance at December 31, 2015, should be
a. $3,000.
b. $21,000.
c. $24,000.
d. $27,000.
104. In 2015, Boyle Company had credit sales of $1,080,000 and granted sales discounts of
$24,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of
$26,400. During 2015, $45,000 of uncollectible accounts receivable were written off. Past
experience indicates that 3% of net credit sales become uncollectible. What should be the
adjusted balance of Allowance for Doubtful Accounts at December 31, 2015?
a. $13,080
b. $13,800
c. $31,680
d. $39,720
Test Bank for Financial Accounting, Ninth Edition
8 – 22
105. An analysis and aging of the accounts receivable of Hugh Company at December 31
revealed the following data:
Accounts Receivable …………………………………………………… $900,000
Allowance for Doubtful Accounts per books
before adjustment (Cr.) ……………………………………………… 50,000
Amounts expected to become uncollectible …………………….. 56,000
The cash realizable value of the accounts receivable at December 31, after adjustment, is:
a. $794,000.
b. $844,000.
c. $850,000.
d. $894,000.
106. Herman Company has a debit balance of $5,000 in its Allowance for Doubtful Accounts
before any adjustments are made at the end of the year. Based on review and aging of its
accounts receivable at the end of the year, Herman estimates that $70,000 of its
receivables are uncollectible. The amount of bad debt expense which should be reported for
the year is:
a. $5,000.
b. $65,000.
c. $70,000.
d. $75,000.
107. On October 1, 2015, Milago Company sells (factors) $700,000 of receivables to Beanfield
Factors, Inc. Beanfield assesses a service charge of 3% of the amount of receivables
sold. The journal entry to record the sale by Milago will include
a. a debit of $700,000 to Accounts Receivable.
b. a credit of $721,000 to Cash.
c. a debit of $721,000 to Cash.
d. a debit of $21,000 to Service Charge Expense.
Accounting for Receivables
8 – 23
108. On March 1, 2015, Dick Miles purchased a suit at Kenny’s Fine Apparel Store. The suit
cost $600 and Dick used his Kenny credit card. Kenny charges 2% per month interest if
payment on credit charges is not made within 30 days. On April 30, 2015, Dick had not yet
made his payment. What entry should Kenny make on April 30th?
a. Uncollectible Account …………………………………………… 600
Accounts Receivable …………………………………….. 600
b. Bad Debt Expense ……………………………………………….. 588
Interest Expense ………………………………………………….. 12
Accounts Receivable …………………………………….. 600
c. Accounts Receivable ……………………………………………. 612
Interest Revenue ………………………………………….. 12
Sales Revenue …………………………………………….. 600
d. Accounts Receivable ……………………………………………. 12
Interest Revenue ………………………………………….. 12
109. Jeff Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold
on July 1. Citibank charges 2% for its credit card use. The entry to record this transaction
by Jeff Retailers will include a credit to Sales Revenue of $75,000 and a debit(s) to
a. Cash $73,500 and Service Charge Expense $1,500.
b. Accounts Receivable $73,500 and Service Charge Expense $1,500.
c. Cash $73,500 and Interest Expense $1,500.
d. Accounts Receivable $75,000.
110. XYZ Company accepted a national credit card for a $4,000 purchase. The cost of the
goods sold is $2,400. The credit card company charges a 3% fee. What is the impact of
this transaction on net operating income?
a. Increase by $1,480
b. Increase by $1,552
c. Increase by $1,600
d. Increase by $3,880
111. Major advantages of credit cards to the retailer include all of the following except the
a. issuer does the credit investigation of customers.
b. issuer undertakes the collection process.
c. retailer receives more cash from the credit card issuer.
d. All of these answers are correct.
Test Bank for Financial Accounting, Ninth Edition
8 – 24
112. The sale of receivables by a business
a. indicates that the business is in financial difficulty.
b. is generally the major revenue item on its income statement.
c. is an indication that the business is owned by a factor.
d. can be a quick way to generate cash for operating needs.
113. If a retailer regularly sells its receivables to a factor, the service charge of the factor
should be classified as a(n)
a. selling expense.
b. interest expense.
c. other expense.
d. contra asset.
114. If a company sells its accounts receivables to a factor,
a. the seller pays a commission to the factor.
b. the factor pays a commission to the seller.
c. there is a gain on the sale of the receivables.
d. the seller defers recognition of sales revenue until the account is collected.
115. Retailers generally consider sales from the use of national credit card sales as a
a. credit sale.
b. collection of an accounts receivable.
c. cash sale.
d. collection of a note receivable.
116. Receivables might be sold to
a. lengthen the cash-to-cash operating cycle.
b. take advantage of deep discounts on the cash realizable value of receivables.
c. generate cash quickly.
d. finance companies at an amount greater than cash realizable value.
117. A company regularly sells its receivables to a factor who assesses a 2% service charge on
the amount of receivables purchased. Which of the following statements is true for the
seller of the receivables?
a. The loss section of the income statement will increase each time receivables are sold.
b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are
sold.
c. Selling expenses will increase each time accounts are sold.
d. The other expense section of the income statement will increase each time accounts are
sold.
Accounting for Receivables
8 – 25
118. T’Pol Furniture factors $900,000 of receivables to Trip Factors, Inc. Trip Factors assesses
a 2% service charge on the amount of receivables sold. T’Pol Furniture factors its
receivables regularly with Trip Factors. What journal entry does T’Pol make when
factoring these receivables?
a. Cash ………………………………………………………………….. 882,000
Loss on Sale of Receivables ………………………………….. 18,000
Accounts Receivable …………………………………….. 900,000
b. Cash ………………………………………………………………….. 882,000
Accounts Receivable …………………………………….. 882,000
c. Cash ………………………………………………………………….. 900,000
Accounts Receivable …………………………………….. 882,000
Gain on Sale of Receivables ………………………….. 18,000
d. Cash ………………………………………………………………….. 882,000
Service Charge Expense ………………………………………. 18,000
Accounts Receivable …………………………………….. 900,000
119. When customers make purchases with a national credit card, the retailer
a. is responsible for maintaining customer accounts.
b. is not involved in the collection process.
c. absorbs any losses from uncollectible accounts.
d. receives cash equal to the full price of the merchandise sold from the credit card
company.
120. The retailer considers Visa and MasterCard sales as
a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.
121. The basic issues in accounting for notes receivable include each of the following except
a. analyzing notes receivable.
b. disposing of notes receivable.
c. recognizing notes receivable.
d. valuing notes receivable.
122. A 60-day note receivable dated July 13 has a maturity date of
a. September 12.
b. September 11.
c. September 10.
d. September 13.
Test Bank for Financial Accounting, Ninth Edition
8 – 26
123. The maturity value of a $50,000, 9%, 60-day note receivable dated July 3 is
a. $50,000.
b. $50,750.
c. $54,500.
d. $59,000.
124. A 90-day note dated May 14 has a maturity date of
a. August 14.
b. August 12.
c. August 13.
d. August 15.
125. A 30-day note dated June 18 has a maturity date of
a. July 19.
b. July 18.
c. July 17.
d. July 16.
126. A promissory note
a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.
127. Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement.
b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable.
d. Promissory notes may be bearer notes and not specifically identify the payee by name.
128. The two key parties to a promissory note are the
a. maker and a bank.
b. debtor and the payee.
c. maker and the payee.
d. sender and the receiver.
Accounting for Receivables
8 – 27
129. When calculating interest on a promissory note with the maturity date stated in terms of
days, the
a. maker pays more interest if 365 days are used instead of 360.
b. maker pays the same interest regardless if 365 or 360 days are used.
c. payee receives more interest if 360 days are used instead of 365.
d. payee receives less interest if 360 days are used instead of 365.
130. The maturity value of a $5,000, 9%, 60-day note receivable dated February 10th is
a. $5,000.
b. $5,038.
c. $5,075.
d. $5,450.
131. The interest on a $10,000, 8%, 1-year note receivable is
a. $800.
b. $10,000.
c. $10,080.
d. $10,800.
132. The maturity value of a $70,000, 8%, 3-month note receivable is
a. $70,467.
b. $70,560.
c. $71,400.
d. $75,600.
133. The interest on a $6,000, 6%, 60-day note receivable is
a. $60.
b. $120.
c. $180.
d. $360.
134. The interest on a $9,000, 6%, 90-day note receivable is
a. $135.
b. $270.
c. $405.
d. $540.
Test Bank for Financial Accounting, Ninth Edition
8 – 28
135. On November 1, Gentle Company received a $3,000, 6%, three-month note receivable.
The cash to be received by Gentle Company when the note becomes due is:
a. $3,000.
b. $3,030.
c. $3,045.
d. $3,180.
136. On January 15, 2015, Craig Company received a two-month, 9%, $9,000 note from
William Pentel for the settlement of his open account. The entry by Craig Company on
January 15, 2015 would include a:
a. debit of $9,135 to Notes Receivable.
b. debit of $9,000 to Notes Receivable.
c. credit of $9,135 to Accounts Receivable.
d. credit of $9,000 to Notes Receivable.
137. On January 15, 2015, Craig Company received a two-month, 9%, $9,000 note from
William Pentel for the settlement of his open account. The entry by Craig Company on
March 15, 2015 if Pentel dishonors the note and collection is expected is:
a. Accounts Receivable—W. Pentel ……………………………. 9,000
Notes Receivable …………………………………………. 9,000
b. Accounts Receivable—W. Pentel ……………………………. 9,135
Notes Receivable …………………………………………. 9,000
Interest Revenue …………………………..……………… 135
c. Accounts Receivable—W. Pentel ……………………………. 8,865
Interest Lost ………………………………………………………… 135
Notes Receivable …………………………………………. 9,000
d. Bad Debt Expense ……………………………………………….. 9,135
Notes Receivable …………………………………………. 9,135
138. Notes receivable are recognized in the accounts at
a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.
139. A note receivable is a negotiable instrument which
a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.
Accounting for Receivables
8 – 29
140. A company that receives an interest bearing note receivable will
a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.
141. The face value of a note refers to the amount
a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker.
c. that is identified on the formal instrument of credit.
d. remaining after a service charge has been deducted.
142. Reck Company receives a $15,000, 3-month, 8% promissory note from Fey Company in
settlement of an open accounts receivable. What entry will Reck Company make upon
receiving the note?
a. Notes Receivable…………………………………………………. 15,300
Accounts Receivable—Fey Company ……………… 15,300
b. Notes Receivable…………………………………………………. 15,300
Accounts Receivable—Fey Company ……………… 15,000
Interest Revenue ………………………………………….. 300
c. Notes Receivable…………………………………………………. 15,000
Interest Receivable ………………………………………. 300
Accounts Receivable—Fey Company ……………… 15,000
Interest Revenue ………………………………………….. 300
d. Notes Receivable…………………………………………………. 15,000
Accounts Receivable—Fey Company ……………… 15,000
143. When a note is accepted to settle an open account, Notes Receivable is debited for the
note’s
a. net realizable value.
b. maturity value.
c. face value.
d. face value plus interest.
144. Short-term notes receivable are reported at
a. cash (net) realizable value.
b. face value.
c. gross realizable value.
d. maturity value.
Test Bank for Financial Accounting, Ninth Edition
8 – 30
145. Short-term notes receivables
a. have a related allowance account called Allowance for Doubtful Notes Receivable.
b. are reported at their gross realizable value.
c. use the same estimations and computations as accounts receivable to determine cash
realizable value.
d. present the same valuation problems as long-term notes receivables.
146. When a note receivable is dishonored,
a. interest revenue is never recorded.
b. bad debts expense is recorded.
c. the maturity value of the note is written off.
d. Accounts Receivable is debited if eventual collection is expected.
147. Randie Company lends Luann Company $10,000 on April 1, accepting a four-month, 6%
interest note. Randie Company prepares financial statements on April 30. What adjusting
entry should be made before the financial statements can be prepared?
a. Note Receivable ………………………………………………….. 10,000
Cash ………………………………………………………….. 10,000
b. Interest Receivable ……………………………………………… 50
Interest Revenue …………………………..…………….. 50
c. Cash …………………………………………………………………. 50
Interest Revenue …………………………..…………….. 50
d. Interest Receivable ……………………………………………… 200
Interest Revenue …………………………..…………….. 200
148. When a note receivable is honored, Cash is debited for the note’s
a. net realizable value.
b. maturity value.
c. gross realizable value.
d. face value.
149. Magneto Company had net credit sales during the year of $1,350,000 and cost of goods
sold of $810,000. The balance in accounts receivable at the beginning of the year was
$180,000, and the end of the year it was $120,000. What was the accounts receivable
turnover?
a. 5.6
b. 7.5
c. 9.0
d. 11.3
Accounting for Receivables
8 – 31
150. The average collection period for accounts receivable is computed by dividing 365 days
by
a. net credit sales.
b. average accounts receivable.
c. ending accounts receivable.
d. accounts receivable turnover.
151. The average collection period is computed by dividing
a. net credit sales by average gross accounts receivable.
b. net credit sales by ending gross accounts receivable.
c. the accounts receivable turnover by 365 days.
d. 365 days by the accounts receivable turnover.
152. The financial statements of Danielle Manufacturing Company report net sales of $750,000
and accounts receivable of $60,000 and $90,000 at the beginning and end of the year,
respectively. What is the accounts receivable turnover for Danielle?
a. 5 times
b. 8.3 times
c. 10 times
d. 12.5 times
153. The financial statements of Danielle Manufacturing Company report net sales of $750,000
and accounts receivable of $60,000 and $90,000 at the beginning and end of the year,
respectively. What is the average collection period for accounts receivable in days?
a. 29.2
b. 36.5
c. 43.8
d. 73
154. The financial statements of Gervais Manufacturing Company report net sales of $500,000
and accounts receivable of $80,000 and $40,000 at the beginning and end of the year,
respectively. What is the accounts receivable turnover for Gervais?
a. 6.3 times
b. 8.3 times
c. 10 times
d. 12.5 times
Test Bank for Financial Accounting, Ninth Edition
8 – 32
155. The financial statements of Gervais Manufacturing Company report net sales of $500,000
and accounts receivable of $80,000 and $40,000 at the beginning and end of the year,
respectively. What is the average collection period for accounts receivable in days?
a. 29.2 days
b. 36.5 days
c. 43.8 days
d. 57.9 days
156. Which of the following are also called trade receivables?
a. Accounts receivable
b. Other receivables
c. Advances to employees
d. Income taxes refundable
157. On February 1, 2015, Fugit Company sells merchandise on account to Armen Company
for $6,500. The entry to record this transaction by Fugit Company is
a. Sales Revenue………………………………………………………….. 6,500
Accounts Payable ……………………………………………….. 6,500
b. Cash ……………………………………………………………………….. 6,500
Sales Revenue …………………………………………………… 6,500
c. Accounts Receivable………………………………………………….. 6,500
Sales Revenue …………………………………………………… 6,500
d. Notes Receivable ………………………………………………………. 6,500
Accounts Receivable …………………………………………… 6,500
158. Writing off an uncollectible account under the allowance method requires a debit to
a. Accounts Receivable.
b. Allowance for Doubtful Accounts.
c. Bad Debt Expense.
d. Uncollectible Accounts Expense.
159. When the allowance method of recognizing bad debts expense is used, the entry to
recognize that expense
a. increases net income.
b. decreases current assets.
c. has no effect on current assets.
d. has no effect on net income.
Accounting for Receivables
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160. The direct write-off method
a. is acceptable for financial reporting purposes.
b. debits Allowance for Doubtful Accounts to record write-offs of accounts.
c. shows only actual losses from uncollectible accounts receivable.
d. estimates bad debt losses.
161. Deborah Company’s account balances at December 31 for Accounts Receivable and
Allowance for Doubtful Accounts were $2,100,000 and $50,000 (Cr.), respectively. An
aging of accounts receivable indicated that $180,000 are expected to become
uncollectible. The amount of the adjusting entry for bad debts at December 31 is
a. $130,000.
b. $180,000.
c. $210,000.
d. $230,000.
162. In recording the sale of accounts receivable, the commission charged by a factor is
recorded as
a. Bad Debt Expense.
b. Commission Expense.
c. Loss on Sale of Receivables.
d. Service Charge Expense.
163. Schwartzman Co., makes a credit card sale to a customer for $800. The credit card sale
has a grace period of 30 days and then an interest charge of 1.5% per month is added to
the balance. If the unpaid balance on the above sale is $640 at the end of the grace
period, the interest charge is
a. $6.40.
b. $9.60.
c. $11.00.
d. $16.00.
164. The interest rate specified on any note is for a
a. day.
b. month.
c. week.
d. year.
Test Bank for Financial Accounting, Ninth Edition
8 – 34
165. On February 1, Ville Company received a $6,000, 5%, four-month note receivable. The
cash to be received by Ville Company when the note becomes due is
a. $100.
b. $6,000.
c. $6,100.
d. $6,300.
166. The entry to record the dishonor of a note receivable assuming the payee expects
eventual collection includes a debit to
a. Notes Receivable.
b. Cash.
c. Allowance for Doubtful Accounts.
d. Accounts Receivable.
167. Which of the following statements concerning receivables is incorrect?
a. Notes receivable are often listed last under receivables.
b. The contingent liability from selling notes receivable should be disclosed.
c. Both the gross amount of receivables and the allowance for doubtful accounts should
be reported.
d. Interest revenue and gain on sale of notes receivable are shown under other revenues
and gains.
168. The accounts receivable turnover is computed by dividing
a. total sales by average net accounts receivable.
b. net credit sales by average net accounts receivable.
c. total sales by ending net accounts receivable.
d. net credit sales by ending net accounts receivable.
169. Which receivables accounting and reporting issue is not essentially the same for IFRS
and GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these are essentially the same for IFRS and GAAP.
170. Which receivables accounting and reporting issue is essentially the same for IFRS and
GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these are essentially the same for IFRS and GAAP.
Accounting for Receivables
8 – 35
171. IFRS requires loans and receivables to be recorded at
a. amortized cost.
b. amortized cost, adjusted for allowances for doubtful accounts.
c. unamortized cost.
d. unamortized cost, adjusted for allowances for doubtful accounts.
172. IFRS sometimes refers to allowances as
a. revenues.
b. discounts.
c. provisions.
d. reserves.
173. IFRS
a. implies that receivables with different characteristics should be reported separately.
b. requires that receivables with different characteristics should be reported separately.
c. implies that receivables with different characteristics should be reported as one
unsegregated amount.
d. requires that receivables with different characteristics should be reported as one
unsegregated amount.
174. Which board(s) has(have) worked to implement fair value measurement for financial
instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. both FASB and IASB.
d. neither FASB nor IASB.
175. Which board(s) has(have) faced bitter opposition when working to implement fair value
measurement for financial instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. both FASB and IASB.
d. neither FASB nor IASB.
176. Which is part of IFRS accounting for financial instruments?
Disclosure of fair value information Optional recording of some financial
for receivables in the notes instruments at fair value
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Test Bank for Financial Accounting, Ninth Edition
8 – 36
177. Which requires a two-tiered approach to test whether the value of loans and receivables
are impaired?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes
178. What criteria are used to determine how to record a factoring transaction?
GAAP IFRS
a. risks and rewards, and loss of control risks and rewards, and loss of control
b. risks and rewards, and loss of control loss of control
c. loss of control loss of control
d. loss of control risks and rewards, and loss of control
179. Which permits partial derecognition of receivables?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 37
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
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Item
Ans.
BE 180
Record the following transactions for Lett Company.
1. On August 4, Lett sold merchandise on account to Smiley Company for $610, terms 2/10,
n/30.
2. On August 7, Lett granted Smiley a sales allowance and reduced the cost of the merchandise
by $60 because some of the goods were slightly damaged.
3. On August 12, Smiley paid the account in full.
Test Bank for Financial Accounting, Ninth Edition
8 – 38
BE 181
At December 31, 2015, Wynne Company reported Accounts Receivable of $45,000 and
Allowance for Doubtful Accounts of $3,500. On January 7, 2016, Brown Enterprises declares
bankruptcy and it is determined that the receivable of $1,200 from Brown is not collectible.
1. What is the cash realizable value of Accounts Receivable at December 31, 2015?
2. What entry would Wynne make to write off the Brown account?
3. What is the cash realizable value of Accounts Receivable after the Brown account is written
off?
BE 182
Eaton Company’s ledger at the end of the current year shows Accounts Receivable of $150,000.
Instructions
a. If Allowance for Doubtful Accounts has a credit balance of $4,400 in the trial balance and
bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for
the end of the period.
b. If Allowance for Doubtful Accounts has a debit balance of $4,400 in the trial balance and bad
debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the
end of the period.
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 39
BE 183
Stine Co. sells Christmas angels. Patel determines that at the end of December, it has the
following aging schedule of Accounts Receivable:
Customer
Total
Not Yet Due
Number of Days
Past Due
1–30
31–60
61–90
Over 90
DV Gannon
$500
$300
$200
JJ Joysen
300
100
200
NJ Bell
150
50
100
JC Werly
200
200
?
300
300
250
200
100
% uncollectible
1%
5%
10%
20%
50%
Total Estimated
Uncollectible Amounts
?
?
?
?
?
?
Compute the net receivables based on the above information at the end of December. (There
was no beginning balance in the Allowance for Doubtful Accounts).
$ 500
JJ Joysen
300
100
200
NJ Bell
50
100
JC Werly
200
300
250
200
100
% uncollectible
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 40
BE 184
Newton Company has the following accounts in its general ledger at July 31: Accounts
Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following
transactions occurred.
Oct. 15 Sold $15,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance
charge.
25 Made sales of $800 on VISA credit cards. The credit card service charge is 2%.
Instructions
Journalize the transactions.
BE 185
Determine the interest on the following notes:
(a) $2,000 at 6% for 90 days.
(b) $900 at 9% for 5 months.
(c) $3,000 at 8% for 60 days
(d) $1,600 at 7% for 6 months
BE 186
Ace Distributors has the following transactions related to notes receivable during the last month of
the year.
Dec. 1 Loaned $15,000 cash to K. Hogan on a 1-year, 6% note.
16 Sold goods to F. Manning, receiving a $4,800, 60-day, 7% note.
31 Accrued interest revenue on all notes receivable.
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 41
BE 186 (Cont.)
Instructions
Journalize the transactions for Ace Distributors.
BE 187
Compute the maturity value for each of the following notes receivable.
1. A $5,000, 6%, 3-month note dated July 20.
Maturity value $____________.
2. A $12,000, 9%, 150-day note dated August 5.
Maturity value $____________.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 42
BE 188
On February 7, Jackson Company sold goods on account to Phillips Enterprises for $5,200,
terms 2/10, n/30. On March 9, Phillips gave Jackson a 60-day, 12% promissory note in settlement
of the account. Record the sale and the acceptance of the promissory note on the books of
Jackson Company.
BE 189
On March 9, Phillips gave Jackson Company a 60-day, 12% promissory note for $5,200. Phillips
honors the note on May 8. Record the collection of the note and interest by Jackson assuming
that no interest has been accrued.
BE 190
On March 9, Phillips gave Jackson Company a 60-day, 12% promissory note for $5,200. Phillips
dishonors the note on May 8. Record the entry that Jackson would make when the note is
dishonored, assuming that no interest has been accrued.
BE 191
The following data exists for Carley Company.
2015 2014
Accounts Receivable $ 50,000 $ 70,000
Net Sales 500,000 410,000
Calculate the accounts receivable turnover and the average collection period for accounts
receivable in days for 2015.
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 43
Solution 191 (5 min.)
EXERCISES
Ex. 192
Presented below are various receivable transactions entered into by Beran Tool Company.
Indicate whether the receivables are reported as accounts receivable, notes receivable, or other
receivables on the balance sheet.
a. Loaned a company officer $5,000.
b. Accepted a $3,000 promissory note from a customer as payment on account.
c. Determined that a $10,000 income tax refund is due from the IRS.
d. Sold goods to a customer on account for $4,000.
e. Recorded $500 accrued interest on a note receivable due next year.
f. Advanced $1,400 to a trusted employee.
Ex. 193
Prepare journal entries to record the following transactions entered into by Valente Company:
2014
June 1 Received a $10,000, 12%, 1-year note from Andrea Foley as full payment on her
account.
Nov. 1 Sold merchandise on account to Patton, Inc. for $12,000, terms 2/10, n/30.
Nov. 5 Patton, Inc. returned merchandise worth $500.
Nov. 9 Received payment in full from Patton, Inc.
Dec. 31 Accrued interest on Foley’s note.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 44
Ex. 193 (Cont.)
2015
June 1 Andrea Foley honored her promissory note by sending the face amount plus interest.
No interest has been accrued in 2015.
Ex. 194
Record the following transactions for Adcock Company.
1. On April 12, sold $11,000 of merchandise to Milton Inc., terms 2/10, n/30.
2. On April 15, Milton returned $2,000 of merchandise.
3. On April 22, Milton paid for the merchandise.
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 45
Ex. 195
(a) On January 6, Whitson Co. sells merchandise on account to Garcia Inc. for $7,000, terms
2/10, n/30. On January 16, Garcia Inc. pays the amount due. Prepare the entries on
Whitson’s books to record the sale and related collection.
(b) On January 10, Jill Hoyle uses her Berkman Co. credit card to purchase merchandise from
Berkman Co. for $9,000. On February 10, Hoyle is billed for the amount due of $9,000. On
February 12, Hoyle pays $4,000 on the balance due. On March 10, Hoyle is billed for the
amount due, including interest at 2% per month on the unpaid balance as of February 12.
Prepare the entries on Berkman Co.’s books related to the transactions that occurred on
January 10, February 12, and March 10.
Ex. 196
Fleming Sign Company uses the allowance method in accounting for uncollectible accounts. Past
experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account
balances at December 31, 2014, and December 31, 2015, appear below:
12/31/14 12/31/15
Net Credit Sales $400,000 $500,000
Accounts Receivable 60,000 80,000
Allowance for Doubtful Accounts 5,200 ?
Instructions
(a) Record the following events in 2015.
Aug. 10 Determined that the account of Sue King for $800 is uncollectible.
Sept. 12 Determined that the account of Tom Young for $3,700 is uncollectible.
Oct. 10 Received a check for $500 as payment on account from Sue King, whose
account had previously been written off as uncollectible. She indicated the
remainder of her account would be paid in November.
Nov. 15 Received a check for $300 from Sue King as payment on her account.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 46
Ex. 196 (Cont.)
(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended
December 31, 2015.
(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2015?
Ex. 197
Molina Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31,
2015, before the current year’s provision for uncollectible accounts. An aging of the accounts
receivable revealed the following:
Estimated Percentage
Uncollectible
Current Accounts $120,000 1%
1–30 days past due 20,000 3%
31–60 days past due 10,000 6%
61–90 days past due 10,000 12%
Over 90 days past due 8,000 30%
Total Accounts Receivable $168,000
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 47
Ex. 197 (Cont.)
Instructions
(a) Prepare the adjusting entry on December 31, 2015, to recognize bad debt expense.
(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account
had a $500 debit balance before the current year’s provision for uncollectible accounts.
Prepare the adjusting entry for the current year’s provision for uncollectible accounts.
(c) Assume that the company has a policy of providing for bad debts at the rate of 1% of sales,
that sales for 2015 were $550,000, and that Allowance for Doubtful Accounts had a $650
credit balance before adjustment. Prepare the adjusting entry for the current year’s provision
for bad debts.
Ex. 198
Compute bad debt expense based on the following information:
(a) RLF Company estimates that 2% of net credit sales will become uncollectible. Sales revenue
are $600,000, sales returns and allowances are $30,000, and the allowance for doubtful
accounts has a $6,000 credit balance.
(b) RLF Company estimates that 10% of accounts receivable will become uncollectible.
Accounts receivable are $100,000 at the end of the year, and the allowance for doubtful
accounts has a $500 debit balance.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 48
Ex. 199
The December 31, 2014 balance sheet of Barone Company had Accounts Receivable of
$400,000 and a credit balance in Allowance for Doubtful Accounts of $32,000. During 2015, the
following transactions occurred: sales on account $1,500,000; sales returns and allowances,
$50,000; collections from customers, $1,250,000; accounts written off $36,000; previously written
off accounts of $6,000 were collected.
Instructions
(a) Journalize the 2015 transactions.
(b) If the company uses the percentage-of-sales basis to estimate bad debt expense and
anticipates 3% of net sales to be uncollectible, what is the adjusting entry at December 31,
2015?
(c) If the company uses the percentage of receivables basis to estimate bad debt expense and
determines that uncollectible accounts are expected to be 8% of accounts receivable, what is
the adjusting entry at December 31, 2015?
(d) Which basis would produce a higher net income for 2015 and by how much?
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
8 – 49
Solution 199 (cont.)
Ex. 200
Megan’s Products is undecided about which base to use in estimating uncollectible accounts. On
December 31, 2015, the balance in Accounts Receivable was $680,000 and net credit sales
amounted to $3,800,000 during 2015. An aging analysis of the accounts receivable indicated that
$40,000 in accounts are expected to be uncollectible. Past experience has shown that about 1%
of net credit sales eventually are uncollectible.
Instructions
Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage-of–
sales basis and (2) the percentage-of-receivables basis under each of the following independent
assumptions:
(a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment.
(b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 50
Solution 200 (15 min.)
Ex. 201
The income statement approach to estimating uncollectible accounts expense is used by Kerley
Company. On February 28, the firm had accounts receivable in the amount of $437,000 and
Allowance for Doubtful Accounts had a credit balance of $2,140 before adjustment. Net credit
sales for February amounted to $3,000,000. The credit manager estimated that uncollectible
accounts expense would amount to 1% of net credit sales made during February. On March 10,
an accounts receivable from Kathy Black for $6,100 was determined to be uncollectible and
written off. However, on March 31, Black received an inheritance and immediately paid her past
due account in full.
Instructions
(a) Prepare the journal entries made by Kerley Company on the following dates:
1. February 28
2. March 10
3. March 31
(b) Assume no other transactions occurred that affected the allowance account during March.
Determine the balance of Allowance for Doubtful Accounts at March 31.
Accounting for Receivables
8 – 51
Solution 201 (cont.)
Ex. 202
Handel Company uses the allowance method for estimating uncollectible accounts. Prepare
journal entries to record the following transactions:
January 5 Sold merchandise to Terry Richman for $2,000, terms n/15.
April 15 Received $600 from Terry Richman on account.
August 21 Wrote off as uncollectible the balance of the Terry Richman account when she
declared bankruptcy.
October 5 Unexpectedly received a check for $300 from Terry Richman. It is not felt any more
will be received from Richman
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
8 – 52
Ex. 203
Avett Furniture Store has credit sales of $400,000 in 2015 and a debit balance of $600 in the
Allowance for Doubtful Accounts at year end. As of December 31, 2015, $130,000 of accounts
receivable remain uncollected. The credit manager prepared an aging schedule of accounts
receivable and estimates that $7,000 will prove to be uncollectible.
On March 4, 2016, the credit manager authorizes a write-off of the $1,200 balance owed by B.
Fernitti.
Instructions
(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2015.
(b) Show the balance sheet presentation of accounts receivable on December 31, 2015.
(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is
$160,000 and the balance of Allowance for Doubtful Accounts is a credit of $3,000. Make the
appropriate entry to record the write-off of the Fernetti account. Also show the balance sheet
presentation of accounts receivable before and after the write-off.
Ex. 204
An inexperienced accountant made the following entries. In each case, the explanation to the
entry is correct.
Dec. 17 Cash ……………………………………………………….…………………. 2,940
Sales Discounts …………………………………………………………… 60
Accounts Receivable …………………………………………….. 3,000
(To record collection of 12/4 sales, terms 2/10, n/30)
20 Cash ………………………………………………………………………….. 18,360
Notes Receivable ………………………………………………… 18,000
Interest Revenue …………………………………………………. 360
(Collection of $18,000, 8%, 90 day note dated Sept. 21.
Interest had been accrued through Nov. 30.)
Accounting for Receivables
FOR INSTRUCTOR USE ONLY
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Ex. 204 (Cont.)
27 Cash ………………………………………………………………………….. 1,000
Bad Debt Expense ……………………………………………….. 1,000
(Collection of account previously written off as
uncollectible under allowance method)
31 Bad Debt Expense ……………………………………………………….. 600
Allowance for Doubtful Accounts …………………………….. 600
(To recognize estimated bad debts based on 1% of
net sales of $600,000)
Instructions
Prepare the correcting entries.
Ex. 205
Prepare the necessary journal entry for the following transaction. Linton Company sold $270,000
of its accounts receivables to a factor. The factor charges a 3% fee.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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Ex. 206
Norton Company has accounts receivable of $40,000 in its general ledger at July 31: During
August, the following transactions occurred.
Aug. 1 Added 1% finance charges to $13,000 of credit card balances for not paying within the
30 day grace period.
15 Sold $21,000 of accounts receivable to Iron Factors Inc. who charge a 4%
commission.
28 Collected $8,000 from Norton credit card customers including $400 of finance charges
previously billed.
Instructions
(a) Journalize the transactions.
(b) Indicate the statement presentation of finance and service charges.
Ex. 207
Listed below are two independent situations involving the disposition of receivables.
1. Morales Company sells $320,000 of its receivables to Instant Factors, Inc. Instant Factors
assesses a finance charge of 3% of the amount of receivables sold.
Instructions
Prepare the journal entry to record the sale of the receivables on Morales Company’s books.
2. A restaurant is the site for a large company party. The bill totals $3,400 and is charged by
the patron on a Visa credit card.
Accounting for Receivables
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Ex. 207 (Cont.)
Instructions
Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the
restaurant’s books.
Ex. 208
Wainwright Stores accepts both its own and national credit cards. During the year the following
selected summary transactions occurred.
Jan. 15 Made Wainwright credit card sales totaling $24,000. (There were no balances prior to
January 15.)
20 Made Visa credit card sales (service charge fee 2%) totaling $7,000.
Feb. 10 Collected $14,000 on Wainwright credit card sales.
15 Added finance charges of 1% to Wainwright credit card balance.
Instructions
(a) Journalize the transactions for Wainwright Stores.
(b) Indicate the statement presentation of the financing charges and the credit card service
charge expense for Wainwright Stores.
Test Bank for Financial Accounting, Ninth Edition
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Ex. 209
Compute the maturity date and the maturity value associated with each of the following notes
receivables.
1. A $15,000, 6%, 3-month note dated April 20.
Maturity date ___________, Maturity value $____________.
2. A $25,000, 8%, 72-day note dated June 10.
Maturity date ___________, Maturity value $____________.
3. An $8,000, 9%, 30–day note dated September 20.
Maturity date ___________, Maturity value $____________.
Ex. 210
Compute the maturity date and interest for the following notes.
Dates of Notes Terms Principal Interest Rate
(a) April 17 60 days $60,000 6%
(b) August 11 3 months 80,000 8%
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Solution 210 (3 min.)
Ex. 211
Compute the missing amount for each of the following notes:
Principal Annual Interest Rate Time Total Interest
———————————————————————————————————————
(a) $40,000 10% 2.5 years ?
———————————————————————————————————————
(b) $120,000 ? 9 months $7,200
———————————————————————————————————————
(c) ? 10% 90 days $1,500
———————————————————————————————————————
(d) $40,000 9% ? $1,200
———————————————————————————————————————
Ex. 212
Joe’s Supply Co. has the following transactions related to notes receivable during the last 2
months of 2015.
Nov. 1 Loaned $20,000 cash to Sara Rondelli on a 1-year, 12% note.
Dec. 11 Sold goods to Phair, Inc., receiving a $11,700, 90-day, 8% note.
16 Received an $12,000, 6-month, 9% note in exchange for Grace Tanner’s outstanding
accounts receivable.
31 Accrued interest revenue on all notes receivable.
Instructions
(a) Journalize the transactions for Joe’s Supply Co.
(b) Record the collection of the Rondelli note at its maturity in 2016.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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Solution 212 (10 min.)
Ex. 213
Morton Company had the following select transactions.
Apr. 1, 2015 Accepted Remington Company’s 1-year, 12% note in settlement of a $25,000
account receivable.
July 1, 2015 Loaned $15,000 cash to Jenny Green on a 9-month, 10% note.
Dec. 31, 2015 Accrued interest on all notes receivable.
Apr. 1, 2016 Received principal plus interest on the Remington note.
Apr. 1, 2016 Jenny Green dishonored its note: Morton expects it will eventually collect.
Instructions
Prepare journal entries to record the transactions. Morton prepares adjusting entries once a year
on December 31.
Accounting for Receivables
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Solution 213 (12 min.)
Ex. 214
Prepare the necessary journal entries for the following transactions for Kennedy Co.
May 25 Kennedy Co. received a $30,000, 2-month, 6% note from Holt Company in settlement
of an account receivable.
July 25 Kennedy Co. received payment on the Holt note.
Test Bank for Financial Accounting, Ninth Edition
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Ex. 215
Record the following transactions in general journal form for Karen Heller Company.
July 1 Received a $20,000, 8%, 3-month note, dated July 1, from Nancy Freeman in
payment of her open account.
Oct. 1 Received notification from Nancy Freeman that she was unable to honor her note at
this time. It is expected that Freeman will pay at a later date.
Nov. 15 Received full payment from Nancy Freeman for her note receivable previously
dishonored.
Ex. 216
Fine Boat Company often requires customers to sign promissory notes for major credit
purchases. Journalize the following transactions for Fine Boat Company.
Feb. 12 Accepted a $25,000, 6%, 60-day note from Bob Yates for a 24-foot motorboat built to
his specifications.
April 14 Received notification from Bob Yates that he was unable to honor his promissory note
but that he expects to pay the amount owed in May.
May 26 Received a check from Bob Yates for the total amount owed.
June 10 Received notification by the bank that Bob Yates check was being returned “NSF” and
that Mr. Yates had declared personal bankruptcy.
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Accounts Receivable— B. Yates ………………………….. 25,250
Ex. 217
The following information is available for Edmiston Company.
Beginning accounts receivable $ 70,000
Ending accounts receivable 110,000
Net sales 990,000
Instructions
Compute the accounts receivable turnover and the average collection period.
Ex. 218
Renfro Company had accounts receivable of $100,000 on January 1, 2015. The only transactions
that affected accounts receivable during 2015 were net credit sales of $1,200,000, cash
collections of $1,000,000, and accounts written off of $30,000.
Instructions
(a) Compute the ending balance of accounts receivable.
(b) Compute the accounts receivable turnover for 2015.
(c) Compute the average collection period in days.
Test Bank for Financial Accounting, Ninth Edition
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COMPLETION STATEMENTS
219. Accounts receivable, which are also referred to as ______________ receivables, are
amounts owed by customers on account.
220. The three primary accounting problems associated with accounts receivable are (1)
______________, (2) _______________, and (3) ______________ of accounts
receivable.
221. In order to encourage prompt payment of a trade receivable, companies often offer
______________ to customers.
222. When credit sales are made, _________________ Expense is considered a normal and
necessary risk of doing business on a credit basis.
223. The two methods of accounting for uncollectible accounts are the ____________ method
and the ______________ method.
224. Allowance for Doubtful Accounts is a _____________ account which is ______________
from Accounts Receivable on the balance sheet.
225. When the allowance method is used to account for uncollectible accounts, the
______________ is credited when an account is determined to be uncollectible.
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226. The _____________ basis of estimating uncollectibles provides a better _____________
of bad debt expense with sales revenue and therefore emphasizes income statement
relationships.
227. The _________________ basis of estimating uncollectibles normally results in the best
approximation of _______________ value and therefore emphasizes balance sheet
relationships.
228. Sales resulting from the use of Visa and MasterCard are considered ______________ by
the retailer.
229. A finance company or bank that purchases receivables from businesses is known as a
______________.
230. A 75-day note receivable dated June 10 would mature on ______________.
231. Collection of a note receivable will result in a credit to ______________ for the face value
of the note and a credit to ______________.
232. A note which is not paid on the maturity date is said to be ______________.
Answers to Completion Statements
Test Bank for Financial Accounting, Ninth Edition
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MATCHING
233. Match the items below by entering the appropriate code letter in the space provided.
A. Aging of receivables F. Percentage of receivables basis
B. Direct write-off method G. Factoring
C. Promissory note H. Dishonored note
D. Trade receivables I. Average collection period
E. Percentage of sales basis J. Credit card sales
____ 1. A written promise to pay a specified amount on demand or at a definite time.
____ 2. Sales that involve the customer, the retailer, and the credit card issuer.
____ 3. Emphasizes the matching of costs and revenues in the same period.
____ 4. Amounts owed by customers from the sale of goods and services.
____ 5. A note which is not paid in full at maturity.
____ 6. Analysis of customer account balances by length of time they have been unpaid.
____ 7. Emphasizes expected cash realizable value of accounts receivable.
____ 8. Generally not acceptable for financial reporting purposes.
____ 9. The amount of time that a receivable is outstanding.
____ 10. Sale of accounts receivable to a factor.
Answers to Matching
SHORT-ANSWER ESSAY QUESTIONS
S-A E 234
Management can choose between two bases in calculating the estimated uncollectible accounts
under the allowance method. One basis emphasizes an income statement viewpoint whereas the
other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two
approaches. How do the different points of view affect the amount recognized as Bad Debt
Expense during the accounting period?
Accounting for Receivables
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Solution 234
S-A E 235
Customer purchases using credit cards are a significant source of revenue for many retailers.
From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail
store having its own credit card as opposed to accepting one of the national credit cards (e.g.,
Visa, MasterCard).
S-A E 236
Your friend Jenny has opened an office supply store. She will extend open credit to local
businesses and is concerned about potential bad debts. What can Jenny do to reduce potential
bad debts?
Solution 236
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 237
Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale.
List reasons why companies are willing to pay these fees.
S-A E 238
An article recently appeared in the Wall Street Journal indicating that companies are selling their
receivables at a record rate. Why are companies selling their receivables?
S-A E 239
Your roommate is uncertain about the advantages of a promissory note. Compare the
advantages of a note receivable with those of an account receivable.
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S-A E 240 (Ethics)
Seaver Books, a small book publishing company, wrote off the debt of The Learning Center, and
the Academy of Basic Education, both small private schools, after it determined that the schools
were facing serious financial difficulty. No notice of the action was sent to the schools; Seaver
Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large
endowment and a government grant. The resulting publicity brought the school to the attention of
Seaver Books, which immediately reinstated the account, and sent a new bill to the school,
including interest for the entire time the debt was outstanding. No further action was taken
regarding the Academy of Basic Education, which was still operational.
Required:
Did Seaver Books act ethically in reinstating the debt of one client, and not the other? Explain.
S-A E 241 (Communication)
Petersen Company received a letter from Jane Kimler, a customer. Jane had purchased $425
worth of clothing from Petersen on credit. She has made two payments of $50 each. She has
missed the last two payments, and has received a collection letter from Petersen. Her total debt
presently, with interest and late fees, is $351.13.
Jane sent a letter to Petersen in which she asked for her debt to be forgiven. She said she had
heard that companies make allowances for accounts they are doubtful about collecting, and that
Petersen certainly should have been doubtful about her—that as a college student she had
changed her major three times. She also said that she could not enjoy a high quality of life when
making such high payments, but that she didn’t want to be embarrassed by bill collectors, either.
She especially didn’t want her parents to find out that she had not paid her debts. Having
Petersen write off her account seemed to her the best solution in the circumstances. She added
that the clothes she bought at Petersen were among the best she had ever owned, and that she
“told everybody” that Petersen was definitely the best place to get clothes.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 241 (Cont.)
Required:
You are the accounting manager for Petersen. Write a short letter to Jane explaining why her
debt cannot be written off.
Accounting for Receivables
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CHALLENGE EXERCISES
CE 1
Presented below are selected transactions of Palmer Company. Palmer sells in large quantities to
other companies and also sells its product in a small retail outlet.
March 1 Sold merchandise on account to Grey Company for $6,000, terms 2/10, n/30.
3 Grey Company returned merchandise worth $600 to Palmer.
9 Palmer collected the amount due from Grey Company from the March 1 sale.
15 Palmer sold merchandise for $10,000 in its retail outlet. The customers used their
Heinrich credit card.
31 Palmer added 1 monthly interest to the customers’ credit card balance.
April 10 Palmer collected $3,050 from credit card customers.
Instructions
(a) Prepare journal entries for the transactions above.
(b) What is the balance from credit card transactions in Accounts Receivable after the April 10
transaction?
Test Bank for Financial Accounting, Ninth Edition
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CE 2
The ledger of Maxx Company at the end of the current year shown Accounts Receivable
$170,000, Sales $1,200,000, and Sales Returns and Allowances $50,000.
Instructions
(a) If Maxx uses the direct write-off method to account for uncollectible account, journalize the
adjusting entry at December 31, assuming Maxx determines that Barkley Company’s $2,400
balance is uncollectible.
(b) If allowance for Doubtful account has a credit balance of 3,500 in the trial balance, journalize
the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net
sales, and (2) 10% of account receivable.
(c) If allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize
the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net
sales and (2) 6% of accounts receivable.
Accounting for Receivables
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CE 3
Presley Supply Co. has the following transaction related to notes receivable during the last 2
months of 2014.
Nov. 1 Loaned $30,000 cash to Logan Ransey on a 1-year, 10% note.
Dec. 11 Sold goods to be Joe Noland, Inc., receiving a $9,000, 90-day, 8% note.
16 Received a $4,000, 6-month, 9% note in exchange for Jane Brock’s outstanding
accounts receivable.
31 Accrued interest revenue on all notes receivable.
Instructions
(a) Journalize the above transactions for Presley Supply Co. Round interest to the nearest dollar.
(b) Record the collection of the Ransey note at its maturity in 2015.
(c) Assume Ransey dishonors its note at its maturity in 2015; Presley expects to eventually
collect the note. Record the dishonors of the Ransey note.