Chapter 7: Receivables and Investments
75. 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 2016?
a.
$28,000
b.
$31,000
c.
$34,000
d.
$50,000
ANSWER:
a
RATIONALE:
$31,000 (Estimated amount of uncollectible accounts) – $3,000 (Allowance prior to
adjustment) = $28,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
76. 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
ANSWER:
b
RATIONALE:
$250,000 (Accounts Receivable at Dec. 31) – $31,000 (Allowance) = $219,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
77. On January 1, 2016, 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 2016. 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 2016 income statement will be:
a.
$545
b.
$595
c.
$745
d.
$795
ANSWER:
RATIONALE:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
78. 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
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
79. The entry required to recognize the bad debts expense for 2016 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
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
80. On January 1, 2016, 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 2016. 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 2016 balance sheet will amount to:
a.
$14,105
b.
$14,155
c.
$14,900
d.
$15,450
ANSWER:
b
RATIONALE:
$14,900 (Accounts Receivable) – $745 (Allowance) = $14,155
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
81. On November 2, 2016, 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 2016 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
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
82. 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.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Understanding
83. 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).
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Understanding
84. 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.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Applying
85. Espat Corp. reported net sales (all on credit) of $1,600,000 and cost of goods sold of $1,100,000 for 2016. Its
beginning balance of Accounts Receivable was $150,000. The accounts receivable balance decreased by $10,000 during
2016. Rounded to two decimal places, what is Espat’s accounts receivable turnover rate for 2016?
a.
7.59
b.
10.32
c.
10.67
d.
11.03
ANSWER:
d
RATIONALE:
$1,600,000 (Net Sales)/[$150,000 (Beginning Accounts Receivable Balance) + $140,000
(Ending Accounts Receivable Balance)/2] = 11.03
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Analyzing
86. During 2016, 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.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Analyzing
87. Lasiter Corp. reported net credit sales of $2,000,000 and cost of goods sold of $1,400,000 for 2016. On January 1,
2016, accounts receivable was $250,000. Amounts owed by customers increased by $20,000 during 2016. Rounding to
two decimal places, what is Lasiter’s accounts receivable turnover rate for 2016?
a.
8.33
b.
8.00
c.
7.69
d.
7.41
ANSWER:
c
RATIONALE:
$2,000,000 (Sales) / [[$250,000 (Jan. 1 Balance) + $270,000 (Dec. 31 Balance)]/2] = 7.69
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Analyzing
88. 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
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
89. 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.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Understanding
90. 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
ANSWER:
c
RATIONALE:
$7,000 (Principal) × .12 or 12% (Interest Rate) × 3 (Time Period) = $2,520
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
91. On July 1, 2016, 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, 2017.
If Falcon’s fiscal year ends September 30, 2016, 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
ANSWER:
c
RATIONALE:
$20,000 (Principal) × .05 or 5% × 3/12 (Time Period) = $250
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
92. On July 1, 2016, 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, 2017.
The effect on Falcon’s financial statements on July 1, 2016 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
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
93. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2016, 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, 2016
b.
January 29, 2017
c.
February 28, 2017
d.
March 1, 2017
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
94. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2016, 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, 2016 (if a 360 day year
is assumed)?
a.
$ -0-
b.
$ 60
c.
$120
d.
$180
ANSWER:
b
RATIONALE:
$9,000 (Principal) × .08 or 8% (Rate) × 30/360 (Time Period) = $60
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
95. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2016, 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
ANSWER:
c
RATIONALE:
$9,000 (Principal) × .08 or 8% (Rate) × 60/360 (Time Period) = $120
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
96. Genuine Parts received a promissory note from a customer on March 1, 2016. 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
ANSWER:
c
RATIONALE:
$8,000 (Principal) × .09 or 9% (Rate) × 90/360 (Time Period) = $180
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
97. Genuine Parts received a promissory note from a customer on March 1, 2016. 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
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
98. Verilux Company sold merchandise to Flight Corp. on November 1, 2016, 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, 2016. What amount should Verilux recognize as interest revenue on December 31, 2016?
a.
$ -0-
b.
$ 116.67
c.
$ 291.67
d.
$ 280.00
ANSWER:
b
RATIONALE:
$10,000 (Principal) × .07 or 7% (Rate) × 2/12 (Time Period) = $116.67
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
99. Verilux Company sold merchandise to Flight Corp. on November 1, 2016, 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, 2016. 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
ANSWER:
b
RATIONALE:
$10,000 (Principal) × .07 or 7% (Rate) × 3/12 (Time Period) = $175.00
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
100. Comfort Shoes received a promissory note from a customer on April 1, 2016. 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, 2016?
a.
$ 40
b.
$ 107
c.
$ 120
d.
$ 160
ANSWER:
c
RATIONALE:
$2,000 × .08 or 8% × 9/12 = $120
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
101. Comfort Shoes received a promissory note from a customer on April 1, 2016. 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
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
102. 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
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
103. 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
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Analyzing
104. 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.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Understanding
105. Discounting a note receivable
a.
Requires using an account called discount on notes receivable
b.
Is the process of lending money
c.
Is the process of selling a promissory note
d.
Slows the collection process
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Understanding
106. 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.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Understanding
107. If Rope 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
ANSWER:
c
RATIONALE:
$23,825 / (100 – 4.7%) = $25,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Analyzing
108. 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
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Analyzing
109. 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.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
110. 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.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
111. 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.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
112. 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.
None of these choices
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
113. 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.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
114. Clarion Corp. invested cash in a 6-month certificate of deposit (CD) on November 1, 2016. If Clarion Corp. has an
accounting period that ends on December 31, 2016, when should Clarion recognize interest revenue from the CD?
a.
On December 31, 2016 only
b.
On May 1, 2017 only
c.
Both December 31, 2016 and May 31, 2017
d.
On the date when its income tax return is filed
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Applying
115. Toppson Corp. invested cash in a 9-month certificate of deposit (CD) on October 1, 2016. If Toppson has an
accounting period which ends on December 31, 2016, when would it most likely recognize interest revenue from the CD?
a.
On December 31, 2016 only
b.
On July 1, 2017 only
c.
Both Dec. 31, 2016 and July 1, 2017
d.
On October 1, 2016
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Applying
116. 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
ANSWER:
a
RATIONALE:
$12,000 (Principal) × .06 (Interest Rate) × 4/12 (Time Period) = $240
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Analyzing
117. 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.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
118. Samsing Inc. pays $18,000 to buy stock in another company and an additional $350 in commissions. Three months
later, Samsing sells the stock for $19,000. At the time of sale, Samsing will recognize a:
a.
A $650 loss
b.
A $1,000 gain
c.
A $350 loss
d.
A $650 gain
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Analyzing
119. 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
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
120. 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.
20%
b.
50%
c.
100%
d.
30%
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
121. On July 1, 2016, Overlin Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually on June 30.
If the accounting year for Overlin ends at December 31, 2016, 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 2016 income statement
until the entire amount of interest is paid on June 30, 2017.
ANSWER:
c
RATIONALE:
$100,000 × 8% × 1/2 year = $4,000 interest at Dec. 31, 2016
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Analyzing
122. On February 1, 2016, 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, 2016, 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.
ANSWER:
a
RATIONALE:
$53,000 – ($50,000 + $1,000) = $2,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Analyzing
123. 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.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Understanding
124. The comparative balance sheets for Flagler Co. for 2017 and 2016 indicate that accounts receivable decreased during
2017. 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 2017.
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.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Applying
125. The comparative balance sheets of Midnite Corp. for 2017 and 2016 indicate that short-term trade notes receivable
increased from $5,000 in 2016 to $75,000 in 2017. 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 2017.
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.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Applying
126. 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
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Applying
127. 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
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Applying
128. 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
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Understanding
129. Sweetson Enterprises’ comparative balance sheets included accounts receivable of $220,300 at December 31, 2016,
and $200,900 at December 31, 2017. Sales reported on Sweetson’s 2017 income statement amounted to $2,350,000. What
is the amount of cash collections that Sweetson will report in the Operating Activities category of its 2017 statement of
cash flows assuming that the direct method is used?
a.
$2,369,400
b.
$2,350,000
c.
$2,771,200
d.
$2,330,600
ANSWER:
a
RATIONALE:
Cash collections to be reported in the Operating Activities section of Sweetson Enterprises’
2017 statement of cash flows (direct method):
Accounts receivable, December 31, 2016
$ 220,300
Plus: Sales during 2017
2,350,000
Less: Cash collections during 2017
(X)
Accounts receivable, December 31, 2017
$200,900
$220,300 + $2,350,000 – X = $200,900
X = $2,369,400
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Analyzing
130. Which one of the following is not an accurate statement regarding the direct write-off method of accounting for bad
debts?
a.
The direct write-off method has some deficiencies when accounting for bad debts.
b.
The direct write-off method ignores the possibility that partial collection of a company’s outstanding accounts
receivable may occur.
c.
Under the direct write-off method, an expense is increased.
d.
The allowance method for bad debts violates the matching principle, but the direct write-off method does not.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
Chapter 7: Receivables and Investments
Completion
131. The mechanism that keeps track of the balances owed by individual customers is called a(n)
_________________________.
ANSWER:
subsidiary ledger
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
132. A general ledger account that is supported by a subsidiary ledger is called a(n) ____________________.
ANSWER:
control account
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
133. The gross accounts receivable less the allowance for doubtful accounts is known as the
_________________________.
ANSWER:
net realizable amount
net realizable value
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
134. A(n) ____________________ categorizes the various accounts receivable amounts by the length of time outstanding.
ANSWER:
aging schedule
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
135. The accounts receivable turnover ratio is computed by dividing ____________ by average accounts receivable.
ANSWER:
net credit sales
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
136. The _______________ the accounts receivable turnover ratio, the quicker the each dollar of accounts receivable can
be collected.
ANSWER:
higher or larger
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
137. Over the life of a note, the maker of a note recognizes ____________ on the balance sheet and _____________ on
the income statement.
ANSWER:
Note payable
Interest expense
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
138. A(n) _________________________ is a written promise to repay a definite sum of money either upon demand, or at
a fixed or determinable date in the future.
ANSWER:
promissory note
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
139. The party that agrees to repay is the ____________________ of the note.
ANSWER:
maker
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
140. A company that holds a promissory note from another company has an asset, called a(n) ____________________.
ANSWER:
note receivable
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
141. The company that makes or gives a promissory note to another company has a liability, called a(n)
____________________.
ANSWER:
note payable
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
142. The maker of a note recognizes ____________________ on its income statement.
ANSWER:
interest expense
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
143. The payee of a note recognizes ____________________ on its income statement.
ANSWER:
interest income
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
144. The amount of money received, or the fair value of the products or services received by the maker when a
promissory note is issued is called the ____________________.
ANSWER:
principal
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
145. The length of time a note is outstanding (that is, the period of time between the date it is issued and the date it
matures) is called the ____________________.
ANSWER:
term
maturity period
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
146. The party that receives the payment due from a note is called the ____________________.
ANSWER:
payee
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
147. The date that a promissory note is due is the ____________________.
ANSWER:
maturity date
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
148. The difference between the principal amount of a note and its maturity value is called ____________________.
ANSWER:
interest
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
149. The amount of cash the maker is to pay the payee on the maturity date of the note is called the
____________________.
ANSWER:
maturity value
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
150. The process of assigning a note due in the future to a bank before its maturity date is called ____________________.
ANSWER:
discounting
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
151. If a company discounts a note at a bank, but still is contingently liable for the maturity value, then the note was
discounted with ____________________.
ANSWER:
recourse
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
152. When an investor is able to secure significant influence over an investee, the ____________________ method of
accounting is used.
ANSWER:
equity
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
153. Securities issued by corporations as a form of ownership in the business, such as common or preferred stock, are
called _________________________.
ANSWER:
equity securities
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
154. Bonds issued by corporations or governmental bodies as a form of borrowing are called ____________________.
ANSWER:
debt securities
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
155. Cash flows from purchases, sales, and maturities of investments are usually classified as _________________
activities.
ANSWER:
investing
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Remembering
156. Changes in accounts and notes receivable are reported in the __________ Activities section of a statement of cash
flows prepared using the indirect method.
ANSWER:
Operating
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Remembering