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Chapter 7: Receivables and Investments
157. When using the indirect cash flow method, a decrease in accounts receivable or notes receivable must be _________
to net income to arrive at the increase or decrease in cash flows.
ANSWER:
added
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 - LO: 07-06
KEYWORDS:
Bloom's: Remembering
158. A contra-asset account used to reduce accounts receivable to its net realizable value is known as a(n)
____________________.
ANSWER:
allowance for doubtful accounts
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Remembering
159. Accountants use the ____________________ to overcome the deficiencies of the direct write-off method for bad
debts.
ANSWER:
allowance method
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Remembering
Matching
For each item listed below, identify how it will be reported on the Statement of Cash Flows under the indirect method.
a.
Operating activity
b.
Investing activity
c.
Financing activity
d.
Not reported separately on the cash flow statement
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 - LO: 07-06
KEYWORDS:
Bloom's: Remembering
160. Write-off of a customer’s account receivable under the allowance method
ANSWER:
d
161. Decrease in accounts receivable
ANSWER:
a
162. Increase in short-term notes receivable
ANSWER:
a
Chapter 7: Receivables and Investments
Select the term from the list below that matches each of the following six descriptions.
a.
Interest
b.
Maturity value
c.
Principal
d.
Payee
e.
Discounting
f.
Term
g.
Recourse
h.
Implicit
i.
Maker
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 - LO: 07-03
FACC.PONO.13.07-04 - LO: 07-04
KEYWORDS:
Bloom's: Remembering
163. The sale of a note
ANSWER:
e
164. The length of time a note is outstanding—the period of time between the date it is issued and the date it matures
ANSWER:
f
165. The party that receives payment due from a note
ANSWER:
d
166. Transfer a note with a contingent liability
ANSWER:
g
167. The difference between the principal amount of the note and its maturity value
ANSWER:
a
168. The amount of cash the maker is to pay the payee on the maturity date of the note
ANSWER:
b
Chapter 7: Receivables and Investments
Match the following definitions with their appropriate terms in Questions 210 - 217.
a.
A receivable arising from the sale of goods or services
with a verbal promise to pay.
b.
A form used to categorize the various individual
accounts receivable according to the length of time
each has been outstanding.
c.
A method of estimating bad debts on the basis of either
the net credit sales of the period or the accounts
receivable at the end of the period.
d.
A measure of the number of times receivables are
collected in a period.
e.
The general ledger account that is supported by a
subsidiary ledger.
f.
A contra-asset account used to reduce accounts
receivable to its net realizable value.
g.
The detail for a number of individual items that
collectively make up a single general ledger account.
h.
The recognition of bad debts expense at the point an
account is written off as uncollectible.
169. Account receivable
ANSWER:
a
170. Subsidiary ledger
ANSWER:
g
171. Control account
ANSWER:
e
172. Direct write-off method
ANSWER:
h
173. Allowance method
ANSWER:
c
174. Allowance for doubtful accounts
ANSWER:
f
175. Aging schedule
ANSWER:
b
176. Accounts Receivable turnover
ANSWER:
d
Chapter 7: Receivables and Investments
Match the following definitions with their appropriate terms in Questions 218 - 231.
a.
A liability resulting from the signing of a
promissory note.
b.
A measure of how long it takes to collect receivables.
c.
A written promise to repay a definite sum of
money on demand or at a fixed or determinable
date in the future.
d.
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.
e.
The party that will receive the money from a
promissory note at some future date.
f.
The process of selling a promissory note.
g.
The date the promissory note is due.
h.
The amount of cash the maker is to pay the payee on the
maturity date of the note.
i.
The difference between the principal amount of
the note and its maturity value.
j.
An asset resulting from the acceptance of a promissory
note from another company.
k.
Securities issued by corporations and
governmental bodies as a form of borrowing.
l.
Securities issued by corporations as a form of ownership
in the business.
m.
The party that agrees to repay the money for a
promissory note at some future date.
n.
The amount of cash received, or the fair value of the
products or services received, by the maker when a
promissory note is issued.
177. Promissory note
ANSWER:
c
178. Maker
ANSWER:
m
179. Payee
ANSWER:
e
180. Note receivable
ANSWER:
j
181. Note payable
ANSWER:
a
182. Principal
ANSWER:
n
183. Maturity date
ANSWER:
g
184. Term
ANSWER:
d
185. Maturity value
ANSWER:
h
186. Interest
ANSWER:
i
187. Discounting
ANSWER:
f
188. Number of days' sales in receivables
ANSWER:
b
189. Equity securities
ANSWER:
l
190. Debt securities
ANSWER:
k
Chapter 7: Receivables and Investments
Subjective Short Answer
191. Murrysville Company had the following data available for 2016 (before making any adjustments):
Accounts receivable, 12/31/16
$343,200 (Dr.)
Allowance for doubtful accounts
3,800 (Cr.)
Net credit sales, 2016
829,000 (Cr.)
Required:
1. Prepare the journal entry to recognize bad debts under the following assumptions:
(a) Bad debts expense is expected to be 3% of net credit sales for the year and
(b) Murrysville expects it will not be able to collect 7% of the balance in accounts receivable at year-end.
2. Assume instead that the balance in the allowance account is a $3,800 debit. How will this affect your answers to (1)?
ANSWER:
1. a. Based on 3% of net credit sales:
2016
Dec. 31
Bad Debts Expense
24,870
Chapter 7: Receivables and Investments
192. In its first year of business, Mariman Company has net income of $290,000, exclusive of any adjustment for bad
debts expense. The president of the company has asked you to calculate net income under each of two alternatives of
accounting for bad debts: the direct write-off method and the allowance method. The president would like to use the
method that will result in the higher net income. So far, no adjustments have been made to write off uncollectible accounts
or to estimate bad debts. The relevant data are as follows:
Write-offs of uncollectible accounts during the year
$ 21,000
Net credit sales
750,000
Estimated percentage of net credit sales that will be uncollectible
5%
Required:
1. Compute net income under each of the two alternatives.
2. Does Mariman have a choice as to which method to use? If so, should it base its choice on which method will result in
the higher net income? (Ignore income taxes.) Explain.
ANSWER:
1. Net income under each of the two alternatives is as follows:
Direct write-off method: $290,000 – $21,000 = $269,000
Allowance method: $290,000 – (5% × $750,000) = $290,000 – $37,500 = $252,500
2. The direct write-off method would result in a lesser amount of expense and therefore in a
higher net income. However, under current accounting standards, if bad debts are material in
amount, the allowance method must be used. In addition, it is not acceptable for a company
to choose accounting methods on the basis of their effects on net income.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
193. Dillsburg Company sells on credit with terms of n/30. For the $800,000 of accounts at the end of the year 2016 that
are not overdue, there is a 92% probability of collection. For the $300,000 of accounts that are less than a month past due,
Dillsburg estimates the likelihood of collection going down to 75%. The probability of collecting the $150,000 of
accounts more than a month past due is estimated to be 30%.
Required:
1. Prepare an aging schedule to estimate the amount of uncollectible accounts.
2. On the basis of the schedule in (1), prepare the journal entry as of December 31, 2016 to estimate bad debts. Assume
that the credit balance in Allowance for Doubtful Accounts is $30,000.
ANSWER:
1.
Estimated Category
Estimated
Amount
Percent
Uncollectible
Amount
Uncollectible
Current
$ 800,000
8%
$ 64,000
Past due:
Less than one month
300,000
25
75,000
More than one month
150,000
70
105,000
Totals
$1,250,000
$244,000
2. Journal entry:
2016
Dec. 31
Bad Debts Expense
214,000
Allowance for Doubtful Accounts
214,000
To record estimated bad debts:
$244,000 less $30,000 currently
in allowance account.
Chapter 7: Receivables and Investments
194. Rural Ridge Company reported the following on its balance sheet at December 31, 2016:
Accounts receivable, less allowance of $12,400
$500,000
A)
How much is the net realizable value of Rural Ridge’ receivables?
B)
What is the balance of the accounts receivable account?
C)
Are you able to determine whether Rural Ridge uses the allowance method or the direct
write off method for uncollectibles? Why or why not?
ANSWER:
A)
$500,000
B)
$500,000 + $12,400 = $512,400
C)
Rural Ridge uses the allowance method. This is seen by the presentation on the balance
sheet of the receivables that shows a deduction from the gross amount of receivables.
Only a company that uses the allowance method would show a deduction from
receivables for uncollectible accounts.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
195. Star Corp. sold merchandise for $8,000 to MegaStore on May 15, 2016, with payment due in 30 days. Subsequent to
this, MegaStore experienced cash flow problems and was unable to pay its debt. On August 10, 2016, Star stopped trying
to collect the outstanding receivable from MegaStore and wrote off the account as uncollectible. On December 1, 2016,
MegaStore sent Star a check for $2,000 and offered to sign a two-month, 12%, $6,000 promissory note to satisfy the
remaining obligation. MegaStore paid the entire amount due Star, with interest, on January 31, 2017. Star ends its
accounting year on December 31 each year and uses the allowance method to account for bad debts.
Required:
1. Prepare all of the necessary journal entries on the books of Star Corp. from May 15, 2016 to January 31, 2017.
2. Why would MegaStore bother to send Star a check for $2,000 on December 1 and agree to sign a note for the balance,
given that such a long period of time had passed since the original purchase?
ANSWER:
1. Journal entries:
2016
May 15
Accounts Receivable—MegaStore
8,000
Sales Revenue
8,000
To record sale on credit; terms n/30.
Chapter 7: Receivables and Investments
Cheswick Corp.
The following information is for Cheswick Corp. at the end of 2016:
Sales
$800,000
Sales returns and allowances
8,000
Accounts Receivable—December 31, 2016
175,000
Allowance for Doubtful Accounts—December 31, 2016
[Credit Balance] (Before adjustment for bad debts)
1,000
Estimated Uncollectible Accounts
(per aging schedule at December 31, 2016)
7,500
196. Refer to the data for Cheswick Corp..
If bad debts are estimated at 1% of net sales, how much will Cheswick Corp. report as bad debts expense for 2016?
ANSWER:
$7,920
($800,000 – $8,000) × .01 or 1% = $7,920
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
197. Refer to the data for Cheswick Corp..
If the aging approach is used to estimate bad debts, how much bad debts expense will Cheswick Corp. report for 2016?
ANSWER:
$7,500 – $1,000 = $6,500
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
198. Refer to the data for Cheswick Corp..
If the aging approach is used to estimate bad debts, how much is the net realizable value of the accounts receivable at
December 31, 2016?
ANSWER:
$175,000 (Accounts Receivable) – $7,500 (Allowance for Doubtful Accounts) = $167,500
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
199. Refer to the data for Cheswick Corp..
Assume that the net realizable value is $170,000 after the adjustment for bad debts in 2016. How much is the net
realizable value of accounts receivable after a customer's account of $2,500 is written off? Explain why.
ANSWER:
$170,000
Accounts receivable and the allowance for doubtful accounts both decrease by the same
amount, $2,500, leaving the net realizable value of the accounts receivable unaffected.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
200. Refer to the data for Cheswick Corp..
Determine the effect on Cheswick Corp.’ accounting equation of the year-end adjustment of bad debts using the aging
approach.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
ANSWER:
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
A. Allow.
for
Uncollect.
Accts
(6,500)
(6,500)
Bad Debt
Expense
6,500
(6,500)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
Beatrice Equipment
Beatrice Equipment sells merchandise only on credit. For the year ended December 31, 2016, the following data is
available:
Sales
$2,400,000
Sales returns and allowances
60,000
Accounts Receivable - January 1, 2016
270,000
Allowance for doubtful accounts - January 1, 2016
25,600
Collections during 2016
2,426,300
Accounts written off as uncollectible during 2016
23,700
201. Refer to the data for Beatrice Equipment.
Determine the balance of Accounts Receivable at December 31, 2016.
ANSWER:
$160,000
$270,000 (Accounts Receivable at Jan. 1) + $2,400,000 (Sales) – $60,000 (Sales returns &
allowances) – $2,426,300 (Collections) – $23,700 (Accounts written off) = $160,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
202. Refer to the data for Beatrice Equipment.
Assume that Beatrice Equipment estimates bad debts at 1% of net credit sales.
A)
What amount will Beatrice Equipment record as bad debts expense for 2016?
B)
How much is the net realizable value of accounts receivable reported on Beatrice
Equipment’s balance sheet at December 31, 2016?
ANSWER:
A) ($2,400,000 – $60,000) × .01 = $23,400
B) [$160,000 – ($25,600 – $23,700 + $23,400)] = $134,700
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
203. Refer to Beatrice Equipment.
Assume that Beatrice Equipment estimates bad debts on an aging analysis, and the aging schedule indicates that $28,000
of the December 31, 2016 accounts receivable will be uncollectible.
A)
What amount will Beatrice Equipment recognize as bad debts expense for 2016?
B)
How much is the net realizable value of the receivables to be reported on Beatrice
Equipment’s balance sheet at December 31, 2016?
ANSWER:
A) $28,000 – ($25,600 – $23,700) = $26,100
B) ($160,000 – $28,000) = $132,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
204. If a company has a choice of acceptable methods to estimate bad debts, what factors should be considered in the
selection?
ANSWER:
The percentage of net sales approach emphasizes the matching principle. The aging approach
emphasizes the valuation of the receivables at the net amount to be collected. A company
should be concerned with both income measurement and balance sheet valuation, but must
choose one of the two approaches, most likely based on management philosophy. If most
customer balances fall within a small range of variation, the percentage of sales approach,
which is easier to apply, probably will give reasonable results for both income measurement
and asset valuation. However, if there is a wide variation in the amounts of customer
balances, and especially if some large customer balances are significantly past due and their
collection is very uncertain, then the aging approach should give better results for both
income measurement and asset valuation.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Applying
205. Can a company use the direct write-off method rather than the allowance method to account for bad debts expense?
Explain why or why not.
ANSWER:
The direct write-off method is not an acceptable GAAP (generally accepted accounting
principles) procedure to account for bad debts. It does not adequately match bad debt expense
with the revenues unless the accounts are determined to be uncollectible in the same year that
the revenue was recognized. In rare cases, when a company has very infrequent and
immaterial amounts of bad debts, the direct write-off method can be justified.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Applying
Sliders Company
Sliders Company sells its merchandise only on credit. The following data is available at December 31, 2016:
Sales
$375,000
Sales returns and allowances
12,000
Accounts receivable at January 1, 2016
60,600
Allowance for doubtful accounts at January 1, 2016
3,200
Cash collections during 2016
362,500
Accounts written off as uncollectible during 2016
2,400
206. Refer to data for Sliders Company.
Determine the balance of Accounts Receivable at December 31, 2016.
ANSWER:
$58,700
$60,600 (Account Receivable—Jan. 1) + $363,000 (Net Sales) – $362,500 (Cash
Collections)
– $2,400 (Accounts Written Off) = $58,700
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
207. Refer to the data for Sliders Company.
The firm estimates that bad debts could be 1% of their net sales.
A)
What amount will Sliders Company recognize as bad debts expense for the year?
B)
Once this calculation is recorded, assume that the company has a balance of Accounts
Receivable of $58,700, and an Allowance for Doubtful Accounts of $800. What will be
the net realizable value once the adjustment from Part A) is made?
ANSWER:
A $363,000 (Net Sales) × .01 or 1% = $3,630
B) $58,700 (Accounts Receivables Balance) – ($800 + $3,630) = $54,270
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
208. Refer to the data for Sliders Company.
Assume the company estimates bad debts using an aging analysis and the aging schedule indicates that $3,600 of the end
of the year Accounts Receivable will be uncollectible.
A)
What amount will Sliders Company recognize as bad debt expense for the year?
B)
If the ending balance of Accounts Receivables is $38,700, what is the net realizable value
of Accounts Receivable reported on December 31, 2016?
ANSWER:
A) $3,600 – ($3,200 – $2,400) = $2,800
B) $38,700 (Accounts Receivable) – $3,600 (Allowance) = $35,100
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS:
Bloom's: Analyzing
209. Stream Media Inc. and Techtronics are competitors in the same industry.
The following information was summarized from a recent annual report of Stream Media Inc.:
(In millions)
Receivables:
December 31, 2017
$ 1,968
December 31, 2016
642
Revenue for the year ended:
December 31, 2017
46,980
December 31, 2016
40,023
The following information was summarized from a recent annual report of Techtronics:
(In millions)
Accounts and notes receivable, net
December 31, 2017
$ 246
December 31, 2016
264
Revenues for the year ended:
December 31, 2017
4,335
December 31, 2016
4,251
Required:
1. Calculate the accounts receivable turnover ratios for Stream Media and Techtronics for the most recent year.
2. Calculate the average collection period, in days, for both companies for the most recent year. Comment on the
reasonableness of the collection periods for these companies considering the nature of their business.
3. Which company appears to be performing better? What other information should you consider in determining how
these companies are performing?
ANSWER:
1. Accounts receivable turnover ratios:
Stream Media:
$46,980/[($1,968 + $642)/2] = $46,980/$1,305 =36 times
Techtronics:
$4,335/[($246 + $264)/2] = $4,335/$255 = 17 times
2. Average collection period:
Stream Media:
360/36 = 10 days
Techtronics:
