Chapter 7: Receivables and Investments
True / False
1. The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum
amount of write-off in each period.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
2. Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize bad debts under
the allowance method.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
3. The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for
Doubtful Accounts.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
4. Selling on credit protects a company from the risk that some of its receivables will never be collected.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
5. Accounts receivable are shown on the balance sheet at their net realizable value.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
6. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the
period in which a sale on credit takes place.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
7. One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching
principle.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
8. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those
debts actually occur.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
9. Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
10. Because the allowance method results in better matching, accounting standards require its use rather than the direct
write-off method, unless bad debts are immaterial.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
11. An aging schedule typically categorizes the various accounts by the length of time each invoice is outstanding.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
12. The accounts receivable turnover ratio is a measure of how well a company manages its receivables.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
13. The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
14. Typically, the lower the accounts receivable turnover ratio, the better.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
15. If Ash Company had sales during the year of $10,000,000, an average accounts receivable of $2,000,000, and net
income of $500,000, its accounts receivable turnover ratio would be 0.25.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Analyzing
16. If accounts receivable turnover is faster, this means that fewer days are required to collect receivables.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Understanding
17. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts
receivable.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
18. A high accounts receivable turnover ratio could mean that the company’s credit policies may be too stringent.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Remembering
19. Lewisburg Corp. had sales during the year of $15,000,000 and an average accounts receivable of $5,000,000. Its
accounts receivable turnover ratio is 0.33 times.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Analyzing
20. The maker of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
21. The maker of a note recognizes a note payable on the balance sheet and interest expense on its income statement.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
22. The payee of a note recognizes a note payable on the balance sheet and interest expense on its income statement.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
23. The payee of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Remembering
24. When a note is discounted at a bank, it is normally done with recourse.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
25. If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the
amount of the sale in a case of nonpayment from a cardholder.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
26. When a company discounts a promissory note at the bank, it receives cash at the same time it would if it held the note
to maturity.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
27. The alternate term for a credit card draft is an invoice.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
28. Promissory notes are non-negotiable.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
29. A note discounted with recourse means that if the original customer fails to pay the bank the total amount due on the
maturity date of the note, the company that transferred the note to the bank is liable for the full amount.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Remembering
30. Whether investments are reported as current assets or noncurrent assets depends on the company’s intent.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
31. A subsidiary is a separate legal entity that is owned or controlled by another entity.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
32. Securities issued by corporations as a form of ownership in the business, such as common and preferred stock, are
called equity securities.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
33. When Company X buys stock in Company Y, Company X is referred to as the investee.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
34. The equity method of accounting is used if the investor owns at least 20% of the investee and the investor is able to
secure influence over the investee.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
35. Purchases and sales of cash equivalents are reported as investing activities on a statement of cash flows.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
36. Baggs buys $100,000 of Vista Company bonds on January 1, 2016 at face value. The bonds pay 10% interest
semiannually on June 30 and December 31. If Baggs sells the bonds at 99 on July 1, 2016, there will be a loss reported on
the income statement.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Analyzing
37. Both stock and bond investments have maturity dates.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
38. A company invests excess cash in a certificate of deposit. At the end of an accounting period before the CD matures,
the company will recognize interest expense.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Remembering
39. A decrease in accounts receivable represents an increase in a company’s cash flow from operating activities.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Remembering
40. An increase in accounts receivable is reported on the statement of cash flows under the indirect method as an addition.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Remembering
41. The most common type of receivables is accounts receivable.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
42. The direct write-off method estimates the amount of bad debts before they occur.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
43. Cash flows from purchases, sales, and maturities of investments are usually classified as operating activities.
a.
True
b.
False
ANSWER:
False
Multiple Choice
44. Which one of the following is not an accurate description of Allowance for Doubtful Accounts?
a.
Contra account
b.
Balance sheet account
c.
Income statement account
d.
Current asset account
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
45. The data presented below is for Falconi, Inc. for 2016.
$2,100,000
395,000
20,000
17,000
What amount will Falconi show on its year-end balance sheet for the net realizable value of its accounts receivable?
a.
$378,000
b.
$375,000
c.
$358,000
d.
$ 20,000
ANSWER:
b
RATIONALE:
$395,000 (Accounts Receivable) – $20,000 (Allowance) = $375,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
46. The data presented below is for Falconi, Inc. for 2016.
$2,100,000
295,000
28,000
17,000
What is the effect on liquidity when Falconi records its estimate for bad debt expense using the allowance method?
a.
Liquidity decreases
b.
Liquidity increases
c.
Liquidity stays the same
d.
Liquidity both increases and decreases
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
47. The following information was presented in the balance sheet of Gloria Company as of December 31, 2016:
Trade accounts receivable, net of allowance for
uncollectibles of $100,000
$1,600,000
Which one of the following statements is true?
a.
Gloria expects that $1,700,000 of accounts receivable will be collected after year end.
b.
The balance in the Accounts Receivable account in Gloria’s general ledger is $1,600,000.
c.
The net realizable value of Gloria’s accounts receivable is $1,600,000.
d.
Gloria expects to collect only $1,500,000 from its customers.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
48. On January 15, 2016, the accounts receivable balance was $7,000 and the balance in the allowance for doubtful
accounts was $700. On January 16, 2016, a $200 uncollectible account was written-off. The net realizable value of
accounts receivable on January 16 immediately after the write-off is:
a.
$6,300
b.
$6,800
c.
$6,500
d.
$7,900
ANSWER:
a
RATIONALE:
$6,800 – $500 = $6,300; Although the allowance account decreases, so too does the total of
accounts receivable, when writing off an account using the allowance method.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
49. Which one of the following is an accurate description of Allowance for Doubtful Accounts?
a.
Contra account
b.
Liability account
c.
Revenue account
d.
Expense account
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
50. Which one of the following statements is true?
a.
When a company uses a subsidiary ledger, the balance in the control account, Accounts Receivable, shows
only the amount the company expects to collect from the accounts receivable, net of any expected
uncollectible accounts.
b.
An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers.
c.
The balance in the control account, Accounts Receivable, should be equal to the sum of the balances in the
subsidiary ledger for accounts receivable.
d.
A subsidiary ledger takes the place of the control account for some companies.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
51. If a company uses the direct write-off method of accounting for bad debts,
a.
It is applying the matching principle.
b.
It will record bad debt expense only when an account is determined to be uncollectible.
c.
It will reduce the accounts receivable account at the end of the accounting period for estimated uncollectible
accounts.
d.
It will report accounts receivable in the balance sheet at their net realizable value.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
52. Fenchurch Corp. uses the direct write-off method to account for bad debts. What are the effects on the accounting
equation of the entry to record the write-off of a customer’s account balance?
a.
Assets and liabilities decrease.
b.
Assets and owners’ equity decrease.
c.
Owners’ equity decrease and liabilities increase.
d.
No effect; assets increase and decrease by the same amount.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
53. If a company uses the allowance method of accounting for bad debts, which one of the following statements is true?
a.
It will report accounts receivable in the balance sheet at their net realizable value
b.
It will record bad debts only when an account is determined to be uncollectible.
c.
It will reduce the accounts receivable at the end of the accounting period for estimated uncollectible accounts.
d.
It violates the matching principle.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
54. Which one of the following statements is true if a company’s collection period for accounts receivable is
unacceptably long?
a.
The company may need to borrow to acquire operating cash.
b.
The company may offer trade discounts to lengthen the collection period.
c.
Cash flows from operations may be higher than expected for the company’s sales.
d.
The company should expand operations with its excess cash.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
55. If a company uses the allowance method to account for bad debts, when will the company’s owners’ equity decrease?
a.
At the date a customer’s account is written off
b.
At the end of the accounting period when an adjusting entry for bad debts is recorded
c.
At the date a customer’s account is determined to be uncollectible
d.
When the accounts receivable amount becomes past due
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
56. Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad debts
expense with revenue on the income statement?
a.
The percentage of accounts receivable approach
b.
The percentage of net credit sales approach
c.
The direct write-off method
d.
The uncollectible approach
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
57. Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net realizable
value of accounts receivable on the balance sheet?
a.
The percentage of accounts receivable approach
b.
The percentage of net credit sales approach
c.
The direct write-off method
d.
The uncollectible approach
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
Chapter 7: Receivables and Investments
Lynx Corp.
The data presented below for Lynx Corp. is for the year ended December 31, 2016:
Sales (100% on credit)
$1,000,000
Sales returns
30,000
Accounts Receivable (December 31, 2016)
170,000
Allowance for Doubtful Accounts [Cr. Balance]
(Before adjustment at December 31, 2016)
1,300
Estimated amount of uncollectible accounts based on aging analysis
14,000
58. See the data for Lynx Corp.
If Lynx Corp. estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt expense for
2016?
a.
$9,560
b.
$9,700
c.
$1,700
d.
None of these choices
ANSWER:
b
RATIONALE:
[$1,000,000 (Sales) – $30,000 (Sales Returns) = $970,000] × (.01 or 1%) = $9,700
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
59. See the data for Lynx Corp.
If Lynx Corp. estimates its bad debt to be 1% of net credit sales, what will be the balance in the Allowance for Doubtful
Accounts account after the adjustment for bad debts?
a.
$1,300
b.
$9,700
c.
$8,400
d.
$11,000
ANSWER:
d
RATIONALE:
$1,300 Allowance for Doubtful Accounts balance before adjustment) + $9,700 (Adjustment)
= $11,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
60. See the data for Lynx Corp.
If Lynx Corp. uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as
bad debt expense for 2016?
a.
$12,700
b.
$13,700
c.
$14,000
d.
$15,300
ANSWER:
a
RATIONALE:
$14,000 (Amount Required) – $1,300 (Current Balance) = $12,700
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
61. See the data for Lynx Corp.
If Lynx Corp.uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable
value of its accounts receivable after the adjustment for bad debt expense?
a.
$140,000
b.
$156,000
c.
$167,000
d.
$184,000
ANSWER:
b
RATIONALE:
$170,000 (Accounts Receivable Balance) – $14,000 (Allowance for Doubtful Accounts) =
$156,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
62. Allowance for Doubtful Accounts represents:
a.
Cash set aside to make up for bad debt losses
b.
The amount of uncollectible accounts written off to date
c.
The difference between total sales made on credit and the amount collected from those credit sales
d.
The difference between the gross amount of accounts receivable and the net realizable value of accounts
receivable
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Remembering
63. Which of the following statements is true regarding the two allowance methods used to account for bad debts?
a.
The percentage of net credit sales approach takes into account the existing balance in the Allowance for
Doubtful Accounts account.
b.
The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts
account.
c.
The percentage of accounts receivable approach takes into account the existing balance in the Allowance for
Doubtful Accounts account.
d.
The direct write-off method does a better job of matching revenues and expenses.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
64. The following data concerns Wang Corporation for 2016:
Credit sales during the year
$1,600,000
Accounts Receivable—December 31, 2016
235,000
Allowance for Doubtful Accounts—December 31, 2016
18,000
Bad debt expense for the year
11,000
What amount will Wang show on its year-end balance sheet for the net realizable value of its accounts receivable?
a.
$253,000
b.
$235,000
c.
$224,000
d.
$217,000
ANSWER:
d
RATIONALE:
$235,000 (Accounts Receivable) – $ 18,000 (Allowance for Doubtful Accounts) = $217,000
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
65. What are the effects on the accounting equation when a company makes the adjustment to record bad debt expense
using the allowance method?
a.
Assets and owners’ equity increase.
b.
Assets and owners’ equity decrease.
c.
Assets increase and owners’ equity decreases.
d.
Assets decrease and owners’ equity increases.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
66. When using the allowance method, what are the effects on the accounting equation when a company writes off a bad
debt?
a.
Assets and stockholders’ equity increase.
b.
Assets and stockholders’ equity decrease.
c.
Assets increase and stockholders’ equity decreases.
d.
No effect on overall assets or equity.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Understanding
Music Corporation
The data below is for Music Corporation for 2016.
Accounts receivable—January 1, 2016
$236,000
Credit sales during 2016
820,000
Collections from credit customers during 2016
590,000
Customer accounts written off as uncollectible during 2016
8,000
Allowance for doubtful accounts—January 1, 2016
8,700
Estimated uncollectible accounts based on an aging analysis
9,600
67. Refer to the data for Music Corporation.
What is the balance of Accounts Receivable at December 31, 2016?
a.
$336,000
b.
$448,400
c.
$458,000
d.
$466,000
ANSWER:
c
RATIONALE:
$236,000 (Accounts Receivable – Jan. 1) + $820,000 (Credit Sales) – $590,000 (Collections)
– $8,000 (Accounts written off) = $458,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
68. Refer to the data for Music Corporation.
If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2016?
a.
$8,000
b.
$8,100
c.
$8,700
d.
$8,900
ANSWER:
d
RATIONALE:
$9,600 (Estimated Uncollectible Accounts) – [$8,700 (Allowance for Doubtful Accounts –
Jan. 1.) – 8,000 (Accounts written off during the year)] = $8,900
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
69. Refer to the data for Music Corporation.
If the aging approach is used to estimate bad debts, what is the balance in the Allowance for Doubtful Accounts after the
bad debt expense adjustment?
a.
$8,000
b.
$8,100
c.
$8,900
d.
$9,600
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
Benton Corporation
The data below is for Benton Corporation for 2016.
Accounts Receivable—January 1, 2016
$334,000
Credit sales during 2016
850,000
Collections from credit customers during 2016
725,000
Customer accounts written off as uncollectible during 2016
12,000
Allowance for Doubtful Accounts [Credit Balance]
(After write-off of uncollectible accounts)
1,700
Estimated uncollectible accounts based on an aging analysis
13,200
70. Refer to the data for Benton Corporation.
What is the balance of Accounts Receivable at December 31, 2016?
a.
$209,000
b.
$225,000
c.
$447,000
d.
$459,000
ANSWER:
c
RATIONALE:
$334,000 (Accounts Receivable – Jan. 1) + $850,000 (Credit Sales) – $725,000 (Cash
Collections) – 12,000 (Accounts written off) = $447,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
71. Refer to the data for Benton Corporation.
If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2016?
a.
$ 2,900
b.
$11,500
c.
$23,500
d.
$26,900
ANSWER:
b
RATIONALE:
$13,200 (Estimated uncollectible accounts) – $1,700 (Allowance balance after write offs) =
$11,500
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
72. Refer to the data for Benton Corporation.
If the aging approach is used to estimate bad debts, what should the balance in the Allowance for Doubtful Accounts be
after the bad debts adjustment?
a.
$26,900
b.
$14,900
c.
$13,200
d.
$11,500
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
Chapter 7: Receivables and Investments
Mellon Corporation
The data presented below is for Mellon Corporation for the year ended December 31, 2016:
Sales (100% on credit)
$1,500,000
Sales returns
60,000
Accounts Receivable (December 31, 2016)
250,000
Allowance for Doubtful Accounts [Credit Balance] (Before adjustment at December
31, 2016
3,000
Estimated amount of uncollectible accounts based on an aging analysis
31,000
73. Refer to the data for Mellon Corporation.
If Mellon estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt expense for 2016?
a.
$25,800
b.
$27,000
c.
$28,800
d.
$30,000
ANSWER:
c
RATIONALE:
[$1,500,000 (Sales) – $60,000 (Sales Returns)] × .02 or 2% = $28,800
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
74. Refer to information for Mellon Corporation.
If Mellon uses 2% of net credit sales to estimate its bad debts, what will be the balance in the Allowance for Doubtful
Accounts account after the adjustment for bad debts?
a.
$33,000
b.
$31,800
c.
$27,000
d.
$25,800
ANSWER:
b
RATIONALE:
$3,000 (Allowance for Doubtful Accounts at Dec. 31) + [$1,500,000 (Sales) – $60,000 (Sales
Returns) × .02 or 2%] = $31,800
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing