Financial Accounting 4th Edition David Spiceland Wayne Thomas Don Herrmann - Test Bank

Financial Accounting 4th Edition David Spiceland Wayne Thomas Don Herrmann – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Chapter 05

Receivables and Sales

True / False Questions

1.	Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. True False

2.	At the time of a credit sale, a company would record an increase in assets and an increase in revenues. True False

3.	A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable. True False

4.	Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account. True False

5.	Trade discounts represent a discount offered to the purchasers for quick payment. True False

6.	When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. True False

7.	A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. True False

8.	A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. True False

9.	The Sales Discounts account is an example of a contra revenue account. True False

10.	The Sales Discounts account is an expense account. True False

11.	Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer’s balance owed. True False

12.	A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. True False

13.	The Sales Returns account is an expense account. True False

14.	If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. True False

15.	Accounts receivable are reported at their net realizable value. True False

16.	The net realizable value of accounts receivable is the full amount owed by customers. True False

17.	Customers’ accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts). True False

18.	The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities. True False

19.	The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. True False

20.	The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. True False

21.	Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that represents the cost of the estimated future bad debts. True False

22.	If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. True False

23.	One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally matches bad debt expense with the revenue it helped to generate. True False

24.	The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts. True False

25.	The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. True False

26.	The aging method for estimating uncollectible accounts considers that a higher percentage of “older” accounts will not be collected compared to “newer” accounts. True False

27.	A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. True False

28.	Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets. True False

29.	Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense. True False

30.	Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable. True False

31.	Under the allowance method, when a company collects cash from an account previously written off, total assets increase. True False

32.	A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year’s estimate of uncollectible accounts may have been too high. True False

33.	A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year’s estimate of uncollectible accounts was too low. True False

34.	Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible. True False

35.	The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. True False

36.	The direct write-off method violates the matching principle. True False

37.	Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. True False

38.	Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. True False

39.	Notes receivable typically arise from sales to customers. True False

40.	Notes receivable are assets and are reported in the balance sheet. True False

41.	Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding. True False

42.	A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000. True False

43.	Accrued interest on a note receivable is interest earned by the end of the year but not yet received. True False

44.	Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities. True False

45.	Two important ratios that help in understanding the company’s effectiveness in managing receivables are the receivables turnover ratio and the average collection period. True False

46.	The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or “turns over”). True False

47.	The receivables turnover ratio equals average accounts receivable divided by net credit sales. True False

48.	A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers. True False

49.	The average collection period shows the approximate number of days the average accounts receivable balance is outstanding. True False

50.	The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement. True False

51.	Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. True False

52.	From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts). True False

53.	From a balance sheet perspective, the percentage-of-receivables method is typically preferable because assets (net accounts receivable) are reported closer to their net realizable value. True False

54.	The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. True False

Multiple Choice Questions

55.

Which of the following best describes credit sales?

A.	Cash sales to customers that are new to the company.

B.	Sales to customers using credit cards.

C.	Sales to customers on account.

D.	Sales with a high risk that the customer will return the product.

56.

Credit sales are recorded as:

A.	Debit Cash, credit Deferred Revenue.

B.	Debit Service Revenue, credit Accounts Receivable.

C.	Debit Cash, credit Service Revenue.

D.	Debit Accounts Receivable, credit Service Revenue.

57.

A company provides services on account. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	(1) Increase, (2) No effect (3) Increase

B.	(1) No effect, (2) Increase (3) Increase

C.	(1) Increase, (2) Increase (3) Increase

D.	(1) No effect, (2) No effect (3) No effect

58.

Which of the following best describes accounts receivable?

A.	The amount of cash owed by a company to its vendors for purchases of products or services on account.

B.	The amount of cash collected by a company from its customers from the sale of products or services on account.

C.	The amount of cash owed to a company by its customers from the sale of products or services on account.

D.	The amount of cash not expected to be collected by a company from its customers from the sale of products or services on account (bad debts).

59.

The amount of cash owed to a company by its customers from the sale of products or services on account is commonly referred to as:

Cash.

B.	Accounts receivable.

Revenue.

D.	Accounts payable.

60.

Identify the likely disadvantage(s) of extending credit to customers.

A.	Delay or failure to collect cash.

B.	Lower profitability.

C.	Lower revenues.

D.	All of the other answers are disadvantages of extending credit to customers.

61.

Identify the likely advantage(s) of extending credit to customers.

A.	Reduce accounts receivable.

B.	Increase sales.

C.	Reduce amounts owed to creditors.

D.	Increase employees’ salaries.

62.

Identify the condition(s) that must exist for a sale and the related receivable to be recognized.

A.	Collection of cash is probable.

B.	The company must have collected cash from at least one previous sale to the customer.

C.	Goods or services have been provided to the customer.

D.	Two of the other answers are conditions that must exist.

63.

Fleming Corp. provided services on account. The transaction would be recorded with a debit to:

A.	Retained Earnings.

B.	Service Revenue.

C.	Accounts Receivable.

Cash.

64.

Fleming Corp. provided services on account. The transaction would be recorded with a credit to:

A.	Accounts Payable.

B.	Service Revenue.

C.	Accounts Receivable.

Cash.

65.

Which of the following items are classified as receivables?

A.	Tax refund claims.

B.	Amounts owed by customers.

C.	Amounts loaned and expected to be collected.

D.	All of the other answers are classified as receivables.

66.

A trade discount results in:

A.	A contra revenue account being recorded.

B.	A contra asset being recorded.

C.	Customers delaying cash payment.

D.	Revenue being recorded for the discounted price.

67.

Barton Health Services provided care to a patient worth $1,200. Because the patient was over the age of 65, Barton granted the patient a 20% discount and the customer paid the correct amount in cash. How would Barton record the service transaction?

A.	Cash	960
	Service Revenue		960
B.	Cash	960
	Trade Discount	240
	Service Revenue		1,200
C.	Cash	1,200
	Service Revenue		1,200
D.	Cash	1,200
	Trade Discount		240
	Service Revenue		960

Option A

Option B

Option C

Option D

68.

When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:

Bad debt.

B.	Sales discount.

C.	Sales return.

D.	Sales allowances.

69.

Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers. In March 2018, Garber provided $4,000 of plumbing services to Red Oak Inc., and $1,500 of services to Cyril Inc., Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net revenues amount for these two transactions?

$5,500.

$4,312.

$4,486.

$4,606.

70.

On July 8, Ray Inc. sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15?

A.	Cash	60,000
	Accounts Receivable		60,000
B.	Cash	58,800
	Accounts Receivable		58,800
C.	Cash	58,800
	Sales Discounts	1,200
	Accounts Receivable		60,000
D.	Cash	60,000
	Sales Discounts		1,200
	Sales Revenue		58,800

Option A

Option B

Option C

Option D

71.

On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net 20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials?

$15,000.

$14,550.

$15,450.

$0.

72.

A company collects a customer’s account within the discount period. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	(1) Decrease, (2) Decrease, (3) Decrease

B.	(1) Increase, (2) Increase, (3) Increase

C.	(1) Increase, (2) Increase, (3) No effect

D.	(1) No effect, (2) No effect, (3) No effect

73.

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10?

A.	Accounts Receivable	7,840
	Sales Revenue		7,840
B.	Accounts Receivable	8,000
	Sales Revenue		8,000
C.	Accounts Receivable	7,840
	Cash Discounts	160
	Sales Revenue		8,000
D.	Accounts Receivable	8,000
	Cash Discounts		160
	Sales Revenue		7,840

Option A

Option B

Option C

Option D

74.

On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17?

A.	Cash	7,840
	Accounts Receivable		7,840
B.	Cash	7,840
	Sales Discounts	160
	Accounts Receivable		8,000
C.	Cash	7,840
	Sales Revenue	160
	Accounts Receivable		8,000
D.	Cash	8,000
	Accounts Receivable		8,000

Option A

Option B

Option C

Option D

75.

On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5?

A.	Cash	7,840
	Accounts Receivable		7,840
B.	Cash	7,840
	Sales Discounts	160
	Accounts Receivable		8,000
C.	Cash	7,840
	Sales Revenue	160
	Accounts Receivable		8,000
D.	Cash	8,000
	Accounts Receivable		8,000

Option A

Option B

Option C

Option D

76.

Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12?

A.	Accounts Receivable	46,000
	Sales Revenue		46,000
B.	Accounts Receivable	46,000
	Sales Revenue		45,540
	Sales Discounts		460
C.	Accounts Receivable	45,540
	Sales Revenue		45,540
D.	Accounts Receivable	45,540
	Sales Discounts	460
	Sales Revenue		46,000

Option A

Option B

Option C

Option D

77.

Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date?

A.	Cash	45,540
	Sales Revenue	460
	Accounts Receivable		46,000
B.	Cash	46,000
	Sales Discounts	460
	Accounts Receivable		46,000
	Interest Revenue		460
C.	Cash	45,540
	Sales Discounts	460
	Accounts Receivable		46,000
D.	Cash	46,000
	Accounts Receivable		45,540
	Sales Revenue		460

Option A

Option B

Option C

Option D

78.

Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date?

A.	Cash	46,000
	Accounts Receivable		45,540
	Discounts Receivable		460
B.	Cash	46,000
	Accounts Receivable		45,540
	Interest Revenue		460
C.	Cash	46,000
	Accounts Receivable		46,000
D.	Cash	46,460
	Accounts Receivable		46,000
	Interest Revenue		460

Option A

Option B

Option C

Option D

79.

Which of the following is recorded upon receipt of a payment on April 7, 2018, by a customer who pays a $900 invoice dated March 3, 2018, with terms 2/10, n/60?

A.	Debit Sales Discounts $18.

B.	Credit Purchase Discounts $18.

C.	Credit Accounts Receivable $882.

D.	Debit Cash $900.

80.

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a:

A.	Sales revenue.

B.	Sales discount.

C.	Sales return.

D.	Sales allowance.

81.

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting Accounts Receivable and debiting:

A.	Sales Revenue.

B.	Sales Discounts.

C.	Sales Returns.

D.	Sales Allowances.

82.

Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a:

A.	Sales revenue.

B.	Sales discount.

C.	Sales return.

D.	Sales allowance.

83.

Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom’s would credit Accounts Receivable and debit:

A.	Sales Revenue.

B.	Sales Discounts.

C.	Sales Returns.

D.	Sales Allowances.

84.

A company records a sales return from a credit customer. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	(1) Decrease, (2) Decrease, (3) Decrease

B.	(1) Decrease, (2) No effect, (3) Decrease

C.	(1) Decrease, (2) Decrease, (3) No effect

D.	(1) No effect, (2) No effect, (3) No effect

85.

Lewis Inc. had the following information taken from various accounts at the end of the year:

Sales discounts	$41,000
Deferred revenues	$32,000
Total sales	$459,000
Purchase discounts	$15,000
Sales allowances	$35,000
Accounts receivable	$205,000

What was Lewis Inc.’s net revenues for the year?

$368,000.

$434,000.

$383,000.

$437,000.

86.

Eric Company has the following information:

Total revenues	$860,000
Sales returns and allowances	$50,000
Sales discounts	$30,000
Ending inventory	$100,000

What is the amount of net revenues for Eric Company?

$330,000.

$230,000.

$680,000.

$780,000.

87.

Boynton Jewelers reported the following amounts at the end of the year: total sales = $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company’s net revenues for the year?

$489,000.

$485,000.

$477,000.

$499,000.

88.

Ryerson Co. provides goods and services to customers during the year totaling $100,000. Also during the year, customers are granted discounts, returns, and allowance of $20,000. At the end of the year, Ryerson estimates that an additional $5,000 in discounts, returns, and allowances will occur next year as a result of sales transactions this year. What is the amount of net revenues Ryerson will report in its current-year income statement?

$85,000.

$75,000.

$100,000.

$80,000.

89.

Accounts receivable are normally reported at the:

A.	Present value of future cash receipts.

B.	Current value plus accrued interest.

C.	Expected amount to be received.

D.	Current value less expected collection costs.

90.

The amount of cash that is actually expected to be collected on accounts receivable is referred to as:

A.	Net realizable value.

B.	Allowance for uncollectible accounts.

C.	Net income.

D.	Net revenue.

91.

The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:

A.	The balance sheet method.

B.	The sales method.

C.	The income statement method.

D.	The aging method.

92.

The percentage-of-receivables method for accounting for uncollectible accounts focuses on the:

A.	Total credit sales for the year.

B.	Ratio of accounts receivable to sales.

C.	Net realizable value of accounts receivable.

D.	Cash flows from sales.

93.

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

A.	Accounts receivable.

B.	Allowance for uncollectible accounts.

C.	Bad debt expense.

D.	Credit sales.

94.

The purpose of recording an allowance for uncollectible accounts is to:

A.	Record the sales returns and allowances.

B.	Report net sales conservatively.

C.	Report accounts receivable at net realizable value.

D.	Report accounts receivable for the total amount of sales in the period.

95.

A company’s adjustment for uncollectible accounts at year-end would include a:

A.	Debit to Bad Debt Expense.

B.	Credit to Accounts Receivable.

C.	Debit to Accounts Receivable.

D.	Debit to Allowance for Uncollectible Accounts.

96.

One advantage of the allowance method for accounting for uncollectible accounts is that the company reports:

A.	Bad debt expense in the same period as the credit sale.

B.	Greater total sales to customers.

C.	Fewer returns by customers.

D.	Greater total cash collected from customers.

97.

The account “Allowance for Uncollectible Accounts” is classified as a(n):

A.	Liability account in the balance sheet.

B.	Contra revenue to credit sales in the income statement.

C.	Expense in the income statement.

D.	Contra asset to accounts receivable in the balance sheet.

98.

Allowance for Uncollectible Accounts is:

A.	An expense account.

B.	A contra asset account.

C.	A contra revenue account.

D.	A liability account.

99.

The normal balance of the account “Allowance for Uncollectible Accounts” is a _______ because _______.

A.	Debit; it is a contra account to Revenue (a credit account)

B.	Credit; it is a contra account to Accounts Receivable (a debit account)

C.	Debit; it is an expense in the income statement

D.	Credit; it is a contra account to Bad Debt Expense (a debit account)

100.

Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?

A.	Increase liabilities and decrease stockholders’ equity.

B.	Decrease assets and decrease liabilities.

C.	Decrease assets and decrease stockholders’ equity.

D.	Increase assets and decrease stockholders’ equity.

101.

Under the allowance method, which of the following does not change the balance in the Accounts Receivable account?

A.	Returns on credit sales.

B.	Collections on customer accounts.

C.	Bad debt expense adjustment.

D.	Write-offs.

102.

At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:

$6,540.

$7,800.

$7,140.

$7,740.

103.

At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:

$6,540.

$7,800.

$7,140.

$7,740.

104.

At December 31, Amy Jo’s Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (credit) before any adjustments. An analysis of Amy Jo’s December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:

$6,220.

$6,450.

$5,250.

$7,190.

105.

At December 31, Amy Jo’s Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (debit) before any adjustments. An analysis of Amy Jo’s December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:

$6,220.

$6,450.

$5,250.

$7,190.

106.

At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State’s adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:

A.	Credit to Allowance for Uncollectible Accounts of $12,000.

B.	Debit to Bad Debt Expense of $7,500.

C.	Credit to Allowance for Uncollectible Accounts of $7,500.

D.	Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500.

107.

At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (debit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State’s adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:

A.	Credit to Allowance for Uncollectible Accounts of $12,000.

B.	Debit to Bad Debt Expense of $16,500.

C.	Credit to Allowance for Uncollectible Accounts of $16,500.

D.	Debit to Bad Debt Expense of $16,500; credit to Allowance for Uncollectible Accounts of $16,500.

108.

At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (debit) before any adjustments. An analysis of Tremble’s December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be:

$1,000.

$16,000.

$14,000.

$15,000.

109.

At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (credit) before any adjustments. An analysis of Tremble’s December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be:

$1,000.

$15,000.

$16,000.

$14,000.

110.

At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment. What adjustment should Mark Inc. record for the estimated bad debts at the end of the year?

A.	Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500.

B.	Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000.

C.	Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000.

D.	Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000.

111.

Suppose that the balance of a company’s Allowance for Uncollectible Accounts was $6,200 (credit) at the end of the year, prior to any adjustments. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of the year. What amount of bad debt expense would appear in the company’s year-end income statement?

$38,100.

$105,700.

$33,000.

$50,500.

112.

Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance?

A.	The amount of cash collections from customers in the current year was less the amount of cash collections from customers in the prior year.

B.	The amount of actual uncollectible accounts in the current year was less than the estimate of uncollectible accounts made at the end of the prior year.

C.	The amount of credit sales in the current year was greater than the amount of credit sales made in the prior year.

D.	The amount of actual uncollectible accounts in the current year was greater than the estimate of uncollectible accounts made at the end of the prior year.

113.

Suppose at the end of the year before any adjusting entries, a company has a balance in Allowance for Uncollectible Accounts of $5,000 (debit). During the year, the company reported the following amounts:

Credit sales to customers = $550,000
Cash collections from customers = $540,000
Actual bad debts = $20,000

What was the balance of Allowance for Uncollectible Accounts at the beginning of the year?

$10,000.

$20,000.

$15,000.

$25,000.

114.

If the estimate of uncollectible accounts at the end of the current year is too high, which of the following is true in the following year?

A.	Cash collections from customers will be greater than expected.

B.	The balance of Allowance for Uncollectible Accounts will be a credit prior to its year-end adjustment.

C.	The amount reported for Bad Debt Expense will be less than the ending balance of Allowance for Uncollectible Accounts after its year-end adjustment.

D.	All of the other answers are true in the following year.

115.

On December 31, 2018, Coolwear Inc. had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $48,400 and $940, respectively. During 2019, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2019. Bad debt expense for 2019 would be:

$320.

$1,140.

$820.

$1,020.

116.

On December 31, 2018, Larry’s Used Cars had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2019, Larry’s wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2019. Bad debt expense for 2019 would be:

$1,280.

$1,465.

$1,420.

$1,140.

117.

For accounts receivable, the longer an account is outstanding, the:

A.	Better the customer.

B.	More likely it will prove uncollectible.

C.	More likely the customer will return.

D.	Higher probability of it being collected.

118.

The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the:

A.	Activity method.

B.	Realization method.

C.	Direct write-off method.

D.	Aging method.

119.

When using an aging method for estimating uncollectible accounts:

A.	Older accounts are considered less likely to be collected.

B.	The number of days the account is past due is not considered.

C.	Older accounts are considered more likely to be collected.

D.	No estimate of uncollectible accounts is made.

120.

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to:

A.	Be more accurate.

B.	Result in the highest net income.

C.	Result in the lowest net income.

D.	Recognize bad debts earlier.

121.

On December 31, 2018, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts:

Age Group (days past due)	Accounts Receivable	Estimated Percent Uncollectible
0-30	$50,000	5%
31-60	$20,000	10%
61-90	$10,000	20%

What is the amount of bad debt expense to be reported on Andy Inc.’s financial statements for 2018 using the aging method?

$6,500.

$1,500.

$5,000.

$8,000.

122.

McConnell’s Bakeries had the following balances on December 31, 2018, before any adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell’s estimates uncollectible accounts based on an aging of accounts receivable as shown below:

Age Group(days past due)	Accounts Receivable	Estimated Percent Uncollectible
Not yet due	$50,000	4%
0-30	$20,000	8%
31-60	$18,000	10%
More than 60	$12,000	40%

What amount of bad debt expense did McConnell’s record in its December 31, 2018, adjustment to the allowance account?

$10,200.

$12,800.

$15,300.

$6,100.

123.

Timkin creates the following accounts receivable aging report at the end of the year:

Age	Amount	Estimated uncollectible
Less than 30 days	$6,000	5%
31-60 days	$4,000	10%
61+ days	$2,000	25%

Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $500. The year-end adjustment would include a:

A.	Credit to Allowance for Uncollectible Accounts for $1,200.

B.	Debit to Bad Debt Expense for $700.

C.	Debit to Bad Debt Expense for $1,700.

D.	Debit to Bad Debt Expense for $1,200.

124.

Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account?

$29,000.

$28,000.

$27,000.

$26,000.

125.

During the year, Bears Inc. recorded credit sales of $500,000. Before adjustments at year-end, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not to collect 5% of the amount not yet past due and 20% of the amount past due?

A.	Bad Debt Expense	22,500
	Allowance for Uncollectible Accounts		22,500
B.	Bad Debt Expense	25,000
	Allowance for Uncollectible Accounts		25,000
C.	Bad Debt Expense	20,000
	Allowance for Uncollectible Accounts		20,000
D.	Allowance for Uncollectible Accounts	20,000
	Bad Debt Expense		20,000

Option A

Option B

Option C

Option D

126.

The following information pertains to Lightning Inc., at the end of December:

Credit Sales	$60,000
Accounts Payable	10,000
Accounts Receivable	7,000
Allowance for Uncollectible Accounts	$400	credit
Cash Sales	20,000

Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables less than 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 less than 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense?

$400.

$470.

$870.

$1,270.

127.

When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?

A.	A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.

B.	A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense.

C.	A debit to Bad Debt Expense and a credit to Accounts Receivable.

D.	A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

128.

Using the allowance method, writing off an actual bad debt would include a:

A.	Debit to Bad Debt Expense.

B.	Credit to Accounts Receivable.

C.	Debit to Accounts Receivable.

D.	Credit to Allowance for Uncollectible Accounts.

129.

Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?

A.	Increases assets and increases stockholders’ equity.

B.	Decreases assets and decreases stockholders’ equity.

C.	Decreases assets and decreases liabilities.

D.	No effect on the accounting equation.

130.

Which of the following is recorded by a credit to Accounts Receivable?

A.	Sale of inventory on account.

B.	Estimating the annual allowance for uncollectible accounts.

C.	Estimating annual sales returns.

D.	Write-offs of bad debts.

131.

Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green’s $2,500 account. Based on Lail’s estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.’s balance sheet at the time of the write-off?

A.	An increase to stockholders’ equity and a decrease to liabilities.

B.	No effect.

C.	An increase to assets and an increase to stockholders’ equity.

D.	A decrease to assets and a decrease to stockholders’ equity.

132.

At the beginning of 2018, the balance in Jackson Enterprises’ Allowance for Uncollectible Accounts was $31,800. During 2018, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a:

A.	Debit to Bad Debt Expense.

B.	Credit to Accounts Receivable.

C.	Credit to the Allowance for Uncollectible Accounts.

D.	Debit to Bad Debt Expense; credit to the Allowance for Uncollectible Accounts.

133.

The current year’s beginning and ending balances for Allowance for Uncollectible Accounts is $23,000 and $27,000, respectively. If the amount of Bad Debt Expense for the year is $18,000, what is the amount of actual bad debts for the year?

$14,000.

$10,000.

$18,000.

$22,000.

134.

Collections of accounts receivable that previously have been written off are credited to:

A.	A Gain account.

B.	Accounts Receivable.

C.	Bad Debt Expense.

D.	Retained Earnings.

135.

A company collects an account receivable previously written off. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	Increase, (2) Increase, (3) Decrease

B.	Increase, (2) Increase, (3) Increase

C.	Increase, (2) Increase, (3) Increase

D.	No effect, (2) No effect, (3) No effect

136.

The direct write-off method is used when:

A.	Uncollectible accounts are not anticipated or are immaterial.

B.	A company elects to use this method as one of several alternatives.

C.	A company has greater cash outflows than cash inflows.

D.	A company expects excessive sales returns.

137.

Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?

A.	Allowance method.

B.	Direct write-off method.

C.	Aging method.

D.	Percentage-of-receivables method.

138.

The direct write-off method is not normally an acceptable method for GAAP because it fails to report:

A.	Revenue from the sale of goods or services to customers.

B.	Cash collected from customers.

C.	Accounts receivable for their net realizable value.

D.	The amounts receivable from customers.

139.

The direct write-off method is generally not permitted for financial reporting purposes because:

A.	Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income.

B.	This method is primarily used for tax purposes.

C.	It is too difficult to accurately estimate future bad debts.

D.	Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to generate.

140.

Which accounting concept does the direct write-off method violate?

A.	Total assets equal total liabilities plus total stockholders’ equity.

B.	Recording amount owed within one year as current liabilities.

C.	Recognizing revenue when goods or services are provided to customers.

D.	An attempt to match revenues and their related expenses.

141.

If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false?

A.	An allowance account is not used.

B.	No adjustment is made at the end of the year to estimate future uncollectible accounts.

C.	Accounts receivable will be reported at their net realizable value.

D.	Bad debt expense is recorded at the time an actual bad debt is written-off.

142.

Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts?

A.	Debit Bad Debt Expense.

B.	Debit Allowance for Uncollectible Accounts.

C.	Credit Accounts Receivable.

D.	No adjustment is made.

143.

Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?

A.	Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts.

B.	Debit Allowance for Uncollectible Accounts, credit Accounts Receivable.

C.	Debit Bad Debt Expense, credit Accounts Receivable.

D.	No adjustment is made.

144.

The distinction between the direct write-off method and the allowance method is:

A.	The year in which cash is collected from customers.

B.	The cumulative amount of bad debt expense reported across years.

C.	The customers to which goods or services are provided.

D.	The amount of bad debt expense reported in each year.

145.

The direct write-off method is an acceptable method for what purpose?

A.	Issuing financial statements to stockholders.

B.	Tax reporting.

C.	Compliance with Generally Accepted Accounting Principles.

D.	Financial reporting.

146.

The primary difference between a note receivable and an account receivable is:

A.	A note receivable cannot be classified as a current asset.

B.	Borrowers have the option of not paying a note receivable.

C.	An account receivable is more likely to be collected.

D.	A note receivable is evidenced by a written debt instrument.

147.

A(n) ______ receivable is an informal credit arrangement with trade customers, whereas a(n) ______ receivable is a formal signed credit arrangement between a creditor and a debtor.

A.	Account; Note

B.	Revenue; Note

C.	Note; Account

D.	Allowance; Stock

148.

A note receivable is reported in the balance sheet:

A.	Always as a current asset.

B.	Always as a long-term asset.

C.	As either a current asset or long-term asset depending on the expected collection date.

D.	As a contra asset.

149.

Suppose a customer is unable to pay its account on time, so the company accepts a six-month interest-bearing note receivable to replace the customer’s account receivable. What effect will accepting the note receivable have on the company’s financial statements at the time of acceptance?

A.	Total assets increase.

B.	Total assets decrease.

C.	No change in total assets.

D.	Total revenues increase.

150.

Suppose a customer is unable to pay its account on time, so the company accepts a six-month interest-bearing note receivable to replace the customer’s account receivable. Over the next six months, what effect will accepting the note receivable have on the company’s financial statements?

A.	Total assets increase.

B.	Total revenues increase.

C.	Net income increases.

D.	All of the other answers are financial statements effects that will occur.

151.

Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. This transaction would include a:

A.	Credit to Cash.

B.	Debit to Sales Discount.

C.	Debit to Notes Receivable.

D.	Credit to Notes Receivable.

152.

On February 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?

$120.

$240.

$100.

$60.

153.

On February 1, 2018, Sanger Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sanger record on August 1, 2018, when the borrower pays Sanger the correct amount owed?

A.	Cash	2,000
	Interest Revenue	100
	Notes Receivable		2,100
B.	Cash	2,100
	Notes Receivable		2,100
C.	Cash	2,100
	Interest Revenue		100
	Notes Receivable		2,000
D.	Cash	2,200
	Notes Receivable		2,200

Option A

Option B

Option C

Option D

154.

On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?

$20.

$40.

$30.

$60.

155.

On August 1, 2018, Turner Manufacturing lends cash and accepts a $6,000 note receivable that offers 8% interest and is due in nine months. How would Turner record the year-end adjustment to accrue interest in 2018?

A.	Interest Revenue	360
	Interest Receivable		360
B.	Interest Receivable	480
	Interest Revenue		480
C.	Interest Receivable	360
	Interest Revenue		360
D.	Interest Receivable	200
	Interest Revenue		200

Option A

Option B

Option C

Option D

156.

$20.

$40.

$30.

$60.

157.

On July 1, 2018, Herzog Mining lends cash and accepts a $9,000 note receivable that offers 10% interest and is due in nine months. How would Herzog record the transaction on April 1, 2019, when the borrower pays Herzog the correct amount owed?

A.	Cash	9,675
	Notes Receivable		9,000
	Interest Revenue		675
B.	Cash	9,675
	Notes Receivable		9,000
	Interest Revenue		225
	Interest Receivable		450
C.	Cash	9,675
	Notes Receivable		9,000
	Interest Receivable		675
D.	Cash	9,675
	Notes Receivable		9,675

Option A

Option B

Option C

Option D

158.

On January 1, 2018, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At the end of 2018, what effect will the adjustment for accrued interest revenue have on the Alice & Co.’s financial statements?

A.	Decreases assets.

B.	Decreases revenue.

C.	Increases expense.

D.	Increases stockholders’ equity.

159.

On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2018 income statement?

$750.

$1,500.

$4,500.

$6,000.

160.

On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2019 income statement?

$0.

$1,500.

$4,500.

$6,000.

161.

On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2020 income statement?

$0.

$4,500.

$6,000.

$12,000.

162.

On September 1, 2018, Heartford Construction lends $50,000 to a customer with 10% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, but no other adjustments are made in 2018. At the end of 2018, which of the following is true?

A.	Assets are overstated.

B.	Revenues are understated.

C.	Expenses are understated.

D.	All amounts are accurately stated.

163.

On September 1, 2018, Heartford Construction lends $50,000 to a customer with 9% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, and the following year-end adjusting entry is made on December 31, 2018:

Interest Receivable	4,500
Interest Revenue		4,500

At the end of 2018, which of the following is true?

A.	Revenues are understated.

B.	Liabilities are understated.

C.	Assets are overstated.

D.	All amounts are accurately stated.

164.

The amount of a company’s receivables is influenced by several variables, including all of the following except:

A.	The level of sales.

B.	The nature of the product or service sold.

C.	The credit and collection policies.

D.	Dividend payments to stockholders.

165.

The formula for the receivables turnover ratio is:

A.	Average accounts receivable divided by average total assets.

B.	Net credit sales divided by average accounts receivable.

C.	Net credit sales divided by average total assets.

D.	Average accounts receivable divided by net credit sales.

166.

The receivables turnover ratio indicates:

A.	How efficient the company is at managing sales and inventory.

B.	The relationship between sales and cost of goods sold.

C.	The number of times during a year that the average accounts receivables were collected.

D.	The relationship between cash sales and credit sales.

167.

An increase in a company’s receivables turnover ratio typically means the company is:

A.	Having trouble paying debts as they become due.

B.	Less profitable.

C.	More effectively granting and collecting credit to customers.

D.	Losing customers to its competitors.

168.

At the beginning of the year, Vici Ventures had accounts receivable of $220,000. At the end of the year, the company had accounts receivable of $340,000. During the year, Vici had total sales of $1,000,000, 70% of which were credit sales. What was Vici’s receivables turnover ratio for the year?

2.50.

3.57.

2.94.

146 days.

169.

Sandburg Veterinarian reports the following information for the year:

Net credit sales	$120,000
Average accounts receivable	20,000
Cash collections on credit sales	100,000

What is Sandburg’s receivables turnover ratio?

6.0.

5.0.

1.2.

0.2.

170.

Beverage International reports net credit sales for the year of $240,000. The company’s accounts receivable balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is Beverage International’s receivables turnover ratio?

12.0.

9.6.

8.0.

1.5.

171.

Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference?

A.	Toppleson is selling to high-risk customers.

B.	Toppleson has effective procedures related to selling goods on account.

C.	Toppleson provides superior products and services.

D.	Toppleson allows customers too long to pay.

172.

A company’s ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management’s ability to:

A.	Collect cash from all sales to customers.

B.	Effectively market its products and services.

C.	Generate profits for investors.

D.	Reduce costs of selling products and services to customers.

173.

The formula for average collection period is:

A.	365 days divided by the receivable turnover ratio.

B.	365 days divided by net credit sales.

C.	365 days divided by average accounts receivable.

D.	Net credit sales divided by average accounts receivable.

174.

What is the most likely reason for a company to have an increase in average collection period?

A.	The company has incurred additional marketing expenses to attract customers.

B.	Customers are paying in a timelier manner.

C.	The company has tightened its credit policies for its customers.

D.	The company has become more lenient in its credit policies and is extending credit terms to maintain customers.

175.

Red Company has the following information:

Net credit sales = $400,000
Net income = $100,000
Average total assets = $80,000
Average accounts receivable = $20,000

What is Red’s average collection period (rounded to the nearest whole day)?

73 days.

18 days.

9 days.

5 days.

176.

The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:

A.	The balance sheet method.

B.	The method most used by companies.

C.	The income statement method.

D.	The percentage-of-receivables method.

177.

The income statement approach for estimating bad debts uses a percentage of

A.	Credit sales.

B.	Accounts receivable.

C.	Allowance for uncollectible accounts.

D.	Bad debt expense.

178.

Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts?

A.	The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts.

B.	This method is referred to as the balance sheet approach.

C.	This method does not allow for future uncollectible accounts.

D.	Under this method, bad debt expense is recorded at the time of an actual bad debt.

179.

Which of the following provides an accurate match?

A.	Percentage-of-receivables method ~ Assets are reported closer to their net realizable value.

B.	Allowance method ~ Receivables are reported net of estimated uncollectible accounts.

C.	Percentage-of-credit-sales method ~ Revenues and expenses are better matched.

D.	All of the other answers provide an accurate match.

180.

The following information pertains to Lindsey Corp. at the end of the year:

Credit Sales	$150,000
Accounts Payable	20,000
Accounts Receivable	30,000
Allowance for Uncollectible Accounts	800	debit
Cash Sales	5,500

Lindsey Corp. uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjustment, what amount of bad debt expense would Lindsey report for the year?

$1,200.

$2,200.

$3,000.

$3,800.

181.

The following information pertains to Lightning Inc., at the end of the year:

Credit Sales	$60,000
Accounts Payable	10,000
Accounts Receivable	7,000
Allowance for Uncollectible Accounts	400	credit
Cash Sales	20,000

Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment?

$600.

$1,000.

$200.

$1,200.

182.

Using the income statement approach for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjustment for estimated uncollectible accounts will require a:

A.	Credit to Accounts Receivable for $2,000.

B.	Debit to Bad Debt Expense for $10,000.

C.	Debit to Allowance for Uncollectible Accounts for $10,000.

D.	Credit to Bad Debt Expense for $8,000.

Matching Questions

183.

Match each term related to net revenues with its description.

1. Net revenues	Total revenues less contra revenues.	____
2. Sales returns	Reduction in revenue because the product or service is sold below the listed price.	____
3. Contra revenues	Reduction in revenue because the customer brings back products to the company after the original purchase.	____
4. Sales discounts	Reduction in revenue because of some deficiency in the company’s product or service.	____
5. Trade discounts	Reduction in revenue when the customer pays within a specified period.	____
6. Sales allowances	Accounts with balances opposite of revenue.	____

184.

Match each term related to the allowance method for uncollectible accounts with its description.

1. Bad debt expense	The account used to record sales on account to customers.	____
2. No effect	The procedure required for financial reporting purposes to account for uncollectible accounts.	____
3. Allowance method	The difference between total accounts receivable and the estimate of future bad debts.	____
4. Net realizable value	The effect on total assets when estimating future bad debts.	____
5. Decrease	The account to credit when estimating future bad debts.	____
6. Accounts receivable	The effect on total expenses when estimating future bad debts.	____
7. Increase	The account to debit when estimating future bad debts.	____
8. Allowance for Uncollectible Accounts	The effect on total liabilities when estimating future bad debts.	____

185.

Match each term related to the comparison between the allowance method and direct write-off method for uncollectible accounts with its description.

1. Direct write-off method	The procedure commonly used for financial reporting purposes to account for uncollectible accounts.	____
2. Increase	The procedure commonly used for tax reporting purposes to account for uncollectible accounts.	____
3. Bad debt expense	The account to credit when writing off an actual bad debt under the allowance method.	____
4. Decrease	The account to debit when writing off an actual bad debt under the direct write-off method.	____
5. Accounts receivable	The account to debit when writing off an actual bad debt under the allowance method.	____
6. No effect	The effect on total expenses when writing off an actual bad debt under the direct write-off method.	____
7. Allowance for Uncollectible Accounts	The effect on total assets when estimating future bad debts under the allowance method.	____
8. Allowance method	The effect on total expenses when estimating future bad debts under the direct write-off method.	____

186.

Match each account with its description.

1. Accounts receivable	Informal credit arrangements with trade customers.	____
2. Interest revenue	Account to debit when interest accrues at the end of the year.	____
3. Notes receivable	Account to credit when interest accruals at the end of the year.	____
4. Interest receivable	Formal signed credit arrangements between a creditor and a debtor.	____
5. Cash	Account to debit when receivables and interest are collected.	____

187.

Match each term related to receivables analysis with its description.

1. Less	The approximate number of days the average accounts receivable balance is outstanding.	____
2. Decrease	An increase in the receivables turnover ratio generally indicates the company manages its receivables _____ efficiently.	____
3. Average collection period	Reducing the length of time in which customers are required to pay will typically _____ the receivables turnover ratio.	____
4. More	The number of times during a year that the average accounts receivable balance is collected.	____
5. Receivables turnover ratio	An increase in the average collection period indicates the company manages its receivables _____ efficiently.	____
6. Increase	Allowing riskier customers to purchase goods or services on account will typically _____ the receivables turnover ratio.	____

Short Answer Questions

188.	A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.

189.	On February 23, a company provides services on account to a customer for $4,500. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

190.

Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of a summer special, Casey offers customers a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue earned by Casey on July 9.

191.	On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.

192.	On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.

193.

On August 12, a company provides services on account to a customer for $3,000. However, on August 16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.

194.	A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues.

195.	A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net revenues.

196.

At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.

197.

At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.

198.

At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (debit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.

199.

During 2018, its first year of operations, a company provides services on account of $250,000. By the end of 2018, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2018.

200.	A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate the net realizable value of accounts receivable.

201.	A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate the net realizable value of accounts receivable.

202.

A company reports the following amounts at the end of the year (before any year-end adjustment).

Credit sales for the year	$120,000
Accounts receivable	36,000
Allowance for uncollectible accounts	1,500	(credit)

Record the adjustment for uncollectible accounts (1) using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected, and (2) using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected.

203.

A company has the following accounts receivable and estimates of uncollectible accounts:

1. Accounts not yet due = $60,000; estimated uncollectible = 3%.
2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 20%.
3. Accounts more than 30 days past due = $10,000; estimated uncollectible = 50%.

Compute the total estimated uncollectible accounts.

204.

At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts:

1. Accounts not yet due = $80,000; estimated uncollectible = 2%.
2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 25%.
3. Accounts more than 30 days past due = $4,000; estimated uncollectible = 60%.

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).

205.

At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts:

1. Accounts not yet due = $70,000; estimated uncollectible = 4%.
2. Accounts 1-30 days past due = $30,000; estimated uncollectible = 15%.
3. Accounts more than 30 days past due = $5,000; estimated uncollectible = 40%.

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).

206.

A company has the following balances on December 31, 2018, before any year-end adjustments: Accounts Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below:

Age Group	Amount Receivable	Estimated Percent Uncollectible
Not yet due	$48,000	5%
0–30 days past due	18,000	15%
31–90 days past due	10,000	40%
More than 90 days past due	4,000	80%
Total	$80,000

Record the adjustment for uncollectible accounts on December 31, 2018.

207.	A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $25,000. Record the write-off of the uncollectible accounts.

208.	At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)?

209.	On March 13, a company writes off a customer’s account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3.

210.

Calculate the missing amount for each of the following notes receivable.

Face Value	Annual Interest rate	Fraction of the Year	Interest
$15,000	4%	8 months	(a)
$25,000	8%	(b)	$500
$30,000	(c)	4 months	$500
(d)	6%	6 months	$600

211.	On February 1, 2018, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018.

212.	On July 1, 2018, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018 and 2019.

213.	On April 1, 2018, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note receivable. Calculate the amount of interest revenue the company will recognize in 2018, 2019, and 2020.

214.	On April 14, a company lends $10,000 cash to one of its employees and accepts a six-month, 12% note in return. Record the acceptance of the note receivable.

215.	On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1.

216.	On May 1, 2018, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 6% note. Record the acceptance of the note on May 1, 2018, the adjustment on December 31, 2018, and the cash collection on May 1, 2019.

217.

Below are amounts for two companies:

	Beginning Accounts Receivable (net)	Ending Accounts Receivable (net)	Net Sales
Company 1	$1,500	$1,200	$29,700
Company 2	3,100	3,300	80,000

For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales?

218.

At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.

219.

At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.

220.

Assume the following scenarios.

Scenario 1. During 2018, Makers Consulting provides services of $100,000. The company receives an initial payment of $75,000 with the balance to be received the following year.
Scenario 2. People-R-Us typically charges $75 for a one-year subscription. On January 1, 2018, Georgette, age 72, purchases a one-year subscription to the magazine and receives a 20% senior citizen discount.
Scenario 3. During 2018, Waste Control provides services on account for $15,000. The customer pays for those services in 2019.
Scenario 4. During 2018, Tasty Foods sells grocery items to one of its customers for $125,000 on account. Cash collections on those sales are $80,000 in 2018 and $30,000 in 2019. The remaining $15,000 is written off as uncollectible in 2019.

Required:

For each scenario, calculate the amount of revenue to be recognized in 2018.

221.

Recovery Experts (RE) specializes in data recovery from crashed hard drives. The price charged varies based on the extent of damage and the amount of data being recovered. RE offers a 10% discount to students and faculty at educational institutions. Consider the following transactions during the month of June.

June 10	Luke’s hard drive crashes and he sends it to RE.
June 12	After initial evaluation, RE e-mails Luke to let him know that full data recovery will cost $1,600.
June 13	Luke informs RE that he would like them to recover the data and that he is a student at USC, qualifying him for a 10% educational discount and reducing the cost by $160 ($1,600 × 10%).
June 16	RE performs the work and claims to be successful in recovering all data. RE asks Luke to pay within 30 days of today’s date, offering a 5% discount for payment within 10 days.
June 19	When Luke receives the hard drive, he notices that RE did not successfully recover all data. Approximately 25% of the data has not been recovered and he informs RE.
June 20	RE reduces the amount Luke owes by 25%.
June 30	Luke pays the amount owed.

Required:

1. Record the necessary transactions(s) for Recovery Experts on each date.
2. Calculate net revenues.
3. Show how net revenues would be presented in the income statement.
4. Calculate net revenues if Luke had paid his bill on June 25.

222.

Tatsuo is the CEO of Ginjo Gallery. At the end of the year, the company’s accountant provides Tatsuo with the following information, before any adjusting entries.

Accounts receivable	$1,000,000
Estimated percentage uncollectible	5%
Allowance for uncollectible accounts	$10,000 (credit)
Operating income	$240,000

Tatsuo has significant stock ownership in the company and therefore would like to keep the stock price high. Analysts on Wall Street expect the company to have operating income of $170,000. The fact that actual operating income is well-above this amount will make investors happy and help maintain a high stock price. Meeting analysts’ expectations will also help Tatsuo keep his job.

Required:

1. Record the adjustment for uncollectible accounts using the accountant’s estimate of 5% of accounts receivable.
2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Ginjo Gallery still meet analysts’ expectations?
3. Tatsuo instructs the accountant to instead record $70,000 as bad debt expense so that operating income will exactly meet analysts’ expectations. By how much would total assets and operating income be misstated if the accountant records this amount?
4. Why would Wanda be motivated to manage operating income in this way?

223.

The following events occur for Wortham Landscape Design during 2018 and 2019, its first two years of operations.

February 2, 2018	Provide services to customers on account for $26,000.
July 23, 2018	Receive $20,000 from customers on account.
December 31, 2018	Estimate that 10% of uncollected accounts will not be received.
April 12, 2019	Provide services to customers on account for $40,000.
June 28, 2019	Receive $5,000 from customers for services provided in 2018.
September 13, 2019	Write off the remaining amounts owed from services provided in 2018.
October 5, 2019	Receive $33,000 from customers for services provided in 2019.
December 31, 2019	Estimate that 10% of uncollected accounts will not be received.

Required:

1. Record transactions for each date.
2. Post transactions to the following accounts: Cash, Accounts Receivable, and Allowance for Uncollectible Accounts.
3. Calculate the net realizable value of accounts receivable at the end of 2018 and 2019.

224.

By the end of its first year of operations, Gallen Corporation has credit sales of $580,000 and accounts receivable of $200,000. Given it’s the first year of operations, Gallen’s management is unsure how much allowance for uncollectible accounts it should establish. One of the company’s competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 3% of ending accounts receivable, so Gallen decides to use that same amount. However, actual write-offs in the following year were 10% of the $200,000 ($20,000). Gallen’s inexperience in the industry led to making sales to high credit risk customers.

Required:

1. Record the adjustment for uncollectible accounts at the end of the first year of operations using the 3% estimate of accounts receivable.
2. By the end of the second year, Gallen has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Gallen underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first year? Ignore tax effects.
3. Should Gallen prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts? Explain.

225.

Power Corporation engages in the manufacture and sale of equipment related to alternative sources of energy. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the commodities market. Many of the company’s customers are having financial difficulty, lengthening the period of time it takes to collect on account. Below are year-end amounts.

Age Group	Operating Revenue	Accounts Receivable	Average Age	Accounts Written Off
Two years ago	$2,300,000	$80,000	13 days	$10,000
Last year	3,100,000	100,000	11 days	15,000
Current year	3,000,000	350,000	27 days	0

Peter, the CEO of Power, notices that accounts written off over the past three years have been minimal and therefore suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year’s financial statements (the direct write-off method).

Required:

1. Do you agree with Peter’s reasoning? Explain.
2. Suppose that other companies in these industries had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 30% because of the significant downturn in the industries. If Power uses the allowance method estimated at 30% of accounts receivable, what should be the balance of the allowance for uncollectible accounts at the end of the current year?
3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Power uses the direct write-off method? Ignore tax effects.

226.

Gable Incorporated provides legal services. During 2018, the company provides services of $500,000 on account. Of this amount, $70,000 remains uncollected at the end of the year. An aging schedule as of December 31, 2018, is provided below.

Age Group	Amount Receivable	Estimated Percent Uncollectible
Not yet due	$40,000	5%
0–30 days past due	19,000	10%
31–60 days past due	9,000	20%
More than 60 days past due	6,000	40%
Total	$74,000

Required:

1. Calculate the allowance for uncollectible accounts.
2. Record the December 31, 2018 adjustment, assuming the balance of Allowance for Uncollectible Accounts before adjustment is $500 (debit).
3. On April 3, 2019, a customer’s account balance of $600 is written off as uncollectible. Record the write-off.
4. On July 17, 2019, the customer whose account was written off in Requirement 3 unexpectedly pays $200 of the amount but does not expect to pay any additional amounts. Record the cash collection.

227.

On June 1, 2018, Demer Consulting provides services to a customer for $150,000. To pay for the services, the customer signs a three-year, 12% note. The face amount is due at the end of the third year, while annual interest is due each June 1.

Required:

1. Record the acceptance of the note on June 1, 2018.
2. Record the interest collected on June 1 for 2019 and 2020, and the adjustment for interest revenue on December 31, 2018, 2019, and 2020.
3. Record the cash collection on June 1, 2020.

228.

Selected financial data for Strong Health Group and Sturdy Medical Corporation, two companies in the health-care industry, are as follows:

($ in millions)	Net Sales	Beginning Accounts Receivable	Ending Accounts Receivable
Strong Health	$1,850	$200	$230
Sturdy Medical	2,100	400	380

Required:

1. Calculate the receivables turnover ratio and average collection period for Strong Health and Sturdy Medical. Round your answers to one decimal place. Compare your calculations with those for Tenet Healthcare and LifePoint Hospitals reported in the chapter text. Which of the four companies maintains a higher receivables turnover?
2. How does the receivables turnover ratio reflect the efficiency of management? Discuss factors that affect the receivables turnover ratio.

Essay Questions

229.	Give three examples of contra revenue accounts and the transactions with which they are associated.

230.	Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes.

231.	What does it mean to report accounts receivable at their net realizable value.

232.	Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable for financial reporting purposes?

233.	Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?

234.	How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?

Chapter 05 Receivables and Sales Answer Key

True / False Questions

1.	Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. TRUE

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

2.	At the time of a credit sale, a company would record an increase in assets and an increase in revenues. TRUE

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

3.	A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable. FALSE A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue.

4.	Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account. TRUE

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

5.	Trade discounts represent a discount offered to the purchasers for quick payment. FALSE Trade discounts represent a reduction in the listed price of a product or service.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

6.	When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. TRUE

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

7.	A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. TRUE

8.	A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. FALSE 2/10 indicates a 2% discount (or $20 in this example) if payment is made within 10 days.

9.	The Sales Discounts account is an example of a contra revenue account. TRUE

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

10.	The Sales Discounts account is an expense account. FALSE Sales Discounts is a contra revenue account.

11.	Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer’s balance owed. TRUE

12.	A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. FALSE A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable.

13.	The Sales Returns account is an expense account. FALSE Sales Returns is a contra revenue account.

14.	If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. TRUE

AACSB: Analytical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

15.	Accounts receivable are reported at their net realizable value. TRUE

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

16.	The net realizable value of accounts receivable is the full amount owed by customers. FALSE Net realizable value is the net amount of cash we expect to collect.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

17.	Customers’ accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts). TRUE

18.	The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities. FALSE The adjustment has the effect of (1) reducing assets and (2) increasing expenses. An increase in expenses reduces net income and retained earnings.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

19.	The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. TRUE

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

20.	The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. TRUE

21.	Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that represents the cost of the estimated future bad debts. TRUE

22.	If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. TRUE

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

23.	One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally matches bad debt expense with the revenue it helped to generate. FALSE This is generally an advantage of the allowance method.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Allowance Method
Topic: Direct Write-Off Method

24.	The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts. FALSE The allowance method records an adjustment for future uncollectible accounts.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Allowance Method
Topic: Direct Write-Off Method

25.	The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. TRUE

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Allowance Method
Topic: Percentage-of-Credit-Sales Method

26.	The aging method for estimating uncollectible accounts considers that a higher percentage of “older” accounts will not be collected compared to “newer” accounts. TRUE

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Topic: Aging of Accounts Receivable

27.

A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000.

FALSE

Estimated uncollectible accounts = ($40,000 × 5%) + ($5,000 × 20%) = $3,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Topic: Aging of Accounts Receivable

28.	Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets. FALSE Writing off an account receivable has no effect on total assets.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Writing Off Accounts Receivable

29.	Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense. FALSE Writing off an account receivable has no effect on expenses.

30.	Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable. TRUE

31.	Under the allowance method, when a company collects cash from an account previously written off, total assets increase. FALSE Collecting cash from an account previously written off has no effect on total assets.

32.	A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year’s estimate of uncollectible accounts may have been too high. TRUE

33.	A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year’s estimate of uncollectible accounts was too low. TRUE

34.	Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible. TRUE

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

35.	The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. TRUE

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

36.	The direct write-off method violates the matching principle. TRUE

37.	Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. FALSE Under the direct write-off method, future uncollectible accounts are not estimated.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

38.	Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. TRUE

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

39.	Notes receivable typically arise from sales to customers. FALSE Notes receivable typically arise from loans to other entities including affiliated companies; loans to stockholders and employees; and only occasionally from the sale of merchandise or services.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

40.	Notes receivable are assets and are reported in the balance sheet. TRUE

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

41.	Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding. TRUE

42.	A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000. FALSE Interest = face value ($10,000) × annual interest rate (10%) × fraction of year (6/12) = $500.

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

43.	Accrued interest on a note receivable is interest earned by the end of the year but not yet received. TRUE

44.	Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities. FALSE Accrued interest increases assets and increases revenues.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

45.	Two important ratios that help in understanding the company’s effectiveness in managing receivables are the receivables turnover ratio and the average collection period. TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

46.	The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or “turns over”). TRUE

AACSB: Reflective Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

47.	The receivables turnover ratio equals average accounts receivable divided by net credit sales. FALSE The receivables turnover ratio equals net credit sales divided by average accounts receivable.

48.	A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers. FALSE A higher receivables turnover ratio generally indicates more favorable management of accounts receivable.

49.	The average collection period shows the approximate number of days the average accounts receivable balance is outstanding. TRUE

50.

The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement.

FALSE

This method is referred to as the income statement method because the estimate of bad debts is based on an income statement amount—credit sales.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Percentage-of-Credit-Sales Method

51.

Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods.

FALSE

Bad debt expense will typically differ between the two methods.

52.	From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts). TRUE

53.	From a balance sheet perspective, the percentage-of-receivables method is typically preferable because assets (net accounts receivable) are reported closer to their net realizable value. TRUE

54.	The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. TRUE

Multiple Choice Questions

55.

Which of the following best describes credit sales?

A.	Cash sales to customers that are new to the company.

B.	Sales to customers using credit cards.

C.	Sales to customers on account.

D.	Sales with a high risk that the customer will return the product.

56.

Credit sales are recorded as:

A.	Debit Cash, credit Deferred Revenue.

B.	Debit Service Revenue, credit Accounts Receivable.

C.	Debit Cash, credit Service Revenue.

D.	Debit Accounts Receivable, credit Service Revenue.

57.

A company provides services on account. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	(1) Increase, (2) No effect (3) Increase

B.	(1) No effect, (2) Increase (3) Increase

C.	(1) Increase, (2) Increase (3) Increase

D.	(1) No effect, (2) No effect (3) No effect

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

58.

Which of the following best describes accounts receivable?

A.	The amount of cash owed by a company to its vendors for purchases of products or services on account.

B.	The amount of cash collected by a company from its customers from the sale of products or services on account.

C.	The amount of cash owed to a company by its customers from the sale of products or services on account.

D.	The amount of cash not expected to be collected by a company from its customers from the sale of products or services on account (bad debts).

59.

The amount of cash owed to a company by its customers from the sale of products or services on account is commonly referred to as:

Cash.

B.	Accounts receivable.

Revenue.

D.	Accounts payable.

60.

Identify the likely disadvantage(s) of extending credit to customers.

A.	Delay or failure to collect cash.

B.	Lower profitability.

C.	Lower revenues.

D.	All of the other answers are disadvantages of extending credit to customers.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

61.

Identify the likely advantage(s) of extending credit to customers.

A.	Reduce accounts receivable.

B.	Increase sales.

C.	Reduce amounts owed to creditors.

D.	Increase employees’ salaries.

62.

Identify the condition(s) that must exist for a sale and the related receivable to be recognized.

A.	Collection of cash is probable.

B.	The company must have collected cash from at least one previous sale to the customer.

C.	Goods or services have been provided to the customer.

D.	Two of the other answers are conditions that must exist.

63.

Fleming Corp. provided services on account. The transaction would be recorded with a debit to:

A.	Retained Earnings.

B.	Service Revenue.

C.	Accounts Receivable.

Cash.

64.

Fleming Corp. provided services on account. The transaction would be recorded with a credit to:

A.	Accounts Payable.

B.	Service Revenue.

C.	Accounts Receivable.

Cash.

65.

Which of the following items are classified as receivables?

A.	Tax refund claims.

B.	Amounts owed by customers.

C.	Amounts loaned and expected to be collected.

D.	All of the other answers are classified as receivables.

66.

A trade discount results in:

A.	A contra revenue account being recorded.

B.	A contra asset being recorded.

C.	Customers delaying cash payment.

D.	Revenue being recorded for the discounted price.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

67.

A.	Cash	960
	Service Revenue		960
B.	Cash	960
	Trade Discount	240
	Service Revenue		1,200
C.	Cash	1,200
	Service Revenue		1,200
D.	Cash	1,200
	Trade Discount		240
	Service Revenue		960

Option A

Option B

Option C

Option D

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

68.

When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:

Bad debt.

B.	Sales discount.

C.	Sales return.

D.	Sales allowances.

69.

$5,500.

$4,312.

$4,486.

$4,606.

Trade discount = $4,000 × 20% = $800. Sales revenue = ($4,000 – $800) + $1,500 = $4,700. Sales discount = $4,700 × 2% = $94. Net revenues = $4,700 – $94 = $4,606.

70.

A.	Cash	60,000
	Accounts Receivable		60,000
B.	Cash	58,800
	Accounts Receivable		58,800
C.	Cash	58,800
	Sales Discounts	1,200
	Accounts Receivable		60,000
D.	Cash	60,000
	Sales Discounts		1,200
	Sales Revenue		58,800

Option A

Option B

Option C

Option D

Sales discount = $600 × 100 printers × 2% = $1,200.

71.

$15,000.

$14,550.

$15,450.

$0.

No revenue recorded on March 25. The revenue would have been recorded on March 17.

72.

A company collects a customer’s account within the discount period. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	(1) Decrease, (2) Decrease, (3) Decrease

B.	(1) Increase, (2) Increase, (3) Increase

C.	(1) Increase, (2) Increase, (3) No effect

D.	(1) No effect, (2) No effect, (3) No effect

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

73.

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10?

A.	Accounts Receivable	7,840
	Sales Revenue		7,840
B.	Accounts Receivable	8,000
	Sales Revenue		8,000
C.	Accounts Receivable	7,840
	Cash Discounts	160
	Sales Revenue		8,000
D.	Accounts Receivable	8,000
	Cash Discounts		160
	Sales Revenue		7,840

Option A

Option B

Option C

Option D

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

74.

A.	Cash	7,840
	Accounts Receivable		7,840
B.	Cash	7,840
	Sales Discounts	160
	Accounts Receivable		8,000
C.	Cash	7,840
	Sales Revenue	160
	Accounts Receivable		8,000
D.	Cash	8,000
	Accounts Receivable		8,000

Option A

Option B

Option C

Option D

Sales discount = $8,000 × 2% = 160.

75.

A.	Cash	7,840
	Accounts Receivable		7,840
B.	Cash	7,840
	Sales Discounts	160
	Accounts Receivable		8,000
C.	Cash	7,840
	Sales Revenue	160
	Accounts Receivable		8,000
D.	Cash	8,000
	Accounts Receivable		8,000

Option A

Option B

Option C

Option D

No sales discount is awarded because payment is not received within 10 days.

76.

Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12?

A.	Accounts Receivable	46,000
	Sales Revenue		46,000
B.	Accounts Receivable	46,000
	Sales Revenue		45,540
	Sales Discounts		460
C.	Accounts Receivable	45,540
	Sales Revenue		45,540
D.	Accounts Receivable	45,540
	Sales Discounts	460
	Sales Revenue		46,000

Option A

Option B

Option C

Option D

77.

A.	Cash	45,540
	Sales Revenue	460
	Accounts Receivable		46,000
B.	Cash	46,000
	Sales Discounts	460
	Accounts Receivable		46,000
	Interest Revenue		460
C.	Cash	45,540
	Sales Discounts	460
	Accounts Receivable		46,000
D.	Cash	46,000
	Accounts Receivable		45,540
	Sales Revenue		460

Option A

Option B

Option C

Option D

$46,000 × 1% = 460; $46,000 – 460 = $45,540.

78.

A.	Cash	46,000
	Accounts Receivable		45,540
	Discounts Receivable		460
B.	Cash	46,000
	Accounts Receivable		45,540
	Interest Revenue		460
C.	Cash	46,000
	Accounts Receivable		46,000
D.	Cash	46,460
	Accounts Receivable		46,000
	Interest Revenue		460

Option A

Option B

Option C

Option D

No discount is recorded because payment is made after 15 days.

79.

Which of the following is recorded upon receipt of a payment on April 7, 2018, by a customer who pays a $900 invoice dated March 3, 2018, with terms 2/10, n/60?

A.	Debit Sales Discounts $18.

B.	Credit Purchase Discounts $18.

C.	Credit Accounts Receivable $882.

D.	Debit Cash $900.

No discount is recorded because payment is made after 10 days.

80.

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a:

A.	Sales revenue.

B.	Sales discount.

C.	Sales return.

D.	Sales allowance.

81.

A.	Sales Revenue.

B.	Sales Discounts.

C.	Sales Returns.

D.	Sales Allowances.

82.

Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a:

A.	Sales revenue.

B.	Sales discount.

C.	Sales return.

D.	Sales allowance.

83.

Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom’s would credit Accounts Receivable and debit:

A.	Sales Revenue.

B.	Sales Discounts.

C.	Sales Returns.

D.	Sales Allowances.

84.

A company records a sales return from a credit customer. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	(1) Decrease, (2) Decrease, (3) Decrease

B.	(1) Decrease, (2) No effect, (3) Decrease

C.	(1) Decrease, (2) Decrease, (3) No effect

D.	(1) No effect, (2) No effect, (3) No effect

85.

Lewis Inc. had the following information taken from various accounts at the end of the year:

Sales discounts	$41,000
Deferred revenues	$32,000
Total sales	$459,000
Purchase discounts	$15,000
Sales allowances	$35,000
Accounts receivable	$205,000

What was Lewis Inc.’s net revenues for the year?

$368,000.

$434,000.

$383,000.

$437,000.

Net revenues = $459,000 – $41,000 – $35,000.

86.

Eric Company has the following information:

Total revenues	$860,000
Sales returns and allowances	$50,000
Sales discounts	$30,000
Ending inventory	$100,000

What is the amount of net revenues for Eric Company?

$330,000.

$230,000.

$680,000.

$780,000.

Net revenues = $860,000 – $50,000 – $30,000 = $780,000.

87.

$489,000.

$485,000.

$477,000.

$499,000.

Net revenues = $550,000 – $12,000 – $44,000 – $17,000 = $477,000.

88.

$85,000.

$75,000.

$100,000.

$80,000.

Net revenues = $100,000 – $20,000 – $5,000 = $75,000.

89.

Accounts receivable are normally reported at the:

A.	Present value of future cash receipts.

B.	Current value plus accrued interest.

C.	Expected amount to be received.

D.	Current value less expected collection costs.

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

90.

The amount of cash that is actually expected to be collected on accounts receivable is referred to as:

A.	Net realizable value.

B.	Allowance for uncollectible accounts.

C.	Net income.

D.	Net revenue.

91.

The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:

A.	The balance sheet method.

B.	The sales method.

C.	The income statement method.

D.	The aging method.

92.

The percentage-of-receivables method for accounting for uncollectible accounts focuses on the:

A.	Total credit sales for the year.

B.	Ratio of accounts receivable to sales.

C.	Net realizable value of accounts receivable.

D.	Cash flows from sales.

93.

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

A.	Accounts receivable.

B.	Allowance for uncollectible accounts.

C.	Bad debt expense.

D.	Credit sales.

94.

The purpose of recording an allowance for uncollectible accounts is to:

A.	Record the sales returns and allowances.

B.	Report net sales conservatively.

C.	Report accounts receivable at net realizable value.

D.	Report accounts receivable for the total amount of sales in the period.

95.

A company’s adjustment for uncollectible accounts at year-end would include a:

A.	Debit to Bad Debt Expense.

B.	Credit to Accounts Receivable.

C.	Debit to Accounts Receivable.

D.	Debit to Allowance for Uncollectible Accounts.

96.

One advantage of the allowance method for accounting for uncollectible accounts is that the company reports:

A.	Bad debt expense in the same period as the credit sale.

B.	Greater total sales to customers.

C.	Fewer returns by customers.

D.	Greater total cash collected from customers.

97.

The account “Allowance for Uncollectible Accounts” is classified as a(n):

A.	Liability account in the balance sheet.

B.	Contra revenue to credit sales in the income statement.

C.	Expense in the income statement.

D.	Contra asset to accounts receivable in the balance sheet.

98.

Allowance for Uncollectible Accounts is:

A.	An expense account.

B.	A contra asset account.

C.	A contra revenue account.

D.	A liability account.

99.

The normal balance of the account “Allowance for Uncollectible Accounts” is a _______ because _______.

A.	Debit; it is a contra account to Revenue (a credit account)

B.	Credit; it is a contra account to Accounts Receivable (a debit account)

C.	Debit; it is an expense in the income statement

D.	Credit; it is a contra account to Bad Debt Expense (a debit account)

100.

Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?

A.	Increase liabilities and decrease stockholders’ equity.

B.	Decrease assets and decrease liabilities.

C.	Decrease assets and decrease stockholders’ equity.

D.	Increase assets and decrease stockholders’ equity.

101.

Under the allowance method, which of the following does not change the balance in the Accounts Receivable account?

A.	Returns on credit sales.

B.	Collections on customer accounts.

C.	Bad debt expense adjustment.

D.	Write-offs.

102.

$6,540.

$7,800.

$7,140.

$7,740.

($238,000 × 3%) – $600 = $6,540.

103.

$6,540.

$7,800.

$7,140.

$7,740.

($238,000 × 3%) + $600 = $7,740.

104.

$6,220.

$6,450.

$5,250.

$7,190.

($311,000 × 2%) – $970 = $5,250.

105.

$6,220.

$6,450.

$5,250.

$7,190.

($311,000 × 2%) + $970 = $7,190.

106.

A.	Credit to Allowance for Uncollectible Accounts of $12,000.

B.	Debit to Bad Debt Expense of $7,500.

C.	Credit to Allowance for Uncollectible Accounts of $7,500.

D.	Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500.

Bad Debt Expense = $12,000 – $4,500 = $7,500.

107.

A.	Credit to Allowance for Uncollectible Accounts of $12,000.

B.	Debit to Bad Debt Expense of $16,500.

C.	Credit to Allowance for Uncollectible Accounts of $16,500.

D.	Debit to Bad Debt Expense of $16,500; credit to Allowance for Uncollectible Accounts of $16,500.

Bad Debt Expense = $12,000 + $4,500 = $16,500.

108.

$1,000.

$16,000.

$14,000.

$15,000.

($300,000 × 5%) = $15,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

109.

$1,000.

$15,000.

$16,000.

$14,000.

($300,000 × 5%) = $15,000.

110.

A.	Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500.

B.	Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000.

C.	Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000.

D.	Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000.

Bad Debt Expense = $6,500 – $2,500 = $4,000.

111.

$38,100.

$105,700.

$33,000.

$50,500.

Bad Debt Expense = $44,300 – $6,200 = $38,100.

AACSB: Analytical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

112.

Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance?

A.	The amount of cash collections from customers in the current year was less the amount of cash collections from customers in the prior year.

B.	The amount of actual uncollectible accounts in the current year was less than the estimate of uncollectible accounts made at the end of the prior year.

C.	The amount of credit sales in the current year was greater than the amount of credit sales made in the prior year.

D.	The amount of actual uncollectible accounts in the current year was greater than the estimate of uncollectible accounts made at the end of the prior year.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

113.

Credit sales to customers = $550,000
Cash collections from customers = $540,000
Actual bad debts = $20,000

What was the balance of Allowance for Uncollectible Accounts at the beginning of the year?

$10,000.

$20,000.

$15,000.

$25,000.

Beginning ($15,000) = Ending before adjustment ($-5,000) + Actual ($20,000)

114.

If the estimate of uncollectible accounts at the end of the current year is too high, which of the following is true in the following year?

A.	Cash collections from customers will be greater than expected.

B.	The balance of Allowance for Uncollectible Accounts will be a credit prior to its year-end adjustment.

C.	The amount reported for Bad Debt Expense will be less than the ending balance of Allowance for Uncollectible Accounts after its year-end adjustment.

D.	All of the other answers are true in the following year.

AACSB: Reflective Thinking
AICPA: FN Measurement
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

115.

$320.

$1,140.

$820.

$1,020.

Bad debt expense = $1,140 – ($940 – $820) = $1,020.

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Allowance Method
Topic: Writing Off Accounts Receivable

116.

$1,280.

$1,465.

$1,420.

$1,140.

Bad debt expense = $1,280 – ($1,325 – $1,465) = $1,420.

117.

For accounts receivable, the longer an account is outstanding, the:

A.	Better the customer.

B.	More likely it will prove uncollectible.

C.	More likely the customer will return.

D.	Higher probability of it being collected.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Topic: Aging of Accounts Receivable

118.

The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the:

A.	Activity method.

B.	Realization method.

C.	Direct write-off method.

D.	Aging method.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Topic: Aging of Accounts Receivable

119.

When using an aging method for estimating uncollectible accounts:

A.	Older accounts are considered less likely to be collected.

B.	The number of days the account is past due is not considered.

C.	Older accounts are considered more likely to be collected.

D.	No estimate of uncollectible accounts is made.

120.

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to:

A.	Be more accurate.

B.	Result in the highest net income.

C.	Result in the lowest net income.

D.	Recognize bad debts earlier.

121.

Age Group (days past due)	Accounts Receivable	Estimated Percent Uncollectible
0-30	$50,000	5%
31-60	$20,000	10%
61-90	$10,000	20%

What is the amount of bad debt expense to be reported on Andy Inc.’s financial statements for 2018 using the aging method?

$6,500.

$1,500.

$5,000.

$8,000.

Estimated uncollectible = ($50,000 × 5%) + ($20,000 × 10%) + ($10,000 × 20%) = $6,500. Bad Debt Expense = $6,500 + $1,500 = $8,000.

AACSB: Analytical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Topic: Aging of Accounts Receivable

122.

Age Group(days past due)	Accounts Receivable	Estimated Percent Uncollectible
Not yet due	$50,000	4%
0-30	$20,000	8%
31-60	$18,000	10%
More than 60	$12,000	40%

What amount of bad debt expense did McConnell’s record in its December 31, 2018, adjustment to the allowance account?

$10,200.

$12,800.

$15,300.

$6,100.

Estimated uncollectible = ($50,000 × 4%) + ($20,000 × 8%) + ($18,000 × 10%) + ($12,000 × 40%) = $10,200. Bad debt expense = $10,200 – $4,100 = $6,100.

123.

Timkin creates the following accounts receivable aging report at the end of the year:

Age	Amount	Estimated uncollectible
Less than 30 days	$6,000	5%
31-60 days	$4,000	10%
61+ days	$2,000	25%

Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $500. The year-end adjustment would include a:

A.	Credit to Allowance for Uncollectible Accounts for $1,200.

B.	Debit to Bad Debt Expense for $700.

C.	Debit to Bad Debt Expense for $1,700.

D.	Debit to Bad Debt Expense for $1,200.

Estimated uncollectible = ($6,000 × 5%) + ($4,000 × 10%) + ($2,000 × 25%) = $1,200. Adjustment to Bad Debt Expense = $1,200 + $500 = $1,700.

124.

$29,000.

$28,000.

$27,000.

$26,000.

($600,000 × 1%) + ($100,000 × 10%) + ($50,000 × 20%) = $26,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Topic: Aging of Accounts Receivable

125.

A.	Bad Debt Expense	22,500
	Allowance for Uncollectible Accounts		22,500
B.	Bad Debt Expense	25,000
	Allowance for Uncollectible Accounts		25,000
C.	Bad Debt Expense	20,000
	Allowance for Uncollectible Accounts		20,000
D.	Allowance for Uncollectible Accounts	20,000
	Bad Debt Expense		20,000

Option A

Option B

Option C

Option D

($250,000 × 5%) + ($50,000 × 20%) – $2,500 = $20,000.

126.

The following information pertains to Lightning Inc., at the end of December:

Credit Sales	$60,000
Accounts Payable	10,000
Accounts Receivable	7,000
Allowance for Uncollectible Accounts	$400	credit
Cash Sales	20,000

$400.

$470.

$870.

$1,270.

Bad Debt Expense = ($3,500 × 2%) + ($2,000 × 10%) + ($1,500 × 40%) – $400 = $470.

127.

When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?

A.	A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.

B.	A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense.

C.	A debit to Bad Debt Expense and a credit to Accounts Receivable.

D.	A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

128.

Using the allowance method, writing off an actual bad debt would include a:

A.	Debit to Bad Debt Expense.

B.	Credit to Accounts Receivable.

C.	Debit to Accounts Receivable.

D.	Credit to Allowance for Uncollectible Accounts.

129.

Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?

A.	Increases assets and increases stockholders’ equity.

B.	Decreases assets and decreases stockholders’ equity.

C.	Decreases assets and decreases liabilities.

D.	No effect on the accounting equation.

130.

Which of the following is recorded by a credit to Accounts Receivable?

A.	Sale of inventory on account.

B.	Estimating the annual allowance for uncollectible accounts.

C.	Estimating annual sales returns.

D.	Write-offs of bad debts.

131.

A.	An increase to stockholders’ equity and a decrease to liabilities.

B.	No effect.

C.	An increase to assets and an increase to stockholders’ equity.

D.	A decrease to assets and a decrease to stockholders’ equity.

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Writing Off Accounts Receivable

132.

A.	Debit to Bad Debt Expense.

B.	Credit to Accounts Receivable.

C.	Credit to the Allowance for Uncollectible Accounts.

D.	Debit to Bad Debt Expense; credit to the Allowance for Uncollectible Accounts.

133.

$14,000.

$10,000.

$18,000.

$22,000.

Beginning balance ($23,000) + Bad Debt Expense ($18,000) – Ending balance ($27,000) = Actual write-offs ($14,000).

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Writing Off Accounts Receivable

134.

Collections of accounts receivable that previously have been written off are credited to:

A.	A Gain account.

B.	Accounts Receivable.

C.	Bad Debt Expense.

D.	Retained Earnings.

135.

A company collects an account receivable previously written off. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.

A.	Increase, (2) Increase, (3) Decrease

B.	Increase, (2) Increase, (3) Increase

C.	Increase, (2) Increase, (3) Increase

D.	No effect, (2) No effect, (3) No effect

136.

The direct write-off method is used when:

A.	Uncollectible accounts are not anticipated or are immaterial.

B.	A company elects to use this method as one of several alternatives.

C.	A company has greater cash outflows than cash inflows.

D.	A company expects excessive sales returns.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

137.

Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?

A.	Allowance method.

B.	Direct write-off method.

C.	Aging method.

D.	Percentage-of-receivables method.

138.

The direct write-off method is not normally an acceptable method for GAAP because it fails to report:

A.	Revenue from the sale of goods or services to customers.

B.	Cash collected from customers.

C.	Accounts receivable for their net realizable value.

D.	The amounts receivable from customers.

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

139.

The direct write-off method is generally not permitted for financial reporting purposes because:

A.	Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income.

B.	This method is primarily used for tax purposes.

C.	It is too difficult to accurately estimate future bad debts.

D.	Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to generate.

140.

Which accounting concept does the direct write-off method violate?

A.	Total assets equal total liabilities plus total stockholders’ equity.

B.	Recording amount owed within one year as current liabilities.

C.	Recognizing revenue when goods or services are provided to customers.

D.	An attempt to match revenues and their related expenses.

141.

If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false?

A.	An allowance account is not used.

B.	No adjustment is made at the end of the year to estimate future uncollectible accounts.

C.	Accounts receivable will be reported at their net realizable value.

D.	Bad debt expense is recorded at the time an actual bad debt is written-off.

142.

Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts?

A.	Debit Bad Debt Expense.

B.	Debit Allowance for Uncollectible Accounts.

C.	Credit Accounts Receivable.

D.	No adjustment is made.

143.

Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?

A.	Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts.

B.	Debit Allowance for Uncollectible Accounts, credit Accounts Receivable.

C.	Debit Bad Debt Expense, credit Accounts Receivable.

D.	No adjustment is made.

144.

The distinction between the direct write-off method and the allowance method is:

A.	The year in which cash is collected from customers.

B.	The cumulative amount of bad debt expense reported across years.

C.	The customers to which goods or services are provided.

D.	The amount of bad debt expense reported in each year.

145.

The direct write-off method is an acceptable method for what purpose?

A.	Issuing financial statements to stockholders.

B.	Tax reporting.

C.	Compliance with Generally Accepted Accounting Principles.

D.	Financial reporting.

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

146.

The primary difference between a note receivable and an account receivable is:

A.	A note receivable cannot be classified as a current asset.

B.	Borrowers have the option of not paying a note receivable.

C.	An account receivable is more likely to be collected.

D.	A note receivable is evidenced by a written debt instrument.

147.

A(n) ______ receivable is an informal credit arrangement with trade customers, whereas a(n) ______ receivable is a formal signed credit arrangement between a creditor and a debtor.

A.	Account; Note

B.	Revenue; Note

C.	Note; Account

D.	Allowance; Stock

148.

A note receivable is reported in the balance sheet:

A.	Always as a current asset.

B.	Always as a long-term asset.

C.	As either a current asset or long-term asset depending on the expected collection date.

D.	As a contra asset.

149.

A.	Total assets increase.

B.	Total assets decrease.

C.	No change in total assets.

D.	Total revenues increase.

150.

A.	Total assets increase.

B.	Total revenues increase.

C.	Net income increases.

D.	All of the other answers are financial statements effects that will occur.

AACSB: Reflective Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

151.

Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. This transaction would include a:

A.	Credit to Cash.

B.	Debit to Sales Discount.

C.	Debit to Notes Receivable.

D.	Credit to Notes Receivable.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

152.

$120.

$240.

$100.

$60.

Interest revenue = $1,000 × 12% × 6/12 = $60.

AACSB: Analytical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

153.

A.	Cash	2,000
	Interest Revenue	100
	Notes Receivable		2,100
B.	Cash	2,100
	Notes Receivable		2,100
C.	Cash	2,100
	Interest Revenue		100
	Notes Receivable		2,000
D.	Cash	2,200
	Notes Receivable		2,200

Option A

Option B

Option C

Option D

Interest revenue = $2,000 × 10% × 6/12 = $100.

154.

$20.

$40.

$30.

$60.

Interest revenue = $1,000 × 12% × 4/12 = $40.

155.

A.	Interest Revenue	360
	Interest Receivable		360
B.	Interest Receivable	480
	Interest Revenue		480
C.	Interest Receivable	360
	Interest Revenue		360
D.	Interest Receivable	200
	Interest Revenue		200

Option A

Option B

Option C

Option D

Interest revenue = $6,000 × 8% × 5/12 = $200.

156.

$20.

$40.

$30.

$60.

Interest revenue = $1,000 × 12% × 2/12 = $20.

157.

A.	Cash	9,675
	Notes Receivable		9,000
	Interest Revenue		675
B.	Cash	9,675
	Notes Receivable		9,000
	Interest Revenue		225
	Interest Receivable		450
C.	Cash	9,675
	Notes Receivable		9,000
	Interest Receivable		675
D.	Cash	9,675
	Notes Receivable		9,675

Option A

Option B

Option C

Option D

Interest revenue = $9,000 × 10% × 3/12 = $225. Interest receivable = $9,000 × 10% × 6/12 = $450.

158.

A.	Decreases assets.

B.	Decreases revenue.

C.	Increases expense.

D.	Increases stockholders’ equity.

159.

On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2018 income statement?

$750.

$1,500.

$4,500.

$6,000.

$100,000 × 6% × 3/12 = $1,500

AACSB: Analytical Thinking
AICPA: FN Measurement
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

160.

On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2019 income statement?

$0.

$1,500.

$4,500.

$6,000.

$100,000 × 6% × 12/12 = $6,000

161.

On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2020 income statement?

$0.

$4,500.

$6,000.

$12,000.

$100,000 × 6% × 9/12 = $4,500

162.

A.	Assets are overstated.

B.	Revenues are understated.

C.	Expenses are understated.

D.	All amounts are accurately stated.

AACSB: Reflective Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

163.

Interest Receivable	4,500
Interest Revenue		4,500

At the end of 2018, which of the following is true?

A.	Revenues are understated.

B.	Liabilities are understated.

C.	Assets are overstated.

D.	All amounts are accurately stated.

164.

The amount of a company’s receivables is influenced by several variables, including all of the following except:

A.	The level of sales.

B.	The nature of the product or service sold.

C.	The credit and collection policies.

D.	Dividend payments to stockholders.

165.

The formula for the receivables turnover ratio is:

A.	Average accounts receivable divided by average total assets.

B.	Net credit sales divided by average accounts receivable.

C.	Net credit sales divided by average total assets.

D.	Average accounts receivable divided by net credit sales.

166.

The receivables turnover ratio indicates:

A.	How efficient the company is at managing sales and inventory.

B.	The relationship between sales and cost of goods sold.

C.	The number of times during a year that the average accounts receivables were collected.

D.	The relationship between cash sales and credit sales.

167.

An increase in a company’s receivables turnover ratio typically means the company is:

A.	Having trouble paying debts as they become due.

B.	Less profitable.

C.	More effectively granting and collecting credit to customers.

D.	Losing customers to its competitors.

168.

2.50.

3.57.

2.94.

146 days.

[($1,000,000 × .70)/($220,000 + $340,000)/2] = 2.50.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

169.

Sandburg Veterinarian reports the following information for the year:

Net credit sales	$120,000
Average accounts receivable	20,000
Cash collections on credit sales	100,000

What is Sandburg’s receivables turnover ratio?

6.0.

5.0.

1.2.

0.2.

Receivables turnover ratio = net credits sales ($120,000)/average accounts receivable ($20,000) = 6.0.

170.

12.0.

9.6.

8.0.

1.5.

Receivables turnover ratio = net credit sales ($240,000)/average accounts receivable [($20,000 + $30,000)/2] = 9.6.

171.

Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference?

A.	Toppleson is selling to high-risk customers.

B.	Toppleson has effective procedures related to selling goods on account.

C.	Toppleson provides superior products and services.

D.	Toppleson allows customers too long to pay.

AACSB: Reflective Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

172.

A company’s ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management’s ability to:

A.	Collect cash from all sales to customers.

B.	Effectively market its products and services.

C.	Generate profits for investors.

D.	Reduce costs of selling products and services to customers.

AACSB: Reflective Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

173.

The formula for average collection period is:

A.	365 days divided by the receivable turnover ratio.

B.	365 days divided by net credit sales.

C.	365 days divided by average accounts receivable.

D.	Net credit sales divided by average accounts receivable.

174.

What is the most likely reason for a company to have an increase in average collection period?

A.	The company has incurred additional marketing expenses to attract customers.

B.	Customers are paying in a timelier manner.

C.	The company has tightened its credit policies for its customers.

D.	The company has become more lenient in its credit policies and is extending credit terms to maintain customers.

175.

Red Company has the following information:

Net credit sales = $400,000
Net income = $100,000
Average total assets = $80,000
Average accounts receivable = $20,000

What is Red’s average collection period (rounded to the nearest whole day)?

73 days.

18 days.

9 days.

5 days.

Turnover ratio = $400,000/$20,000 = 20
Collection period = 365 days/20 = 18 days (rounded)

176.

The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:

A.	The balance sheet method.

B.	The method most used by companies.

C.	The income statement method.

D.	The percentage-of-receivables method.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Percentage-of-Credit-Sales Method

177.

The income statement approach for estimating bad debts uses a percentage of

A.	Credit sales.

B.	Accounts receivable.

C.	Allowance for uncollectible accounts.

D.	Bad debt expense.

178.

Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts?

A.	The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts.

B.	This method is referred to as the balance sheet approach.

C.	This method does not allow for future uncollectible accounts.

D.	Under this method, bad debt expense is recorded at the time of an actual bad debt.

179.

Which of the following provides an accurate match?

A.	Percentage-of-receivables method ~ Assets are reported closer to their net realizable value.

B.	Allowance method ~ Receivables are reported net of estimated uncollectible accounts.

C.	Percentage-of-credit-sales method ~ Revenues and expenses are better matched.

D.	All of the other answers provide an accurate match.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Percentage-of-Credit-Sales Method

180.

The following information pertains to Lindsey Corp. at the end of the year:

Credit Sales	$150,000
Accounts Payable	20,000
Accounts Receivable	30,000
Allowance for Uncollectible Accounts	800	debit
Cash Sales	5,500

$1,200.

$2,200.

$3,000.

$3,800.

Bad debt expense = $150,000 × 2% = $3,000.

AACSB: Analytical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Percentage-of-Credit-Sales Method

181.

The following information pertains to Lightning Inc., at the end of the year:

Credit Sales	$60,000
Accounts Payable	10,000
Accounts Receivable	7,000
Allowance for Uncollectible Accounts	400	credit
Cash Sales	20,000

Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment?

$600.

$1,000.

$200.

$1,200.

Allowance for Uncollectible Accounts = $400 + ($60,000 × 1%) = $1,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Percentage-of-Credit-Sales Method

182.

A.	Credit to Accounts Receivable for $2,000.

B.	Debit to Bad Debt Expense for $10,000.

C.	Debit to Allowance for Uncollectible Accounts for $10,000.

D.	Credit to Bad Debt Expense for $8,000.

Matching Questions

183.

Match each term related to net revenues with its description.

1. Net revenues	Total revenues less contra revenues.	1
2. Sales returns	Reduction in revenue because the product or service is sold below the listed price.	5
3. Contra revenues	Reduction in revenue because the customer brings back products to the company after the original purchase.	2
4. Sales discounts	Reduction in revenue because of some deficiency in the company’s product or service.	6
5. Trade discounts	Reduction in revenue when the customer pays within a specified period.	4
6. Sales allowances	Accounts with balances opposite of revenue.	3

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

184.

Match each term related to the allowance method for uncollectible accounts with its description.

1. Bad debt expense	The account used to record sales on account to customers.	6
2. No effect	The procedure required for financial reporting purposes to account for uncollectible accounts.	3
3. Allowance method	The difference between total accounts receivable and the estimate of future bad debts.	4
4. Net realizable value	The effect on total assets when estimating future bad debts.	5
5. Decrease	The account to credit when estimating future bad debts.	8
6. Accounts receivable	The effect on total expenses when estimating future bad debts.	7
7. Increase	The account to debit when estimating future bad debts.	1
8. Allowance for Uncollectible Accounts	The effect on total liabilities when estimating future bad debts.	2

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

185.

Match each term related to the comparison between the allowance method and direct write-off method for uncollectible accounts with its description.

1. Direct write-off method	The procedure commonly used for financial reporting purposes to account for uncollectible accounts.	8
2. Increase	The procedure commonly used for tax reporting purposes to account for uncollectible accounts.	1
3. Bad debt expense	The account to credit when writing off an actual bad debt under the allowance method.	5
4. Decrease	The account to debit when writing off an actual bad debt under the direct write-off method.	3
5. Accounts receivable	The account to debit when writing off an actual bad debt under the allowance method.	7
6. No effect	The effect on total expenses when writing off an actual bad debt under the direct write-off method.	2
7. Allowance for Uncollectible Accounts	The effect on total assets when estimating future bad debts under the allowance method.	4
8. Allowance method	The effect on total expenses when estimating future bad debts under the direct write-off method.	6

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Direct Write-Off Method

186.

Match each account with its description.

1. Accounts receivable	Informal credit arrangements with trade customers.	1
2. Interest revenue	Account to debit when interest accrues at the end of the year.	4
3. Notes receivable	Account to credit when interest accruals at the end of the year.	2
4. Interest receivable	Formal signed credit arrangements between a creditor and a debtor.	3
5. Cash	Account to debit when receivables and interest are collected.	5

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

187.

Match each term related to receivables analysis with its description.

1. Less	The approximate number of days the average accounts receivable balance is outstanding.	3
2. Decrease	An increase in the receivables turnover ratio generally indicates the company manages its receivables _____ efficiently.	4
3. Average collection period	Reducing the length of time in which customers are required to pay will typically _____ the receivables turnover ratio.	6
4. More	The number of times during a year that the average accounts receivable balance is collected.	5
5. Receivables turnover ratio	An increase in the average collection period indicates the company manages its receivables _____ efficiently.	1
6. Increase	Allowing riskier customers to purchase goods or services on account will typically _____ the receivables turnover ratio.	2

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

Short Answer Questions

188.

A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.

Accounts Receivable	6,400
Service Revenue		6,400

Feedback: Trade discount = $8,000 × 20% = $1,600. Sale price = $8,000 – $1,600 = $6,400.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

189.

On February 23, a company provides services on account to a customer for $4,500. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

February 23
Accounts Receivable	4,500
Service Revenue		4,500
March 4
Cash	4,500
Accounts Receivable		4,500

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

190.

July 9
Cash	400
Service Revenue		400

Feedback: Trade discount = $500 × 20% = $100. Sale price = $500 – $100 = $400.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

191.

On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.

September 8
Accounts Receivable	1,500
Service Revenue		1,500

September 15
Cash	1,470
Sales Discounts	30
Accounts Receivable		1,500

Feedback: Sales discounts = $1,500 × 2% = $30.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-01 Recognize accounts receivable.
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Credit Sales and Accounts Receivable
Topic: Net Revenues

192.

On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.

October 22
Accounts Receivable	1,800
Service Revenue		1,800
December 19
Cash	1,800
Accounts Receivable		1,800

Feedback: No sales discount of 3% is awarded because the customer did not pay within 15 days as set forth by the terms of the service agreement.

193.

August 12
Accounts Receivable	3,000
Service Revenue		3,000

August 16
Sales Allowances	400
Accounts Receivable		400

August 20
Cash	2,600
Accounts Receivable		2,600

194.	A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues. $440,000 Feedback: Net revenues = $500,000 – $10,000 – $30,000 – $20,000 = $440,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

195.

A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net revenues.

$350,000

Feedback: Net revenues = $400,000 – $10,000 – $15,000 – $25,000 = $350,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Net Revenues

196.

Bad Debt Expense	1,300
Allowance for Uncollectible Accounts		1,300

Feedback: Adjustment = ($15,000 × 10%) – $200 = $1,300.

197.

Bad Debt Expense	7,000
Allowance for Uncollectible Accounts		7,000

Feedback: Adjustment = ($180,000 × 5%) – $2,000 = $7,000.

198.

Bad Debt Expense	11,000
Allowance for Uncollectible Accounts		11,000

Feedback: Adjustment = ($180,000 × 5%) + $2,000 = $11,000.

199.

Bad Debt Expense	12,000
Allowance for Uncollectible Accounts		12,000

Feedback: Adjustment = ($250,000 – $130,000) × 10% = $12,000.

200.	A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate the net realizable value of accounts receivable. $56,000 Feedback: Net realizable value = $62,000 – $6,000 = $56,000.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

201.

A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate the net realizable value of accounts receivable.

$70,000

Feedback: Net realizable value = $75,000 – $5,000 = $70,000.

202.

A company reports the following amounts at the end of the year (before any year-end adjustment).

Credit sales for the year	$120,000
Accounts receivable	36,000
Allowance for uncollectible accounts	1,500	(credit)

(1)
Bad Debt Expense	2,100
Allowance for Uncollectible Accounts		2,100
(2)
Bad Debt Expense	2,400
Allowance for Uncollectible Accounts		2,400

Feedback: (1) Adjustment = ($36,000 × 10%) – $1,500 = $2,100.
(2) Adjustment = $120,000 × 2% = $2,400.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Allowance Method
Topic: Percentage-of-Credit-Sales Method

203.

A company has the following accounts receivable and estimates of uncollectible accounts:

Compute the total estimated uncollectible accounts.

$10,800

Feedback: Estimate = ($60,000 × 3%) + ($20,000 × 20%) + ($10,000 × 50%) = $10,800.

204.

At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts:

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).

Bad Debt Expense	8,100
Allowance for Uncollectible Accounts		8,100

Feedback: Adjustment = ($80,000 × 2%) + ($20,000 × 25%) + ($4,000 × 60%) – $900 = $8,100.

205.

At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts:

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).

Bad Debt Expense	10,500
Allowance for Uncollectible Accounts		10,500

Feedback: Adjustment = ($70,000 × 4%) + ($30,000 × 15%) + ($5,000 × 40%) + $1,200 = $10,500.

206.

Age Group	Amount Receivable	Estimated Percent Uncollectible
Not yet due	$48,000	5%
0–30 days past due	18,000	15%
31–90 days past due	10,000	40%
More than 90 days past due	4,000	80%
Total	$80,000

Record the adjustment for uncollectible accounts on December 31, 2018.

Bad Debt Expense	11,200
Allowance for Uncollectible Accounts		11,200

Feedback: Adjustment = ($48,000 × 5%) + ($18,000 × 15%) + ($10,000 × 40%) + ($4,000 × 80%) – $1,100 = 11,200.

207.

A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $25,000. Record the write-off of the uncollectible accounts.

Allowance for Uncollectible Accounts	25,000
Accounts Receivable		25,000

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Writing Off Accounts Receivable

208.	At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)? -$2,000 (or $2,000 debit)

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Writing Off Accounts Receivable

209.

On March 13, a company writes off a customer’s account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3.

March 13
Allowance for Uncollectible Accounts	3,800
Accounts Receivable		3,800
June 3
Accounts Receivable	3,800
Allowance for Uncollectible Accounts		3,800
Cash	3,800
Accounts Receivable		3,800

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Writing Off Accounts Receivable

210.

Calculate the missing amount for each of the following notes receivable.

Face Value	Annual Interest rate	Fraction of the Year	Interest
$15,000	4%	8 months	(a)
$25,000	8%	(b)	$500
$30,000	(c)	4 months	$500
(d)	6%	6 months	$600

(a) $400; (b) 3 months; (c) 5%; (d) $20,000

Feedback: $15,000 × 4% × 8/12 = (a) $400.
$25,000 × 8% × (b) 3/12 = $500.
$30,000 × (c) 5% × 4/12 = $500.
(d) $20,000 × 6% × 6/12 = $600.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

211.	On February 1, 2018, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018. $1,200 Feedback: $20,000 × 8% × 9/12 = $1,200.

212.	On July 1, 2018, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018 and 2019. 2018 = $800; 2019 = $400 Feedback: 2018: $20,000 × 8% × 6/12 = $800. 2019: $20,000 × 8% × 3/12 = $400.

213.

On April 1, 2018, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note receivable. Calculate the amount of interest revenue the company will recognize in 2018, 2019, and 2020.

2018 = $4,500; 2019 = $6,000; 2020 = $1,500

Feedback: 2018: $50,000 × 12% × 9/12 = $4,500.
2019: $50,000 × 12% × 12/12 = $6,000.
2020: $50,000 × 12% × 3/12 = $1,500.

214.

On April 14, a company lends $10,000 cash to one of its employees and accepts a six-month, 12% note in return. Record the acceptance of the note receivable.

Notes Receivable	10,000
Cash		10,000

AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Topic: Accounting for Notes Receivable

215.

On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1.

April 1
Notes Receivable	12,000
Service Revenue		12,000
October 1
Cash	12,600
Notes Receivable		12,000
Interest Revenue		600

Feedback: Interest revenue = $12,000 × 10% × 6/12 = $600.

216.

On May 1, 2018, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 6% note. Record the acceptance of the note on May 1, 2018, the adjustment on December 31, 2018, and the cash collection on May 1, 2019.

May 1, 2018
Notes Receivable	100,000
Cash		100,000
December 31, 2018
Interest Receivable	4,000
Interest Revenue		4,000
May 1, 2019
Cash	106,000
Notes Receivable		100,000
Interest Receivable		4,000
Interest Revenue		2,000

Feedback: Interest revenue 2018 = $100,000 × 6% × 8/12 = $4,000.
Interest revenue 2019 = $100,000 × 6% × 4/12 = $2,000.

217.

Below are amounts for two companies:

	Beginning Accounts Receivable (net)	Ending Accounts Receivable (net)	Net Sales
Company 1	$1,500	$1,200	$29,700
Company 2	3,100	3,300	80,000

For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales?

Company 1 = 22; Company 2 = 25; Company 2 is more efficient

Feedback: Company 1 = $29,700/[($1,500 + $1,200)/2] = 22.
Company 2 = $80,000/[($3,100 + $3,300)/2] = 25.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

218.

Bad Debt Expense	8,400
Allowance for Uncollectible Accounts		8,400

Feedback: Adjustment = $280,000 × 3% = 8,400.

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Percentage-of-Credit-Sales Method

219.

Bad Debt Expense	8,400
Allowance for Uncollectible Accounts		8,400

Feedback: Adjustment = $280,000 × 3% = $8,400.

220.

Assume the following scenarios.

Required:

For each scenario, calculate the amount of revenue to be recognized in 2018.

Revenue recognized in 2018
Scenario 1:	$100,000
Scenario 2:	$60	(= $75 × 80%)
Scenario 3:	$15,000
Scenario 4:	$125,000

AACSB: Analytical Thinking
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Recognize accounts receivable.
Topic: Credit Sales and Accounts Receivable

221.

June 10	Luke’s hard drive crashes and he sends it to RE.
June 12	After initial evaluation, RE e-mails Luke to let him know that full data recovery will cost $1,600.
June 13	Luke informs RE that he would like them to recover the data and that he is a student at USC, qualifying him for a 10% educational discount and reducing the cost by $160 ($1,600 × 10%).
June 16	RE performs the work and claims to be successful in recovering all data. RE asks Luke to pay within 30 days of today’s date, offering a 5% discount for payment within 10 days.
June 19	When Luke receives the hard drive, he notices that RE did not successfully recover all data. Approximately 25% of the data has not been recovered and he informs RE.
June 20	RE reduces the amount Luke owes by 25%.
June 30	Luke pays the amount owed.

Required:

Requirement 1

June 10	Debit	Credit
No entry
June 12
No entry
June 13
No entry
June 16
Accounts Receivable	1,440
Service Revenue		1,440
(Provide services of $1,600 on account with a 10% discount)
June 19
No entry
June 20
Sales Allowances	360
Accounts Receivable		360
(Sales allowance for services on account)
June 30
Cash	1,080
Accounts Receivable		1,080
(Receive cash on account)

Requirement 2

Total Service Revenue	$1,440
Less: Sales Allowances	360
Net Revenues	$1,080

Requirement 3

Recovery Experts Partial Income Statement
Total Service Revenue	$1,440
Less: Sales Allowances	(360)
Net Revenues		$1,080

Requirement 4

June 25
Cash	1026
Sales Discounts	54
Accounts Receivable		1,080
(Receive cash on account with 5% sales discount) (Sales discount = 1,080 × 5%)

Total Service Revenue	$1,440
Less: Sales Allowances	360
Sales Discounts	54
Net Revenues	$1,026

AACSB: Analytical Thinking
AICPA: FN Measurement
AICPA: FN Reporting
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-01 Recognize accounts receivable.
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances.
Topic: Credit Sales and Accounts Receivable
Topic: Net Revenues

222.

Tatsuo is the CEO of Ginjo Gallery. At the end of the year, the company’s accountant provides Tatsuo with the following information, before any adjusting entries.

Accounts receivable	$1,000,000
Estimated percentage uncollectible	5%
Allowance for uncollectible accounts	$10,000 (credit)
Operating income	$240,000

Required:

Requirement 1

	Debit	Credit
Bad Debt Expense	40,000
Allowance for Uncollectible Accounts		40,000
(Estimate future bad debts) ($1,000,000 × 5% – $10,000 = $40,000)

Requirement 2

Revised operating income = $240,000 – $40,000 (bad debt expense)
= $200,000

Ginjo Gallery will meet analysts’ expectations because the revised operating income of $200,000 is greater than the $170,000 expectations.

Requirement 3

Revised operating income = $240,000 – $70,000 (bad debt expense)
= $170,000

If Ginjo Gallery records bad debt expense for $70,000 instead of $40,000, assets will be understated and operating income will be understated by $30,000.

Requirement 4

By managing operating income downward, Tatsuo is “saving” reported income for the future. If bad debt expense is overestimated this year, then it can be understated next year. Understating bad debt expense next year will overstate operating income in that year.

223.

The following events occur for Wortham Landscape Design during 2018 and 2019, its first two years of operations.

February 2, 2018	Provide services to customers on account for $26,000.
July 23, 2018	Receive $20,000 from customers on account.
December 31, 2018	Estimate that 10% of uncollected accounts will not be received.
April 12, 2019	Provide services to customers on account for $40,000.
June 28, 2019	Receive $5,000 from customers for services provided in 2018.
September 13, 2019	Write off the remaining amounts owed from services provided in 2018.
October 5, 2019	Receive $33,000 from customers for services provided in 2019.
December 31, 2019	Estimate that 10% of uncollected accounts will not be received.

Required:

Requirement 1

February 2, 2018	Debit	Credit
Accounts Receivable	26,000
Service Revenue		26,000
(Provide services on account)
July 23, 2018
Cash	20,000
Accounts Receivable		20,000
(Receive cash on account)
December 31, 2018
Bad Debt Expense	600
Allowance for Uncollectible Accounts		600
(Estimate future bad debts) ($6,000 × 10% = $600)
April 12, 2019
Accounts Receivable	40,000
Service Revenue		40,000
(Provide services on account)
June 28, 2019
Cash	5,000
Accounts Receivable		5,000
(Receive cash on account)
September 13, 2019
Allowance for Uncollectible Accounts	1,000
Accounts Receivable		1,000
(Write off actual bad debts)
October 5, 2019
Cash	33,000
Accounts Receivable		33,000
(Receive cash on account)
December 31, 2019
Bad Debt Expense	1,100
Allowance for Uncollectible Accounts		1,100
(Estimate future bad debts) ($7,000 × 10% + $400 = $1,100)

Requirement 2

	Cash		Accounts Receivable
	20,000		26,000	20,000
Dec. 31, 2018	20,000	Dec. 31, 2018	6,000	_______
	5,000		40,000	5,000
	33,000			1,000
Dec. 31, 2019	58,000			33,000
		Dec. 31, 2019	7,000

Allow. for Uncol. Accts.
	600	Dec. 31, 2018
1,000	1,100
	700	Dec. 31, 2019

Requirement 3

	2018	2019
Total accounts receivable	$6,000	$7,000
Less: Allowance for uncollectible accounts	600	700
Net realizable value	$5,400	$6,300

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Allowance Method
Topic: Writing Off Accounts Receivable

224.

Required:

Requirement 1

	Debit	Credit
Bad Debt Expense	6,000
Allowance for Uncollectible Accounts		6,000
(Estimate future bad debts) ($200,000 × 3% = $6,000)

Requirement 2

Gallen underestimated uncollectible accounts by $14,000. Actual bad debts in the second year were $20,000 and the company estimated bad debts to be only $6,000. Because of this, total assets will be overstated and total expenses will be understated by $14,000 in the first year.

Requirement 3

Gallen should not prepare new financial statements for the first year. The fact that actual bad debts in the second year turned out to be different than the amount estimated at the end of the first year does not constitute a reason for re-issuing prior financial statements. Estimation error is an issue inherent in financial reporting.

AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Analyze
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Allowance Method
Topic: Writing Off Accounts Receivable

225.

Age Group	Operating Revenue	Accounts Receivable	Average Age	Accounts Written Off
Two years ago	$2,300,000	$80,000	13 days	$10,000
Last year	3,100,000	100,000	11 days	15,000
Current year	3,000,000	350,000	27 days	0

Required:

Requirement 1

Power should not use the direct write-off method. Even if no accounts are known to be uncollectible at the time, Peter should estimate future bad debts and record those estimates as an expense (bad debt expense) and reduction in total assets (allowance for uncollectible accounts) in the current year.

Requirement 2

Allowance for uncollectible accounts = $350,000 × 30% = $105,000.

Requirement 3

If Power uses the direct write-off method, total assets will be overstated and total expenses will be understated by $105,000.

AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA: FN Measurement
Blooms: Analyze
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Allowance Method
Topic: Direct Write-Off Method

226.

Age Group	Amount Receivable	Estimated Percent Uncollectible
Not yet due	$40,000	5%
0–30 days past due	19,000	10%
31–60 days past due	9,000	20%
More than 60 days past due	6,000	40%
Total	$74,000

Required:

Requirement 1

Age group	Amount receivable	Estimated percent uncollectible	Estimated amount uncollectible
Not yet due	$40,000	5%	$2,000
0-90 days past due	19,000	10%	1,900
91-180 days past due	9,000	20%	1,800
More than 180 days past due	6,000	40%	2,400
Total	$74,000		$8,100

Requirement 2

December 31, 2018	Debit	Credit
Bad Debt Expense	8,600
Allowance for Uncollectible Accounts		8,600
(Estimate future bad debts) ($8,100 + $500 = $8,600)

Requirement 3

April 3, 2019
Allowance for Uncollectible Accounts	600
Accounts Receivable		600
(Write off actual bad debts)

Requirement 4

July 17, 2019
Accounts Receivable	200
Allowance for Uncollectible Accounts		200
(Re-establish portion of account previously written off)
July 17, 2019
Cash	200
Accounts Receivable		200
(Receive cash on account)

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts.
Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible.
Topic: Aging of Accounts Receivable
Topic: Writing Off Accounts Receivable

227.

Required:

Requirement 1

June 1, 2018	Debit	Credit
Notes Receivable	150,000
Service Revenue		150,000
(Provide services and issue note)

Requirement 2

December 31, 2018	Debit	Credit
Interest Receivable	10,500
Interest Revenue		10,500
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)
June 1, 2019
Cash	18,000
Interest Receivable		10,500
Interest Revenue		7,500
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 5/12)
December 31, 2019
Interest Receivable	10,500
Interest Revenue		10,500
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)
June 1, 2020
Cash	18,000
Interest Receivable		10,500
Interest Revenue		7,500
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 5/12)
December 31, 2020
Interest Receivable	10,500
Interest Revenue		10,500
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)

Requirement 3

June 1, 2020	Debit	Credit
Cash	168,000
Notes Receivable		150,000
Interest Receivable		10,500
Interest Revenue		7,500
(Receive cash on note and interest) (Interest revenue = $150,000 × 12% × 5/12)

228.

Selected financial data for Strong Health Group and Sturdy Medical Corporation, two companies in the health-care industry, are as follows:

($ in millions)	Net Sales	Beginning Accounts Receivable	Ending Accounts Receivable
Strong Health	$1,850	$200	$230
Sturdy Medical	2,100	400	380

Required:

Requirement 1

			Strong Health Group	Sturdy Medical Corporation
Receivables turnover ratio	=	Net sales	$1,850	$2,100
Receivables turnover ratio	=	Average accounts receivable	($200 + $230)/2	($400 + $380)/2
	=		8.6 times	5.4 times
Average collection period	=	365	365	365
Average collection period	=	Receivables turnover ratio	8.6	5.4
	=		42.4 days	67.6 days

Compared to Sturdy Medical, Strong Health has a higher receivables turnover ratio and a lower average collection period, which means it collects cash more quickly from its customers. The receivables turnover ratio and average collection period for Tenet Healthcare in the most recent year reported in the text are 6.2 times and 58.9 days, respectively. The receivables turnover ratio and average collection period for LifePoint Hospitals in the most recent year reported in the text are 3.8 times and 96.1 days, respectively. Strong Health has the most favorable (highest) receivables turnover ratio of the four companies.

Requirement 2

The receivables turnover ratio and average collection period provide an indication of management’s ability to collect cash from customers in a timely manner. A high receivables turnover ratio suggests that managers are selling to customers that have the ability to pay their accounts in a timely manner. The more quickly a company can collect its receivables, the more quickly it can use that cash to generate even more cash by reinvesting in the business and generating additional sales. Factors that could affect the receivables turnover ratio would be managers failing to recognize the financial situation of lower-quality customers, being too aggressive in selling to customers on account, or encountering weak business conditions in the industry which would affect all companies.

AACSB: Analytical Thinking
AICPA: FN Decision Making
AICPA: FN Measurement
Blooms: Analyze
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

Essay Questions

229.

Give three examples of contra revenue accounts and the transactions with which they are associated.

A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time. Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s product or service.

230.

Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes.

Companies should account for uncollectible accounts receivable using the allowance method. Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

231.

What does it mean to report accounts receivable at their net realizable value.

Net realizable value is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts. The net realizable value of accounts receivable is the amount reported in the balance sheet.

AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Topic: Allowance Method

232.

Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable for financial reporting purposes?

The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense. The direct write-off method makes no attempt to estimate future bad debts. Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs. Only the allowance method is allowed for financial reporting purposes.

AACSB: Reflective Thinking
AICPA: FN Measurement
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Topic: Allowance Method
Topic: Direct Write-Off Method

233.

Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?

The percentage-of-receivables method estimates future bad debts based on a balance sheet amount – accounts receivable. The percentage-of-credit-sales method estimates future bad debts based on an income statement amount – credit sales. The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus). This is why the percentage-of-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method.

AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Record an allowance for future uncollectible accounts.
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Topic: Allowance Method
Topic: Percentage-of-Credit-Sales Method

234.

How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?

The receivables turnover ratio equals net credit sales divided by average accounts receivable. The ratio shows the number of times during a year that the average accounts receivable balance is collected (or “turns over”). Typically, a higher ratio is a good indicator of a company’s effectiveness in managing receivables.

AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Topic: Receivables Turnover Ratio

Financial Accounting 4th Edition David Spiceland Wayne Thomas Don Herrmann - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Psychiatric Nursing 8th Edition by Keltner

Winningham’s Critical Thinking Cases in Nursing 6th Edition

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley

Bates’ Guide To Physical Examination And History Taking 12th Edition

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

Quick Links

Contact Information

Financial Accounting 4th Edition David Spiceland Wayne Thomas Don Herrmann - Test Bank

Description

Additional Information

Reviews

Additional information

Add Review Cancel reply

Related Products

Psychiatric Nursing 8th Edition by Keltner

Winningham’s Critical Thinking Cases in Nursing 6th Edition

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley

Bates’ Guide To Physical Examination And History Taking 12th Edition

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

Basic And Clinical Pharmacology 14th Edition by Katzung Trevor

Quick Links

Contact Information