Financial Accounting 5e David Spiceland 5e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Financial Accounting, 5e (Spiceland) Chapter 5 Receivables and Sales 1) Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from …
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Financial Accounting 5e David Spiceland 5e – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Financial Accounting, 5e (Spiceland)
Chapter 5 Receivables and Sales
1) Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future.
Answer: TRUE
Difficulty: 1 Easy
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
2) At the time of a credit sale, a company would record an increase in assets and an increase in revenues.
Answer: TRUE
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
3) A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.
Answer: FALSE
Explanation: A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue.
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
4) Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account.
Answer: TRUE
Difficulty: 1 Easy
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
5) Trade discounts represent a discount offered to the purchaser for quick payment.
Answer: FALSE
Explanation: Trade discounts represent a reduction in the listed price of a good or service.
Difficulty: 1 Easy
Topic: Net Revenues – Trade Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
6) When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.
Answer: TRUE
Difficulty: 3 Hard
Topic: Net Revenues – Trade Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
7) A sales discount represents a reduction, not in the selling price of a good or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time.
Answer: TRUE
Difficulty: 1 Easy
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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.
Answer: FALSE
Explanation: 2/10 indicates a 2% discount (or $20 in this example) if payment is made within 10 days.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
9) The Sales Discounts account is an example of a contra revenue account.
Answer: TRUE
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
10) The Sales Discounts account is an expense account.
Answer: FALSE
Explanation: Sales Discounts is a contra revenue account.
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
11) Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer’s balance owed.
Answer: TRUE
Difficulty: 1 Easy
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
12) A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances.
Answer: FALSE
Explanation: A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable.
Difficulty: 2 Medium
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
13) The Sales Returns account is an expense account.
Answer: FALSE
Explanation: Sales Returns is a contra revenue account.
Difficulty: 2 Medium
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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.
Answer: TRUE
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
15) Accounts receivable are reported at the net amount expected to be collected.
Answer: TRUE
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
16) The net amount of accounts receivable is the full amount owed by customers.
Answer: FALSE
Explanation: The net amount is the amount of cash we expect to collect.
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
17) Customers’ accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts).
Answer: TRUE
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
18) The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities.
Answer: FALSE
Explanation: The adjustment has the effect of (1) reducing assets and (2) increasing expenses. An increase in expenses reduces net income and retained earnings.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
19) The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.
Answer: TRUE
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
20) The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect.
Answer: TRUE
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
21) Bad debt expense represents the cost of the estimated future bad debts and is reported as an expense on the income statement.
Answer: TRUE
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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.
Answer: TRUE
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
23) One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally records accounts receivable for the net amount of cash expected to be collected.
Answer: FALSE
Explanation: This is generally an advantage of the allowance method.
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance; Direct Write-Off Method
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
24) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance; Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
25) Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets.
Answer: FALSE
Explanation: Writing off an account receivable has no effect on total assets.
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
26) Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense.
Answer: FALSE
Explanation: Writing off an account receivable has no effect on expenses.
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
27) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
28) Under the allowance method, when a company collects cash from an account previously written off, total assets increase.
Answer: FALSE
Explanation: Collecting cash from an account previously written off has no effect on total assets.
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
29) The aging method for estimating uncollectible accounts considers that a higher percentage of “older” accounts will not be collected compared to “newer” accounts.
Answer: TRUE
Difficulty: 2 Medium
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
30) 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.
Answer: FALSE
Explanation: Estimated uncollectible accounts = ($40,000 × 5%) + ($5,000 × 20%) = $3,000.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
31) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
32) A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year’s estimate of uncollectible accounts was too low.
Answer: TRUE
Difficulty: 2 Medium
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
33) The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts.
Answer: FALSE
Explanation: The direct write-off method records an adjustment on the date the account is known to be uncollectible.
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
34) Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible.
Answer: TRUE
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
35) The direct write-off method is used for tax purposes but is generally not permitted for financial reporting.
Answer: TRUE
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
36) The direct write-off method violates the concept of timeliness.
Answer: TRUE
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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.
Answer: FALSE
Explanation: Under the direct write-off method, future uncollectible accounts are not estimated.
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
38) Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
39) Notes receivable typically arise from sales to customers.
Answer: FALSE
Explanation: 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.
Difficulty: 1 Easy
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
40) Notes receivable are assets and are reported in the balance sheet.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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.
Answer: FALSE
Explanation: Interest = face value ($10,000) × annual interest rate (10%) × fraction of year (6/12) = $500.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
43) Accrued interest on a note receivable is interest earned by the end of the year but not yet received.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
44) Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.
Answer: FALSE
Explanation: Accrued interest increases assets and increases revenues.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
46) The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or “turns over”).
Answer: TRUE
Difficulty: 2 Medium
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
47) The receivables turnover ratio equals average accounts receivable divided by net credit sales.
Answer: FALSE
Explanation: The receivables turnover ratio equals net credit sales divided by average accounts receivable.
Difficulty: 1 Easy
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
48) A lower receivables turnover ratio generally indicates more effective management of accounts receivable by company managers.
Answer: FALSE
Explanation: A higher receivables turnover ratio generally indicates more effective management of accounts receivable.
Difficulty: 2 Medium
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
49) The average collection period shows the approximate number of days the average accounts receivable balance is outstanding.
Answer: TRUE
Difficulty: 2 Medium
Topic: Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
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.
Answer: FALSE
Explanation: 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.
Difficulty: 2 Medium
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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.
Answer: FALSE
Explanation: Bad debt expense will typically differ between the two methods.
Difficulty: 2 Medium
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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).
Answer: TRUE
Difficulty: 2 Medium
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
53) From a balance sheet perspective, the percentage-of-receivables method is typically preferred over the percentage-of-credit-sales method because assets (net accounts receivable) are reported closer to the amount of cash we expect to collect.
Answer: TRUE
Difficulty: 2 Medium
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
55) Which of the following best describes credit sales?
Answer: C
Difficulty: 1 Easy
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
56) Credit sales are recorded as:
Answer: D
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
57) A company provides services on account. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.
Answer: C
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
58) Which of the following best describes accounts receivable?
Answer: C
Difficulty: 1 Easy
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
59) The amount of cash owed to a company by its customers from the sale of goods or services on account is commonly referred to as:
Answer: B
Difficulty: 1 Easy
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
60) Identify the primary disadvantage of extending credit to customers.
Answer: A
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
61) Identify the likely advantage of extending credit to customers.
Answer: B
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
62) Identify the condition(s) that must exist for a sale and the related receivable to be recognized.
Answer: D
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
63) When a company provides services on account, the transaction would be recorded with a debit to:
Answer: C
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
64) When a company provides services on account, the transaction would be recorded with a credit to:
Answer: B
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
65) Which of the following items are classified as receivables?
Answer: D
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
66) A trade discount results in:
Answer: D
Difficulty: 2 Medium
Topic: Net Revenues – Trade Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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 |
Answer: A
Difficulty: 3 Hard
Topic: Net Revenues – Trade Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
68) When customers purchase goods 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:
Answer: B
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
69) Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers. In March 2021, 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?
Answer: D
Explanation: 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.
Difficulty: 3 Hard
Topic: Net Revenues – Trade Discounts; Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
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 |
Answer: C
Explanation: Sales discount = $600 × 100 printers × 2% = $1,200.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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?
Answer: D
Explanation: No revenue recorded on March 25. The revenue would have been recorded on March 17.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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.
Answer: A
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
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 |
Answer: B
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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 |
Answer: B
Explanation: Sales discount = $8,000 × 2% = 160.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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 |
Answer: D
Explanation: No sales discount is awarded because payment is not received within 10 days.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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 |
Answer: A
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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 |
Answer: C
Explanation: $46,000 × 1% = 460; $46,000 − 460 = $45,540.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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 |
Answer: C
Explanation: No discount is recorded because payment is made after 15 days.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
79) Which of the following is recorded upon receipt of a payment on April 7, 2021, by a customer who pays a $900 invoice dated March 3, 2021, with terms 2/10, n/60?
Answer: D
Explanation: No discount is recorded because payment is made after 10 days.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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:
Answer: D
Difficulty: 2 Medium
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
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:
Answer: D
Difficulty: 2 Medium
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
82) Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a:
Answer: C
Difficulty: 2 Medium
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
83) Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom’s Textiles would credit Accounts Receivable and debit:
Answer: C
Difficulty: 2 Medium
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
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.
Answer: A
Difficulty: 3 Hard
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
85) A company had the following information taken from various accounts at the end of the year:
| Sales discounts | $ | 41,000 | |
| Deferred revenues | $ | 32,000 | |
| Total revenues | $ | 459,000 | |
| Purchase discounts | $ | 15,000 | |
| Sales allowances | $ | 35,000 | |
| Accounts receivable | $ | 205,000 |
What was the company’s net revenues for the year?
Answer: C
Explanation: Net revenues = $459,000 − $41,000 − $35,000 = $383,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
86) A 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 the company?
Answer: D
Explanation: Net revenues = $860,000 − $50,000 − $30,000 = $780,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
87) A company reported the following amounts at the end of the year: total sales revenue = $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company’s net revenues for the year?
Answer: C
Explanation: Net revenues = $550,000 − $12,000 − $44,000 − $17,000 = $477,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
88) A company reported the following amounts at the end of the year: total sales revenue = $500,000; sales discounts = $10,000; sales allowances = $15,000; net revenues = $440,000. What amount did the company report for sales returns for the year?
Answer: A
Explanation: Sales returns = $500,000 − $440,000 − $10,000 − $15,000 = $35,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
89) A company reported the following amounts at the end of the year: total sales revenue = $624,000; sales allowances = $6,000; sales returns = $22,000; net revenues = $588,000. What amount did the company report for sales discounts for the year?
Answer: B
Explanation: Sales discounts = $624,000 − $588,000 − $6,000 − $22,000 = $8,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
90) Which of the following amounts would be used to calculate net revenues for the current year?
Answer: D
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
91) At the end of the current year, a company has the following amounts:
| During the current year | Estimated for next year | |||||||
| Sales returns | $ | 7,200 | $ | 8,300 | ||||
| Sales allowances | $ | 12,500 | $ | 9,100 | ||||
| Sales discounts | $ | 2,400 | $ | 2,600 | ||||
For what amount would the company report sales returns in its current-year income statement?
Answer: C
Explanation: Sales returns = $7,200 + $8,300 = $15,500.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
92) 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?
Answer: B
Explanation: Net revenues = $100,000 − $20,000 − $5,000 = $75,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
93) Accounts receivable are normally reported at the:
Answer: C
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
94) The amount of cash that is actually expected to be collected on accounts receivable is referred to as:
Answer: A
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
95) The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:
Answer: A
Difficulty: 1 Easy
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
96) The percentage-of-receivables method for accounting for uncollectible accounts focuses on the:
Answer: C
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
97) Using a balance sheet approach to estimate bad debts involves calculating the desired ending balance in which account?
Answer: B
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
98) The purpose of recording an allowance for uncollectible accounts is to:
Answer: C
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
99) A company’s adjustment for uncollectible accounts at year-end would include a:
Answer: A
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
100) One advantage of the allowance method for accounting for uncollectible accounts is that the company reports:
Answer: A
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
101) The account “Allowance for Uncollectible Accounts” is classified as a(n):
Answer: D
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
102) Allowance for Uncollectible Accounts is:
Answer: B
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
103) The normal balance of the account “Allowance for Uncollectible Accounts” is a ________ because ________.
Answer: B
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
104) 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?
Answer: C
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement/Keyboard Navigation
105) Under the allowance method, which of the following does not change the balance in the Accounts Receivable account?
Answer: C
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
106) At the end of its first year of operations, a company has accounts receivable of $250,000. The company expects to collect 90% of these accounts. The company’s year-end adjusting entry for uncollectible accounts would be:
Answer: C
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
107) During its first year of operations, a company has credit sales of $250,000 and cash sales of $100,000. By the end of the year, cash collections on credit sales total $180,000, and the company estimates uncollectible accounts to be 6% of accounts receivable. The amount to record for the year-end adjusting entry for uncollectible accounts would be:
Answer: B
Explanation: ($250,000 − $180,000) × 6% = $4,200.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
108) 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?
Answer: D
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
109) Using the allowance method, writing off an actual bad debt would include a:
Answer: B
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
110) A company accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?
Answer: D
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
111) Which of the following is recorded by a credit to Accounts Receivable?
Answer: D
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
112) 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?
Answer: B
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
113) At the beginning of 2021, the balance in Jackson Enterprises’ Allowance for Uncollectible Accounts was $31,800. During 2021, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a:
Answer: B
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
114) 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 written off for the year?
Answer: A
Explanation: Beginning balance ($23,000) + Bad Debt Expense ($18,000) − Ending balance ($27,000) = Actual write-offs ($14,000).
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
115) Collections of accounts receivable that previously have been written off are credited to:
Answer: B
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
116) A company collects an account receivable previously written off. Indicate how this transaction would affect (1) assets, (2) stockholders’ equity, and (3) revenues.
Answer: D
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
117) 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:
Answer: A
Explanation: ($238,000 × 3%) − $600 = $6,540.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
118) 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:
Answer: D
Explanation: ($238,000 × 3%) + $600 = $7,740.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
119) 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:
Answer: C
Explanation: ($311,000 × 2%) − $970 = $5,250.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
120) 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:
Answer: D
Explanation: ($311,000 × 2%) + $970 = $7,190.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
121) At the end of 2021, 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, 2021, to record its estimated uncollectible accounts included a:
Answer: D
Explanation: Bad Debt Expense = $12,000 − $4,500 = $7,500.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
122) At the end of 2021, 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, 2021, to record its estimated uncollectible accounts included a:
Answer: D
Explanation: Bad Debt Expense = $12,000 + $4,500 = $16,500.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
123) 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:
Answer: D
Explanation: ($300,000 × 5%) = $15,000.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
124) 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:
Answer: B
Explanation: ($300,000 × 5%) = $15,000.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
125) 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?
Answer: B
Explanation: Bad Debt Expense = $6,500 − $2,500 = $4,000.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
126) 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?
Answer: A
Explanation: Bad Debt Expense = $44,300 − $6,200 = $38,100.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
127) Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance?
Answer: D
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
128) 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?
Answer: C
Explanation: Beginning ($15,000) = Ending before adjustment (−$5,000) + Actual bad debts ($20,000).
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year; Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
129) 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?
Answer: D
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
130) On December 31, 2021, Coolwear Inc. had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $48,400 and $940, respectively. During 2022, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2022. Bad debt expense for 2022 would be:
Answer: D
Explanation: Bad debt expense = $1,140 − ($940 − $820) = $1,020.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year; Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
131) On December 31, 2021, Larry’s Used Cars had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2022, 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, 2022. Bad debt expense for 2022 would be:
Answer: C
Explanation: Bad debt expense = $1,280 − ($1,325 − $1,465) = $1,420.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year; Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
132) For accounts receivable, the longer an account is outstanding, the:
Answer: B
Difficulty: 1 Easy
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
133) The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the:
Answer: D
Difficulty: 1 Easy
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
134) When using an aging method for estimating uncollectible accounts:
Answer: A
Difficulty: 1 Easy
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
135) Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to:
Answer: A
Difficulty: 2 Medium
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
136) On December 31, 2021, 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 2021 using the aging method?
Answer: D
Explanation: Estimated uncollectible = ($50,000 × 5%) + ($20,000 × 10%) + ($10,000 × 20%) = $6,500. Bad Debt Expense = $6,500 + $1,500 = $8,000.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
137) McConnell’s Bakeries had the following balances on December 31, 2021, 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, 2021, adjustment to the allowance account?
Answer: D
Explanation: 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.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
138) A company 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:
Answer: C
Explanation: Estimated uncollectible = ($6,000 × 5%) + ($4,000 × 10%) + ($2,000 × 25%) = $1,200. Bad Debt Expense = $1,200 + $500 = $1,700.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
139) 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 method, 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?
Answer: D
Explanation: ($600,000 × 1%) + ($100,000 × 10%) + ($50,000 × 20%) = $26,000.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
140) 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 method, what would be the adjustment assuming Bears expects it will not 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 |
Answer: C
Explanation: ($250,000 × 5%) + ($50,000 × 20%) − $2,500 = $20,000.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
141) 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 up to 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 up to 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense?
Answer: B
Explanation:
Bad Debt Expense = ($3,500 × 2%) + ($2,000 × 10%) + ($1,500 × 40%) − $400 = $470.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
142) The direct write-off method is used when:
Answer: A
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
143) Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?
Answer: B
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
144) The direct write-off method is not normally an acceptable method for GAAP because it fails to report:
Answer: C
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
145) The direct write-off method is generally not permitted for financial reporting purposes because:
Answer: D
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
146) Which accounting concept does the direct write-off method violate?
Answer: D
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
147) If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false?
Answer: C
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
148) Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts?
Answer: D
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
149) Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?
Answer: C
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
150) The distinction between the direct write-off method and the allowance method is:
Answer: D
Difficulty: 2 Medium
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
151) The direct write-off method is an acceptable method for what purpose?
Answer: B
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
152) The primary difference between a note receivable and an account receivable is:
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
153) 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.
Answer: A
Difficulty: 1 Easy
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
154) A note receivable is reported in the balance sheet:
Answer: C
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
155) 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?
Answer: C
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
156) 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?
Answer: D
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
157) Hughes Aircraft sold a four-passenger airplane for $380,000, accepting a 12% note for the purchase price. This transaction would include a:
Answer: C
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
158) On February 1, 2021, Miter 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 Miter Corp. report during 2021?
Answer: D
Explanation: Interest revenue = $1,000 × 12% × 6 / 12 = $60.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
159) On February 1, 2021, 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, 2021, 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 |
Answer: C
Explanation: Interest Revenue = $2,000 × 10% × 6 / 12 = $100.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
160) On September 1, 2021, 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 2021?
Answer: B
Explanation: Interest revenue = $1,000 × 12% × 4 / 12 = $40.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
161) On September 1, 2021, 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 2022?
Answer: A
Explanation: Interest revenue = $1,000 × 12% × 2 / 12 = $20.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
162) On August 1, 2021, 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 2021?
| 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 |
Answer: D
Explanation: Interest revenue = $6,000 × 8% × 5 / 12 = $200.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
163) On July 1, 2021, 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, 2022, when the borrower pays Herzog the correct amount owed? Assume the company has a December 31 year end.
| 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 |
Answer: B
Explanation: Interest Revenue = $9,000 × 10% × 3 / 12 = $225. Interest Receivable = $9,000 × 10% × 6 / 12 = $450.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
164) On January 1, 2021, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At the end of 2021, what effect will the adjustment for accrued interest revenue have on the Alice & Co.’s financial statements?
Answer: D
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Reporting/Keyboard Navigation
165) On October 1, 2021, 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 2021 income statement?
Answer: B
Explanation: $100,000 × 6% × 3 / 12 = $1,500.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
166) On October 1, 2021, 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 2022 income statement?
Answer: D
Explanation: $100,000 × 6% × 12 / 12 = $6,000.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
167) On October 1, 2021, 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 2023 income statement?
Answer: B
Explanation: $100,000 × 6% × 9 / 12 = $4,500.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
168) On September 1, 2021, a company accepts a $9,000, 12-month note receivable. For 2021, the company reports interest revenue of $240. How much interest revenue will the company report in 2022?
Answer: B
Explanation: Interest revenue in 2022 = $240 × (8 months in 2022 / 4 months in 2021) = $480.
There are twice as many months occurring in 2022 (8 months) as in 2021 (4 months) on the 12-month note, so interest revenue will be twice as much in 2022.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
169) On August 1, 2021, a company accepts an $8,000, 9-month note receivable. For 2021, the company reports interest revenue of $200. What is the interest rate on the note?
Answer: B
Explanation: Interest = $8,000 × Rate × 5 / 12 = $200. Rate = 6%
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
170) On September 1, 2021, a company 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 2021. At the end of 2021, which of the following is true?
Answer: B
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
171) On September 1, 2021, a company 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, 2021:
| Interest Receivable | 4,500 | |
| Interest Revenue | 4,500 |
At the end of 2021, which of the following is true?
Answer: C
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
172) The amount of a company’s receivables is influenced by several variables, including all of the following except:
Answer: D
Difficulty: 2 Medium
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
173) The formula for the receivables turnover ratio is:
Answer: B
Difficulty: 1 Easy
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
174) The receivables turnover ratio indicates:
Answer: C
Difficulty: 1 Easy
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
175) An increase in a company’s receivables turnover ratio typically means the company is:
Answer: C
Difficulty: 2 Medium
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
176) 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?
Answer: A
Explanation: [($1,000,000 × .70) / ($220,000 + $340,000) / 2] = 2.50.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
177) A company 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 the company’s receivables turnover ratio?
Answer: A
Explanation: Receivables turnover ratio = net credits sales ($120,000) / average accounts receivable ($20,000) = 6.0.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
178) 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?
Answer: B
Explanation: Receivables turnover ratio = net credit sales ($240,000) / average accounts receivable [($20,000 + $30,000) / 2] = 9.6.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
179) A company reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference?
Answer: B
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Evaluate
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
180) A company’s ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management’s ability to:
Answer: A
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
181) The formula for average collection period is:
Answer: A
Difficulty: 1 Easy
Topic: Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
182) What is the most likely reason for a company to have an increase in average collection period?
Answer: D
Difficulty: 3 Hard
Topic: Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
183) A 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 the company’s average collection period (rounded to the nearest whole day)?
Answer: B
Explanation:
Turnover ratio = $400,000 / $20,000 = 20
Collection period = 365 days / 20 = 18 days (rounded)
Difficulty: 3 Hard
Topic: Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
184) The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:
Answer: C
Difficulty: 1 Easy
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
185) The income statement method for estimating bad debts uses a percentage of:
Answer: A
Difficulty: 1 Easy
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
186) Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts?
Answer: A
Difficulty: 2 Medium
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
187) Which of the following provides an accurate match?
Answer: D
Difficulty: 3 Hard
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
188) 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?
Answer: C
Explanation: Bad debt expense = $150,000 × 2% = $3,000.
Difficulty: 3 Hard
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
189) 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?
Answer: B
Explanation: Allowance for Uncollectible Accounts = $400 + ($60,000 × 1%) = $1,000.
Difficulty: 3 Hard
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
190) Using the income statement method 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:
Answer: B
Difficulty: 3 Hard
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
Match each term related to net revenues with its description.
191) Total revenues less contra revenues.
Difficulty: 2 Medium
Topic:
Learning Objective:
Net Revenues – Trade Discounts; Net Revenues – Sales Returns and Sales Allowances; Net Revenues – Sales Discounts
05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
192) Reduction in revenue because the product or service is sold below the listed price.
Difficulty: 2 Medium
Topic: Net Revenues – Trade Discounts; Net Revenues – Sales Returns and Sales Allowances; Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
193) Reduction in revenue because the customer brings back products to the company after the original purchase.
Difficulty: 2 Medium
Topic: Net Revenues – Trade Discounts; Net Revenues – Sales Returns and Sales Allowances; Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
194) Reduction in revenue because of some deficiency in the company’s good or service.
Difficulty: 2 Medium
Topic: Net Revenues – Trade Discounts; Net Revenues – Sales Returns and Sales Allowances; Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
195) Reduction in revenue when the customer pays within a specified period.
Difficulty: 2 Medium
Topic: Net Revenues – Trade Discounts; Net Revenues – Sales Returns and Sales Allowances; Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
196) Accounts with balances opposite of revenue.
Difficulty: 2 Medium
Topic: Net Revenues – Trade Discounts; Net Revenues – Sales Returns and Sales Allowances; Net Revenues – Sales Discounts
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
Answers: 191) C 192) E 193) F 194) A 195) D 196) B
Match each term related to the allowance method for uncollectible accounts with its description.
197) The account used to record sales on account to customers.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
198) The procedure required for financial reporting purposes to account for uncollectible accounts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
199) The difference between total accounts receivable and the estimate of future bad debts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
200) The effect on total assets when estimating future bad debts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
201) The account to credit when estimating future bad debts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
202) The effect on total expenses when estimating future bad debts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
203) The account to debit when estimating future bad debts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
204) The effect on total liabilities when estimating future bad debts.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-04 Establish an allowance for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
Answers: 197) D 198) B 199) F 200) H 201) C 202) G 203) E 204) A
Match each term related to the comparison between the allowance method and direct write-off method for uncollectible accounts with its description.
205) The procedure commonly used for financial reporting purposes to account for uncollectible accounts.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 5-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
206) The procedure commonly used for tax reporting purposes to account for uncollectible accounts.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
207) The account to credit when writing off an actual bad debt under the allowance method.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
208) The account to debit when writing off an actual bad debt under the direct write-off method.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
209) The account to debit when writing off an actual bad debt under the allowance method.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
210) The effect on total expenses when writing off an actual bad debt under the direct write-off method.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
211) The effect on total assets when estimating future bad debts under the allowance method.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
212) The effect on total expenses when estimating future bad debts under the direct write-off method.
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Direct Write-Off Method
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
Answers: 205) B 206) A 207) H 208) C 209) E 210) G 211) F 212) D
Match each account with its description.
213) Informal credit arrangements with trade customers.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
214) Account to debit when interest accrues at the end of the year.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
215) Account to credit when interest accrues at the end of the year.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
216) Formal signed credit arrangements between a creditor and a debtor.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
217) Account to debit when receivables and interest are collected.
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
Answers: 213) D 214) B 215) E 216) C 217) A
Match each term related to receivables analysis with its description.
218) The approximate number of days the average accounts receivable balance is outstanding.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
219) An increase in the receivables turnover ratio generally indicates the company manages its receivables ________ efficiently.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
220) Reducing the length of time in which customers are required to pay will typically ________ the receivables turnover ratio.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
221) The number of times during a year that the average accounts receivable balance is collected.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
222) An increase in the average collection period indicates the company manages its receivables ________ efficiently.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
223) Allowing riskier customers to purchase goods or services on account will typically ________ the receivables turnover ratio.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking
Answers: 218) E 219) D 220) A 221) C 222) F 223) B
224) 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.
Answer:
| Accounts Receivable | 6,400 | |
| Service Revenue | 6,400 |
Trade discount = $8,000 × 20% = $1,600. Sale price = $8,000 – $1,600 = $6,400.
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable; Net Revenues – Trade Discounts
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
225) 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.
Answer:
| February 23 | ||
| Accounts Receivable | 4,500 | |
| Service Revenue | 4,500 | |
| March 4 | ||
| Cash | 4,500 | |
| Accounts Receivable | 4,500 |
Difficulty: 2 Medium
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
226) 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 recognized by Casey on July 9.
Answer:
| July 9 | ||
| Cash | 400 | |
| Service Revenue | 400 |
Trade discount = $500 × 20% = $100. Sale price = $500 − $100 = $400.
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable; Net Revenues – Trade Discounts
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
227) 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.
Answer:
| September 8 | ||
| Accounts Receivable | 1,500 | |
| Service Revenue | 1,500 |
| September 15 | ||
| Cash | 1,470 | |
| Sales Discounts | 30 | |
| Accounts Receivable | 1,500 |
Sales discounts = $1,500 × 2% = $30.
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable; Net Revenues – Sales Discounts
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
228) 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.
Answer:
| October 22 | ||
| Accounts Receivable | 1,800 | |
| Service Revenue | 1,800 | |
| December 19 | ||
| Cash | 1,800 | |
| Accounts Receivable | 1,800 |
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.
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable; Net Revenues – Sales Discounts
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
229) 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.
Answer:
| 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 |
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowance, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
230) A company reports the following amounts at the end of the year: Total sales revenue = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues.
Answer: $440,000
Net revenues = $500,000 − $10,000 − $30,000 − $20,000 = $440,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement/Keyboard Navigation
231) A company reports the following amounts at the end of the year: Total sales revenue = $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.
Answer: $350,000
Net revenues = $400,000 − $10,000 − $15,000 − $25,000 = $350,000.
Difficulty: 3 Hard
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
232) During 2021, its first year of operations, a company ends the year with accounts receivable of $100,000. The company estimates that 20% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2021.
Answer:
| Bad Debt Expense | 20,000 | |
| Allowance for Uncollectible Accounts | 20,000 |
Adjustment = $100,000 × 20% = $20,000.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
233) During 2021, its first year of operations, a company provides services on account of $250,000. By the end of 2021, 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, 2021.
Answer:
| Bad Debt Expense | 12,000 | |
| Allowance for Uncollectible Accounts | 12,000 |
Adjustment = ($250,000 − $130,000) × 10% = $12,000.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
234) A company has the following balances on December 31, 2021, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate net accounts receivable.
Answer: $56,000
Net accounts receivable = $62,000 − $6,000 = $56,000.
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
235) A company has the following balances on December 31, 2021, after year-end adjustments: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate net accounts receivable.
Answer: $70,000
Net accounts receivable = $75,000 − $5,000 = $70,000.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
236) 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.
Answer:
| Allowance for Uncollectible Accounts | 25,000 | |
| Accounts Receivable | 25,000 |
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
237) 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)?
Answer: −$2,000 (or $2,000 debit)
Difficulty: 2 Medium
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
238) 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.
Answer:
| 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 |
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-04- Write off accounts receivable as uncollectible.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement/Keyboard Navigation
239) 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.
Answer:
| Bad Debt Expense | 1,300 | |
| Allowance for Uncollectible Accounts | 1,300 |
Adjustment = ($15,000 × 10%) − $200 = $1,300.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
240) 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.
Answer:
| Bad Debt Expense | 7,000 | |
| Allowance for Uncollectible Accounts | 7,000 |
Adjustment = ($180,000 × 5%) − $2,000 = $7,000.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
241) 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.
Answer:
| Bad Debt Expense | 11,000 | |
| Allowance for Uncollectible Accounts | 11,000 |
Adjustment = ($180,000 × 5%) + $2,000 = $11,000.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
242) 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.
Answer:
(1)
| Bad Debt Expense | 2,100 | |
| Allowance for Uncollectible Accounts | 2,100 |
(1) Adjustment = ($36,000 × 10%) − $1,500 = $2,100.
(2)
| Bad Debt Expense | 2,400 | |
| Allowance for Uncollectible Accounts | 2,400 |
(2) Adjustment = $120,000 × 2% = $2,400.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year; Percentage-of-Credit-Sales Method
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
243) A company has the following accounts receivable and estimates of uncollectible accounts:
Compute the total estimated uncollectible accounts.
Answer: $10,800
Estimated uncollectible accounts = ($60,000 × 3%) + ($20,000 × 20%) + ($10,000 × 50%) = $10,800.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
244) 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).
Answer:
| Bad Debt Expense | 8,100 | |
| Allowance for Uncollectible Accounts | 8,100 |
Adjustment = ($80,000 × 2%) + ($20,000 × 25%) + ($4,000 × 60%) − $900 = $8,100.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
245) 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).
Answer:
| Bad Debt Expense | 10,500 | |
| Allowance for Uncollectible Accounts | 10,500 |
Adjustment = ($70,000 × 4%) + ($30,000 × 15%) + ($5,000 × 40%) + $1,200 = $10,500.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
246) A company has the following balances on December 31, 2021, 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, 2021.
Answer:
| Bad Debt Expense | 11,200 | |
| Allowance for Uncollectible Accounts | 11,200 |
Adjustment = ($48,000 × 5%) + ($18,000 × 15%) + ($10,000 × 40%) + ($4,000 × 80%) − $1,100 = 11,200.
Difficulty: 3 Hard
Topic: Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
247) 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 |
Answer:
(a) $400; (b) 3 months; (c) 5%; (d) $20,000
$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.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
248) On February 1, 2021, 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 2021.
Answer: $1,200
$20,000 × 8% × 9/12 = $1,200.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
249) On July 1, 2021, 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 2021 and 2022.
Answer: 2021 = $800; 2022 = $400
2021: $20,000 × 8% × 6/12 = $800.
2022: $20,000 × 8% × 3/12 = $400.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
250) On April 1, 2021, 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 2021, 2022, and 2023.
Answer: 2021 = $4,500; 2022 = $6,000; 2023 = $1,500
2021: $50,000 × 12% × 9/12 = $4,500.
2022: $50,000 × 12% × 12/12 = $6,000.
2023: $50,000 × 12% × 3/12 = $1,500.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
251) 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.
Answer:
| Notes Receivable | 10,000 | |
| Cash | 10,000 |
Difficulty: 2 Medium
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
252) 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.
Answer:
| April 1 | Debit | Credit |
| Notes Receivable | 12,000 | |
| Service Revenue | 12,000 | |
| October 1 | ||
| Cash | 12,600 | |
| Notes Receivable | 12,000 | |
| Interest Revenue | 600 |
Interest revenue = $12,000 × 10% × 6/12 = $600.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
253) On May 1, 2021, 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, 2021, the adjustment on December 31, 2021, and the cash collection on May 1, 2022.
Answer:
| May 1, 2021 | Debit | Credit |
| Notes Receivable | 100,000 | |
| Cash | 100,000 | |
| December 31, 2021 | ||
| Interest Receivable | 4,000 | |
| Interest Revenue | 4,000 | |
| May 1, 2022 | ||
| Cash | 106,000 | |
| Notes Receivable | 100,000 | |
| Interest Receivable | 4,000 | |
| Interest Revenue | 2,000 |
Interest revenue 2021 = $100,000 × 6% × 8/12 = $4,000.
Interest revenue 2022 = $100,000 × 6% × 4/12 = $2,000.
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
254) 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?
Answer: Company 1 = 22; Company 2 = 25; Company 2 is more efficient.
Company 1 = $29,700/[($1,500 + $1,200)/2] = 22.
Company 2 = $80,000/[($3,100 + $3,300)/2] = 25.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Evaluate
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
255) 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.
Answer:
| Bad Debt Expense | 8,400 | |
| Allowance for Uncollectible Accounts | 8,400 |
Feedback: Adjustment = $280,000 × 3% = 8,400.
Difficulty: 3 Hard
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
256) 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.
Answer:
| Bad Debt Expense | 8,400 | |
| Allowance for Uncollectible Accounts | 8,400 |
Adjustment = $280,000 × 3% = $8,400.
Difficulty: 3 Hard
Topic: Percentage-of-Credit-Sales Method
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
257) Assume the following scenarios.
Scenario 1. During 2021, 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, 2021, Georgette, age 72, purchases a one-year subscription to the magazine and receives a 20% senior citizen discount.
Scenario 3. During 2021, Waste Control provides services on account for $15,000. The customer pays for those services in 2022.
Scenario 4. During 2021, Tasty Foods sells grocery items to one of its customers for $125,000 on account. Cash collections on those sales are $80,000 in 2021 and $30,000 in 2022. The remaining $15,000 is written off as uncollectible in 2022.
Required:
For each scenario, calculate the amount of revenue to be recognized in 2021.
Answer:
Revenue recognized in 2021
| Scenario 1: | $100,000 | |
| Scenario 2: | $60 | = ($75 × 80%) |
| Scenario 3: | $15,000 | |
| Scenario 4: | $125,000 |
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable
Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement/Keyboard Navigation
258) 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:
Answer:
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 | Debit | Credit |
| Cash | 1,026 | |
| 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
Difficulty: 3 Hard
Topic: Credit Sales and Accounts Receivable; Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-01 Recognize accounts receivable at time of credit sales.; 05-02 Calculate net revenues using returns, allowance, and discounts.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
259) 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:
Answer:
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.
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance; Allowance Method – Writing Off Accounts Receivable
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-04 Write off accounts receivable as uncollectible.
Bloom’s: Analyze; Evaluate
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
260) The following events occur for Wortham Landscape Design during 2021 and 2022, its first two years of operations.
| February 2, 2021 | Provide services to customers on account for $26,000. |
| July 23, 2021 | Receive $20,000 from customers on account. |
| December 31, 2021 | Estimate that 10% of uncollected accounts will not be received. |
| April 12, 2022 | Provide services to customers on account for $40,000. |
| June 28, 2022 | Receive $5,000 from customers for services provided in 2021. |
| September 13, 2022 | Write off the remaining amounts owed from services provided in 2021. |
| October 5, 2022 | Receive $33,000 from customers for services provided in 2022. |
| December 31, 2022 | Estimate that 10% of uncollected accounts will not be received. |
Required:
Answer:
Requirement 1
| February 2, 2021 | Debit | Credit |
| Accounts Receivable | 26,000 | |
| Service Revenue | 26,000 | |
| (Provide services on account) | ||
| July 23, 2021 | ||
| Cash | 20,000 | |
| Accounts Receivable | 20,000 | |
| (Receive cash on account) | ||
| December 31, 2021 | ||
| Bad Debt Expense | 600 | |
| Allowance for Uncollectible Accounts | 600 | |
| (Estimate future bad debts) ($6,000 × 10% = $600) | ||
| April 12, 2022 | ||
| Accounts Receivable | 40,000 | |
| Service Revenue | 40,000 | |
| (Provide services on account) | ||
| June 28, 2022 | ||
| Cash | 5,000 | |
| Accounts Receivable | 5,000 | |
| (Receive cash on account) | ||
| September 13, 2022 | ||
| Allowance for Uncollectible Accounts | 1,000 | |
| Accounts Receivable | 1,000 | |
| (Write off actual bad debts) | ||
| October 5, 2022 | ||
| Cash | 33,000 | |
| Accounts Receivable | 33,000 | |
| (Receive cash on account) | ||
| December 31, 2022 | ||
| Bad Debt Expense | 1,100 | |
| Allowance for Uncollectible Accounts | 1,100 | |
| (Estimate future bad debts) ($7,000 × 10% + $400 = $1,100) |
Requirement 2
Requirement 3
| 2021 | 2022 | |
| Total accounts receivable | $6,000 | $7,000 |
| Less: Allowance for uncollectible accounts | 600 | 700 |
| Net accounts receivable | $5,400 | $6,300 |
Difficulty: 3 Hard
Topic: Allowance Method – Establishing the Allowance; Allowance Method – Writing Off Accounts Receivable; Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-04 Write off accounts receivable as uncollectible.; 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking; Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
261) Gable Incorporated provides legal services. During 2021, 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, 2021, 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:
Answer:
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, 2021 | 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, 2022 | Debit | Credit |
| Allowance for Uncollectible Accounts | 600 | |
| Accounts Receivable | 600 |
(Write off actual bad debts)
Requirement 4
| July 17, 2022 | Debit | Credit |
| Accounts Receivable | 200 | |
| Allowance for Uncollectible Accounts | 200 |
(Re-establish portion of account previously written off)
| July 17, 2022 | Debit | Credit |
| Cash | 200 | |
| Accounts Receivable | 200 |
(Receive cash on account)
Difficulty: 3 Hard
Topic: Allowance Method – Writing Off Accounts Receivable; Allowance Method – Aging of Accounts Receivable
Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze
AACSB: Analytical Thinking; Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
262) 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 |
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 expected 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:
Answer:
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.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.
Bloom’s: Analyze; Evaluate
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation
263) 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:
Answer:
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.
Difficulty: 3 Hard
Topic: Allowance Method – Estimating in Subsequent Year; Direct Write-Off Method
Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Analyze; Evaluate
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation
264) On June 1, 2021, 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:
Answer:
Requirement 1
| June 1, 2021 | Debit | Credit |
| Notes Receivable | 150,000 | |
| Service Revenue | 150,000 |
(Provide services and issue note)
Requirement 2
| December 31, 2021 | Debit | Credit |
| Interest Receivable | 10,500 | |
| Interest Revenue | 10,500 |
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)
| June 1, 2022 | Debit | Credit |
| Cash | 18,000 | |
| Interest Receivable | 10,500 | |
| Interest Revenue | 7,500 |
(Collect annual interest payment) (Interest revenue = $150,000 × 12% × 5/12)
| December 31, 2022 | Debit | Credit |
| Interest Receivable | 10,500 | |
| Interest Revenue | 10,500 |
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)
| June 1, 2023 | Debit | Credit |
| Cash | 18,000 | |
| Interest Receivable | 10,500 | |
| Interest Revenue | 7,500 |
(Collect annual interest payment) (Interest revenue = $150,000 × 12% × 5/12)
| December 31, 2023 | Debit | Credit |
| Interest Receivable | 10,500 | |
| Interest Revenue | 10,500 |
(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)
Requirement 3
| June 1, 2023 | 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 = $150,000 × 12% × 5/12)
Difficulty: 3 Hard
Topic: Accounting for Notes Receivable
Learning Objective: 05-07 Account for notes receivable and interest revenue.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
265) Selected financial data for Strong Health Group and Sturdy Medical Corporation, two companies in the health-care industry, are as follows:
| ($ in millions) | Net Sales | Beginning Accounts
Receivable |
Ending Accounts
Receivable |
| Strong Health | $1,850 | $200 | $230 |
| Sturdy Medical | 2,100 | 400 | 380 |
Required:
Answer:
Requirement 1
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 5.6 times and 65.2 days, respectively. The receivables turnover ratio and average collection period for LifePoint Hospitals in the most recent year reported in the text are 4.3 times and 84.9 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.
Difficulty: 3 Hard
Topic: Analysis – Receivables Turnover Ratio; Analysis – Average Collection Period
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Analyze; Evaluate
AACSB: Analytical Thinking
AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation
266) Give three examples of contra revenue accounts and the transactions with which they are associated.
Answer: 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.
Difficulty: 2 Medium
Topic: Net Revenues – Sales Discounts; Net Revenues – Sales Returns and Sales Allowances
Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
267) Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes.
Answer: 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.
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation
268) What does it mean to report accounts receivable at the net amount of cash expected to be collected.
Answer: Net accounts receivable 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. Net accounts receivable is the amount reported in the balance sheet.
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting/Keyboard Navigation
269) 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?
Answer: 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.
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance; Direct Write-Off Method
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation
270) 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?
Answer: 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.
Difficulty: 2 Medium
Topic: Allowance Method – Establishing the Allowance; Percentage-of-Credit-Sales Method
Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
271) How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?
Answer: 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.
Difficulty: 2 Medium
Topic: Analysis – Receivables Turnover Ratio
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making/Keyboard Navigation
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
