Financial Accounting 5th Canadian Edition - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Chapter 5 Short-Term Investments and Receivables 5.1 Account for short-term investments 1) Short-term investments: A) are equity securities B) are debt securities C) may be classified as either …
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Financial Accounting 5th Canadian Edition – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Chapter 5 Short-Term Investments and Receivables
5.1 Account for short-term investments
1) Short-term investments:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-1
2) The purchase of short-term investments:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-1
3) Corporations invest in a short-term investment:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-1
4) Unrealized gains or losses on short-term investments are reported using:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-1
5) Short-term investments are investments that a company plans to hold for one year or less.
Answer: TRUE
Diff: 1 Type: TF
L.O.: L.O. 5-1
6) All marketable securities are considered to be short-term investments.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-1
7) Smart-T Corporation purchased an investment in April for $10,000. If Smart-T Corporation sold this investment on May 30th for $12,000. They would have a realized gain.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-1
8) Zeep Company purchased shares of Zoop Inc on June 30, 2014 for $7,500. At the end of August these shares are now worth $6,500. Zeep has an unrealized loss on this investment.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-1
9) Short term investment purchases are initially recorded at their cost.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-1
10) Investments held by a corporation are always classified as current assets.
Answer: FALSE
Diff: 3 Type: TF
L.O.: L.O. 5-1
11) What are ‘held-for-trading investments’?
Answer: Held-for-trading investments are made with a very short-term intent. They are treated as current assets. Trading investments are acquired for the purpose of generating a profit from short-term fluctuations in price.
Diff: 2 Type: ES
L.O.: L.O. 5-1
12) Vance Corporation purchases UXB shares on May 10 for $120,000. On October 15th Vance receives a cash dividend of $1,200 from UXB. On December 31st the value of Vance Corporation’s investment in UXB has increased in value to $150,000.
Prepare journal entries needed on May 10, October 15, and December 31, 2014.
Answer:
May 10 Short-Term Investment -UXB 120,000
Cash 120,000
Oct. 15 Cash 1,200
Dividend Revenue 1,200
Dec. 31 Short-Term Investments 30,000
Unrealized Gain on Investment 30,000
Diff: 2 Type: ES
L.O.: L.O. 5-1
13) January 1, 2013 Orange Tree Spa invests in $100,000 worth of Apple Spa shares to hold as a short term investment. On December 31, 2013, this investment now has a market value of $105,000.
On May 1, 2014 Orange Tree Spa sells their Apple Spa shares for $95,000. Prepare the required entries for Orange Tree Spa.
Answer:
Jan 1, 2013 Short Term Investment — Apple Spa $100,000
Cash $100,000
Dec 31, 2013 Short Term Investments 5,000
Unrealized gain on investments 5,000
May 1, 2014 Cash 95,000
Loss on Sale of Investments 10,000
Short Term Investments 105,000
Diff: 2 Type: ES
L.O.: L.O. 5-1
14) Olive Corporation purchases Branch Inc shares on June 21 for $220,000. On October 1 Olive receives a cash dividend of $2,500 from Branch Inc. On December 31st the value of Olive Corporation’s investment in Branch has decreased in value to $210,000.
Prepare journal entries needed on June 21, October 1, and December 31, 2014.
Answer:
Jun. 21 Short-Term Investment —Branch 220,000
Cash 220,000
Oct. 1 Cash 2,500
Dividend Revenue 2,500
Dec. 31 Unrealized loss on Investments 10,000
Short Term Investments 10,000
Diff: 2 Type: ES
L.O.: L.O. 5-1
15) Briefly describe:
1) how held-for-trading investments are reported on the balance sheet;
2) how income from these investments is reported in the financial statements; and
3) how changes in the market value of held-for-trading investments are reported on the income statement.
Answer: 1) Held-for-trading investments are reported on the balance sheet at fair (market) value.
2) Interest and/or dividend income from these investments is reported as revenue on the company’s income statement.
3) Changes in the market value of held-for-trading investments are reported on the income statement as an unrealized gain (if the value increases) or an unrealized loss (if the value decreases.
Diff: 3 Type: ES
L.O.: L.O. 5-1
5.2 Account for and control receivables
1) A ledger that contains a separate account for each customer is called an accounts receivable:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-2
2) A critical element of internal control over collections of accounts receivables is:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-2
3) One method of establishing proper internal control over collections of accounts receivable is to:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-2
4) Under a lock-box system, customers’ payments are initially received by the company’s:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-2
5) Receivables are monetary claims against others.
Answer: TRUE
Diff: 1 Type: TF
L.O.: L.O. 5-2
6) Two major types of receivable include: account receivables and notes payable.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-2
7) One method of establishing internal controls over receivables is to establish a bank lock-box.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-2
8) One of the benefits of extending credit to customers is the possibility of increased sales.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-2
9) For good internal control over cash, the handling of cash and the record keeping for receivables should be separated.
Answer: TRUE
Diff: 1 Type: TF
L.O.: L.O. 5-2
10) Net accounts receivable is equal to accounts receivable less the allowance for uncollectible accounts.
Answer: TRUE
Diff: 1 Type: TF
L.O.: L.O. 5-2
11) Explain how net realizable value for accounts receivable is calculated. On which financial statement is net realizable value shown?
Answer: Net realizable value is calculated by subtracting the allowance for uncollectible accounts from accounts receivable. Net realizable value for accounts receivable appears on the balance sheet as a current asset.
Diff: 2 Type: ES
L.O.: L.O. 5-2
12) Global Alliance Ltd has just established a lock-box account at a local bank. Explain what this is and why it would be used. Identify the specific element of internal control that the use of a lock-box addresses.
Answer: A bank lock-box is designed to achieve separation of cash-handling and cash-accounting duties. Customers send their payments directly to the bank instead of to Global Alliance Ltd. The bank records the receipt of the cash and deposits it into Global Alliance’s account. The bank then forwards the remittance advice to Global Alliance’s bookkeeper who will credit the appropriate customer accounts. This system takes the cash-handling duties away from Global Alliance’s accounting department and allows for the separation of duties. It also allows for a faster access to the cash by Global Alliance, since the cheques are only handled once at the bank.
Diff: 2 Type: ES
L.O.: L.O. 5-2
13) Briefly state the main issues in controlling and managing the collection of receivables.
Answer:
∙ Extend credit only to credit worthy customers. The company should strive to select and extend credit to those customers who are credit-worthy and have the ability to pay, while minimizing the extension of credit to customers whose ability to pay is questionable.
∙ Separate cash-handling, credit, and accounting duties to keep employees from stealing the cash collected from customers. A bank using a lock-box account system can perform the cash-handling function, while someone who is not connected with the accounting function should perform authorizations for customer credit. In this way, adequate internal control can be achieved.
∙ Pursue collection from customers to maximize cash flow. Accounts receivable should be tracked via an aging schedule, and management should begin calling customers who are delinquent after a certain period of time, as established by corporate policy. Communicating with customers will help stimulate collections, or allow the company to work with those customers who are having legitimate problems in paying their debts.
Diff: 2 Type: ES
L.O.: L.O. 5-2
5.3 Estimate and account for uncollectible accounts receivables
1) The Bad Debt Expense account is classified:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
2) What category of account is the Allowance for Uncollectible Accounts account?
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-3
3) Under the allowance method, the entry to record the bad debts estimate includes a:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-3
4) Under the direct write-off method, the entry to record the estimated bad debts:
Answer: A
Diff: 3 Type: MC
L.O.: L.O. 5-3
5) The account that shows the amount of accounts receivable that the business does not expect to collect is:
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-3
6) Net accounts receivable is calculated as:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
7) Which of the following accounts is a contra-account to Accounts Receivable?
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
8) Under the allowance method for estimating uncollectible accounts, the entry to write off an account:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
9) Under the allowance method for estimating uncollectible accounts, the entry to record the estimated bad debts:
Answer: B
Diff: 3 Type: MC
L.O.: L.O. 5-3
10) Under the allowance method, the entry to reinstate an account previously written off:
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 5-3
11) Which principle of accounting prescribes the use of the allowance method of accounting for bad debts?
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-3
12) After a customer’s account has been written off under the allowance method, the customer sends the company the amount owed. Before the receipt of cash can be recorded, the company must first:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
13) Under the allowance method, the entry to write off a $1,425 uncollectible account includes:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-3
14) Under the direct write-off method, the entry to write off an uncollectible account of $1,250 includes:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
15) Under the percentage-of-sales method, the estimate of bad debts for the period:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
16) Under the aging-of-accounts-receivable method:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
17) Using the aging-of-accounts-receivable method, you estimate that total uncollectible accounts are $3,800. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $1,100. The amount of the adjusting entry should be:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
18) Using the aging-of-accounts-receivable method, you estimate that total uncollectible accounts are $3,800.The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,100. The amount of the adjusting entry should be:
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-3
19) Using the percentage-of-sales method, you estimate that total uncollectible accounts are $4,500. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $1,400. The amount of the adjusting entry is:
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 5-3
20) Using the percentage-of-sales method, you estimate that total uncollectible accounts are $4,500. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,400. The amount of the adjusting entry is:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
21) Under the allowance method, if bad debt write-offs during the year exceed the allowance amount, the balance in Allowance for Uncollectible Accounts at year end prior to adjustment:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-3
22) Using the aging-of-accounts-receivable method to estimate uncollectible receivables, CMU Corporation estimates that $3,750 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a credit balance of $600. Bad debt expense to be reported on the income statement is:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
23) Smart-T Corporation uses the aging-of-accounts-receivable method to estimate uncollectible receivables. At year end Smart-T estimates that $4,750 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a credit balance of $200. Bad debt expense to be reported on the income statement is:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
24) Using the aging-of-accounts-receivable method to estimate uncollectible receivables, Records Management Corp. estimates that $8,000 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a debit balance of $2,000. Bad debt expense to be reported on the income statement is:
Answer: A
Diff: 3 Type: MC
L.O.: L.O. 5-3
25) The direct write-off method does not meet the requirements of the:
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-3
26) Lifecycle Management Corporation uses the percentage-of-sales method to estimate uncollectible receivables. Net credit sales for the current year amount to $2,000,000 and management estimates 5% will be uncollectible. Allowance for doubtful accounts prior to adjustment has a credit balance of $10,000. The amount of expense reported on the income statement will be:
Answer: B
Diff: 3 Type: MC
L.O.: L.O. 5-3
27) When an account is written off using the direct write-off method, total assets will:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
28) Livelink Incorporated use the percentage-of-sales method to estimate uncollectible receivables. Net credit sales for the current year amount to $1,000,000 and management estimates 3% will be uncollectible. Allowance for Doubtful Accounts prior to adjustment has a debit balance of $1,900. The amount of expense reported on the income statement will be:
Answer: B
Diff: 3 Type: MC
L.O.: L.O. 5-3
29) When an account is written off using the direct write-off method, net income will:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-3
30) Under the allowance method, the entry to record the estimated bad debts for the period includes a credit to Accounts Receivable.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-3
31) Allowance for Doubtful Accounts is a contra account to short term investments.
Answer: FALSE
Diff: 1 Type: TF
L.O.: L.O. 5-3
32) The allowance method of accounting for bad debts records collection losses on the basis of estimates rather than waiting to determine which customers will not pay.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-3
33) Under the allowance method, the entry to write off an account that has been deemed uncollectible has no impact on the net income of the firm.
Answer: TRUE
Diff: 3 Type: TF
L.O.: L.O. 5-3
34) Many companies use both the percentage-of-sales and the aging method to establish their allowance for doubtful accounts.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-3
35) There are two basic ways to estimate uncollectible receivables: the percentage-of-sales method and the aging-of-receivables method.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-3
36) When estimating uncollectible receivables based on the percentage-of-sales method, the adjusting entry will include a credit to Accounts Receivable.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-3
37) Record entries for the following transactions for UTF-8 Corp. UTF-8 Corp. maintains an Allowance for Uncollectible Accounts.
Answer:
Sales 1,800
Sales 759
Accounts Receivable-Java Ltd. 1,800
Accounts Receivable-Centera 759
Allowance for Uncollectible Accounts 759
Cash 759
Accounts Receivable-Centera 759
Diff: 2 Type: ES
L.O.: L.O. 5-3
38) Prepare adjusting journal entries for the following independent situations.
Answer:
Allowance for Uncollectible Accounts 17,000
Allowance for Uncollectible Accounts 12,200
Allowance for Uncollectible Accounts 13,600
Allowance for Uncollectible Accounts 16,500
Diff: 3 Type: ES
L.O.: L.O. 5-3
39) For each of the following independent situations, compute net accounts receivable.
Answer:
$300 + $7,500 = $7,800
$84,000 – $7,800 = $76,200
($400) + $7,500 = $7,100
$83,000 – $7,100 = $75,900
Diff: 3 Type: ES
L.O.: L.O. 5-3
40) Describe the effect on the financial statements of each of the following transactions, assuming the allowance method of estimating bad debts is used:
Answer:
Diff: 3 Type: ES
L.O.: L.O. 5-3
41) StorageTek Corporation gathered the following information from its accounting records for the year ended December 31, 2014, prior to adjustment:
Net credit sales for the year $1,150,000
Accounts Receivable (Dec. 31, 2014) 93,000
Allowance for Uncollectible Accounts, prior to
adjustment (Dec. 31, 2014) 6,000 (debit balance)
StorageTek Corporation uses the allowance method of accounting for bad debts and estimates bad debts at 2.5% of net credit sales.
Required:
Answer:
Allowance for Uncollectible Accounts 28,750
($1,150,000 × 0.025)
Less: Allowance for Uncollectible Accounts (22,750)
Net Accounts Receivable $70,250
Diff: 3 Type: ES
L.O.: L.O. 5-3
42) Optura Computer Company uses the allowance method to account for bad debts. Indicate the effect of each of the following transactions on gross Accounts Receivable, the Allowance for Uncollectible Accounts, net Accounts Receivable, and Bad Debt Expense. Use (+) for increase, (-) for decrease, and (0) for no effect.
Gross Allowance for Net Bad
Accounts Uncollectible Accounts Debt
Receivable Accounts Receivable Expense
his account
receivable. ________ ________ ________ ________
sales is estimated to
be uncollectible. ________ ________ ________ ________
Accounts Receivable
is estimated to be
uncollectible (the
balance in allowance
for uncollectible
accounts is a debit
of $400. ________ ________ ________ ________
receivable is
reinstated. ________ ________ ________ ________
Answer: Gross Allowance for Net Bad
Accounts Uncollectible Accounts Debt
Receivable Accounts Receivable Expense
his account
receivable. – 0 – 0
sales is estimated to
be uncollectible. 0 + – +
Accounts Receivable
is estimated to be
uncollectible (the
balance in allowance
for uncollectible
accounts is a debit
of $400. 0 + – +
receivable is
reinstated. + + 0 0
Diff: 3 Type: ES
L.O.: L.O. 5-3
43) The December 31, 2014 unadjusted trial balance of Eel Creek Ltd. (Eel) disclosed the following balances:
Accounts receivable $400,000
Allowance for doubtful accounts 24,000 cr.
Net Credit Sales 1,400,000
Additionally, the firm has given up trying to collect on $19,000 from a customer who recently declared bankruptcy. Eel’s management has not yet written off the amount but intends to do so before the company’s books are closed for the year. The firm does not use the direct write-off method to estimate bad debt expense.
Provide the entry for the write-off.
Answer: Allowance for doubtful accounts 19,000
Accounts receivable 19,000
Diff: 3 Type: ES
L.O.: L.O. 5-3
44) The December 31, 2014 unadjusted trial balance of Eel Creek Ltd. (Eel) disclosed the following balances:
Accounts receivable $400,000
Allowance for doubtful accounts 24,000 cr.
Net Credit Sales 1,400,000
Additionally, the firm has given up trying to collect on $19,000 from a customer who recently declared bankruptcy. Eel’s management has not yet written off the amount but intends to do so before the company’s books are closed for the year. The firm does not use the direct write-off method to estimate bad debt expense.
Provide the entry to record bad debt expense for 2014 assuming the firm uses the percentage of credit sales method for recording bad debt expense. On the average Eel has experienced a 8% rate of uncollectible accounts over the past 5 years.
Answer:
Bad debt expense ($1,400,000 × 8%) 112,000
Allowance for doubtful accounts 112,000
Diff: 3 Type: ES
L.O.: L.O. 5-3
5.4 Account for notes receivable
1) When a note matures, the payee should record:
Answer: C
Diff: 1 Type: MC
L.O.: L.O. 5-4
2) When a note matures, the maker should record:
Answer: A
Diff: 1 Type: MC
L.O.: L.O. 5-4
3) A written promise to pay a specified amount of money at a particular future date is called a(n):
Answer: B
Diff: 1 Type: MC
L.O.: L.O. 5-4
4) IXOS Ltd. accepted an eighteen-month, $15,000, 8% note from ECM Corporation on June 1, 2014. The amount of interest to be accrued on December 31, 2014, is:
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 5-4
5) The person or business to whom the signer of a promissory note promises a future payment is called the:
Answer: B
Diff: 1 Type: MC
L.O.: L.O. 5-4
6) The interest on a $50,000 note at 9% for 4 months is:
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-4
7) The interest on a $50,000 note at 12% for 60 days is:
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 5-4
8) Waterloo Limited accepts a note to settle an overdue account from a customer. The journal entry on Waterloo Limited’s books will include a:
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 5-4
9) On the maturity date, the payee of a note will:
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-4
10) The entry to record accrued interest on a note receivable at year end includes a:
Answer: B
Diff: 3 Type: MC
L.O.: L.O. 5-4
11) The formula for computing interest expense is equal to:
Answer: A
Diff: 1 Type: MC
L.O.: L.O. 5-4
12) The payee of the note records interest on a note receivable as interest expense.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-4
13) Financing expenses are typically classified as an operating expense.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-4
5.5 Explain how to improve cash flows from sales and receivables
1) Factoring receivables involves selling them at a discounted price.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-5
2) Identify and briefly describe four ways to improve cash flows from sales and receivables.
Answer: 1) Credit card sales – permitting customers to pay with credit cards usually improves sales and the credit card provider promptly remits the net amount owing to the company.
2) Debit card sales – monies are taken directly from the customers’ account and credited to the company account.
3) Selling (factoring) receivables – the company sells its accounts receivables to a factor who pays the company the amount due now, charging a fee for the service.
4) Offering sales discounts – the company offers its customers a discount for prompt payment of the invoice.
Diff: 3 Type: ES
L.O.: L.O. 5-5
5.6 Evaluate a company’s liquidity
1) Which of the following ratios is considered to be a more stringent measure of a company’s ability to pay its current liabilities than the current ratio?
Answer: A
Diff: 1 Type: MC
L.O.: L.O. 5-6
2) A company has $50,000 in cash, $85,000 in short-term investments, $120,000 in net current receivables, and $145,000 in inventory. The total current liabilities of the firm are $275,000. The acid-test ratio of the company is:
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 5-6
3) The number of days it takes to collect the average amount of receivables is called:
Answer: D
Diff: 1 Type: MC
L.O.: L.O. 5-6
4) A company with net sales of $850,000, a beginning balance of net receivables of $230,000, and an ending balance of net receivables of $190,000 has a days’ sales in receivables of:
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-6
5) Content Integration Inc. has $25,000 in cash, $40,000 in short-term investments, $55,000 in net current receivables, and $12,000 in prepaid expenses. The total current liabilities of the firm are $190,000. Jupiter Precision’s acid-test ratio is:
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 5-6
6) A company with net sales of $500,000, a beginning balance of net receivables of $80,000, and an ending balance of net receivables of $90,000 has a collection period of:
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 5-6
7) In 2014, Digital Asset Management Corp. (DAM) received $2,500,000 on collection from their customers. These cash receipts would be reported on Krane DAM’s 2014 cash flow statement as a(n):
Answer: B
Diff: 3 Type: MC
L.O.: L.O. 5-6
8) Which of the following are excluded from the numerator in the calculation of the acid-test ratio?
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 5-6
9) Cash collected from accounts receivable is shown on the cash flow statement as a(n):
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 5-6
10) The days sales in receivables ratio is computed as average net accounts receivable divided by 365 days.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-6
11) The current ratio is calculated by taking the total of all current assets except inventory divided by the total of all current liabilities.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-6
12) A decrease in the acid-test ratio from one year to the next indicates the company’s liquidity position is likely improving.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 5-6
13) An increase in the acid-test ratio from one year to the next indicates the company’s liquidity position is likely improving.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-6
14) The quick ratio helps investors measure the organization’s liquidity.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-6
15) The acceptable acid-test ratio varies by industry.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-6
16) Generally, the higher the acid-test ratio the easier it is for an organization to pay its current liabilities.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 5-6
17) Eloquent Media Ltd. completed the following transactions:
Sept. 14, 2013 Provided services to Inga Corporation on account, $3,000, terms 30 days.
Nov. 1, 2013 Accepted a one-year, 12% note from Inga Corporation to settle its account.
Dec. 31, 2013 Accrued interest on the note from Inga Corporation. (Round to the nearest dollar.)
Nov. 1, 2014 Received amount due from Inga Corporation.
Record entries for the above transactions.
Answer:
Sept. 14 Accounts Receivable-Inga Corporation 3,000
Service Revenue 3,000
Nov. 1 Note Receivable-Inga Corporation 3,000
Accounts Receivable-Inga Corp. 3,000
Dec. 31 Interest Receivable 60
Interest Revenue 60
($3,000 × 0.12 × 2/12)
Nov. 1 Cash 3,360
Note Receivable 3,000
Interest Receivable 60
Interest Revenue 300
($3,000 × 0.12 × 10/12)
Diff: 3 Type: ES
L.O.: L.O. 5-6
18) Compute the unknowns for the following transactions dealing with interest on notes receivable. Use a 365-day year. Round answers to the nearest dollar.
Principal Interest Duration Interest Maturity
Rate Value
Answer:
Principal Interest Duration Interest Maturity
Rate Value
Diff: 3 Type: ES
L.O.: L.O. 5-6
19) Smart-T has just signed up for a BK Trust debit card machine (interact) which charges a 1% fee. On March 15th Smart-T has debit card transactions totaling $15,550. Record the journal entry for this day’s sales.
Answer:
March 15 Cash $15,394.50
Interact Fee 155.50
Sales Revenue $15,550
Diff: 3 Type: ES
L.O.: L.O. 5-6
20) Smart-T has just sold their accounts receivables of $260,000 to Colleen Collect Inc on a non-recourse basis for 95% of their balance. Prepare the journal entry for this transaction.
Answer: Cash $247,000
Financing Expenses 13,000
Accounts Receivable $260,000
Diff: 3 Type: ES
L.O.: L.O. 5-6
21) Vance Inc. has just agreed to accept a new credit card VISTA as payment for services rendered. VISTA charges a 2.5% fee on all transactions. The sale placed on VISTA credits for the month of April totaled $330,000. Prepare the required journal entry.
Answer: Cash $321,750
Financing Expense 8,250
Service Revenue $330,000
Diff: 3 Type: ES
L.O.: L.O. 5-6
22) Ace has just signed up for a KD Trust debit card machine (interact) which charges a $1 fee for transactions up to $200 and a $3 fee for transactions over that amount. On September 15th a customer makes a $150 purchase plus a cash back request of $40. Record the journal entry.
Answer:
Sept 15 Cash $189
Interact Fee 1
Sales Revenue $150
Cash 40
Diff: 3 Type: ES
L.O.: L.O. 5-6
23) The accountant at Intellectual Property Inc. gathered the following selected accounting information:
2013 2014
Cash $ 35,000 $33,000
Short-term investments 28,000 29,000
Accounts receivable (net) 33,000 30,000
Inventory 47,000 50,000
Prepaid expenses 7,000 5,500
Accounts payable 55,000 62,000
Salaries payable 10,000 8,000
Income taxes payable 3,000 2,500
Bonds payable (due 2019) 90,000 90,000
Sales 250,000 230,000
Cost of goods sold 180,000 165,000
Required:
Net accounts receivable on December 31, 2012 was $27,000.
Answer:
2014 ($33,000 + $29,000 + $30,000) / ($62,000 + $8,000 + $2,500) = 1.27
2014 ($33,000 + $30,000) / 2 = $31,500 ($31,500/ $230,000) × 365 = 50 days
Diff: 3 Type: ES
L.O.: L.O. 5-6
24) Vista Inc. had the following balances in selected accounts at the end of 2013 and 2014.
2013 2014
Cash $58,000 $45,000
Short-term investments 46,000 39,000
Accounts receivable 54,000 61,000
Allowance for uncollectible accounts 3,500 5,000
Inventory 78,000 98,000
Accounts payable 91,000 102,000
Wages payable 17,000 25,000
Income taxes payable 4,500 6,500
Note payable (due 2019) 100,000 100,000
Sales 415,000 525,000
Cost of goods sold 225,000 304,000
The accounts receivable at the end of 2012 were $50,000 and the allowance for uncollectible accounts was $2,500.
Required:
Answer:
2014 ($45,000 + $39,000 + $61,000 – $5000) / ($102,000 + $25,000 + $6,500) = 1.05
($49,000 / $415,000) × 365 = 43 days
2014 ($54,000 – $3,500 + $61,000 – $5,000) / 2 = $53,250
($53,250 / $525,000) × 365 = 37 days
Diff: 3 Type: ES
L.O.: L.O. 5-6
25) Given the following information calculate the 2013 and 2014 acid-test ratios for Smart-T. :
2013 2014
Cash $ 15,000 $66,000
Short-term investments 48,000 29,000
Accounts receivable (net) 45,000 45,000
Inventory 9,000 13,000
Prepaid expenses 5,000 5,500
Accounts payable 40,000 43,000
Salaries payable 8,000 9,000
Income taxes payable 5,000 5,500
Bonds payable (due 2019) 80,000 80,000
Sales 250,000 230,000
Cost of goods sold 180,000 165,000
Is Smart-T’s liquidity situation improving?
Note: 2012 net accounts receivables = $40,000
Answer: Smart-T’s liquidity has improved.
2013 ($15,000 + $48,000 + $45,000) / ($40,000 + $8,000 + $5,000) = 2.04
2014 ($66,000 + $29,000 + $45,000) / ($43,000 + $9,000 + $5,500) = 2.43
Diff: 3 Type: ES
L.O.: L.O. 5-6
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.
