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Sample Questions Posted Below
Chapter 5–Sales and Receivables 3 copy
Student:
___________________________________________________________________________
1. Selling on credit protects a company from the risk that some of its receivables will never be collected.
True False
2. Accounts receivable are shown on the balance sheet at their net realizable value.
True False
3. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the
revenue of the period in which a sale on credit takes place.
True False
4. A primary advantage of the allowance method to account for bad debts is that it supports the matching
principle.
True False
5. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts
before those debts actually occur.
True False
6. The account,
“Allowance for Doubtful Accounts” is an expense account (the cost of making bad credit
sales) that is reported on the income statement.
True False
7. Because the allowance method results in better matching, accounting standards require its use rather than
the direct write-off method, unless bad debts are immaterial.
True False
8. The longer a customer’s account balance remains outstanding, the greater the likelihood that it will be
collected in the near future.
True False
9. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its
accounts receivable.
True False
10. The higher the accounts receivable turnover the better because it indicates that the company is more
quickly collecting cash (through sales).
True False
11. The lender (issuer) of a note recognizes a note payable on the balance sheet and interest expense on its
income statement.
True False
12. The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income
statement.
True False
13. If a company accepts a major credit card such as VISA from a customer, then the company is responsible
for the amount of the sale in a case of nonpayment from a cardholder.
True False
14. The terms “realized” and “realizable” mean that the selling price is fixed and determinable and
collectibility is reasonably assured.
True False15. Net Sales = Total credit sales – Sales Discounts – Sales Returns and Allowances
True False
16. Trade receivables represent a stronger legal claim against the debtor than do non-trade receivables.
True False
17. The amount of interest paid is a function of three variables, the amount borrowed, the interest rate, and
the length of the loan period.
True False
18. If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the
Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry
for bad debts.
True False
19. A balance sheet approach to estimating bad debt expense is not permitted under GAAP (Generally
Accepted Accounting Principles).
True False
20. A sale and its associated receivable are recorded only when the order, shipping, and billing documents are
all present.
True False
21. The method of recording bad debts that results in a bad debt expense before the actual default is the
.
____________________
________________________________________
22. According to the
which the sale was made.
____________________ principle, bad debt expense must be recorded in the period in
________________________________________
23. The
____________________
ordered goods.
order is necessary for the buyer to be obligated to accept and pay for the
________________________________________
24. The basis of accounting that recognizes revenue when it is realizable and earned is called the
.
____________________
________________________________________
25. A(n) ____________________
outstanding.
categorizes the various accounts receivable amounts by the length of time
________________________________________
26.
____________________
are receivables that generally specify an interest rate and a maturity date at
which any interest and principal must be repaid.
________________________________________
27. The amount of money borrowed when a promissory note is issued is called the
.
____________________
________________________________________
28. A(n) ____________________
and assumes the risk of uncollectibility.
is the buyer of receivables, who acquires the right to collect the receivables
________________________________________
29. Special forms of factoring are called
.
____________________
________________________________________
30. Gross profit divided by net sales is called the
ratio.
____________________
________________________________________31. 32. 33. 34. 35. 36. 37. 38. The difference between the principal amount of a note and its maturity value is called
.
____________________
________________________________________
To encourage prompt payment, sellers offer a(n) ____________________
.
________________________________________
A sales invoice that bears the notation 2/10 means
.
____________________
________________________________________
How efficiently a company is using the resources at its disposal is called
____________________
________________________________________
Net sales is total sales less sales discounts and
.
________________
________________________________________
Select the term that matches each of the following descriptions.
1. The difference between the principal amount of the note and its
Princi
_
maturity value
pal
__
_
2. The length of time a note is outstanding–the period of time
Frac
_
between the date it is issued and the date the note is due to be
tion of
__
paid
year
_
3. The amount borrowed Lende
_
r
__
_
4. Date which the total interest and principal must be repaid Maturi
_
ty date
__
_
5. The amount of cash the maker is to pay the payee on the
Interes
_
maturity date of the note
t
__
_
6. The party that receives payment due from a note Maturi
_
ty Value
__
_
.
Select the term that matches each of the following descriptions.
1. Reduction of price granted by the seller for a particular
class of customers
2. Used to encourage prompt payment 3. Used to induce the customer to keep damaged goods Match each statement to the item listed below
1. Generally entitle the holder to interest. 2. The packaging of receivables as financial
instruments or securities for sale to investors.
3. Indicates that non-cash resources have been
exchanged for cash.
4. A contra-asset account. 5. Money due the company from another business or
individual.
6. A way to estimate bad debts. 7. Indicates that the earnings process is substantially
complete.
Sales
___
Allowance
_
Sales
___
Discount
_
Trade
___
Discount
_
Securitization
__
__
Aging method
__
__
Accounts
__
receivable
__
Notes receivable
__
__
Allowance for
__
Doubtful Accounts
__
Realized
__
__
Earned
__
__39. 40. 41. 42. 43. 44.
Match each statement to the item listed below
1. Money due from customers purchasing inventory in the
ordinary course of business
2. A way to estimate bad debt expense. 3. Receivables that the company is not able to collect. 4. The amount of sales expected to be collectible after
deducting discounts and returns and allowances.
5. Measure the return the company is earning on sales. 6. Arise from transactions not involving inventory (e.g.,
interest receivable).
Profitability
ratios
Trade
receivables
Bad debt
expense
Percentage
of credit sales
Nontrade
receivables
Net sales
revenue
__
__
__
__
__
__
__
__
__
__
__
__
Action Signs recorded credit sales of $10,000 on the gross method. Terms are 2/20, n/30. Select the
correct statement about the entry to record this sale.
A. Accounts receivable increases $10,000.
B. Sales increase $9,800
C. Sales discounts increase $200
D. All of the above are correct
A company receiving payment of a $20,000 accounts receivable within 10 days with terms of 2/10, n/30,
would record a sales discount of:
A. 10% of $20,000
B. 2% of $20,000
C. (100% – 10%) x $20,000
D. (100% – 2%) x $20,000
A company had sales of $40,000, sales discounts of $800, sales returns of $1,600 and commissions owed
to sales people of $600. Compute net sales.
A. $37,600
B. $37,000
C. $38,400
D. $39,000
Select the incorrect statement from the following.
The following information was presented in the balance sheet of Acworth Pools as of December 31,
2012:
Trade accounts receivable, net of allowance for doubtful
accounts of $200,000 $1,700,000
A. The company expects to actually collect $1,700,000 of its receivables.
B. The balance in the Accounts Receivable account in the company’s general ledger is $1,700,000.
C. The net realizable value of the company’s receivables is $1,700,000.
D. The company expects uncollectibles to total $200,000.
What is the distinguishing characteristic between accounts receivable and notes receivable?
A. Accounts receivable are usually current assets while notes receivable are usually long-term assets.
B. Accounts receivable require payment of interest while notes receivable does not have payment of
interest.
C
Notes receivable result from credit sale transactions for merchandising companies, while accounts
.
receivable result from credit sale transactions for service companies.
D. Notes receivable generally specify an interest rate and a maturity date at which any interest and
principle must be repaid.45. 46. 47. 48. 49. 50. 51. 52. On December 15, 2012, the accounts receivable balance was $50,000 and the balance in the allowance
for doubtful accounts was $5,000. That morning, a $1,000 uncollected account was written-off. The net
realizable value of accounts receivable immediately after the write-off is:
A. $49,000
B. $46,000
C. $45,000
D. $44,000
Which one of the following is an accurate description of the Allowance for Doubtful Accounts?
A. Contra Account
B. Liability Account
C. Revenue Account
D. Expense Account
If a company uses the direct write-off method of accounting for bad debts,
A. It establishes an estimate for the allowance for doubtful accounts.
B. It will record bad debt expense only when an account is determined to be uncollected.
C. It will reduce the accounts receivable account at the end of the accounting period for estimated
uncollected accounts.
D. When an account is written off, total assets will stay the same.
A company uses the direct write-off method to account for bad debts. What are the effects on the
accounting equation of the entry to record the write-off of a customer’s account balance?
A. Assets and liabilities decrease
B. Assets and Stockholders’ equity decrease
C. Stockholders’ equity and liabilities decrease
D. Assets increase and Stockholders’ equity decrease
All of the following are true for a company that uses the allowance method of accounting for bad debts,
EXCEPT:
A. It uses a contra-asset account called the allowance for doubtful accounts.
B. It records bad debt expense each time an account is determined to be uncollectible.
C. It reduces its accounts receivable balance when the account is written off.
D. It reports accounts receivable in the balance sheet at their net realizable value.
Which one of the following statements is true if a company’s collection period for accounts receivable is
unacceptably long?
A. The collection cost would be reduced.
B. The company may offer sales discounts to shorten the collection period.
C. Cash flows from operations may be higher than expected for the company’s sales.
D. The company should expand operations with its excess cash.
If a company uses the allowance method to account for doubtful accounts, when will the company’s
Stockholders’ equity decrease?
A. At the date a customer’s account is written off
B. At the end of the accounting period when an adjusting entry for bad debts is recorded
C. At the date a customer’s account is determined to be uncollected
D. When the accounts receivable amount becomes past due
Which allowance method approach is considered to be an income statement approach to estimating bad
debts?
A. The percentage of accounts receivable approach
B. The percentage of accounts written off approach
C. The percentage of net credit sales approach
D. The direct write off method53. 54. 55.
56. 57. 58. Which one of the approaches for the allowance procedure emphasizes the net realizable value of accounts
receivable on the balance sheet?
A. The aging of accounts receivable method
B. The percentage of net credit sales method
C. The percentage of accounts written off method
D. The direct write-off method
A company’s accounts receivable balance after posting net collections from customers for 2012 is
$150,000. Management feels that uncollected accounts should be based on the following aging of
accounts receivable and uncollected percentages. There are $100,000 that are 1-30 past due at 2% and
$50,000 that are 31 to 60 days past due at 10%. The net realizable value of the accounts receivable is
A. $147,500
B. $148,000
C. $150,000
D. $143,000
The net realizable value of the accounts receivable is
All Star Auto has an accounts receivable balance after posting net collections from customers for 2012 of
$180,000. The customers took advantage of sales discounts of $15,000. Management aged the accounts
receivable and estimate for uncollected account percentages as follows:
$90,000 Current at 2%
$50,000 1-30 days past due at 5%
$30,000 31-60 days past due at 10%
$10,000 60+ days past due at 25%
A. $173,200
B. $170,200
C. $172,700
D. $180,000
Beginning accounts receivable were $200,000 and ending accounts receivable were $300,000. Assuming
cash collections totaled $1,100,000, what were credit sales?
A. $1,200,000
B. $1,100,000
C. $1,300,000
D. $1,500,000
Alco Roofing Company’s beginning accounts receivable were $200,000 and ending accounts receivable
were $270,000. During the period, credit sales totaled $570,000, How much cash was collected from
customers?
A. $470,000
B. $500,000
C. $570,000
D. $640,000
A company had beginning accounts receivable of $175,000. All sales were on account and totaled
$550,000. Cash collected from customers totaled $650,000. Calculate the ending accounts receivable
balance.
A. $725,000
B. $275,000
C. $ 75,000
D. $175,00059. 60. 61. Refer to AT&U Company. If the company estimates its bad debts at 1% of net credit sales, what amount
will be reported as bad debt expense for 2012?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
A. $44,500
B. $25,000
C. $24,500
D. $4,500
Refer to AT&U Company. If the company estimates its bad debt to be 2% of net credit sales, what will be
the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
A. $20,000
B. $19,000
C. $49,000
D. $69,000
Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its
bad debts, what amount will be reported as bad debt expense for 2012?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
A. $25,000
B. $45,000
C. $20,000
D. $49,00062. Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its
bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt
expense?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
A. $640,000
B. $595,000
C. $620,000
D. $615,000
63. Allatoona Landing reported net credit sales of $1,250,000 and cost of goods sold of $900,000 for 2012.
Its beginning balance of Accounts Receivable was $175,000. The accounts receivable balance decreased
by $25,000 during 2012. Rounded to two decimal places, what is the company’s accounts receivable
turnover rate for 2012?
A. 7.14
B. 7.69
C. 8.33
D. 11.03
64. The Allowance for Doubtful Accounts represents:
A. Bad debt losses incurred in the current period
B. The amount of uncollected accounts written off to date
C. The difference between total sales made on credit and the amount collected from those credit sales
D. The difference between the recorded value of accounts receivable and the net realizable value of
accounts receivable
65. Which of the following statements is true regarding the two allowance procedures used to estimate bad
debts?
A
The percentage of net credit sales method takes into account the existing balance in the Allowance for
.
Doubtful Accounts account.
B. The direct write-off method takes into account the existing balance in the Allowance for Doubtful
Accounts account.
C. The aging of accounts receivable method takes into account the existing balance in the Allowance for
Doubtful Accounts account.
D. The direct write-off method does a better job of matching revenues and expenses.
66. Refer to A2Z Events. What amount will the company show on its year-end balance sheet for the net
realizable value of its accounts receivable?
A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year Accounts Receivable–December 31, 2012 410,000
Allowance for Doubtful Accounts–December 31, 2012 Bad debt expense for the year $2,400,000
55,000
70,000
A. $410,000
B. $285,000
C. $340,000
D. $355,00067. 68. 69. Refer to A2Z Events. What are the effects on the accounting equation when the company makes the
adjustment to record bad debt expense using the allowance method?
A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year Accounts Receivable–December 31, 2012 410,000
Allowance for Doubtful Accounts–December 31, 2012 Bad debt expense for the year $2,400,000
55,000
70,000
A. Assets increase and liabilities decrease
B. Assets and stockholders’ equity decrease
C. Assets increase and stockholders’ equity decreases
D. Assets decrease and stockholders’ equity increases
Refer to A2Z Events. What are the effects on the accounting equation when the company writes off a bad
debt under the allowance method?
A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year Accounts Receivable–December 31, 2012 410,000
Allowance for Doubtful Accounts–December 31, 2012 Bad debt expense for the year $2,400,000
55,000
70,000
A. Assets decrease and stockholders’ equity increase
B. Assets and stockholders’ equity decrease
C. Assets increase and stockholders’ equity decreases
D. No effect on overall assets or stockholders’ equity
Refer to Accelerated Solutions. What is the balance of Accounts Receivable at December 31, 2012?
Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable–January 1, 2012 Credit sales during 2012 1,200,000
Collections from credit customers during 2012 Customer accounts written off as uncollected during 2012 Allowance for doubtful accounts–January 1, 2012 Estimated uncollected accounts based on an aging analysis $ 350,000
850,000
10,000
35,000
50,000
A. $700,000
B. $340,000
C. $690,000
D. $710,00070. 71. 72. Refer to Accelerated Solutions. If the aging method is used to estimate bad debts, what amount should be
recorded as bad debt expense for 2012?
Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable–January 1, 2012 Credit sales during 2012 1,200,000
Collections from credit customers during 2012 Customer accounts written off as uncollected during 2012 Allowance for doubtful accounts–January 1, 2012 Estimated uncollected accounts based on an aging analysis $ 350,000
850,000
10,000
35,000
50,000
A. $50,000
B. $ 5,000
C. $15,000
D. $25,000
Refer to Accelerated Solutions. If the aging approach is used to estimate bad debts, find the balance in the
Allowance for Doubtful Accounts after the bad debt expense adjustment.
Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable–January 1, 2012 Credit sales during 2012 1,200,000
Collections from credit customers during 2012 Customer accounts written off as uncollected during 2012 Allowance for doubtful accounts–January 1, 2012 Estimated uncollected accounts based on an aging analysis $ 350,000
850,000
10,000
35,000
50,000
A. $ 5,000
B. $15,000
C. $25,000
D. $50,000
Refer to A-One Construction. What is the balance of Accounts Receivable at December 31, 2012?
A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable–January 1, 2012 $455,000
Credit sales during 2012 900,000
Collections from credit customers during 2012 825,000
Customer accounts written off as uncollected during 2012 15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis 2,100
29,200
A. $545,000
B. $440,000
C. $515,000
D. $530,00073. 74. 75. Refer to A-One Construction. If the aging approach is used to estimate bad debts, what amount should be
recorded as bad debt expense for 2012?
A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable–January 1, 2012 $455,000
Credit sales during 2012 900,000
Collections from credit customers during 2012 825,000
Customer accounts written off as uncollected during 2012 15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis 2,100
29,200
A. $ 2,100
B. $27,100
C. $29,200
D. $31,300
Refer to A-One Construction. If the aging approach is used to estimate bad debts, what should the balance
in the Allowance for Doubtful Accounts be after the bad debts adjustment?
A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable–January 1, 2012 $455,000
Credit sales during 2012 900,000
Collections from credit customers during 2012 825,000
Customer accounts written off as uncollected during 2012 15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis 2,100
29,200
A. $ 2,100
B. $31,100
C. $29,200
D. $27,100
Refer to A&B Foods. If the company estimates its bad debts at 4% of net credit sales, what amount will
be reported as bad debt expense for 2012?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $50,000
B. $75,000
C. $78,000
D. $84,00076. 77. 78. Refer to A&B Foods. If the company uses 4% of net credit sales to estimate its bad debts, what will be
the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $ 50,000
B. $103,000
C. $ 78,000
D. $ 75,000
Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad
debts, what amount will be reported as bad debt expense for 2012?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $50,000
B. $75,000
C. $78,000
D. $53,000
Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad
debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt
expense?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $343,000
B. $345,000
C. $420,000
D. $395,00079. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances
of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There
were $500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to
$78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable
balance.
Refer to the Ace Computing Company. The entry to recognize the write-off of the specific uncollected
accounts will act to:
A. Increase total assets and stockholders’ equity
B. Increase total assets and decrease stockholders’ equity
C. Decrease total assets and stockholders’ equity
D. Not affect total assets or stockholders’ equity
80. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances
of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There
were $500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to
$78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable
balance.
Refer to the Ace Computing Company. The amount of bad debts expense recognized in the 2012 income
statement will be:
A. $1,652
B. $ 652
C. $ 142
D. $1,450
81. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances
of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There
were $500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to
$78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable
balance.
Refer to the Ace Computing Company. The entry required to recognize the bad debts expense for 2012
will act to:
A. Increase total assets and retained earnings
B. Decrease total assets and retained earnings
C. Decrease total assets and increase net income
D. Increase total assets and decrease net income
82. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances
of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There
were $500 of receivables written off as uncollected in 2012. Cash collections of receivables amounted to
$78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable
balance.
Refer to the Ace Computing Company. The net realizable value of receivables appearing on the 2012
balance sheet will amount to:
A. $40,648
B. $39,648
C. $41,300
D. $39,800
83. 84. 85. 86. 87. 88. On December 1, 2012, Anson’s Drug Store concluded that a customer’s $325 account receivable was
uncollected and that the account should be written off. What effect will this write-off have on the
company’s 2012 net income and balance sheet totals assuming the direct write-off method is used to
account for bad debts?
A. Decrease in net income; decrease in total assets
B. Increase in net income; no effect on total assets
C. No effect on net income; decrease in total assets
D. No effect on net income; no effect on total assets
During 2012, the accounts receivable turnover rate for Adaptive Equipment increased from 10 to 15 times
per year. Which one of the following statements is the most likely explanation for the change?
A
The company’s credit department has followed up with customers whose account balances are past due
.
in order to generate quicker collections.
B. The company has decreased sales to its most credit worthy customers.
C. The company has increased the amount of time customers have to pay their accounts before they are
past due.
D. The company has extended credit to more risky customers in order to increase sales.
Allgood Pet Supplies reported net credit sales of $3,200,000 and cost of goods sold of $2,600,000 for
2012. On January 1, 2012, accounts receivable was $450,000. Amounts owed by customers increased
by $50,000 during 2012. Rounding to two decimal places, what is the company’s accounts receivable
turnover rate for 2012?
A. 5.47
B. 6.40
C. 6.74
D. 7.11
The principal amount of a note receivable plus the interest due is referred to as the note’s
A. face valve.
B. promissory value.
C. expected value.
D. maturity value.
How will the lender of the promissory note record the note on its books?
A. The promissory note will be recorded as an asset
B. The promissory note will be recorded as a contra asset
C. The promissory note will be recorded as revenue
D. The promissory note will be recorded as an expense
A company needs to record 6 months of accrued interest on a 4-year, 12%, $12,000 promissory note
payable. How much interest expense should be accrued?
A. $2,160
B. $1,440
C. $1,080
D. $720
89. Academy Grill Supply
On October 1, 2012, the company received a $50,000 promissory note from a customer. The annual
interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September 30,
2013.
Refer to Academy Grill Supply. If the company’s year ends September 31, 2013, an adjusting entry is
needed to:
A. Increase interest revenue by $2,250
B. Increase notes receivable by $750
C. Increase interest receivable by $750
D. Increase notes receivable by $2,250
90. Academy Grill Supply
On October 1, 2012, the company received a $50,000 promissory note from a customer. The annual
interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September 30,
2013.
Refer to Academy Grill Supply. The effect on the company’s financial statements on September 30,
2013, is as follows:
A. Assets and Stockholders’ equity increase
B. Assets and Stockholders’ equity decrease
C. Assets and liabilities increase
D. No net change in assets
91. Absolute Appliances
The company sold merchandise to a customer on December 1, 2012, for $120,000. The company
accepted a promissory note as payment. The note has a term of three months and an annual interest rate of
10%. The company’s accounting period ends on December 31.
Refer to Absolute Appliances. What is the maturity date of the note?
A. December 31, 2012
B. January 31, 2013
C. February 28, 2013
D. March 1, 2013
92. Absolute Appliances
The company sold merchandise to a customer on December 1, 2012, for $120,000. The company
accepted a promissory note as payment. The note has a term of three months and an annual interest rate of
10%. The company’s accounting period ends on December 31.
Refer to Absolute Appliances. What amount should the company recognize as interest revenue on
December 31, 2012?
A. $ -0-
B. $ 1,000
C. $12,000
D. $11,000
93. Absolute Appliances
The company sold merchandise to a customer on December 1, 2012, for $120,000. The company
accepted a promissory note as payment. The note has a term of three months and an annual interest rate of
10%. The company’s accounting period ends on December 31.
Refer to Absolute Appliances. What amount should the company recognize as interest revenue on the
maturity date of the note?
A. $ -0-
B. $1,000
C. $2,000
D. $3,000
94. The College Store accepts MasterCard for payments of purchases made by students. The credit card
drafts are deposited directly in a bank account. MasterCard charges a 1.55% collection fee. Credit card
drafts totaling $10,000 are deposited during August. Recording the sales and deposits will result in an
increase in
A. Cash for $10,000
B. Sales for $ 9,854
C. Accounts Receivable for $9,854
D. Service Charge Expense for $155
95. Accent Flooring
The company received a promissory note from a customer on March 1, 2012. The principal amount of the
note is $20,000; the terms are 3 months and 9% annual interest.
Refer to the information for Accent Flooring. What is the total amount of interest the company will
receive when the note is collected?
A. $ 300
B. $ 150
C. $ 450
D. $1,800
96. Accent Flooring
The company received a promissory note from a customer on March 1, 2012. The principal amount of the
note is $20,000; the terms are 3 months and 9% annual interest.
Refer to the information for Accent Flooring. At the maturity date, the customer pays the amount due
for the note and interest. What entry is required on the books of Accent Flooring on the maturity date
assuming that none of the interest had already been recognized?
A. Increase Cash and decrease Notes Receivable by $20,000
B. Increase Cash by $20,450, increase Interest Revenue by $450, and decrease Notes Receivable by
$20,000
C. Increase Cash by $20,450, increase Notes Receivable by $20,000, and increase Interest Revenue by
$450
D. No entry is required; the customer pays the amount due to Accent Flooring.
97. Refer to Abbot Safe & Lock. What amount will the company show on its year-end balance sheet for the
net realizable value of its accounts receivable?
Abbot Safe & Lock
The following information was obtained from the company’s records for 2012:
Credit sales during the year Accounts receivable–December 31, 2012 325,000
Allowance for doubtful accounts–December 31, 2012 Bad debt expense for the year $3,200,000
35,000
20,000
98.
A. $305,000
B. $290,000
C. $270,000
D. $325,000
Refer to Abbot Safe & Lock. What is the effect on liquidity when the company records its estimate for
bad debt expense using the allowance method?
Abbot Safe & Lock
The following information was obtained from the company’s records for 2012:
Credit sales during the year Accounts receivable–December 31, 2012 325,000
Allowance for doubtful accounts–December 31, 2012 Bad debt expense for the year $3,200,000
35,000
20,000
A. Liquidity decreases
B. Liquidity increases
C. Liquidity stays the same
D. Liquidity both increases and decreases99. A Better Mousetrap
The company sold merchandise to a customer on December 1, 2012, for $100,000. The customer paid
with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company’s
accounting period ends on December 31.
Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on
December 31, 2012?
A. $ -0-
B. $ 750
C. $1,500
D. $9,000
100.A Better Mousetrap
The company sold merchandise to a customer on December 1, 2012, for $100,000. The customer paid
with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company’s
accounting period ends on December 31.
Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on the
maturity date of the note?
A. $ -0-
B. $4,500
C. $3,750
D. $9,000
101.Art Shoes
This company received a promissory note from a customer on July 1, 2012. The face amount of the note
is $45,000; the terms are 12 months and 10% annual interest.
Refer to Art Shoes. How much interest revenue will the company recognize for the year ended December
31, 2012?
A. $ 0
B. $9,000
C. $2,250
D. $4,500
102.Art Shoes
This company received a promissory note from a customer on July 1, 2012. The face amount of the note
is $45,000; the terms are 12 months and 10% annual interest.
Refer to Art Shoes. At the maturity date, the customer pays for the note and interest. The company made
the proper adjustment at the end of December for interest. The effect of recognizing the transaction on the
maturity date is
A. A decrease to Cash
B. An increase to Notes Receivable
C. An increase to Discount on Notes Receivable
D. A decrease to Notes Receivable
103.Advanced Packaging accepted a credit card account receivable in exchange for $25,000 of services
provided to a customer. The credit card company charges a 4% service charge. Recording the transaction
in the company’s accounting records will have what effect on the accounting equation?
A. Increase assets and stockholders’ equity by $24,000
B. Decrease assets and stockholders’ equity by $1,000
C. Increase assets by $25,000
D. Increase stockholders’ equity by $25,000
104.What should a company do to improve its accounts receivable turnover rate?
A. Lower its selling prices.
B. Increase its sales force.
C. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
D. Reduce the number of employees working in the credit department.
105.On January 2, Alfredo Corporation sold merchandise with a gross price of $100,000 to a customer with
terms of 2/10, n/30. How much Sales Discounts would be recorded if payment was received from the
customer on January 8? Assume the company uses the Gross Method of recording receivables.
A. $0
B. $2,000
C. $98,000
D. $100.000
106.All of the following are criteria that the SEC requires to be met before revenue is considered realized (or
realizable) and earned EXCEPT:
A. Delivery has occurred or services have been provided.
B. The seller’s price to the buyer is fixed and determinable.
C. Collection is possible.
D. Persuasive evidence of an arrangement exists.
107.Internal control for sales involve which of the following documentation?
A. A sale and its associated receivable are recorded only when the order, shipping, and billing documents
are all presented.
B. A sale and its associated receivable are recorded only when the billing documents are prepared.
C. A sale and its associated receivable are recorded only when the goods are ordered.
D. A sale and its associated receivable are recorded only when the good are produced.
108.Which of the following would be correct if a company factored $2,500,000 of receivables with a 2
percent fee?
A. $2,450,000 credit to cash
B. $50,000 debit to factoring fee expense
C. $2,500,000 debit to accounts receivable.
D. $50,000 debit to factoring fee receivable.
109.
The following information is available for All Care Nursing Supply for fiscal year ending December 31,
2012. Calculate the Accounts Receivable Turnover Ratio:
Net Sales $450,000 Accounts Receivable, December 31, 2011 $175,000
Operating Income $120,000 Accounts Receivable, December 31, 2012 $125,000
Net Income $100,000
A. 3
B. .8
C. 3.6
D. 2.57
110.
Advanced Technology reported the following on its balance sheet at December 31, 2012:
Accounts receivable, less Allowance for Doubtful Accounts of $20,500
$580,200
A) B) C) What is the net realizable value of the company’s accounts receivable?
What is the balance of the accounts receivable account?
Are you able to determine whether the company uses the allowance method or the direct write off method for bad debts? Why
or why not?
111.Refer to Atlantis Tropicals. If bad debts are estimated at 1% of net credit sales, how much will the
company report as bad debts expense for 2012?
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
112.Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how much bad debts
expense will the company report for 2012?
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
113.Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how much is the net
realizable value of the accounts receivable at December 31, 2012?
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
114.Refer to Atlantis Tropicals. Assume that the net realizable value is $210,000 after the adjustment for bad
debts in 2012. How much is the net realizable value of accounts receivable after a customer’s account of
$15,000 is written off? Explain why.
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
115.
Refer to Atlantis Tropicals. Determine the effect on the company’s accounting equation of the year-end
adjustment of bad debts using the aging approach.
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
Assets = Liabilities + Stockholders’ Equity
116.Refer to Aardvark Resale. Determine the balance of Accounts Receivable at December 31, 2012.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
117.
Refer to Aardvark Resale. Assume that the company estimates bad debts at 2% of net credit sales.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
A) B) What amount will the company record as bad debts expense for 2012?
How much is the net realizable value of accounts receivable reported on the company’s balance sheet at December 31, 2012?
118.
Refer to Aardvark Resale. Assume that the company estimates bad debts based on the aging method, and
the aging schedule indicates that $30,100 of the year-end accounts receivable will be uncollected.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
A) B) What amount will the company recognize as bad debts expense for the year?
How much is the net realizable value of the receivables to be reported on the company’s balance sheet at year-end?
119.Refer to Aardvark Resale. Since the company has a choice of acceptable methods to estimate bad debts,
what factors should be considered in the selection?
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
120.Refer to Aardvark Resale. Can the company use the direct write-off method rather than the allowance
method to account for bad debts expense? Explain why or why not.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
121.Refer to Abundant Returns. Determine the balance of Accounts Receivable at December 31, 2012.
Abundant Returns
This company sells its merchandise only on credit. The following data are available at December 31,
2012.
Sales $411,000
Sales returns and allowances 12,000
Accounts receivable at January 1, 2012 89,000
Allowance for doubtful accounts at January 1, 2012 4,100
Cash collections during 2012 385,100
Accounts written off as uncollected during 2012 3,600
122.
Refer to Abundant Returns. The firm estimates that bad debts could be 2% of net sales.
Abundant Returns
This company sells its merchandise only on credit. The following data are available at December 31,
2012.
Sales $411,000
Sales returns and allowances 12,000
Accounts receivable at January 1, 2012 89,000
Allowance for doubtful accounts at January 1, 2012 4,100
Cash collections during 2012 385,100
Accounts written off as uncollected during 2012 3,600
A) B) What amount will the company recognize as bad debts expense for the year?
Assume that the company has a balance of Accounts Receivable of $108,900, and an Allowance for Doubtful Accounts of $820.
What will be the net realizable value once the adjustment from (Part A) is made?
123.
Refer to Abundant Returns. Assume that the company estimates bad debts using the aging method. The
aging schedule indicates that $11,500 of the end of the year Accounts Receivable will be uncollected.
Abundant Returns
This company sells its merchandise only on credit. The following data are available at December 31,
2012.
Sales $411,000
Sales returns and allowances 12,000
Accounts receivable at January 1, 2012 89,000
Allowance for doubtful accounts at January 1, 2012 4,100
Cash collections during 2012 385,100
Accounts written off as uncollected during 2012 3,600
A) B) What amount will the company recognize as bad debt expense for the year?
If the ending balance of Accounts Receivables is $65,200, what is the net realizable value of Accounts Receivable reported on
December 31, 2012?
124.
On November 1, 2012, Aero Graphics sold merchandise to a customer and received a 10%, 90-day
promissory note with a principal amount of $60,000.
A) Identify the maturity date of the note.
B) How much total interest revenue will the company earn over the term of the note?
C) By how much will net income be understated if the company fails to make a year-end adjusting entry for the note?
125.Accutemp Heating & Air
On May 1, 2012, the company sold merchandise to a customer and received a 8%, 6-month note with a
principal amount of $100,000. The company’s year end is December 31.
Refer to Accutemp Heating & Air. Identify the maturity date of the note.
126.Accutemp Heating & Air
On May 1, 2012, the company sold merchandise to a customer and received a 8%, 6-month note with a
principal amount of $100,000. The company’s year end is December 31.
Refer to Accutemp Heating & Air. How much total interest revenue will the company recognize over the
term of the note?
127.
Affinity Services Group received a 12%, 6-month promissory note with a principal amount of $10,000
from a customer for the sale of merchandise on December 1, 2012.
A) How much interest revenue will the company recognize as of December 31, 2012?
B) How much interest revenue will the company recognize in 2013?
C) Determine the total amount of cash the company will collect on the date of the note’s maturity.
128.
n/30.
Prepare the journal entries to:
A) Record the sale using the gross method.
B) Assume the payment is received on June 10, 2012.
C) Assume payment is not received until June 21, 2012.
On June 3, 2012, Alpine Corporation sold merchandise with a gross price of $45,000 with terms of 2/10,
129.
Alpha Company’s accounts receivable and allowance for doubtful accounts balances were $100,000 and
$14,000 (credit) respectively, at the beginning of 2012. During 2012, a customer defaults on a $12,000
balance related to goods purchased during 2011. By the end of the year, the company had made credit
sales of $2,400,000 and collected $2,200,000 on account. It now estimates that 1 percent of its credit sales
will default.
A) Prepare the journal entry to record the write off the bad debt.
B) Prepare the adjusting entry to record bad debt expense for 2012.
C) What is the net accounts receivable balance at the end of the year?
130.
During 2012 the company made $3,200,000 in credit sales, collected $3,000,000 of accounts receivable
and wrote off $20,000 of accounts receivable as uncollected.
Required:
On January 1, 2012, Alliance Company had the following balances for accounts receivable and allowance
for doubtful accounts:
Accounts receivable $750,000 (debit)
Allowance for doubtful accounts 50,000 (credit)
A) B) C) D) What is the company’s preadjustment balance in accounts receivable on December 31, 2012?
What is the preadjustment balance in allowance for doubtful accounts on December 31, 2012?
Assume an analysis of aging of accounts receivable indicates that $45,000 of the current accounts receivable balance is
uncollected. By what amount will the allowance for doubtful accounts need to be adjusted?
Prepare the adjusting entry for 2012 for Allowance for Doubtful Accounts.
131.
All American Storage Corporation sold merchandise with credit terms of 2/10, n/30, for $100,000 to a
customer on January 01, 2012. Nine months later, on October 1, 2012 the company accepted a 12%, 6-
month note receivable in settlement of the account. The customer paid the maturity value of the note on
the due date.
Prepare the following journal entries:
A) Record the sale of merchandise January 1, 2012.
B) Record the receipt of the note receivable on October 1, 2012.
C) Record the adjusting entry to accrue interest on December 31,
2012.
D) What is the due date of the note?
E) Record the collection of the note on the due date.
132.
The following information is available for All-4-U Company for the year ending December 31, 2012:
Net Sales $5,000,000 Accounts Receivable December 31, 2011 $1,250,000
Cost of goods sold $3,500,000 Accounts Receivable December 31, 2012 $1,000,000
Operating Income $600,000
Net Income $400,000
A) B) C) D) Compute the gross profit ratio for 2012.
Compute the operating margin ratio for 2012.
Compute the net profit margin ratio for 2012.
Compute the accounts receivable turnover for 2012.
133.
Answer these questions concerning the company’s receivables:
The following comparative financial statements for the years ended December 31, 2012 and 2011 are
provided for Air Plus Company:
Balance Sheet: 2012 2011
Cash and cash equivalents $87,000 $71,600
Accounts receivables, less allowance for doubtful
accounts of $90 (2012) and $82 (2011) 3,800 2,500
Notes receivable 15,000 20,000
Income Statement:
Net sales for the year $9,700 $8,800
Net income for the year 920 1,050
A) B) C) What is the gross amount of accounts receivable at December 31, 2012? Why is this amount different than the amount of
receivables shown in the 2012 column of the balance sheet?
What is the net realizable value of accounts receivable at December 31, 2012? What does this amount represent?
How should accounts receivable be classified on a classified balance sheet? Why?
134.Determine the following:
A) Gross sales
B) Net sales
C) Gross profit
Assuming the company uses the income statement approach to estimating uncollectibles:
D) Bad debt estimate percentage
E) Year-end adjusting entry to record bad debt expense
F) Ending balance in Allowance for Doubtful Accounts after adjustment
G) Net realizable value of receivables after adjustment for bad debts
Assuming the company uses the balance sheet approach to estimating uncollectibles:
H) Gross receivables
I) Ending balance in Allowance for Doubtful Accounts after adjustment
J) Net realizable value of receivables after adjustment for bad debts
The following information was taken from the records of Alphabet Soup at the end of 2012:
Cash sales $1,000,000
Credit sales 500,000
Sales discounts 5,000
Accounts Receivable 250,000
Allowance for Doubtful Accounts (before adjustment) (25,000)
Estimated uncollected accounts 2,475
Cost of goods sold $975,000
135.What are the criteria the SEC uses to determine if revenue is realized or realizable and earned?
136.What is the purpose of an aging schedule for accounts receivable?
137.Airport Support Company reported its accounts receivable turnover ratio at 10 times. Its credit terms are
2/10, n/20. What does this ratio tell you about this company?
138.Identify two methods of accelerating cash from sales.
139.You are the credit manager at a large retail department store. What steps should you take before deciding
to write off a customer’s account?
You Decide Essay
140.Compute the (1) gross profit margin, (2) operating margin, (3) net profit margin, and (4) accounts
receivable turnover for the two companies and indicate which company’s performed better.
Nordstrom
You are interning at a financial services firm and have been asked to evaluate the performance of
two major department stores. The following information (in millions) is available for Wal-Mart and
Nordstrom for the most recent fiscal periods available:
Wal-Mart
You Decide Essay
Net Sales $405,046 Beginning Accounts Receivable $4,144
Gross Profit 100,389 Ending Accounts Receivable 3,905
Operating Income 23,950
Net Income 14,848
Net Sales $8,627 Beginning Accounts Receivable $1,942
Gross Profit 3,299 Ending Accounts Receivable 2,035
Operating Income 834
Net Income 441
1. Chapter 5–Sales and Receivables 3 copy Key
Selling on credit protects a company from the risk that some of its receivables will never be
collected.
FALSE
2. Accounts receivable are shown on the balance sheet at their net realizable value.
TRUE
3. The use of the allowance method is an attempt by accountants to match bad debts as an expense with
the revenue of the period in which a sale on credit takes place.
TRUE
4. A primary advantage of the allowance method to account for bad debts is that it supports the matching
principle.
TRUE
5. Under the allowance method of accounting for bad debts, the company estimates the amount of bad
debts before those debts actually occur.
TRUE
6. The account,
FALSE
“Allowance for Doubtful Accounts” is an expense account (the cost of making bad credit
sales) that is reported on the income statement.
7. Because the allowance method results in better matching, accounting standards require its use rather
than the direct write-off method, unless bad debts are immaterial.
TRUE
8. The longer a customer’s account balance remains outstanding, the greater the likelihood that it will be
collected in the near future.
FALSE
9. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its
accounts receivable.
TRUE
10. The higher the accounts receivable turnover the better because it indicates that the company is more
quickly collecting cash (through sales).
TRUE
11. The lender (issuer) of a note recognizes a note payable on the balance sheet and interest expense on its
income statement.
FALSE
12. The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its
income statement.
TRUE
13. If a company accepts a major credit card such as VISA from a customer, then the company is
responsible for the amount of the sale in a case of nonpayment from a cardholder.
FALSE
14. The terms “realized” and “realizable” mean that the selling price is fixed and determinable and
collectibility is reasonably assured.
TRUE15. Net Sales = Total credit sales – Sales Discounts – Sales Returns and Allowances
FALSE
16. Trade receivables represent a stronger legal claim against the debtor than do non-trade
receivables.
FALSE
17. The amount of interest paid is a function of three variables, the amount borrowed, the interest rate, and
the length of the loan period.
TRUE
18. If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the
Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting
entry for bad debts.
FALSE
19. A balance sheet approach to estimating bad debt expense is not permitted under GAAP (Generally
Accepted Accounting Principles).
FALSE
20. A sale and its associated receivable are recorded only when the order, shipping, and billing documents
are all present.
TRUE
21. The method of recording bad debts that results in a bad debt expense before the actual default is the
.
____________________
allowance method
22. According to the
in which the sale was made.
matching
____________________ principle, bad debt expense must be recorded in the period
23. The
____________________
ordered goods.
purchase
order is necessary for the buyer to be obligated to accept and pay for the
24. The basis of accounting that recognizes revenue when it is realizable and earned is called the
.
____________________
accrual basis
25. A(n) ____________________
time outstanding.
aging schedule or
aging method
categorizes the various accounts receivable amounts by the length of
26.
____________________
are receivables that generally specify an interest rate and a maturity date at
which any interest and principal must be repaid.
Notes receivable
27. The amount of money borrowed when a promissory note is issued is called the
.
____________________
principal or
face amount
28. A(n) ____________________
is the buyer of receivables, who acquires the right to collect the
receivables and assumes the risk of uncollectibility.
factor
29. Special forms of factoring are called
credit cards
.
____________________30. 31. 32. 33. 34. 35. 36. Gross profit divided by net sales is called the
gross profit
ratio.
____________________
The difference between the principal amount of a note and its maturity value is called
.
____________________
interest
To encourage prompt payment, sellers offer a(n) ____________________
.
sales discount
A sales invoice that bears the notation 2/10 means
2% discount applies within 10 days
.
____________________
How efficiently a company is using the resources at its disposal is called
.
____________________
asset management
Net sales is total sales less sales discounts and
sales returns or
sales returns and allowances
.
________________
Select the term that matches each of the following descriptions.
1. The difference between the principal amount of the note and
its maturity value
2. The length of time a note is outstanding–the period of time
between the date it is issued and the date the note is due to be
paid
3. The amount borrowed Lende
4. Date which the total interest and principal must be repaid 5. The amount of cash the maker is to pay the payee on the
maturity date of the note
6. The party that receives payment due from a note 37. Select the term that matches each of the following descriptions.
1. Reduction of price granted by the seller for a particular
class of customers
2. Used to encourage prompt payment 3. Used to induce the customer to keep damaged goods Princi
pal 3
Frac
tion of
2
year
r 6
Maturi
ty date 4
Interes
t 1
Maturi
ty Value 5
Sales
Allowance 3
Sales
Discount 2
Trade
Discount 138. 39. 40. 41. Match each statement to the item listed below
1. Generally entitle the holder to interest. Securitization
2. The packaging of receivables as financial
instruments or securities for sale to investors.
3. Indicates that non-cash resources have been
exchanged for cash.
4. A contra-asset account. 5. Money due the company from another business or
individual.
6. A way to estimate bad debts. 7. Indicates that the earnings process is substantially
complete.
2
Aging method
6
Accounts
receivable 5
Notes receivable
1
Allowance for
Doubtful Accounts 4
Realized
3
Earned
7
Match each statement to the item listed below
1. Money due from customers purchasing inventory in the
ordinary course of business
2. A way to estimate bad debt expense. 3. Receivables that the company is not able to collect. 4. The amount of sales expected to be collectible after
deducting discounts and returns and allowances.
5. Measure the return the company is earning on sales. 6. Arise from transactions not involving inventory (e.g.,
interest receivable).
Profitability
ratios 5
Trade
receivables 1
Bad debt
expense 3
Percentage
of credit sales 2
Nontrade
receivables 6
Net sales
revenue 4
Action Signs recorded credit sales of $10,000 on the gross method. Terms are 2/20, n/30. Select the
correct statement about the entry to record this sale.
A. Accounts receivable increases $10,000.
B. Sales increase $9,800
C. Sales discounts increase $200
D. All of the above are correct
A company receiving payment of a $20,000 accounts receivable within 10 days with terms of 2/10, n/
30, would record a sales discount of:
A. 10% of $20,000
B. 2% of $20,000
C. (100% – 10%) x $20,000
D. (100% – 2%) x $20,00042. 43.
44. 45. 46. 47. 48. A company had sales of $40,000, sales discounts of $800, sales returns of $1,600 and commissions
owed to sales people of $600. Compute net sales.
A. $37,600
B. $37,000
C. $38,400
D. $39,000
Select the incorrect statement from the following.
The following information was presented in the balance sheet of Acworth Pools as of December 31,
2012:
Trade accounts receivable, net of allowance for doubtful
accounts of $200,000 $1,700,000
A. The company expects to actually collect $1,700,000 of its receivables.
B. The balance in the Accounts Receivable account in the company’s general ledger is $1,700,000.
C. The net realizable value of the company’s receivables is $1,700,000.
D. The company expects uncollectibles to total $200,000.
What is the distinguishing characteristic between accounts receivable and notes receivable?
A. Accounts receivable are usually current assets while notes receivable are usually long-term assets.
B. Accounts receivable require payment of interest while notes receivable does not have payment of
interest.
C
Notes receivable result from credit sale transactions for merchandising companies, while accounts
.
receivable result from credit sale transactions for service companies.
D. Notes receivable generally specify an interest rate and a maturity date at which any interest and
principle must be repaid.
On December 15, 2012, the accounts receivable balance was $50,000 and the balance in the allowance
for doubtful accounts was $5,000. That morning, a $1,000 uncollected account was written-off. The
net realizable value of accounts receivable immediately after the write-off is:
A. $49,000
B. $46,000
C. $45,000
D. $44,000
Which one of the following is an accurate description of the Allowance for Doubtful Accounts?
A. Contra Account
B. Liability Account
C. Revenue Account
D. Expense Account
If a company uses the direct write-off method of accounting for bad debts,
A. It establishes an estimate for the allowance for doubtful accounts.
B. It will record bad debt expense only when an account is determined to be uncollected.
C. It will reduce the accounts receivable account at the end of the accounting period for estimated
uncollected accounts.
D. When an account is written off, total assets will stay the same.
A company uses the direct write-off method to account for bad debts. What are the effects on the
accounting equation of the entry to record the write-off of a customer’s account balance?
A. Assets and liabilities decrease
B. Assets and Stockholders’ equity decrease
C. Stockholders’ equity and liabilities decrease
D. Assets increase and Stockholders’ equity decrease49. 50. 51. 52. 53. 54. 55. All of the following are true for a company that uses the allowance method of accounting for bad
debts, EXCEPT:
A. It uses a contra-asset account called the allowance for doubtful accounts.
B. It records bad debt expense each time an account is determined to be uncollectible.
C. It reduces its accounts receivable balance when the account is written off.
D. It reports accounts receivable in the balance sheet at their net realizable value.
Which one of the following statements is true if a company’s collection period for accounts receivable
is unacceptably long?
A. The collection cost would be reduced.
B. The company may offer sales discounts to shorten the collection period.
C. Cash flows from operations may be higher than expected for the company’s sales.
D. The company should expand operations with its excess cash.
If a company uses the allowance method to account for doubtful accounts, when will the company’s
Stockholders’ equity decrease?
A. At the date a customer’s account is written off
B. At the end of the accounting period when an adjusting entry for bad debts is recorded
C. At the date a customer’s account is determined to be uncollected
D. When the accounts receivable amount becomes past due
Which allowance method approach is considered to be an income statement approach to estimating
bad debts?
A. The percentage of accounts receivable approach
B. The percentage of accounts written off approach
C. The percentage of net credit sales approach
D. The direct write off method
Which one of the approaches for the allowance procedure emphasizes the net realizable value of
accounts receivable on the balance sheet?
A. The aging of accounts receivable method
B. The percentage of net credit sales method
C. The percentage of accounts written off method
D. The direct write-off method
A company’s accounts receivable balance after posting net collections from customers for 2012 is
$150,000. Management feels that uncollected accounts should be based on the following aging of
accounts receivable and uncollected percentages. There are $100,000 that are 1-30 past due at 2% and
$50,000 that are 31 to 60 days past due at 10%. The net realizable value of the accounts receivable
is
A. $147,500
B. $148,000
C. $150,000
D. $143,000
The net realizable value of the accounts receivable is
All Star Auto has an accounts receivable balance after posting net collections from customers for
2012 of $180,000. The customers took advantage of sales discounts of $15,000. Management aged the
accounts receivable and estimate for uncollected account percentages as follows:
$90,000 Current at 2%
$50,000 1-30 days past due at 5%
$30,000 31-60 days past due at 10%
$10,000 60+ days past due at 25%
A. $173,200
B. $170,200
C. $172,700
D. $180,000
56. 57. 58. 59. Beginning accounts receivable were $200,000 and ending accounts receivable were $300,000.
Assuming cash collections totaled $1,100,000, what were credit sales?
A. $1,200,000
B. $1,100,000
C. $1,300,000
D. $1,500,000
Alco Roofing Company’s beginning accounts receivable were $200,000 and ending accounts
receivable were $270,000. During the period, credit sales totaled $570,000, How much cash was
collected from customers?
A. $470,000
B. $500,000
C. $570,000
D. $640,000
A company had beginning accounts receivable of $175,000. All sales were on account and totaled
$550,000. Cash collected from customers totaled $650,000. Calculate the ending accounts receivable
balance.
A. $725,000
B. $275,000
C. $ 75,000
D. $175,000
Refer to AT&U Company. If the company estimates its bad debts at 1% of net credit sales, what
amount will be reported as bad debt expense for 2012?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
60. A. $44,500
B. $25,000
C. $24,500
D. $4,500
Refer to AT&U Company. If the company estimates its bad debt to be 2% of net credit sales, what
will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad
debts?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
A. $20,000
B. $19,000
C. $49,000
D. $69,00061. Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate
its bad debts, what amount will be reported as bad debt expense for 2012?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
62.
A. $25,000
B. $45,000
C. $20,000
D. $49,000
Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate
its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for
bad debt expense?
AT&U Company
Data for the year ended December 31, 2012, are presented below:
Sales (credit) $2,500,000
Sales returns and allowances 50,000
Accounts Receivable (December 31, 2012) 640,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on aging analysis 20,000
45,000
63. A. $640,000
B. $595,000
C. $620,000
D. $615,000
Allatoona Landing reported net credit sales of $1,250,000 and cost of goods sold of $900,000 for
2012. Its beginning balance of Accounts Receivable was $175,000. The accounts receivable balance
decreased by $25,000 during 2012. Rounded to two decimal places, what is the company’s accounts
receivable turnover rate for 2012?
A. 7.14
B. 7.69
C. 8.33
D. 11.03
64. The Allowance for Doubtful Accounts represents:
A. Bad debt losses incurred in the current period
B. The amount of uncollected accounts written off to date
C. The difference between total sales made on credit and the amount collected from those credit sales
D. The difference between the recorded value of accounts receivable and the net realizable value of
accounts receivable65. 66. 67. 68. Which of the following statements is true regarding the two allowance procedures used to estimate
bad debts?
A. The percentage of net credit sales method takes into account the existing balance in the Allowance
for Doubtful Accounts account.
B. The direct write-off method takes into account the existing balance in the Allowance for Doubtful
Accounts account.
C. The aging of accounts receivable method takes into account the existing balance in the Allowance
for Doubtful Accounts account.
D. The direct write-off method does a better job of matching revenues and expenses.
Refer to A2Z Events. What amount will the company show on its year-end balance sheet for the net
realizable value of its accounts receivable?
A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year Accounts Receivable–December 31, 2012 410,000
Allowance for Doubtful Accounts–December 31, 2012 Bad debt expense for the year $2,400,000
55,000
70,000
A. $410,000
B. $285,000
C. $340,000
D. $355,000
Refer to A2Z Events. What are the effects on the accounting equation when the company makes the
adjustment to record bad debt expense using the allowance method?
A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year Accounts Receivable–December 31, 2012 410,000
Allowance for Doubtful Accounts–December 31, 2012 Bad debt expense for the year $2,400,000
55,000
70,000
A. Assets increase and liabilities decrease
B. Assets and stockholders’ equity decrease
C. Assets increase and stockholders’ equity decreases
D. Assets decrease and stockholders’ equity increases
Refer to A2Z Events. What are the effects on the accounting equation when the company writes off a
bad debt under the allowance method?
A2Z Events
The following data are from the company’s records for 2012:
Credit sales during the year Accounts Receivable–December 31, 2012 410,000
Allowance for Doubtful Accounts–December 31, 2012 Bad debt expense for the year $2,400,000
55,000
70,000
A. Assets decrease and stockholders’ equity increase
B. Assets and stockholders’ equity decrease
C. Assets increase and stockholders’ equity decreases
D. No effect on overall assets or stockholders’ equity69. 70. 71. Refer to Accelerated Solutions. What is the balance of Accounts Receivable at December 31, 2012?
Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable–January 1, 2012 Credit sales during 2012 1,200,000
Collections from credit customers during 2012 Customer accounts written off as uncollected during 2012 Allowance for doubtful accounts–January 1, 2012 Estimated uncollected accounts based on an aging analysis $ 350,000
850,000
10,000
35,000
50,000
A. $700,000
B. $340,000
C. $690,000
D. $710,000
Refer to Accelerated Solutions. If the aging method is used to estimate bad debts, what amount should
be recorded as bad debt expense for 2012?
Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable–January 1, 2012 Credit sales during 2012 1,200,000
Collections from credit customers during 2012 Customer accounts written off as uncollected during 2012 Allowance for doubtful accounts–January 1, 2012 Estimated uncollected accounts based on an aging analysis $ 350,000
850,000
10,000
35,000
50,000
A. $50,000
B. $ 5,000
C. $15,000
D. $25,000
Refer to Accelerated Solutions. If the aging approach is used to estimate bad debts, find the balance in
the Allowance for Doubtful Accounts after the bad debt expense adjustment.
Accelerated Solutions
The following data are from the company’s records for 2012:
Accounts receivable–January 1, 2012 Credit sales during 2012 1,200,000
Collections from credit customers during 2012 Customer accounts written off as uncollected during 2012 Allowance for doubtful accounts–January 1, 2012 Estimated uncollected accounts based on an aging analysis $ 350,000
850,000
10,000
35,000
50,000
A. $ 5,000
B. $15,000
C. $25,000
D. $50,00072. 73. 74. Refer to A-One Construction. What is the balance of Accounts Receivable at December 31, 2012?
A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable–January 1, 2012 $455,000
Credit sales during 2012 900,000
Collections from credit customers during 2012 825,000
Customer accounts written off as uncollected during 2012 15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis 2,100
29,200
A. $545,000
B. $440,000
C. $515,000
D. $530,000
Refer to A-One Construction. If the aging approach is used to estimate bad debts, what amount should
be recorded as bad debt expense for 2012?
A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable–January 1, 2012 $455,000
Credit sales during 2012 900,000
Collections from credit customers during 2012 825,000
Customer accounts written off as uncollected during 2012 15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis 2,100
29,200
A. $ 2,100
B. $27,100
C. $29,200
D. $31,300
Refer to A-One Construction. If the aging approach is used to estimate bad debts, what should the
balance in the Allowance for Doubtful Accounts be after the bad debts adjustment?
A-One Construction
The following data are from the company’s records for 2012:
Accounts Receivable–January 1, 2012 $455,000
Credit sales during 2012 900,000
Collections from credit customers during 2012 825,000
Customer accounts written off as uncollected during 2012 15,000
Allowance for Doubtful Accounts
(After write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis 2,100
29,200
A. $ 2,100
B. $31,100
C. $29,200
D. $27,10075. 76. 77. Refer to A&B Foods. If the company estimates its bad debts at 4% of net credit sales, what amount
will be reported as bad debt expense for 2012?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $50,000
B. $75,000
C. $78,000
D. $84,000
Refer to A&B Foods. If the company uses 4% of net credit sales to estimate its bad debts, what will be
the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $ 50,000
B. $103,000
C. $ 78,000
D. $ 75,000
Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad
debts, what amount will be reported as bad debt expense for 2012?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $50,000
B. $75,000
C. $78,000
D. $53,00078. Refer to A&B Foods. If the company uses the aging of accounts receivable method to estimate its bad
debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt
expense?
A&B Foods
Data for the year ended December 31, 2012, are presented below.
Sales (100% on credit) $2,100,000
Sales returns 150,000
Accounts Receivable (December 31, 2012) 420,000
Allowance for Doubtful Accounts
(Before adjustment at December 31, 2012) Estimated amount of uncollected accounts based on an aging analysis 25,000
75,000
A. $343,000
B. $345,000
C. $420,000
D. $395,000
79. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried
balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of
credit sales. There were $500 of receivables written off as uncollected in 2012. Cash collections of
receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the
year-end accounts receivable balance.
Refer to the Ace Computing Company. The entry to recognize the write-off of the specific
uncollected accounts will act to:
A. Increase total assets and stockholders’ equity
B. Increase total assets and decrease stockholders’ equity
C. Decrease total assets and stockholders’ equity
D. Not affect total assets or stockholders’ equity
80. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried
balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of
credit sales. There were $500 of receivables written off as uncollected in 2012. Cash collections of
receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the
year-end accounts receivable balance.
Refer to the Ace Computing Company. The amount of bad debts expense recognized in the 2012
income statement will be:
A. $1,652
B. $ 652
C. $ 142
D. $1,450
81. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried
balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of
credit sales. There were $500 of receivables written off as uncollected in 2012. Cash collections of
receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the
year-end accounts receivable balance.
Refer to the Ace Computing Company. The entry required to recognize the bad debts expense for
2012 will act to:
A. Increase total assets and retained earnings
B. Decrease total assets and retained earnings
C. Decrease total assets and increase net income
D. Increase total assets and decrease net income
82. Ace Computing Company
On January 1, 2012, the Accounts Receivable and the Allowance for Doubtful Accounts carried
balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of
credit sales. There were $500 of receivables written off as uncollected in 2012. Cash collections of
receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the
year-end accounts receivable balance.
83. 84. 85. 86. 87. Refer to the Ace Computing Company. The net realizable value of receivables appearing on the 2012
balance sheet will amount to:
A. $40,648
B. $39,648
C. $41,300
D. $39,800
On December 1, 2012, Anson’s Drug Store concluded that a customer’s $325 account receivable was
uncollected and that the account should be written off. What effect will this write-off have on the
company’s 2012 net income and balance sheet totals assuming the direct write-off method is used to
account for bad debts?
A. Decrease in net income; decrease in total assets
B. Increase in net income; no effect on total assets
C. No effect on net income; decrease in total assets
D. No effect on net income; no effect on total assets
During 2012, the accounts receivable turnover rate for Adaptive Equipment increased from 10 to 15
times per year. Which one of the following statements is the most likely explanation for the change?
A
The company’s credit department has followed up with customers whose account balances are past
.
due in order to generate quicker collections.
B. The company has decreased sales to its most credit worthy customers.
C. The company has increased the amount of time customers have to pay their accounts before they
are past due.
D. The company has extended credit to more risky customers in order to increase sales.
Allgood Pet Supplies reported net credit sales of $3,200,000 and cost of goods sold of $2,600,000 for
2012. On January 1, 2012, accounts receivable was $450,000. Amounts owed by customers increased
by $50,000 during 2012. Rounding to two decimal places, what is the company’s accounts receivable
turnover rate for 2012?
A. 5.47
B. 6.40
C. 6.74
D. 7.11
The principal amount of a note receivable plus the interest due is referred to as the note’s
A. face valve.
B. promissory value.
C. expected value.
D. maturity value.
How will the lender of the promissory note record the note on its books?
A. The promissory note will be recorded as an asset
B. The promissory note will be recorded as a contra asset
C. The promissory note will be recorded as revenue
D. The promissory note will be recorded as an expense
88. A company needs to record 6 months of accrued interest on a 4-year, 12%, $12,000 promissory note
payable. How much interest expense should be accrued?
A. $2,160
B. $1,440
C. $1,080
D. $720
89. Academy Grill Supply
On October 1, 2012, the company received a $50,000 promissory note from a customer. The annual
interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September
30, 2013.
Refer to Academy Grill Supply. If the company’s year ends September 31, 2013, an adjusting entry is
needed to:
A. Increase interest revenue by $2,250
B. Increase notes receivable by $750
C. Increase interest receivable by $750
D. Increase notes receivable by $2,250
90. Academy Grill Supply
On October 1, 2012, the company received a $50,000 promissory note from a customer. The annual
interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September
30, 2013.
Refer to Academy Grill Supply. The effect on the company’s financial statements on September 30,
2013, is as follows:
A. Assets and Stockholders’ equity increase
B. Assets and Stockholders’ equity decrease
C. Assets and liabilities increase
D. No net change in assets
91. Absolute Appliances
The company sold merchandise to a customer on December 1, 2012, for $120,000. The company
accepted a promissory note as payment. The note has a term of three months and an annual interest
rate of 10%. The company’s accounting period ends on December 31.
Refer to Absolute Appliances. What is the maturity date of the note?
A. December 31, 2012
B. January 31, 2013
C. February 28, 2013
D. March 1, 2013
92. Absolute Appliances
The company sold merchandise to a customer on December 1, 2012, for $120,000. The company
accepted a promissory note as payment. The note has a term of three months and an annual interest
rate of 10%. The company’s accounting period ends on December 31.
Refer to Absolute Appliances. What amount should the company recognize as interest revenue on
December 31, 2012?
A. $ -0-
B. $ 1,000
C. $12,000
D. $11,000
93. Absolute Appliances
The company sold merchandise to a customer on December 1, 2012, for $120,000. The company
accepted a promissory note as payment. The note has a term of three months and an annual interest
rate of 10%. The company’s accounting period ends on December 31.
Refer to Absolute Appliances. What amount should the company recognize as interest revenue on the
maturity date of the note?
A. $ -0-
B. $1,000
C. $2,000
D. $3,000
94. The College Store accepts MasterCard for payments of purchases made by students. The credit card
drafts are deposited directly in a bank account. MasterCard charges a 1.55% collection fee. Credit card
drafts totaling $10,000 are deposited during August. Recording the sales and deposits will result in an
increase in
A. Cash for $10,000
B. Sales for $ 9,854
C. Accounts Receivable for $9,854
D. Service Charge Expense for $155
95. Accent Flooring
The company received a promissory note from a customer on March 1, 2012. The principal amount of
the note is $20,000; the terms are 3 months and 9% annual interest.
Refer to the information for Accent Flooring. What is the total amount of interest the company will
receive when the note is collected?
A. $ 300
B. $ 150
C. $ 450
D. $1,800
96. Accent Flooring
The company received a promissory note from a customer on March 1, 2012. The principal amount of
the note is $20,000; the terms are 3 months and 9% annual interest.
Refer to the information for Accent Flooring. At the maturity date, the customer pays the amount due
for the note and interest. What entry is required on the books of Accent Flooring on the maturity date
assuming that none of the interest had already been recognized?
A. Increase Cash and decrease Notes Receivable by $20,000
B. Increase Cash by $20,450, increase Interest Revenue by $450, and decrease Notes Receivable by
$20,000
C. Increase Cash by $20,450, increase Notes Receivable by $20,000, and increase Interest Revenue by
$450
D. No entry is required; the customer pays the amount due to Accent Flooring.
97.
Refer to Abbot Safe & Lock. What amount will the company show on its year-end balance sheet for
the net realizable value of its accounts receivable?
Abbot Safe & Lock
The following information was obtained from the company’s records for 2012:
Credit sales during the year Accounts receivable–December 31, 2012 325,000
Allowance for doubtful accounts–December 31, 2012 Bad debt expense for the year $3,200,000
35,000
20,000
98.
A. $305,000
B. $290,000
C. $270,000
D. $325,000
Refer to Abbot Safe & Lock. What is the effect on liquidity when the company records its estimate for
bad debt expense using the allowance method?
Abbot Safe & Lock
The following information was obtained from the company’s records for 2012:
Credit sales during the year Accounts receivable–December 31, 2012 325,000
Allowance for doubtful accounts–December 31, 2012 Bad debt expense for the year $3,200,000
35,000
20,000
A. Liquidity decreases
B. Liquidity increases
C. Liquidity stays the same
D. Liquidity both increases and decreases
99. A Better Mousetrap
The company sold merchandise to a customer on December 1, 2012, for $100,000. The customer paid
with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company’s
accounting period ends on December 31.
Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on
December 31, 2012?
A. $ -0-
B. $ 750
C. $1,500
D. $9,000
100. A Better Mousetrap
The company sold merchandise to a customer on December 1, 2012, for $100,000. The customer paid
with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company’s
accounting period ends on December 31.
Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on the
maturity date of the note?
A. $ -0-
B. $4,500
C. $3,750
D. $9,000
101. Art Shoes
This company received a promissory note from a customer on July 1, 2012. The face amount of the
note is $45,000; the terms are 12 months and 10% annual interest.
Refer to Art Shoes. How much interest revenue will the company recognize for the year ended
December 31, 2012?
A. $ 0
B. $9,000
C. $2,250
D. $4,500
102. Art Shoes
103. 104. 105. 106. 107. This company received a promissory note from a customer on July 1, 2012. The face amount of the
note is $45,000; the terms are 12 months and 10% annual interest.
Refer to Art Shoes. At the maturity date, the customer pays for the note and interest. The company
made the proper adjustment at the end of December for interest. The effect of recognizing the
transaction on the maturity date is
A. A decrease to Cash
B. An increase to Notes Receivable
C. An increase to Discount on Notes Receivable
D. A decrease to Notes Receivable
Advanced Packaging accepted a credit card account receivable in exchange for $25,000 of services
provided to a customer. The credit card company charges a 4% service charge. Recording the
transaction in the company’s accounting records will have what effect on the accounting equation?
A. Increase assets and stockholders’ equity by $24,000
B. Decrease assets and stockholders’ equity by $1,000
C. Increase assets by $25,000
D. Increase stockholders’ equity by $25,000
What should a company do to improve its accounts receivable turnover rate?
A. Lower its selling prices.
B. Increase its sales force.
C. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
D. Reduce the number of employees working in the credit department.
On January 2, Alfredo Corporation sold merchandise with a gross price of $100,000 to a customer
with terms of 2/10, n/30. How much Sales Discounts would be recorded if payment was received from
the customer on January 8? Assume the company uses the Gross Method of recording receivables.
A. $0
B. $2,000
C. $98,000
D. $100.000
All of the following are criteria that the SEC requires to be met before revenue is considered realized
(or realizable) and earned EXCEPT:
A. Delivery has occurred or services have been provided.
B. The seller’s price to the buyer is fixed and determinable.
C. Collection is possible.
D. Persuasive evidence of an arrangement exists.
Internal control for sales involve which of the following documentation?
A. A sale and its associated receivable are recorded only when the order, shipping, and billing
documents are all presented.
B. A sale and its associated receivable are recorded only when the billing documents are prepared.
C. A sale and its associated receivable are recorded only when the goods are ordered.
D. A sale and its associated receivable are recorded only when the good are produced.
108. Which of the following would be correct if a company factored $2,500,000 of receivables with a 2
percent fee?
A. $2,450,000 credit to cash
B. $50,000 debit to factoring fee expense
C. $2,500,000 debit to accounts receivable.
D. $50,000 debit to factoring fee receivable.
109.
The following information is available for All Care Nursing Supply for fiscal year ending December
31, 2012. Calculate the Accounts Receivable Turnover Ratio:
Net Sales $450,000 Accounts Receivable, December 31, 2011 $175,000
Operating Income $120,000 Accounts Receivable, December 31, 2012 $125,000
Net Income $100,000
A. 3
B. .8
C. 3.6
D. 2.57
110.
Advanced Technology reported the following on its balance sheet at December 31, 2012:
Accounts receivable, less Allowance for Doubtful Accounts of $20,500 $580,200
A) B) C) What is the net realizable value of the company’s accounts receivable?
What is the balance of the accounts receivable account?
Are you able to determine whether the company uses the allowance method or the direct write off method for bad debts?
Why or why not?
111.
A) $580,200
B) $580,200 + $20,500 = $600,700
C) The company uses the allowance method. This is seen by the presentation on the balance sheet of the receivables that shows
a deduction from the gross amount of receivables. Only a company that uses the allowance method would show a deduction
from receivables for doubtful accounts.
Refer to Atlantis Tropicals. If bad debts are estimated at 1% of net credit sales, how much will the
company report as bad debts expense for 2012?
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
$9,200
($1,000,000 – $80,000) ´
.01 or 1% = $9,200112. 113. 114. Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how much bad debts
expense will the company report for 2012?
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
$35,000 – $23,000 = $12,000
Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how much is the net
realizable value of the accounts receivable at December 31, 2012?
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
$255,000 (Accounts Receivable) – $35,000 (Allowance for Doubtful Accounts) = $220,000
Refer to Atlantis Tropicals. Assume that the net realizable value is $210,000 after the adjustment for
bad debts in 2012. How much is the net realizable value of accounts receivable after a customer’s
account of $15,000 is written off? Explain why.
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
$210,000
Accounts receivable and the allowance for doubtful accounts both decrease by the same amount,
$15,000, leaving the net realizable value of the accounts receivable unaffected.115.
Refer to Atlantis Tropicals. Determine the effect on the company’s accounting equation of the year-
end adjustment of bad debts using the aging approach.
Atlantis Tropicals
The following information was taken from the company’s records at the end of 2012.
Credit Sales $1,000,000
Sales returns and allowances 80,000
Accounts Receivable–December 31, 2012 255,000
Allowance for Doubtful Accounts–December 31, 2012
(Before adjustment for bad debts) 23,000
Estimated uncollected accounts
(per aging schedule at December 31, 2012) 35,000
Assets = Liabilities + Stockholders’ Equity
Assets = Liabilities + Stockholders’ Equity
Allow. For Doubtful Accounts (12,000) Bad Debt Expense (12,000)
116. Refer to Aardvark Resale. Determine the balance of Accounts Receivable at December 31, 2012.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
$315,000
$225,000 (Accounts Receivable at Jan. 1) + $1,200,000 (Sales) – $50,000 (Sales returns & allowances)
– $1,050,000 (Collections) – $10,000 (Accounts written off) = $315,000117.
Refer to Aardvark Resale. Assume that the company estimates bad debts at 2% of net credit sales.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
A) B) What amount will the company record as bad debts expense for 2012?
How much is the net realizable value of accounts receivable reported on the company’s balance sheet at December 31,
2012?
A) ($1,200,000 – $50,000) ´
.02 = $23,000
B) $315,000 (Accounts Receivable at Dec. 31) – [$15,000 – $10,000 + $23,000] (Allowance for Doubtful Accounts after write-
off and year-end adjustment) = $287,000
118.
Refer to Aardvark Resale. Assume that the company estimates bad debts based on the aging method,
and the aging schedule indicates that $30,100 of the year-end accounts receivable will be uncollected.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
A) B) What amount will the company recognize as bad debts expense for the year?
How much is the net realizable value of the receivables to be reported on the company’s balance sheet at year-end?
A) B) $30,100 – ($15,000 – $10,000) = $25,100
($315,000 – $30,100) = $284,900119. Refer to Aardvark Resale. Since the company has a choice of acceptable methods to estimate bad
debts, what factors should be considered in the selection?
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
The percentage of net credit sales method emphasizes the matching principle. The aging method
emphasizes the valuation of the receivables at the net amount to be collected. The company would
be concerned with both income measurement and balance sheet valuation, but must choose one of
the two approaches, most likely based on management philosophy. If most customer balances fall
within a small range of variation, the percentage of net credit sales method, which is easier to apply,
will probably give reasonable results for both income measurement and asset valuation. However, if
there is a wide variation in the amounts of customer balances, and especially if some large customer
balances are significantly past due and their collection is uncertain, then the aging method should give
better results for both income measurement and asset valuation.
120. Refer to Aardvark Resale. Can the company use the direct write-off method rather than the allowance
method to account for bad debts expense? Explain why or why not.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2012, the following
data are available:
Sales $1,200,000
Sales returns and allowances 50,000
Accounts Receivable–January 1, 2012 225,000
Allowance for doubtful accounts–January 1, 2012 15,000
Collections during 2012 1,050,000
Accounts written off as uncollected during 2012 10,000
The direct write-off method is not an acceptable GAAP (generally accepted accounting principles)
procedure to account for bad debts. It does not adequately match bad debt expense with the revenues
unless the accounts are determined to be uncollected in the same year that the revenue was recognized.
In rare cases, when a company has very infrequent and immaterial amounts of bad debts, the direct
write-off method can be justified. It does not appear that the company’s situation meets these
conditions for use of the direct write-off method.121. Refer to Abundant Returns. Determine the balance of Accounts Receivable at December 31, 2012.
Abundant Returns
This company sells its merchandise only on credit. The following data are available at December 31,
2012.
Sales $411,000
Sales returns and allowances 12,000
Accounts receivable at January 1, 2012 89,000
Allowance for doubtful accounts at January 1, 2012 4,100
Cash collections during 2012 385,100
Accounts written off as uncollected during 2012 3,600
$99,300
$89,000 (Account Receivable–Jan. 1) + $411,000 (Sales) – $12,000 (Sales Returns and Allowances) –
$385,100 (Cash Collections) – $3,600 (Accounts Written Off) = $99,300
122.
Refer to Abundant Returns. The firm estimates that bad debts could be 2% of net sales.
Abundant Returns
This company sells its merchandise only on credit. The following data are available at December 31,
2012.
Sales $411,000
Sales returns and allowances 12,000
Accounts receivable at January 1, 2012 89,000
Allowance for doubtful accounts at January 1, 2012 4,100
Cash collections during 2012 385,100
Accounts written off as uncollected during 2012 3,600
A) B) What amount will the company recognize as bad debts expense for the year?
Assume that the company has a balance of Accounts Receivable of $108,900, and an Allowance for Doubtful Accounts of
$820. What will be the net realizable value once the adjustment from (Part A) is made?
A) B) $411,000 – $12,000 = $399,000 (Net Sales) ´
.02 or 2% = $7,980
$108,900 (Accounts Receivables Balance) – ($820 + $7,980) = $100,100123.
Refer to Abundant Returns. Assume that the company estimates bad debts using the aging method.
The aging schedule indicates that $11,500 of the end of the year Accounts Receivable will be
uncollected.
Abundant Returns
This company sells its merchandise only on credit. The following data are available at December 31,
2012.
Sales $411,000
Sales returns and allowances 12,000
Accounts receivable at January 1, 2012 89,000
Allowance for doubtful accounts at January 1, 2012 4,100
Cash collections during 2012 385,100
Accounts written off as uncollected during 2012 3,600
A) B) What amount will the company recognize as bad debt expense for the year?
If the ending balance of Accounts Receivables is $65,200, what is the net realizable value of Accounts Receivable reported
on December 31, 2012?
A) $11,500 – ($4,100 – $3,600) = $11,000
B) $65,200 (Accounts Receivable) – $11,500 (Allowance) = $53,700
124.
On November 1, 2012, Aero Graphics sold merchandise to a customer and received a 10%, 90-day
promissory note with a principal amount of $60,000.
A) Identify the maturity date of the note.
B) How much total interest revenue will the company earn over the term of the note?
C) By how much will net income be understated if the company fails to make a year-end adjusting entry for the note?
A) 90 – 29 days (Nov.) – 31 days (Dec.) = 30. Therefore, the due date is January 30, 2013.
B) $60,000 ´ 10% ´ 90/365 = $1,479.45
C) Net income will be understated by $986.30 ($1,479.45 ´ 60/90)
125. Accutemp Heating & Air
On May 1, 2012, the company sold merchandise to a customer and received a 8%, 6-month note with
a principal amount of $100,000. The company’s year end is December 31.
Refer to Accutemp Heating & Air. Identify the maturity date of the note.
November 1, 2012
126. Accutemp Heating & Air
On May 1, 2012, the company sold merchandise to a customer and received a 8%, 6-month note with
a principal amount of $100,000. The company’s year end is December 31.
Refer to Accutemp Heating & Air. How much total interest revenue will the company recognize over
the term of the note?
$4,000
$100,000 (Principal) ´ 8% (Interest Rate) ´ 6/12 (Time Period) = $4,000127.
Affinity Services Group received a 12%, 6-month promissory note with a principal amount of $10,000
from a customer for the sale of merchandise on December 1, 2012.
A) How much interest revenue will the company recognize as of December 31, 2012?
B) How much interest revenue will the company recognize in 2013?
C) Determine the total amount of cash the company will collect on the date of the note’s maturity.
A) $10,000 ´ 12% ´ 1/12= $100
B) $10,000 ´ 12% ´ 5/12= $500
C) $10,000 + ($10,000 ´ 12% ´ 6/12) = $10,600
128.
10, n/30.
Prepare the journal entries to:
A) Record the sale using the gross method.
B) Assume the payment is received on June 10, 2012.
C) Assume payment is not received until June 21, 2012.
On June 3, 2012, Alpine Corporation sold merchandise with a gross price of $45,000 with terms of 2/
Debit Credit
A) 6/03 Accounts Receivable 45,000
Sales Revenue 45,000
B) 6/10 Cash ($45,000 ´ 98%) 44,100
Sales Discounts 900
Accounts Receivable 45,000
C) 6/21 Cash 45,000
Accounts Receivable 45,000
129.
Alpha Company’s accounts receivable and allowance for doubtful accounts balances were $100,000
and $14,000 (credit) respectively, at the beginning of 2012. During 2012, a customer defaults on a
$12,000 balance related to goods purchased during 2011. By the end of the year, the company had
made credit sales of $2,400,000 and collected $2,200,000 on account. It now estimates that 1 percent
of its credit sales will default.
A) Prepare the journal entry to record the write off the bad debt.
B) Prepare the adjusting entry to record bad debt expense for 2012.
C) What is the net accounts receivable balance at the end of the year?
Debit Credit
A) Allowance for Doubtful Accounts 12,000
Accounts Receivable 12,000
B) Bad Debt Expense 24,000
Allowance for Doubtful Accounts 24,000
($2,400,000 ´ 1% = $24,000)
C) A/R ($100,000 + 2,400,000 – 2,200,000 – 12,000) Less: Allow. for doubtful accts ($14,000 – 12,000 + 24,000) $288,000
26,000
Net accounts receivable $262,000130.
During 2012 the company made $3,200,000 in credit sales, collected $3,000,000 of accounts
receivable and wrote off $20,000 of accounts receivable as uncollected.
Required:
On January 1, 2012, Alliance Company had the following balances for accounts receivable and
allowance for doubtful accounts:
Accounts receivable $750,000 (debit)
Allowance for doubtful accounts 50,000 (credit)
A) B) C) D) What is the company’s preadjustment balance in accounts receivable on December 31, 2012?
What is the preadjustment balance in allowance for doubtful accounts on December 31, 2012?
Assume an analysis of aging of accounts receivable indicates that $45,000 of the current accounts receivable balance is
uncollected. By what amount will the allowance for doubtful accounts need to be adjusted?
Prepare the adjusting entry for 2012 for Allowance for Doubtful Accounts.
A) Beginning Accounts Receivable January 1, 2012 $ 750,000
Plus Sales during 2012 3,200,000
Minus collections during 2012 -3,000,000
Minus accounts written off during 2012 – 20,000
Accounts Receivable December 31, 2012 $ 930,000
B) Beginning Allowance for doubtful accounts Minus accounts written off during 2012 Preadjustment balance Allowance for doubtful accounts $ 50,000
– 20,000
$ 30,000
C) Preadjustment balance Allowance for doubtful accounts $ 30,000
Balance in Allowance for doubtful accounts after adjustment Adjustment to Allowance for doubtful accounts 45,000
$ 15,000
D) Debit Credit
12/31 Bad Debt Expense 15,000
Allowance for Doubtful Accounts 15,000131.
All American Storage Corporation sold merchandise with credit terms of 2/10, n/30, for $100,000 to
a customer on January 01, 2012. Nine months later, on October 1, 2012 the company accepted a 12%,
6-month note receivable in settlement of the account. The customer paid the maturity value of the note
on the due date.
Prepare the following journal entries:
A) Record the sale of merchandise January 1, 2012.
B) Record the receipt of the note receivable on October 1, 2012.
C) Record the adjusting entry to accrue interest on December 31,
2012.
D) What is the due date of the note?
E) Record the collection of the note on the due date.
Debit Credit
A) Jan. 1, 2012 Accounts Receivable 100,000
Sales Revenue 100,000
B) Oct. 1, 2012 Notes Receivable 100,000
Accounts Receivable 100,000
C) Dec. 31, 2012 Interest Receivable Interest Income (100,000 x .12 x 6/12 x 1/2 ) 3,000
3,000
D) April 1, 2013
E) April 1, 2013 Cash ($100,000 + 6,000 (interest)) 106,000
Notes Receivable 100,000
Interest Receivable 3,000
Interest Revenue 3,000
132.
The following information is available for All-4-U Company for the year ending December 31, 2012:
Net Sales $5,000,000 Accounts Receivable December 31, 2011 $1,250,000
Cost of goods sold $3,500,000 Accounts Receivable December 31, 2012 $1,000,000
Operating Income $600,000
Net Income $400,000
A) B) C) D) Compute the gross profit ratio for 2012.
Compute the operating margin ratio for 2012.
Compute the net profit margin ratio for 2012.
Compute the accounts receivable turnover for 2012.
A)
B)
C)
D)133.
Answer these questions concerning the company’s receivables:
The following comparative financial statements for the years ended December 31, 2012 and 2011 are
provided for Air Plus Company:
Balance Sheet: 2012 2011
Cash and cash equivalents $87,000 $71,600
Accounts receivables, less allowance for doubtful
accounts of $90 (2012) and $82 (2011) 3,800 2,500
Notes receivable 15,000 20,000
Income Statement:
Net sales for the year $9,700 $8,800
Net income for the year 920 1,050
A) B) C) What is the gross amount of accounts receivable at December 31, 2012? Why is this amount different than the amount of
receivables shown in the 2012 column of the balance sheet?
What is the net realizable value of accounts receivable at December 31, 2012? What does this amount represent?
How should accounts receivable be classified on a classified balance sheet? Why?
A) B) C) $3,800 + $90 = $3,890. It is different because, unlike the balance sheet presentation, it has not been adjusted for the
estimated amount of receivables that are deemed uncollected.
$3,800; This is the amount that the company expects to collect.
Accounts receivable should be classified as a current asset since receivables are expected to be collected within a year’s
time or less.134. Determine the following:
A) Gross sales
B) Net sales
C) Gross profit
Assuming the company uses the income statement approach to estimating uncollectibles:
D) Bad debt estimate percentage
E) Year-end adjusting entry to record bad debt expense
F) Ending balance in Allowance for Doubtful Accounts after adjustment
G) Net realizable value of receivables after adjustment for bad debts
Assuming the company uses the balance sheet approach to estimating uncollectibles:
H) Gross receivables
I) Ending balance in Allowance for Doubtful Accounts after adjustment
J) Net realizable value of receivables after adjustment for bad debts
The following information was taken from the records of Alphabet Soup at the end of 2012:
Cash sales $1,000,000
Credit sales 500,000
Sales discounts 5,000
Accounts Receivable 250,000
Allowance for Doubtful Accounts (before adjustment) (25,000)
Estimated uncollected accounts 2,475
Cost of goods sold $975,000
A) $1,000,000 + $500,000 = $1,500,000
B) $1,500,000 (gross sales) – $5,000 (sales discounts) = $1,495,000
C) $1,495,000 (net sales) – $975,000 (CGS) = $520,000
D) $2,475 (bad debt estimate) / $495,000 (net credit sales) =
.005 (or 1/2 of one percent)
E) Bad debt expense 2,475 Allowance for Doubtful
Accounts 2,475
F) $25,000 (beg balance) + $2,475 (adjusting entry) = $27,475
G) $250,000 (A/R) – $27,475 (Allowance) = $222,525
H) $250,000
I) $2,475
J) $250,000 (A/R) – $2,475 = $247,525
135. What are the criteria the SEC uses to determine if revenue is realized or realizable and earned?
136. 1. 2. 3. Persuasive evidence of an arrangement exists.
Delivery has occurred or services have been provided.
The seller’s price to the buyer is fixed and determinable.
4. Collection is reasonably assured.
What is the purpose of an aging schedule for accounts receivable?
An aging schedule categorizes the various account receivable amounts by age based on how long
an account is past due or outstanding. A company uses this for estimating how much of its accounts
receivable are expected to default. It is a refined approach because it lists the dollar amounts of
receivables based on the period of time each has been outstanding, such as 30, 60, or more days
outstanding.137. 138. 139. Airport Support Company reported its accounts receivable turnover ratio at 10 times. Its credit terms
are 2/10, n/20. What does this ratio tell you about this company?
At an accounts receivable turnover of 10 times per year, the company’s receivables are outstanding
approximately 36 days prior to collection (360/10 days). Given that credit terms are 2/10, n/20, one
would expect customers to pay within 20 days. Customers should pay within ten days to obtain the
discount of 2%. The company needs to make more efforts to collect its receivables given its current
credit terms.
Identify two methods of accelerating cash from sales.
Using credit cards often accelerates cash collections. The bank charges a fee but the company receives
payment from the credit card company instead of waiting until the customer actually pays. A company
is also able to accelerate cash by factoring receivables to the bank. This involves selling accounts
receivable to the bank instead of waiting for the customer to actually pay.
You are the credit manager at a large retail department store. What steps should you take before
deciding to write off a customer’s account?
You Decide Essay
After giving customers a grace period, you might send them a series of past due notices. The tone of
the notices would get increasingly urgent. Eventually, you may decide to turn the account over to a
collection agency. If all these efforts fail, you would likely write off the account.140. For the period in question, Nordstrom was more profitable than Wal-mart.
Compute the (1) gross profit margin, (2) operating margin, (3) net profit margin, and (4) accounts
receivable turnover for the two companies and indicate which company’s performed better.
Nordstrom
You are interning at a financial services firm and have been asked to evaluate the performance of
two major department stores. The following information (in millions) is available for Wal-Mart and
Nordstrom for the most recent fiscal periods available:
Wal-Mart
You Decide Essay
Net Sales $405,046 Beginning Accounts Receivable $4,144
Gross Profit 100,389 Ending Accounts Receivable 3,905
Operating Income 23,950
Net Income 14,848
Net Sales $8,627 Beginning Accounts Receivable $1,942
Gross Profit 3,299 Ending Accounts Receivable 2,035
Operating Income 834
Net Income 441
Wal-Mart Nordstrom
Gross profit margin $100,389 / $405,046 = 24.78% $3,299 / $8,627 = 38.24%
Operating margin $23,950 / $405,046 = 5.91% $834 / $8,627 = 9.67%
Net profit margin $14,848 / $405,046 = 3.67% $441 / $8,627 = 5.11%
Receivable turnover 405,046 / [($3,905 + $4,144) / 2] = 100.65 $8,627 / [$2,035 + $1,942) / 2] = 4.34
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