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Intermediate Accounting, Vol 1, 3e (Lo/Fisher)
Chapter 5 Cash and Receivables
Learning Objective 1
1) What is NOT included in “cash and cash equivalents”?
A) Canadian cash on hand.
B) Demand deposits.
C) Six-month term deposits.
D) Three-month Treasury bills.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
2) Define “cash” and explain how funds that are subject tor restrictions should be accounted for in the accounting records.
Answer: Cash refers to cash on hand and demand deposits; “cash” refers to legal tender: bills and coins issued by the Bank of Canada (or a foreign government/central bank in the case of foreign currency).
Cash represents funds that are readily accessible to settle debts. Any funds that are subject to restrictions should be separately reported outside of current assets.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
3) Explain why the definition of cash and cash equivalents is important for the financial statements. How would a transfer from one bank account to another be reported in the cash flow statement?
Answer: The definition impacts the cash flow statement. Only changes in cash and cash equivalents result in cash flows; changes in the composition of cash and cash equivalents does not constitute a cash flow.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
4) Which statement about “cash and cash equivalents” is correct?
A) The definition for “cash and cash equivalents” used on the balance sheet differs from the definition for “cash and cash equivalents” used on the cash flow statement.
B) A change in the composition of “cash and cash equivalents” is considered an operating activity on the cash flow statement.
C) A change in the composition of “cash and cash equivalents” is not considered a cash flow for purposes of the cash flow statement.
D) “Cash and cash equivalents” are short term liquid investments that can be converted to cash within a short time frame.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
5) Which of the following is NOT a reason for preparing a bank reconciliation?
A) It explains differences between cash in the general ledger and cash on the bank statement.
B) It is necessary in order to prevent fraud committed by employees.
C) It is helpful in identifying any errors made by the bank.
D) It is helpful in identifying any bookkeeping errors made in the general ledger.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
6) Which statement is correct about the bank reconciliation?
A) It compares cash in the company’s records with those of the bank.
B) It does not identify accounting errors made by the bank.
C) It interferes with other internal controls over cash.
D) It compares cash in the general ledger with the monthly budgets.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
7) What is included in “cash and cash equivalents”?
A) Petty cash.
B) Six-month term deposits in Canadian dollars.
C) Guaranteed Investment Certificate maturing in 100 days.
D) Four-month term deposit in U.S. dollars.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
8) What is included in “cash and cash equivalents”?
A) Guaranteed Investment Certificate maturing in 181 days.
B) Four-month term deposits.
C) U.S. cash on hand.
D) Guaranteed Investment Certificate maturing in 125 days.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
9) What is included in “cash and cash equivalents”?
A) Short term, liquid investments convertible into known amounts of cash.
B) Short term, highly liquid investment convertible into known amounts of cash.
C) Cash restricted for plant expansion.
D) Sinking funds.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
10) What dollar amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 30 days | $12,000 |
| Investment in a money market fund | 8,000 |
| Cash on hand | 1,000 |
| Postage stamps | 1,000 |
A) $9,000
B) $12,000
C) $21,000
D) $22,000
Answer: C
Explanation: C) 12,000 + 8,000 + 1,000 = 21,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
11) What dollar amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 30 days | $11,000 |
| Investment in a money market fund | 8,000 |
| Cash restricted for plant expansion | 1,000 |
| Three-month term deposits | 2,000 |
A) $9,000
B) $11,000
C) $21,000
D) $22,000
Answer: C
Explanation: C) 11,000 + 8,000 + 2,000 = 21,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
12) What dollar amount will be included in “cash and cash equivalents”?
| Investment in shares of a public company | $11,000 |
| Investment in a money market fund | 8,000 |
| Cash restricted for plant expansion | 1,000 |
| Three-month term deposits | 2,000 |
A) $8,000
B) $10,000
C) $19,000
D) $21,000
Answer: B
Explanation: B) 8,000 + 2,000 = 10,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
13) What criterion is NOT required for a “cash equivalent”?
A) Convertibility into cash.
B) Long term investment.
C) Insignificant risk of change in value.
D) Highly liquid investment.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
14) What amount will be included in “cash and cash equivalents”?
| Investment in shares of a public company | $12,000 |
| Investment in a money market fund | 18,000 |
| Bonds of a publicly traded company | 10,000 |
| Two-month U.S. dollar term deposits | 24,000 |
A) $18,000
B) $22,000
C) $30,000
D) $42,000
Answer: D
Explanation: D) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
15) What amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 140 days | $12,000 |
| Investment in a money market fund | 18,000 |
| U.S. dollar bonds of a publicly traded company | 10,000 |
| Treasury bills maturing in 30 days | 24,000 |
A) $36,000
B) $42,000
C) $54,000
D) $64,000
Answer: B
Explanation: B) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
16) What amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 125 days | $12,000 |
| Treasury bills maturing in 30 days | 24,000 |
| U.S. dollar chequing account | 18,000 |
| Shares of a U.S. publicly traded company | 10,000 |
A) $36,000
B) $42,000
C) $54,000
D) $64,000
Answer: B
Explanation: B) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
17) What amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 140 days | $12,000 |
| Euro-denominated savings account | 18,000 |
| U.S. dollar chequing account | 10,000 |
| Treasury bills maturing in 30 days | 24,000 |
A) $36,000
B) $42,000
C) $52,000
D) $64,000
Answer: C
Explanation: C) 24,000 + 18,000 + 10,000 = 52,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
18) What amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 30 days | $24,000 |
| Six-month U.S. term deposit | 12,000 |
| U.S. dollars on hand | 18,000 |
| Bonds of a publicly traded U.S. company | 10,000 |
A) $30,000
B) $36,000
C) $40,000
D) $42,000
Answer: D
Explanation: D) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
19) What amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 10 days | $12,000 |
| Four-month U.S. term deposit | 18,000 |
| Bonds of a publicly traded U.S. company | 10,000 |
| U.S. treasury bill maturing in 120 days | 24,000 |
A) $0
B) $12,000
C) $36,000
D) $64,000
Answer: B
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
20) What amount will be included in “cash and cash equivalents”?
| Euro treasury bills maturing in 140 days | $12,000 |
| U.S. treasury bill maturing in 120 days | 18,000 |
| Bonds of a publicly traded U.S. company | 10,000 |
| U.S. dollars on hand | 24,000 |
A) $12,000
B) $18,000
C) $24,000
D) $54,000
Answer: C
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
21) What amount will be included in “cash and cash equivalents”?
| Treasury bills maturing in 101 days | $12,000 |
| Six-month U.S. term deposit | 18,000 |
| Bonds of a publicly traded U.S. company | 10,000 |
| U.S. treasury bill maturing in 120 days | 24,000 |
A) $0
B) $12,000
C) $36,000
D) $64,000
Answer: A
Diff: 2 Type: MC
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
22) Which statement about “cash and cash equivalents” is correct?
A) The definition for “cash and cash equivalents” used on the balance sheet differs from the definition for “cash and cash equivalents” used on the cash flow statement.
B) A change in the composition of “cash and cash equivalents” is considered a financing activity on the cash flow statement.
C) A change in the composition of “cash and cash equivalents” is considered a cash flow for purposes of the cash flow statement.
D) The definition for “cash and cash equivalents” used on the balance sheet is the same as the definition for “cash and cash equivalents” used on the cash flow statement.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
23) Explain why a bank reconciliation is necessary.
Answer:
• A bank reconciliation ties together the amount of cash according to a company’s records and the amount of cash according to the bank that holds its funds.
• The reasons for preparing a bank reconciliation are threefold: to understand why the two sets of records differ, to identify any bookkeeping errors by either entity; and to contribute to the internal control over cash.
• From a cash perspective, there will be timing differences between transactions being recorded in the general ledger for accounting purposes and when those transactions actually clear through the bank. Bank reconciliations use records from the enterprise and its bank to determine the corrected cash balance that should be used for financial reporting purposes.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
24) Identify the two criteria for classifying an investment as a cash equivalent.
Answer: Cash equivalents must be (i) readily convertible to known amounts of cash (convertibility), and (ii) have insignificant risks of changes in value (substantially risk-free).
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
25) Identify if the following investments meet the requirements to be classified as cash and cash equivalents.
Answer:
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
26) Identify whether each of the following items should be classified in “cash and cash equivalents” on the balance sheet. Assume that the reporting entity has operations in Canada.
Answer:
Diff: 2 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
27) During May 2018, ABC Company wrote a cheque (#345) to a supplier as a payment on its account. The cheque was written for the correct amount of $16,900. The May bank statement listed the cheque at $61,900 and an ending account balance of $(50,500) in overdraft.
Required:
a. Given the above information, prepare the portion of the May cash reconciliation that reconciles the bank balance to the cash balance to be used in the financial statements.
b. Where on the balance sheet should the cash (or overdraft) balance be shown?
Answer:
a.
b. The overdraft balance should be included in assets as an offset against cash and cash equivalents, not as a separate liability. Should the overall balance of cash and cash equivalents be negative, the amount would then be reported as a current liability.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
28) Pomegranate Company’s bank balance on its October 31, 2018 bank statement is $11,500. Pomegranate’s accountant is preparing a bank reconciliation and determined that three cheques issued by Pomegranate to its suppliers for a total of $6,500 had not yet cleared the bank. Also, a deposit for $700 made by Pomegranate on October 31 did not appear on the bank statement. Bank service charges of $240 appear on the bank statement, but have not yet been recorded in the general ledger.
Given the above information, prepare a bank reconciliation to determine the correct cash balance that should be reflected in Pomegranate’s general ledger at October 31, 2018.
Answer:
Diff: 1 Type: ES
Skill: Computational
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.
Learning Objective 2
1) Which statement about internal controls over cash is correct?
A) A bank reconciliation is the only control required for cash.
B) A bank reconciliation is designed for detection of problems after the fact.
C) A bank reconciliation is a tool to investigate employee fraud.
D) A bank reconciliation is designed to prevent problems from happening.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
2) Which of the following would NOT be an example of segregation of duties?
A) Sales employees have restricted ability to delete or modify accounts receivables.
B) Employees make sales to customers and record the credit sales in the accounts receivables.
C) Customer refunds are recorded on a written credit note.
D) Employees depositing funds to the bank do not prepare the bank reconciliation.
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
3) Which of the following would be an example of segregation of duties?
A) Sales employees have the ability to delete or modify accounts receivables.
B) Employees who make sales to customers record the credit sales in the accounts receivables.
C) Customer refunds are not recorded on a credit note.
D) Employees depositing funds to the bank do not prepare the bank reconciliation.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
4) What is one way to segregate duties to improve controls over cash?
A) Request all customers to pay in cash.
B) Separate sales employees from employees who book the accounting entries.
C) Request all customers to pay by cheques made payable to “CASH.”
D) Have the employee who is responsible for making cash deposits to the bank also do the bank reconciliations.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
5) Which statement about internal controls over cash is correct?
A) Internal controls should not be designed to be preventative.
B) A bank reconciliation is designed for prevention of problems before the fact.
C) Controls should restrict sales staff ability to modify or delete accounts receivable.
D) Credit notes should not be issued for customer refunds.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
6) Small Company (SC) is in its fourth year of retail operations. The owner/manager previously employed a part-time bookkeeper to sign cheques, as well as to prepare journal entries, bank reconciliations, and monthly financial statements. SC has just hired you as the first full-time accountant to replace the bookkeeper, and you are preparing the December 31, 2018 financial statements.
Required:
a. Briefly explain the concept of “segregation of duties.”
b. Identify an internal control issue relating to SC’s cash-handling procedures, and provide your recommendation(s) to improve SC’s internal controls over cash.
Answer:
a. Segregation of duties is intended to ensure that a person in a position to misappropriate assets like cash is not in a position to cover up the theft.
b. The existing cash-handling procedures are not sufficiently segregated. In fact, they are not segregated at all. The bookkeeper both handles the cash and prepares the bank reconciliation. To mitigate the risk of embezzlement, SC should assign someone other than me (the accountant) to prepare the bank reconciliations.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
7) Explain why it is important to segregate duties of employees dealing with cash in an organization. Provide at least three examples of ways which this segregation could be made on the receivables side.
Answer: Segregation of duties prevents any single employee from mishandling cash and/or changing the accounts receivable records for personal gain. When duties are segregated, fraud requires collusion among two or more employees, which is much more difficult to execute.
• Restrict the ability of sales staff to modify or delete accounts receivable. Credits or refunds (for defective items, for example) need to be recorded by credit note.
• Assign employees with no access to accounts receivable the task of recording cash and cheques received.
• Assign different employees the task of depositing funds to the bank.
• Have accounts receivable staff (separate from the above) record payments against the specific accounts.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
8) Explain why it is important to segregate duties of employees dealing with cash in an organization. Provide an example of ways which this segregation could be made on the payable side
Answer: When a company segregates the duties, it prevents any single employee from mishandling cash and/or changing the accounts receivable records for personal gain. When duties are segregated, fraud requires collusion among two or more employees, which is much more difficult to execute.
On the payable side, it is important to limit who has access to the accounts payable master file that contains information on suppliers’ names, addresses, and so on. Staff responsible for day-to-day processing of suppliers’ invoices should not have this access; otherwise, they could obtain approval to pay a particular supplier, then redirect the cheque to a different payee and address.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
9) Explain some controls that can be used in an organization to safeguard cash and other assets.
Answer:
• Bank reconciliations and separation of duties are important internal controls to reduce the likelihood of cash misappropriation.
• Managerial and customer monitoring are also alternative ways to reduce the risk of fraud.
• Internal controls for other assets are as important as for cash because people have less aversion to misappropriating non-cash items.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.
Learning Objective 3
1) What are the general recognition criteria for non-cash assets under GAAP?
A) If the item meets the definition of an asset, it must have an indefinite life.
B) If the item meets the definition of an expense, it must be measurable.
C) In order for the item to be an asset, it will have future economic benefits, be under the entity’s control, and result form past transactions.
D) Future transactions can be recorded under GAAP.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
2) The following accounts were abstracted from Almond Co.’s unadjusted trial balance at December 31, 2019:
DebitCredit
Accounts receivable$3,850,000
Allowance for uncollectable accounts51,000
Net credit sales$5,950,000
The company estimates that 5 percent of the gross accounts receivable will become uncollectable. After adjustment at December 31, 2019, the allowance for doubtful accounts should have a credit balance of
A) 192,500
B) 243,500
C) 246,500
D) 297,500
Answer: A
Explanation: A) 3,850,000 × 5% = 192,500
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
3) The following accounts were abstracted from Almond Co.’s unadjusted trial balance at December 31, 2019:
DebitCredit
Net credit sales$2,950,000
Accounts receivable$800,000
Allowance for uncollectable accounts11,000
The company estimates that 1.5 percent of the net credit sales will become uncollectable. After adjustment at December 31, 2019, the allowance for doubtful accounts should have a credit balance of
A) 11,000
B) 12,000
C) 44,250
D) 55,250
Answer: D
Explanation: C) 2,950,000 × 1.5% = 44,250; 11,000 – 44,250 = 33,250
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
4) Which of the following is one of the general criteria for recognizing an asset?
A) The item must have future economic benefits.
B) The item must have an indefinite life.
C) The item must be tangible.
D) The item must be material.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
5) A $50,000 sale transaction is made with terms of 2/10, net 30. Assuming that the customer takes the discount, what amount is booked to the “cash discount” account under the gross method of accounting for cash discounts?
A) $0
B) $1,000 debit
C) $1,000 credit
D) $49,000 debit
Answer: B
Explanation: B) 50,000 × 2% = 1,000 debit
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
6) Jackie Co.’s allowance for doubtful accounts was $15,000 at the end of 2019 and $205,000 at the end of 2018. For the year ended December 31, 2019, Jackie reported bad debt expense of $48,000 in its income statement. What amount did Jackie debit to the appropriate account in 2019 to write off actual bad debts?
Answer: $205,000 + $48,000 – $15,000 = $238,000
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
7) Which statement about receivables is correct?
A) Receivables are non-monetary items.
B) Monetary items are measured at their present value.
C) Trade receivables generally have payments terms extending beyond 3 months.
D) Trade receivables should generally be recorded at their discounted present value.
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
8) Which statement best describes the gross method of accounting for cash discounts?
A) Records receivables at their present value amount.
B) Records any discounts forfeited as income.
C) Records any discounts taken as a reduction in revenue.
D) Records any discounts taken as an expense.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
9) Which statement best describes the net method of accounting for cash discounts?
A) Records receivables at their face value.
B) Records any discounts forfeited as income.
C) Records any discounts taken as an expense.
D) Records any discounts taken as a reduction in revenue.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
10) Which statement is correct?
A) The “net” method for recording cash discounts is conceptually inferior to the “gross” method.
B) Under the “net” method, an entry is needed if the discount is not taken.
C) The “gross” method for recording cash discounts is conceptually superior to the “net” method.
D) The gross method overstates revenue.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
11) A $50,000 sale transaction is made with terms of 2/10, net 30. Assuming that the customer takes the discount, what amount is booked to the “cash discount” account under the net method of recording a discount?
A) $0
B) $1,000 debit
C) $1,000 credit
D) $49,000 debit
Answer: A
Explanation: A) discount is booked up front at time of initial sale
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
12) A $50,000 sale transaction is made with terms of 2/10, net 30. What amount is debited to the accounts receivable account when the sale is made under the gross method of accounting for cash discounts?
A) $49,000 credit
B) $49,000 debit
C) $50,000 credit
D) $50,000 debit
Answer: D
Explanation: D) Discount is recorded when cash is received
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
13) Which statement is correct?
A) The “gross” method for recording cash discounts is conceptually better than the “net” method.
B) The net method understates expenses.
C) The gross method overstates revenue.
D) Under the “gross” method, an entry is needed if the discount is taken.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
14) Which statement is correct?
A) A transfer without recourse means that the purchaser can go back to the company for compensation of bad debts.
B) A transfer without recourse means that the purchaser of the receivables takes the collection risk.
C) A transfer without recourse means that the seller of the receivables takes the collection risk.
D) A transfer with recourse means that the purchaser of the receivables takes the collection risk.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
15) A $100,000 sale transaction is made with terms of 5/10, net 30. What amount is debited to the accounts receivable account when the sale is made under the gross method of recording a discount?
A) $95,000 credit
B) $95,000 debit
C) $100,000 credit
D) $100,000 debit
Answer: D
Explanation: D) Discount is recorded when cash is received
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
16) Which statement is correct?
A) A transfer with recourse means that the purchaser cannot go back to the company for compensation of bad debts.
B) A transfer with recourse means that the purchaser of the receivables takes the collection risk.
C) A transfer with recourse means that the seller of the receivables takes the collection risk.
D) A transfer without recourse means that the seller of the receivables takes the collection risk.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
17) Which statement is correct?
A) A transfer with recourse means that the purchaser of the receivables takes the collection risk.
B) A transfer without recourse means that the seller of the receivables takes the collection risk.
C) Factoring with recourse reduces a current ratio that is >1.
D) Factoring without recourse creates a liability on the balance sheet.
Answer: C
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
18) Which statement is NOT correct?
A) Factoring with recourse creates a liability on the balance sheet.
B) Factoring with recourse reduces a current ratio that is >1.
C) Factoring with recourse negatively impacts working capital.
D) Factoring without recourse reduces a current ratio that is >1.
Answer: C
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
19) Which statement is correct?
A) Factoring without recourse creates a receivable on the balance sheet.
B) Factoring without recourse reduces a current ratio that is >1.
C) Factoring with recourse negatively impacts working capital.
D) Factoring without recourse creates a liability on the balance sheet.
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
20) Which statement is NOT correct?
A) Factoring with recourse creates a liability on the balance sheet.
B) Factoring with recourse creates a receivable on the balance sheet.
C) Factoring without recourse negatively impacts working capital.
D) Factoring without recourse means that the seller takes the collection risk.
Answer: D
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
21) Philip Corp reported credit sales of $240,000 and write-offs of bad debts of $57,000 for last year. Accounts receivable had a balance of $1,127,000 at the beginning of the year and $881,000 at the end of the year. How much cash was collected from customers during the year?
A) $246,000
B) $429,000
C) $486,000
D) $669,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,127,000 + 240,000 – Collections – 57,000 = 881,000 → Collections = 429,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
22) EasyCredit Inc. reported cash sales of $45,000, credit sales of $280,000 and write-offs of bad debts of $7,000 for last year. Accounts receivable had a balance of $327,000 at the beginning of the year and $381,000 at the end of the year. How much cash was collected from customers during the year?
A) $54,000
B) $219,000
C) $264,000
D) $334,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
327,000 + 280,000 – Collections – 7,000 = 381,000 → Collections = 219,000
Cash = Cash from A/R payments + cash sales = 219,000 + 45,000 = 264,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
23) Maximum Inc. reported credit sales of $880,000, bad debt write-offs of $297,000 and bad debt expense of $257,000 for last year. Accounts receivable had a balance of $1,367,000 at the beginning of the year and $1,381,000 at the end of the year. How much cash was collected from customers during the year?
A) $457,000
B) $569,000
C) $714,000
D) $866,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,367,000 + 880,000 – Collections – 297,000 = 1,381,000 → Collections = 569,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
24) Lenient Corp. reported cash sales of $1,145,000, credit sales of $1,880,000, cash returns of $50,000, bad debt write-offs of $300,000 and bad debt expense of $250,000 for last year. Accounts receivable had a balance of $3,400,000 at the beginning of the year and $2,350,000 at the end of the year. How much cash was collected from customers during the year?
A) $2,630,000
B) $2,975,000
C) $3,725,000
D) $3,775,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
3,400,000 + 1,880,000 – Collections – 300,000 = 2,350,000 → Collections = 2,630,000
Cash collected = Cash from A/R + cash sales – cash returns = 2,630,000 + 1,145,000 – 50,000 = 3,725,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
25) Fitness Machines reported credit sales of $880,000 and bad debt expense of $250,000 for last year. Accounts receivable had a balance of $1,400,000 at the beginning of the year and $1,350,000 at the end of the year. Assuming there are no write-offs made during the year, how much cash was collected from customers during the year?
A) $630,000
B) $680,000
C) $930,000
D) $1,180,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Close Bal
$1,400,000 + 880,000 – Collections – 0 = 1,350,000 → Collections = 930,000
Diff: 1 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
26) Fitness Machines reported cash sales of $50,000, credit sales of $800,000 and bad debt expense of $150,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year and $1,250,000 at the end of the year. Assuming there are no write-offs during the year, how much cash was collected from customers during the year?
A) $400,000
B) $450,000
C) $550,000
D) $600,000
Answer: D
Explanation: D) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,000,000 + 800,000 – Collections – 0 =1,250,000 → Collections = 550,000
Cash = Cash from A/R + cash sales = 550,000 + 50,000 = 600,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
27) Medical Machines reported credit sales of $800,000, cash returns of $25,000 and bad debt expense of $150,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year and $1,250,000 at the end of the year. Assuming there are no write-offs during the year, how much cash was collected from customers during the year?
A) $375,000
B) $525,000
C) $550,000
D) $650,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Close Bal
1,000,000 + 800,000 – Collections – 0 = 1,250,000 → Collections = 550,000
Cash = Cash from A/R – cash returns = 550,000 – 25,000 = 525,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
28) Pauline Company estimates the allowance for doubtful accounts by aging its accounts receivable. At the end of 2018, the balance in the allowance account was $50,000. During 2019, the company wrote off $5,000 and collected a $3,000 receivable that had been previously written off as uncollectable. At the end of 2019, the aging schedule indicated that the balance of the allowance for doubtful accounts should be $64,000. What is the bad debt expense for 2019?
A) $16,000
B) $19,000
C) $66,000
D) $69,000
Answer: A
Explanation: A) 64,000 – (50,000 – 5,000) – 3,000 = 16,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
29) A $100,000 sale transaction is made with terms of 5/10, net 30. What entry is made to the accounts receivable account when the sale is made under the net method of recording a discount?
A) $95,000 credit
B) $95,000 debit
C) $100,000 credit
D) $100,000 debit
Answer: B
Explanation: B) discount recorded up front when sale is made
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
30) Which statement is correct about recording an allowance for doubtful accounts?
A) Accounts receivable are not adjusted for known uncollectable amounts.
B) Net accounts receivable is recalculated when there are changes recorded in the Allowance for Doubtful Accounts contra account.
C) Comparability is the reason an allowance for doubtful accounts is needed.
D) An allowance for doubtful accounts does not require estimates or judgments.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
31) Which statement is correct about estimating the allowance for doubtful accounts?
A) Under the income statement approach, bad debt expense is based on the accounts receivable amount.
B) Under the income statement approach, bad debt expense is based on the percentage of credit sales.
C) Under the income statement approach, bad debt expense is based on an aging of the accounts receivable amount.
D) Under the income statement approach, bad debt expense is based on the volume of sales transactions.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
32) Karin-Jones Ltd. reported an opening balance of $1,712,000 in accounts receivable and of $147,000 in allowance for doubtful accounts for last year. During the year, sales on account were $2,500,000, collections of accounts receivable were $1,300,000, and bad debt expense was $89,000. At the end of the year, the company had a credit balance of $172,000 in the allowance for doubtful accounts. What amount of accounts receivable was written off during the year?
A) $25,000
B) $64,000
C) $83,000
D) $2,912,000
Answer: B
Explanation: B) 147,000 + 89,000 – 172,000 = 64,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
33) Which statement is NOT correct about estimating the allowance for doubtful accounts under the balance sheet approach?
A) Accounts receivable are stated at their net realizable value.
B) Accounts receivable are stated at their fair value.
C) Bad debt expense is based on the accounts receivable balance.
D) Bad debt expense is based on an aging of the accounts receivable.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
34) Medical Machines reported credit sales of $800,000, cash collections of $550,000 and bad debt write-offs of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. What was the ending balance in the accounts receivable account?
A) $450,000
B) $1,235,000
C) $1,250,000
D) $1,800,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,000,000 + 800,000 – 550,000 – 15,000 = 1,235,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
35) Family Fun reported credit sales of $800,000, cash collections of $550,000 and bad debt expense of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the ending balance in the accounts receivable account?
A) $450,000
B) $1,235,000
C) $1,250,000
D) $1,800,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,000,000 + 800,000 – 550,000 – 0 = 1,250,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
36) Family Fun reported cash sales of $250,000, credit sales of $750,000, cash collections from receivables of $500,000, bad debt write-offs of $25,000 and bad debt expense of $35,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. What was the ending balance in the accounts receivable account?
A) $1,190,000
B) $1,225,000
C) $1,440,000
D) $1,475,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,000,000 +750,000 – 500,000 – 25,000 = 1,225,00
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
37) Micelle Inc. reported credit sales of $600,000, cash collections of $450,000 and bad debt expense of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the end of the year. Assuming there are no write-offs made during the year, what was the balance in the accounts receivable account at the beginning of the year?
A) $400,000
B) $850,000
C) $865,000
D) $1,150,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
Open Bal + 600,000 – 450,000 – 0 = 1,000,000 → Open Bal = 850,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
38) Fruit Valley Inc. reported cash sales of $250,000, credit sales of $850,000, cash collections from receivables of $500,000, bad debt write-offs of $25,000 and bad debt expense of $35,000 for last year. Accounts receivable had a balance of $1,000,000 at the end of the year. What was the balance in the accounts receivable account at the beginning of the year?
A) $425,000
B) $460,000
C) $650,000
D) $675,000
Answer: D
Explanation: D) Open Bal + Credit Sales – Cash Collections – Write-offs = Close Bal
Open Bal + 850,000 – 500,000 – 25,000 = 1,000,000 → Open Bal = 675,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
39) Micelle Inc. reported credit sales of $600,000 and cash collections of $450,000 for last year. The ending balance in accounts receivable was $800,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $80,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year?
A) $6,000
B) $8,000
C) $81,500
D) $86,000
Answer: D
Explanation: D) 80,000 + (600,000 ∗ 0.01) = 86,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
40) Micelle Inc. reported credit sales of $700,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year?
A) $7,000
B) $8,000
C) $47,000
D) $150,000
Answer: C
Explanation: C) 40,000 + (700,000 ∗ 0.01) = 47,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
41) Marvelos Inc. reported credit sales of $1,000,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year?
A) $11,000
B) $15,000
C) $51,000
D) $55,000
Answer: D
Explanation: D) 40,000 + (1,500,000 ∗ 0.01) = 55,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
42) Sahil Inc. reported credit sales of $600,000 and cash collections of $450,000 for last year. The ending balance in accounts receivable was $800,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $80,000 at the beginning of the year. What was the bad debt expense for the year?
A) $1,500
B) $6,000
C) $8,000
D) $86,000
Answer: B
Explanation: B) 600,000 ∗ 0.01 = 6,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
43) Sabrina Inc. reported credit sales of $700,000 and cash sales of $100,000. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What was the bad debt expense for the year?
A) $7,000
B) $8,000
C) $15,000
D) $47,000
Answer: A
Explanation: A) 700,000 ∗ 0.01 = 7,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
44) Thineesha Corp. reported credit sales of $1,000,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What was the bad debt expense for the year?
A) $9,000
B) $10,000
C) $15,000
D) $55,000
Answer: C
Explanation: C) 1,500,000 ∗ 0.01 = 15,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
45) Marvelos Inc. reported credit sales of $1,000,000, cash sales of $100,000 and bad debt write-offs of $10,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense was $15,000. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What was the balance in the allowance for doubtful accounts at the end of the year?
A) $15,000
B) $45,000
C) $55,000
D) $65,000
Answer: B
Explanation: B) Open Bal + Bad Debt Expense – Write-offs = Ending Bal
40,000 + 15,000 – 10,000 = 45,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
46) Super Corp. reported credit sales of $2,000,000, cash sales of $200,000 and bad debt write-offs of $100,000 for last year. The ending balance in accounts receivable was $4,500,000. Bad debt expense was $250,000. The allowance for doubtful accounts had a balance of $400,000 at the beginning of the year. What was the balance in the allowance for doubtful accounts at the end of the year?
A) $100,000
B) $300,000
C) $500,000
D) $550,000
Answer: D
Explanation: D) Open Bal + Bad Debt Expense – Write-offs = Ending Bal
400,000 + 250,000 – 100,000 = 550,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
47) Super Corp. reported credit sales of $2,000,000, cash sales of $200,000 and bad debt write-offs of $100,000 for last year. The ending balance in accounts receivable was $4,500,000. Bad debt expense was 2% of credit sales. The allowance for doubtful accounts had a balance of $400,000 at the beginning of the year. What was the balance in the allowance for doubtful accounts at the end of the year?
A) $40,000
B) $340,000
C) $344,000
D) $440,000
Answer: B
Explanation: B) Open Bal + Bad Debt Expense – Write-offs = Ending Bal
400,000 + (2,000,000 ∗.02) – 100,000 = 340,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
48) K-Jones Ltd. reported opening balances of $1,712,000 in accounts receivable and $147,000 in the allowance for doubtful accounts at the beginning of last year. During the year, sales on account totaled $2,500,000, collections of accounts receivable were $1,300,000, bad debt write-offs were $65,000 and bad debt expense was $89,000. What was the ending balance in the allowance for doubtful account?
A) $82,000
B) $171,000
C) $326,000
D) $2,847,000
Answer: B
Explanation: B) Open Bal + Bad Debt Exp – Write-offs = Ending Bal
147,000 + 89,000 – 65,000 = 171,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
49) Propel Fly reported opening balances of $1,712,000 in accounts receivable and $147,000 in the allowance for doubtful accounts at the beginning of last year. During the year, sales on account totaled $2,500,000, collections of accounts receivable were $1,300,000, bad debt write-offs were $65,000 and bad debt expense was $89,000. What was the ending balance in accounts receivable?
A) $171,000
B) $2,758,000
C) $2,823,000
D) $2,847,000
Answer: D
Explanation: D) Open Bal + Credit Sales – Collections – Write-offs = Ending Bal
1,712,000 + 2,500,000 – 1,300,000 – 65,000 = 2,847,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
50) Which statement about using the percentage of credit sales to estimate bad debt expense is NOT correct?
A) This method has the same results as estimating the bad debt expense by aging the accounts receivable.
B) This method records an adjustment to the allowance account irrespective of the balance in that account immediately prior to the adjustment.
C) This method focuses on the income statement.
D) This method only indirectly measures accounts receivable at net realizable value.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
51) Which statement about using the aging of accounts receivable to estimate bad debt expense is correct?
A) This method has the same results as estimating the bad debt expense by using the percentage of credit sales.
B) This method records an adjustment to the allowance account irrespective of the balance in that account, immediately prior to the adjustment.
C) This method focuses on the income statement.
D) This method focuses on the balance sheet.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
52) Based on the following information for calendar 2018:
| Accounts receivable, January 1 | $125,000 |
| Credit sales during the year | 1,400,000 |
| Allowance for doubtful accounts, January 1 | 15,000 |
| Cash collected on accounts receivable during the year | 1,350,000 |
If the allowance for doubtful accounts is estimated at 10% of the ending accounts receivable balance, what is the bad debts expense for 2018?
A) $1,500
B) $2,500
C) $9,500
D) $17,500
Answer: B
Explanation: B) [(125,000 + 1,400,000 – 1,350,000) × 10%] – 15,000 = 2,500
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
53) Based on the following information for calendar 2018:
| Accounts receivable, January 1 | $125,000 |
| Credit sales during the year | 1,400,000 |
| Allowance for doubtful accounts, January 1 | 15,000 |
| Cash collected on accounts receivable during the year | 1,350,000 |
| Uncollectable accounts written off during the year | 8,000 |
If bad debts expense is estimated at 1.5% of credit sales, what is the balance in the allowance for doubtful accounts at year end?
A) $13,000
B) $15,625
C) $28,000
D) $36,000
Answer: C
Explanation: C) 15,000 + (1,400,000 × 1.5%) – 8,000 = 28,000
Diff: 3 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
54) Pauline Company estimates the allowance for doubtful accounts by aging its accounts receivable. At the end of 2018, the balance in the allowance account was $50,000. During 2019, the company wrote off $5,000 in bad debts and collected a $3,000 receivable that had been previously written off as uncollectable. At the end of 2019, the aging schedule indicated that the balance of the allowance for doubtful accounts should be $64,000. What is the bad debts expense for 2019?
A) $16,000
B) $19,000
C) $66,000
D) $69,000
Answer: A
Explanation: A) 64,000 – (50,000 – 5,000) – 3,000 = 16,000
Diff: 2 Type: MC
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
55) Explain the differences and relationships among expenditures, assets, and expenses. Use an example to support your discussion.
Answer: An expenditure is an outlay of cash or incurment of a liability that could result in an expense or an asset being recorded for accounting purposes.
The expenditure results in an asset if it satisfies the definition and recognition criteria for an asset; otherwise, the amount must be expensed.
Previously recorded assets turn into expenses as the benefits from the assets are used up. For example, a payment to purchase a machine would result in an asset (property, plant, and equipment) because the machine is expected to generate future benefits, it results from a past transaction, it is under the control of the enterprise, and its future benefits are reasonably estimable. As the equipment is used, depreciation expense is recorded.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
56) Royal Inc. offers terms of 4/10, net 60 for its accounts receivable. The company issues an invoice for $73,000. How should Royal record the invoice if it uses (a) the gross method and (b) the net method?
Answer:
* 73,000 × 96% = 70,080
Diff: 1 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
57) Spiders Geophysics issues an invoice to Huslia Goldmines for $150,000 on August 5, 2018. The invoice states the payment terms are 5/10, net 30. Huslia pays the invoice on August 14, 2018. How should Spiders record the invoice and its subsequent collection if it uses (a) the gross method or (b) the net method?
Answer:
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
58) Intercoastal Shelving Company made a sale to Superb Knives for $8,800 on December 10, 2019. Since it was approaching year end, Intercoastal wanted to encourage prompt payment, so it provided generous discounts for those clients able to pay promptly. Thus Intercoastal offered terms of 5/10, net 20. Superb paid the invoice on January 20, 2020.
How should Intercoastal record the invoice and its subsequent collection if the company uses (a) the gross method or (b) the net method?
Answer:
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
59) Explain two problems associated with the direct write-off method.
Answer:
• Poor matching: With the direct write-off method, revenue is recorded in one period while the associated bad debts expense is recorded in a subsequent period.
• Direct write-off method results in an A/R balance that overstates net realizable value.
• Note: this question has nothing to do with the A/R sub-ledger. The use of a contra account for bad debts allows for the reconciliation of the sub-ledger with the A/R balance on the general ledger, but a sub-ledger is used regardless of the method of accounting for bad debts.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
60) On January 1, 2019, Color Company agreed to sell a diamond to a customer at a special price of $4,000. In return, the customer signed a non-interest bearing note payable to Color Company. Payment terms were $800 on January 1, 2019, and $800 each January 1 from 2020 to 2023. Color normally charges 8% interest to its customers.
What amount of revenue and accounts receivable should Color recognize on January 1, 2019?
Answer: Receivable = 2,650 (n 4 i 8 PMT 800 CPT PV = 2,650)
Revenue – 3,450 (2,650 + 800)
JE would be Cash 800
Acct Receivable2,650
Revenue3,450
Diff: 1 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
61) XYZ Company estimates their allowance for doubtful accounts (ADA) by aging their accounts receivable. At the end of 2018, the balance in the ADA was $165,000. During 2019, XYZ wrote off $16,000 and collected a $14,500 receivable that had been previously written off as uncollectable. At the end of 2019, the aging schedule indicated that the balance in the ADA should be $187,000. How much is the bad debts expense for 2019?
Answer:
Diff: 1 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
62) Beebo Ltd. provides for doubtful accounts based on 6% of credit sales. The following data are available for 2018.
| Credit sales during 2018 | $3,550,000 |
| Allowance for doubtful accounts, Jan 1, 2018 | 59,000 Cr |
| Collection of accounts written off in prior years | 3,500 |
| Customer accounts written off as uncollectable during 2018 | 37,000 |
How much should the balance in the allowance for doubtful accounts be at December 31, 2018?
Answer:
Diff: 1 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
63) At the end of its first year of operations, December 31, 2019, Felicity Ltd.’s accounts show the following amounts:
| Accounts receivable | $1,485,000 |
| Allowance for doubtful accounts, before any adjusting or closing entries | 11,000 Cr |
| Bad debt expense for 2019 prior to any adjusting or closing entries | 48,000 Dr |
| Customer accounts written off as uncollectable during 2019 | 37,000 |
The company estimates that the following amounts of accounts receivable will not be collectible:
What should be the amount of bad debt expense for the year ended December 31, 2019?
Answer:
Estimated ADA based on aging schedule – ADA prior to adjusting/closing + BDE prior to adjusting/closing = 2019 BDE
161,750 – 11,000 + 48,000 = 198,750
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
64) Pessimist Inc. reported credit sales of $5,400,000 and $4,800,000 for the years ended December 31, 2017 and 2018, respectively. Information on trade accounts receivable for the company is presented below.
The balance of the allowance for doubtful accounts as of January 1, 2017 was $15,000. In addition, you learn that the company wrote off specific accounts of $18,500 in 2017, and the bad debts expense was $13,000 in 2018.
Required:
a. Determine the bad debts expense for 2017.
b. Determine the amount of receivables written off during 2018.
c. Prepare the journal entry to record the bad debts expense for 2017.
Answer:
a. Calculate the bad debts expense for 2017.
Since the 2017 write-offs during the year exceeded the beginning of the year ADA, the ending ADA prior to adjustment/closing is equal to zero. Also, the bad debts expense prior to adjustment/closing is equal to the write-offs less the initial balance in the ADA account. So, BDE prior to adjustment = 18,500 – 15,000 = 3,500
Estimated ADA based on aging schedule – ADA prior to adjusting/closing + BDE prior to adjusting/closing = 2017 BDE
15,326 – 0 + 3,500 = 18,826
b. Calculate the amount of receivables written off during 2018.
Beginning ADA – Ending ADA + BDE = 2018 write-offs
15,326 – 13,000 + 14,506 = 13,820
c. Prepare the journal entry to record the bad debts expense for 2017.
| Dr. Bad debts expense | 18, 826 |
| Cr. Allowance for doubtful accounts | 18, 826 |
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
65) Speed Motorcycles sold $550,000 of receivables to a factor to increase the company’s liquidity. The company chose to factor these receivables without recourse. In exchange for these receivables, the factor paid Speed $485,000 on the date of transfer. Ultimately, the factor collected $525,000 from these receivables.
Record the entry on Speed’s books relating to the $550,000 factoring of accounts receivable.
Answer:
| Upon transfer | Dr. Cash | 485,000 | |
| of receivables | Dr. Interest expense | 65,000 | |
| Cr. Accounts receivable | 550,000 |
Note: subsequent collection by factor is irrelevant since Speed sold without recourse.
Diff: 1 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
66) McGraw Motors both sells and leases vehicles. With sales temporarily slowing due to the economy, the company factored a significant portion of its lease receivables. The company factored with recourse receivables with a carrying amount of $22 million in exchange for $21.45 million less a holdback of $550,000 for potential uncollectable accounts. Due to poor economic conditions, the actual uncollectable accounts amounted to $900,000.
Record the entries on McGraw’s books relating to the $22 million factoring of lease receivables.
Answer:
| Upon transfer | Dr. Cash | 20,900,000 | |
| of receivables | Dr. Due from factor | 550,000 | |
| Cr. Short-term debt–asset-backed financing | 21,450,000 | ||
| Completion of | Dr. Allowance for doubtful accounts | 900,000 | |
| collection | Cr. Due from factor | 550,000 | |
| Cr. Cash | 350,000 | ||
| Dr. Short-term debt–asset-backed financing | 21,450,000 | ||
| Dr. Interest expense | 550,000 | ||
| Cr. Accounts receivable | 22,000,000 |
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
67) Gossamer Furnishings extends generous payment terms to its customers. As a result, it has accumulated a substantial portfolio of accounts receivable. To improve cash flow, the company decided to sell $600,000 of these receivables to a factor. The company had previously checked the credit worthiness of its customers, so it is confident that few accounts will become uncollectable. Therefore, Gossamer chose to factor these receivables with recourse. In exchange for these receivables, the factor paid Gossamer 93¢ on each dollar of receivables on the date of transfer. The factor also held 2¢ on each dollar for potential uncollectable accounts. Ultimately, the factor collected $593,800 from these receivables.
Record the entries on Gossamer’s books relating to the $600,000 factoring of accounts receivable.
Answer:
| Upon transfer | Dr. Cash (600,000 × 93%) | 558,000 | |
| of receivables | Dr. Due from factor (600,000 × 2%) | 12,000 | |
| Cr. Short-term debt–asset-backed financing | 570,000 | ||
| Completion | Dr. Cash | 5,800 | |
| of collection | Dr. ADA (600,000 – 593,800) | 6,200 | |
| Cr. Due from factor | 12,000 | ||
| Dr. Short-term debt–asset-backed financing | 570,000 | ||
| Dr. Interest expense | 30,000 | ||
| Cr. Accounts receivable | 600,000 |
Diff: 2 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
68) Johnson Credit Union is a small, regional financial institution with a loyal customer base. Like most financial institutions, Johnson has a significant portfolio of home mortgages. Because of the nature of its operations, the risks relating to these mortgages are geographically concentrated. To reduce this risk, the credit union securitized $25 million of mortgages receivable for proceeds of $21.5 million. Under the securitization arrangement, investors in the mortgage-backed securities bear the cost of any defaults on the mortgages. Johnson’s only continuing involvement in the mortgages is the administration of the cash receipts and the transfer of that cash to the investors.
Required:
a. Should Johnson record this securitization as a sale or as a borrowing transaction? Explain.
b. Record the entry in Johnson’s books relating to Johnson’s securitization of mortgage receivables.
Answer:
a. The securitization transaction transfers the risks and rewards of ownership to the investors in the mortgage-backed securities because it is the investors who bear the cost of non-payment. Consequently, the transactions should be recorded as a sale.
b.
| Dr. Cash | 21,500,000 | |||
| Dr. Interest expense | 3,500,000 | |||
| Cr. Mortgages receivable | 25,000,000 |
Diff: 1 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
69) The accounting records of 10Com Ltd. show the following for 2018:
| Accounts receivable, Jan. 1, 2018 | $55,000 |
| Accounts receivable, Dec. 31, 2018 | 85,000 |
| Allowance for doubtful accounts, Jan. 1, 2018 | 6,300 |
| Bad debt expense before year end adjusting or closing entries, Dec 31, 2018 | 3,400 Dr * |
| Customer accounts written off as uncollectable during 2018 | 5,550 ** |
*The credit side of the journal entry (or entries) related to this amount went to allowance for doubtful accounts.
** Account write-offs were debited to the allowance for doubtful accounts.
More Info
For 2018, cash sales were $970,000, while credit sales were $720,000. Recently, 10Com’s management has become concerned about various estimates used in its accounting system, including those relating to receivables and uncollectable accounts. The company is considering two alternatives.
For the purpose of comparing these two alternatives, the company has made the following estimates for each alternative.
• Alternative 1: Bad debts approximating 0.7% of credit sales.
• Alternative 2: Aging of the accounts receivable at the end of the period, where 80% would incur a 2% loss, while the remaining 20% would incur a 9% loss.
Required:
For each of the two alternatives listed above, calculate the bad debts expense for 2018 and the allowance for doubtful accounts balance at the end of 2018.
Answer: Alternative 1 (% of sales method):
* 5,040 = 720,000 × .007
Alternative 2 (aging method): First calculate the amount of ADA. Of the $85,000 balance of accounts receivable, management expects 80% to incur a 2% loss and the remaining 20% to incur a 9% loss. Thus, the balance in ADA should be (85,000 × 80% × 2%) + (85,000 × 20% × 9%) = $2,890. Combined with other information relating to the ADA account, we can determine the amount of adjustment required to the ADA account to be $1,260 debit and a corresponding credit to BDE.
Diff: 3 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
70) Eastwick Company is preparing its financial statement for the year ended December 31, 2017. A summary of Eastwick’s accounts receivable sub-ledger shows the following information:
Required:
a. Calculate the amount of bad debts expense required for 2017.
b. Present the journal entry to record bad debts expense for 2017.
c. Present the journal entry that was used to record write-offs for 2017.
d. Independent of the information above, suppose Eastwick factored $1,500,000 of receivables without recourse. In exchange, it received $1,380,000. Present the journal entry to record this transfer of receivables.
e. Independent of part (d), Eastwick instead factored the $1,500,000 of receivables with recourse and received $1,430,000 cash. Both Eastwick and the factor anticipate that 2% of these receivables will prove to be uncollectable, so the factor has held this amount to cover any uncollectable accounts. Should the amount of uncollectable accounts prove to be more or less than 2%, the difference will be paid by/refunded to Eastwick. Present the journal entry to record this transfer of receivables.
Answer:
a. Calculate the bad debts expense (BDE) by showing the activity in the allowance for doubtful accounts T –account during 2017.
b.
| Dr. Bad debts expense | 69,000 | ||
| Cr. Allowance for doubtful accounts | 69,000 |
c.
| Dr. Allowance for doubtful accounts | 80,000 | ||
| Cr. Accounts receivable | 80,000 |
d.
| Dr. Cash | 1,380,000 | ||
| Dr. Interest expense | 120,000 | ||
| Cr. Accounts receivable | 1,500,000 |
e.
| Dr. Cash | 1,430,000 | ||
| Dr. Due from factor (2% × $1,500,000) | 30,000 | ||
| Cr. Short-term debt-asset-backed financing | 1,460,000 |
Diff: 3 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
Learning Objective 4
1) Explain how a company’s revenue recognition policy can be used to manipulate earnings.
Answer: A company seeking to temporarily boost earnings can do so by accelerating its revenue recognition policy (i.e., recognizing revenue at an earlier point in time relative to cash collection). Such actions will increase both sales revenue and accounts receivable, but the percentage change in receivables will tend to be higher, because the increase in revenue will be in receivables.
Financial statement readers therefore should be alert to increases in days of receivables that are out of proportion to any increases in sales, as such discrepancies could indicate an acceleration in revenue recognition policy that is possibly undisclosed. The discrepancy could also indicate a decline in credit quality of the customer base, or an active change in credit policy.
Diff: 2 Type: ES
Skill: Conceptual
Objective: 5.4 Apply the standards to account for non-trade receivables.
2) What is a “promissory note”?
A) A written promise to repay a specified amount at a specified date.
B) A verbal promise to repay a specified amount at a specified date.
C) A written promise to repay for the goods purchased under regular business terms and conditions.
D) A short term highly liquid investment that is readily convertible to known amounts of cash.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.4 Apply the standards to account for non-trade receivables.
3) Which of the following is a difference between trade and non-trade receivables?
A) Trade receivables are generally recorded using present value techniques versus non-trade receivables, which are generally recorded using market interest rates.
B) Trade receivables are generally outstanding for long periods of time versus non-trade receivables, which are generally outstanding for short periods of time.
C) Trade receivables are generally verbal contracts versus non-trade receivables, which are generally written contracts.
D) Trade receivables are generally verbal contracts versus non-trade receivables, which are generally constructive contracts.
Answer: C
Diff: 3 Type: MC
Skill: Conceptual
Objective: 5.4 Apply the standards to account for non-trade receivables.
4) Explain how a company can use its credit policy for customers and allowance for bad debts policies to manipulate earnings.
Answer: A legitimate way to increase sales is to relax the company’s credit policy. The company may sell to less credit worthy clients, or allow longer payment terms.
However, if the company does not correspondingly increase its allowance for doubtful accounts and bad debts expense, then it will be able to increase current earnings. Future earnings will be lower when it is found that the allowance for bad debts was not sufficient for the lax credit policy.
Diff: 3 Type: ES
Skill: Conceptual
Objective: 5.4 Apply the standards to account for non-trade receivables.
5) Explain what is meant by “channel stuffing” and how this can be used to manipulate earnings.
Answer: This practice involves filling the distribution channel by selling on favourable terms not usually offered. For example, a manufacturer could offer its distributor an unlimited right of return so that the distributor would take more of the manufacturer’s products than normal. These “sales” do not fulfill the criteria for revenue recognition.
Diff: 3 Type: ES
Skill: Conceptual
Objective: 5.4 Apply the standards to account for non-trade receivables.
6) Collier Port Authority has had a long-standing relationship with a nearby lumber company, which ships a significant amount of lumber through the port. To help finance the lumber company’s operations, Collier advanced $10 million to them in return for a promissory note which specified payment of the $10 million, plus interest at 15%, due at the end of two years. However, due to adverse conditions in the lumber industry, the lumber company was unable to meet its obligation and pay Collier at the end of the two years. In light of the importance of the relationship between Collier and the lumber company, Collier extended the due date by three years (after the original two years), but increased the repayment amount to $14 million, inclusive of interest. The market interest rate for the loan remained at 15%.
Record the journal entries relating to the note receivable from the date of issuance to the restructuring date, inclusive.
Answer:
| Issuance of | Dr. Note receivable | 10,000,000 | |
| promissory note | Cr. Cash | 10,000,000 | |
| Interest accrual – | Dr. Note receivable (10 million × 15%) | 1,500,000 | |
| Yr 1 | Cr. Interest income | 1,500,000 | |
| Interest accrual – | Dr. Note receivable (11,500,000 × 15%) | 1,725,000 | |
| Yr 2 | Cr. Interest income | 1,725,000 | |
| Loan | Dr. Restructured note receivable | 9,205,227 | |
| restructuring | 3N 15 I 14000000 FV CPT PV = | ||
| 9,205,227 | |||
| Dr. Loss on note restructuring | 4,019,733 | ||
| Cr. Note receivable | 13,225,000 | ||
| 10,000,000 + 1,500,000 + 1,725,000 |
Diff: 2 Type: ES
Skill: Computational
Objective: 5.4 Apply the standards to account for non-trade receivables.
7) The December 31, 2018 financial statements of Pure Air Works (PAW) show $125,000 for “Note receivable.” You learn that the company provided cash of $125,000 to a customer (a new chain of hotdog stands) in exchange for a promissory note.
The note was issued on January 1, 2017, bearing interest at 7% per year (which approximates the market interest rate), with principal and interest (total $133,750) due on January 1, 2018.
However, the hotdog chain has had numerous delays obtaining the required licenses to operate on street corners.
Consequently, on January 1, 2018, the chain and PAW renegotiated the promissory note so that the $133,750 in principal and interest would come due on January 1, 2020. Aside from the initial recording of the note receivable on January 1, 2017, PAW has not recorded any other journal entries relating to this note.
Present the necessary journal entries to correct PAW’s accounts in 2017 and 2018. Round all values to the nearest dollar.
Answer:
| 2017 | |||
| Dr. Note receivable (or interest receivable) 125,000 × 7% | 8,750 | ||
| Cr. Interest income | 8,750 | ||
| 2018 | |||
| Dr. Restructured note receivable | 116,822 | ||
| 2 N 7 I 133750 FV CPT PV = 116,822 | |||
| Dr. Loss on note restructuring | 16,928 | ||
| Cr. Note receivable | 133,750 | ||
| Dr. Restructured note receivable (or interest receivable) | 8,178 | ||
| Cr. Interest income (116,822 ∗ 7%) | 8,178 | ||
Diff: 3 Type: ES
Skill: Computational
Objective: 5.4 Apply the standards to account for non-trade receivables.
Comprehensive Learning Objectives
1) Khanna Inc. had the following transactions, information and balances in its accounting records for fiscal 2018: (CAD = Canadian dollars; USD = U.S. dollars)
| Balance in CAD at
December 31, 2018 |
|
| Post dated cheque from Delhi Holdings | 10,500 |
| Certified cheque from Bora Corp. | 9,200 |
| Stamps on hand | 2,000 |
| USD chequing account at Bank National | 110,000 |
| CAD chequing account at Bank National | 105,000 |
| Chequing account in a foreign currency that is not stable | 9,500 |
| USD savings account at Bank National | 20,000 |
| CAD treasury bill due in 100 days | 10,000 |
| CAD treasury bill due in 40 days | 25,000 |
| USD term deposit at Bank National due in 80 days | 15,000 |
| Euro term account at Bank National due in 120 days | 8,000 |
| Cash advance received from customer | 14,000 |
| Cash advance given to supplier | 7,000 |
| Money market mutual fund | 17,000 |
| Cash advance to executive, due on demand | 8,000 |
| Cash restricted for future land purchase | 90,000 |
| Refundable deposits paid to provincial government to secure construction contracts | 35,000 |
| Installment accounts receivable, due in 2019 | 225,000 |
| Shares in Boomer Inc. | 12,500 |
| Bonds of Chelsea Corp. | 8,000 |
| Accounts receivable, due in 30 days | 325,000 |
| Credit balances in Accounts Receivable | 19,000 |
| Advances to sales employees | 5,500 |
| Allowances for doubtful accounts | 67,500 |
Required:
a) Determine the amount of “cash” that will be reported on the balance sheet.
b) Determine the amount of “cash equivalents” that will be reported on the balance sheet.
c) Determine the amount of “trade accounts receivable” that will be reported on the balance sheet.
d) Determine the amount of “other receivables” that will be reported on the balance sheet.
e) Explain how the allowance for doubtful accounts will be presented on the balance sheet.
Answer: (a) — (d)
| Balance | (a)
“cash” |
(b)
“cash equivalents” |
(c)
‘trade receivables’ |
(d)
‘other receivables’ |
|
| Post dated cheque from Delhi Holdings | 10,500 | NOT CASH | |||
| Certified cheque from Bora Corp. | 9,200 | 9,200 | |||
| Stamps on hand | 2,000 | NOT CASH | |||
| USD chequing account at Bank National | 110,000 | 110,000 | |||
| CAD chequing account at Bank National | 105,000 | 105,000 | |||
| Chequing account in a foreign currency that is not stable | 9,500 | NOT CASH – only if currency is stable | |||
| USD savings account at Bank National | 20,000 | 20,000 | |||
| CAD treasury bill due in 100 days | 10,000 | Exceeds
90 days |
|||
| CAD treasury bill due in 40 days | 25,000 | 25,000 | |||
| USD term deposit
at Bank National due in 80 days |
15,000 | 15,000 | |||
| Euro term account at Bank National due in 120 days | 8,000 | Exceeds
90 days |
|||
| Cash advance received from customer | 14,000 | ||||
| Cash advance given to supplier | 7,000 | 7,000 | |||
| Money market mutual fund | 17,000 | 17,000 | |||
| Cash advance to executive, due on demand | 8,000 | 8,000 | |||
| Cash restricted for future land purchase | 90,000 | ||||
| Refundable deposits paid to provincial government to secure construction contracts | 35,000 | 35,000 | |||
| Installment accounts receivable, due in 2019 | 225,000 | 225,000 | |||
| Accounts receivable, due in 30 days | 325,000 | 325,000 | |||
| Credit balances in Accounts Receivable | 19,000 | (19,000)* | |||
| Advances to sales employees | 5,500 | 5,500 | |||
| Allowance for doubtful accounts | 67,500 | ||||
| Shares in Boomer Inc. | 12,500 | ||||
| Bonds of Chelsea Corp. | 8,000 | ||||
| Totals | 224,200 | 77,000 | 531,000 | 55,500 |
*student could also exclude from A/R if he/she feels this amount should be presented as a current liability instead of A/R.
e) allowance for doubtful accounts is presented on the balance sheet as a contra account to the accounts receivable balance.
Diff: 3 Type: ES
Skill: Computational
Objective: 5.1/ 5.2/ 5.3 Apply the standards and procedures for recording, reconciling and reporting cash and cash equivalents./Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations./Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
2) Soorya Inc. had the following balances for fiscal 2018.
| Jan 1, 2018 | Dec 31, 2018 | |
| Accounts receivable | 2,500,000 | 2,000,000 |
| Allowance for doubtful accounts | 125,000 | unknown |
Additional information on 2018 transactions:
| Q1 | Q2 | Q3 | Q4 | |
| Sales | ||||
| -Cash | 100,000 | 200,000 | 150,000 | 250,000 |
| -Credit | 500,000 | 700,000 | 600,000 | 800,000 |
| -Discounts given (only on credit sales) | 25,000 | 40,000 | 35,000 | 50,000 |
| Bad debts | ||||
| -write-offs | 15,000 | 10,000 | 20,000 | 5,000 |
| -collection on previously written off accounts | 10,000 | 0 | 5,000 | 20,000 |
Here is an aging of the accounts receivable:
| Days outstanding | Accounts receivable balance @ Jan 1, 2018 | Accounts receivable balance @ Dec 31, 2018 | Estimate % uncollectable
(consistent rate for 5 years) |
| 0-30 | 1,900,000 | 1,000,000 | 0% |
| 31-60 | 250,000 | 350,000 | 10% |
| 61-90 | 250,000 | 350,000 | 20% |
| >90 | 100,000 | 300,000 | 50% |
Required:
a) How much cash was collected from accounts receivable during 2018?
b) Prepare the journal entry to record the discounts using both the gross and net method of accounting; assume that the total discounts given related to sales totaling $450,000. Also prepare the journal entry that would be required if the discounts were not taken by customers under the net method.
c) Assume all discounts were taken by customers and that the company used the gross method.
Complete the following chart:
| Balance at end of fiscal 2018 | |
| Gross Sales | |
| Net Sales | |
| Bad debt expense |
d) What would the bad debt expense be if Soorya wanted to use the percentage of sales method and felt that its experience showed that 4.5% of sales were not collectible?
Answer:
a) How much cash was collected from accounts receivable during 2018?
Open A/R Balance + Sales on credit during the year – Discounts given – Ending A/R Balance
2,500,000 + 2,600,000 – 150,000 – 2,000,000 = 2,950,000
b) Prepare the journal entry to record the discounts using both the gross and net method of accounting.
| Gross method | ||
| Dr. A/R | 450,000 | |
| Cr. Sales | 450,000 | |
| Dr. Cash | 300,000 | |
| Dr. Cash discounts | 150,000 | |
| Cr. A/R | 450,000 | |
| Net Method | ||
| Dr. A/R | 300,000 | |
| Cr. Sales | 300,000 | |
| Dr. Cash | 300,000 | |
| Cr. A/R | 300,000 | |
| If discount not taken under net method | ||
| Dr. Cash | 450,000 | |
| Cr. Interest or other revenue | 150,000 | |
| Cr. A/R | 300,000 |
c) Complete the following chart:
| Balance at end of fiscal 2018 | |
| Gross sales (Cash + credit sales) | 2,600,000 + 700,000 = 3,300,000 |
| Net sales | 3,300,000 – 150,000 = 3,150,000 |
| Allowance for doubtful | (350,000 × 10%) + (350,000 × 20%) + ( 300,000 × 50%) = 255,000 |
| Bad debts expense * | 145,000 |
*Bad debt expense for 2017
End ADA balance + write-offs – collections on previous write-offs – Open ADA balance
255,000 + 50,000 – 35,000 – 125,000 = 145,000
d) What would the bad debt expense be if Soorya wanted to use the percentage of sales method and felt that its experience showed that 4.5% of sales were not collectible?
Net Credit Sales × 4.5 % (2,600,000 – 150,000) × 4.5% = 110,250
Diff: 3 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
3) Explain why an allowance for doubtful accounts is required under GAAP. Discuss how such an allowance should be established.
Answer:
• Enterprises should report trade receivables at expected net realizable value to mitigate the moral hazard that would result from the mismatch in timing between the recording of bad debts expense and the recognition of revenue.
• Evaluation of receivables’ value should take account of information available concerning the enterprise’s revenue recognition policy, credit policy, sales return policy, whether the enterprise has factored a portion of their receivables, as well as whether management has particular incentives to bias earnings.
Diff: 1 Type: ES
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
4) At December 31, 2018, Pinebrook Inc. reported $135,000 in accounts receivable and $9,300 in the allowance for doubtful accounts. In 2019, the company had $875,000 in credit sales and collected $915,000 on accounts receivable. Pinebrook also wrote off $2,500 in uncollectable accounts. The company uses the aging method to estimate bad debts, and management has estimated that the allowance for doubtful accounts for December 31, 2019 should be $8,800.
Required:
a. Provide the journal entry to record bad debts expense for the year 2019. (Ignore information contained in part (b) below.)
b. While auditing the books of Pinebrook, you discover that the company’s bookkeeper has erroneously recorded a transaction: for one customer who went bankrupt in 2019, she wrote off the $6,800 receivable with a debit to bad debts expense. Determine the error’s effects (overstated/understated) on the December 31, 2019 balance sheet (accounts receivable, allowance for doubtful accounts) and the income statement for the year 2019.
c. In January 2020, the company factored all of its receivables ($95,000) without recourse for proceeds of $77,000. Present the journal entry to record this transaction.
Answer:
a.
Journal entry to record bad debts expense
| Dr. Bad debts expense 2,000
Cr. Allowance for doubtful accounts 2,000 |
b. Both the December 31, 2019 balance sheet and the income statement for 2019 will be correctly stated as a result of the errors.
c. Journal entry to record the sale of all receivables for $77,000
| Dr. Cash 77,000
Dr. Allowance for doubtful account 8,800 Dr. Interest expense or loss on sale of accounts receivable 9,200 Cr. Accounts receivable 95,000 |
Diff: 3 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
5) Brasser Co. started using the percentage of sales method to account for bad debts in 2018. In 2017, the company’s first fiscal year, the company had used the direct write-off method because the amount of bad debts was judged to be immaterial. The following information relates to the company’s sales and receivables.
| 2017 | 2018 | |
| Credit sales | $18,750,000 | $18,900,000 |
| Estimated bad debts as a percentage of credit sales | 0.5% | 0.4% |
| Accounts written off | 65,750 | 93,600 |
Required:
a. Calculate the correct balance in the allowance for doubtful accounts (ADA) at the end of 2018. Remember to include the effect of the change in accounting policy on 2017 accounts.
b. Record the write-off entry for 2018 and the year-end adjusting entries for 2018 to adjust the ADA. (Ignore income tax effects)
Answer:
a. The balance of the allowance for doubtful accounts is determined as follows:
b. Write-off entry (2018):
| Dr. Allowance for doubtful accounts 93,600
Cr. Accounts receivable 93,600 |
Adjusting entry:
| Dr. Retained earnings (to adjust for BDE not recorded in 2017) 28,000
Dr. Bad debts expense (for 2018 BDE) 75,600 Cr. Allowance for doubtful accounts 103,600 |
Diff: 3 Type: ES
Skill: Computational
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.
PAGE \* MERGEFORMAT 265
© 2017 Pearson Canada Inc.
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