Deck 8: Receivables, Bad Debt Expense, and Interest Revenue

Question 1

If the receivables turnover ratio rises significantly,the increase may be a signal that the company is extending credit to high-risk borrowers or allowing an overly generous repayment schedule.

Answer 1

False

Question 2

The aging of accounts receivable method is based upon the principle that the longer an account is overdue,the higher the risk of nonpayment.

Answer 2

True

Question 3

Interest on a two-month,7%,$1,000 note would be calculated as $1,000 x 0.07 x 2.

Answer 3

False

Question 4

When a company routinely sells on credit,it is inevitable that some of its customers will not pay the amount owed.

Question 5

The direct write-off method for uncollectible accounts is not allowed by GAAP because it ignores the conservatism concept and the matching principle.

Question 6

The allowance method for uncollectible accounts is used for accounts receivable but not for notes receivable.

Question 7

In normal circumstances,the allowance for doubtful accounts for a company should be a fairly consistent percentage of gross accounts receivable.

Question 8

Factoring refers to an arrangement in which a company sells its receivables to another company and receives cash immediately.

Question 9

The receivables turnover ratio is calculated using the total net receivables.

Question 10

If a company factors its receivables,its receivables turnover ratio will be lower than it would have been if the receivables had not been factored.

Question 11

The accounts receivable account for each customer is called a subsidiary account.

Question 12

Under the allowance method for uncollectible accounts,writing off a specific account will not affect the net accounts receivable.

Question 13

The allowance method for uncollectible accounts is required by GAAP because it conforms to the matching principle.

Question 14

The direct write-off method for uncollectible accounts is better than the allowance method because it is more consistent with the conservatism principle.

Question 15

The percentage of credit sales method is simpler but less accurate than the aging method for calculating bad debts.

Question 16

The direct write-off method for uncollectible accounts is not allowed by either GAAP or IFRS,but is required by the IRS.

Question 17

Allowance for doubtful accounts is a temporary account which is closed to retained earnings at the end of the accounting period.

Question 18

Interest revenue from notes receivable is reported on a multiple step income statement as a part of Income from Operations.

Question 19

When credit card sales occur,the seller may receive cash immediately,or within a few days,depending upon the specific credit card program being used.

Question 20

Credit card companies charge a fee to the seller that accepts the credit cards.This fee is recorded by the seller as a non-operating expense on its income statement.

Question 21

Over the past five years,a company had average annual credit sales of $320,000 and this year had write-offs of $2,000.Credit sales in the current year are $300,000.The balance in the Allowance for Doubtful Accounts is a $500 credit.Using the percentage of credit sales method and an estimate of 1%,what amount should the company record as an estimate of bad debt expense?

A)$2,500
B)$3,000
C)$2,980
D)$3,200

Question 22

Which of the following statements regarding the tradeoffs of extending credit is not true?

A)Extending credit to at least some customers is necessary in a competitive market to avoid losing sales to competitors.
B)Even if a company were to collect in full from customers,there would be a cost of extending credit to customers.
C)Even though additional costs are incurred if credit is extended,a company expects that the additional revenue will be more than sufficient to offset the additional costs.
D)Even if there are no bad debts from credit sales,the delayed receipt of cash will always increase additional costs beyond the increased revenue from the credit sales.

Question 23

Which of the following statements regarding the interpretation of the receivables turnover ratio is not true?

A)Analysts often interpret a sudden increase in the receivables turnover ratio as a signal of a developing problem.
B)The smaller the receivables turnover ratio the larger the days to collect will be.
C)A change in the receivables turnover ratio may indicate a change in the company's credit granting policies.
D)A change in the receivables turnover ratio may indicate a change in economic conditions.

Question 24

An allowance for doubtful accounts is a contra-account that offsets:

A)bad debt expense.
B)cash.
C)net income.
D)accounts receivable.

Question 25

The Grass is Greener Corporation provides $6,000 worth of lawn care on account during the month.Experience suggests that about 2% of net credit sales will not be collected.To record the potential bad debts,The Grass is Greener Corporation would:

A)debit Accounts Receivable and credit Allowance for Doubtful Accounts for $120.
B)debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $120.
C)debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $120.
D)debit Bad Debt Expense and credit Accounts Receivable for $120.

Question 26

If a company did not extend credit to customers:

A)gross revenue would increase.
B)costs would increase but so would its revenue.
C)costs would decrease but so would its revenue.
D)gross profit would increase.

Question 27

The potential advantages of extending credit include all of the following except:

A)higher selling expenses.
B)higher profits.
C)higher customer satisfaction.
D)higher revenues.

Question 28

The Grass is Greener Corporation uses the allowance method and learns that a customer who owes $350 has gone bankrupt and payment will not be made.The Grass is Greener Corporation should:

A)debit Bad Debt Expense and credit Accounts Receivable for $350.
B)debit the Allowance for Doubtful Accounts and credit Accounts Receivable for $350.
C)debit Bad Debt Expense and credit Cash for $350.
D)debit Accounts Receivable and credit Bad Debt Expense for $350.

Question 29

The Grass is Greener Corporation provides $6,000 worth of lawn care on account during the month.Experience suggests that about 2% of net credit sales will not be collected.According to the revenue recognition principle and the matching principle,the company should:

A)record an estimate of bad debt expense in the same period as the lawn care is provided.
B)not report the sales revenue until it collects payment.
C)increase the value of its liabilities with an adjustment.
D)wait until the accounts are determined to be uncollectible before making an entry for bad debt expense.

Question 30

Which of the following statements regarding the allowance for doubtful accounts is true?

A)Under the aging of accounts receivable method,bad debt expense is calculated and then added to the beginning balance in the allowance for doubtful accounts.
B)The allowance for doubtful accounts is a contra-revenue account.
C)The allowance for doubtful accounts is credited when a specific write-off is recorded.
D)The allowance for doubtful accounts has a normal credit balance.

Question 31

When a company that uses the allowance method writes off an actual bad debt:

A)total assets decrease.
B)total liabilities increase.
C)total expenses increase and total revenues increase.
D)total assets,revenues,and expenses remain the same.

Question 32

Which of the following statements regarding the recording of interest on notes receivable is true?

A)Interest on notes receivable is recorded as revenue only when the cash is received.
B)When a company receives an interest payment on a note,the entire payment is debited to interest receivable.
C)Interest on notes receivable is recognized when it is earned which is not necessarily when the interest is received in cash.
D)Interest earned but not yet received must be recorded in an adjusting entry which includes a debit to interest revenue.

Question 33

Assume the Mirtha Company had the following balances at year-end. Assume the company recorded no write-offs or recoveries during 2015.What was the amount of bad debt expense reported in 2015?

A)$79,000.
B)$64,600.
C)$28,800.
D)$14,400.

Question 34

Which of the following statements about extending credit is not true?

A)It is common for companies to sell on account to other companies.
B)Some companies extend credit to individual consumers.
C)Bad debts arise from credit sales to individual consumers,but not from credit sales to other companies.
D)When credit is available,customers often buy more products and services.

Question 35

Extending credit to customers will not result in which of the following additional costs?

A)Increased wage costs will be incurred to evaluate customer creditworthiness,track what each customer owes,and follow up to ensure collection.
B)Bad debt expense will result when amounts cannot be collected from customers.
C)Delayed receipt of cash may result in requiring the company to take out short-term loans and incur interest costs.
D)Decreased gross profit from reduced sales.

Question 36

Which of the following statements regarding the receivables turnover ratio is true?

A)The receivables turnover ratio indicates how many times,on average,the process of selling to and collecting from customers occurs during the accounting period.
B)Companies of similar size in different industries tend to have similar receivables turnover ratios.
C)A high turnover ratio may suggest the company is allowing too much time for customers to pay.
D)The days to collect ratio is found by dividing the receivables turnover ratio by 365 days.

Question 37

When an adjusting entry is made in anticipation of some receivables being uncollectible,the adjustment:

A)reduces both net income and net accounts receivable.
B)reduces net income and increases liabilities.
C)reduces net accounts receivable and increases liabilities.
D)reduces net income and selling expenses.

Question 38

Which of the following statements regarding methods of accounting for bad debts is true?

A)When the allowance method is used,the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet.
B)The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method.
C)When the allowance method is used,if actual results differ from the estimates,the prior year financial statements must be corrected.
D)When the allowance method is used,bad debt expense is equal to the write-offs that occurred during the period.

Question 39

Companies are concerned about the cost of extending credit for all the following reasons except:

A)the time delay in receiving payment.
B)the expense of the extra goods that must be produced or bought.
C)the risk of nonpayment.
D)the administrative costs associated with extending credit.

Question 40

The Grass is Greener Corporation is owed $11,890 from a client for landscaping.The account is overdue and the client is having difficulty paying.Why might the Grass is Greener Corporation extend a note receivable to the client?

A)The loan will decrease the net income of the Grass is Greener Corporation for the current accounting period.
B)The loan will strengthen the Grass is Greener Corporation's legal right to be repaid with interest.
C)The loan will reduce the tax liability for the Grass is Greener Corporation.
D)The loan will eliminate any doubts of collection of the amount due.

Question 41

Your company wrote off $350 in accounts receivable two months ago when a customer went bankrupt.That customer reorganizes and now pays the $350.Your company should:

A)debit Bad Debt Expense and credit Cash.
B)debit Accounts Receivable and credit Bad Debt Expense and then debit Cash and credit Allowance for Doubtful Accounts.
C)debit Cash and credit Accounts Receivable.
D)debit Accounts Receivable and credit Allowance for Doubtful Accounts and then debit Cash and credit Accounts Receivable.

Question 42

When a company makes an adjustment in anticipation of future uncollectible receivables:

A)it debits an asset account and credits a liability account.
B)it debits an expense account and credits an asset account.
C)it debits an expense account and credits a revenue account.
D)it debits an expense account and credits a contra-asset account.

Question 43

The amount of uncollectible accounts at the end of the year is estimated to be $25,000 using the aging of accounts receivable method.The balance in the Allowance for Doubtful Accounts account is an $8,000 credit before adjustment.Assuming no accounts are written off during the period,what will be the amount of bad debt expense for the period?

A)$8,000.
B)$17,000.
C)$25,000.
D)$33,000.

Question 44

To record estimated uncollectible accounts using the allowance method,the adjusting entry would normally be a debit to:

A)Accounts Receivable and a credit to Allowance for Doubtful Accounts.
B)Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
C)Allowance for Doubtful Accounts and a credit to Accounts Receivable.
D)Bad Debt Expense and a credit to Accounts Receivable.

Question 45

On the balance sheet,the allowance for doubtful accounts:

A)is included in current liabilities.
B)increases the reported net value of accounts receivable.
C)appears under the heading "Other Assets."
D)is deducted from accounts receivable.

Question 46

During the year,a company that uses the allowance method concludes that $6,844 of specific customer accounts will not be collected.These are written off by:

A)debiting Accounts Receivable and crediting Allowance for Doubtful Accounts for $6,844.
B)debiting Accounts Receivable and crediting Bad Debt Expense for $6,844.
C)debiting Bad Debt Expense and crediting Accounts Receivable for $6,844.
D)debiting Allowance for Doubtful Accounts and crediting Accounts Receivable for $6,844.

Question 47

The amount of uncollectible accounts at the end of the year is estimated to be $25,000,using the aging of accounts receivable method.The balance in the Allowance of Doubtful Accounts account is an $8,000 credit before adjustment.What should the account balance in the Allowance for Doubtful Accounts be after adjustment?

A)$8,000.
B)$17,000.
C)$25,000.
D)$33,000.

Question 48

If an uncollectible account,previously written off,is recovered:

A)net accounts receivable increases.
B)net accounts receivable decreases.
C)net accounts receivable stays the same.
D)total revenues increase.

Question 49

Your company has previously averaged about 26% of its accounts receivable in the "over 90 days past due" category but now forecasts 18% in this category.You use the aging of accounts receivable method of estimating bad debt expense.If the total of credit sales remains unchanged from previous months and no write offs are made,the estimate of bad expense based on the new forecast will:

A)increase over the estimate for previous months.
B)decrease over the estimate for previous months.
C)not change.
D)will depend on the percentage of credit sales deemed uncollectible.

Question 50

On average,5% of total accounts receivable has been uncollectible in the past.At the end of the year,the balance of accounts receivable is $100,000 and the allowance for doubtful accounts has an unadjusted credit balance of $500.Credit sales during the year were $150,000.Using the aging of accounts receivable method,the estimated bad debt expense would be:

A)$4,500.
B)$5,000.
C)$7,000.
D)$7,500.

Question 51

On average,5% of total accounts receivable has been uncollectible in the past.At the end of the year,the current balance of accounts receivable is $100,000.The allowance for doubtful accounts has an unadjusted debit balance of $500 using the aging of accounts receivable method.Credit sales during the year were $150,000.The estimated bad debt expense is:

A)$4,500.
B)$5,000.
C)$5,500.
D)$7,000.

Question 52

Use the information above to answer the following question.The unadjusted balance of the allowance for doubtful accounts of Johnstone Supplies,Inc. ,is a credit balance in the amount of $28,947 on July 31,2014.Based on the accounts receivable aging report,bad debt expense will be:

A)$34,012.
B)$5,065.
C)$62,959.
D)$50,434.

Question 53

Before adjustment,the allowance for doubtful accounts has a credit balance of $2,700.The company had $140,000 of net credit sales during the period and historically fails to collect 4% of credit sales.The company uses the percentage of credit sales method of estimating doubtful accounts.After adjusting for estimated bad debts,the ending balance in the allowance for doubtful accounts account will be:

A)$8,300.
B)$5,400.
C)$2,900.
D)$5,600.

Question 54

Your company uses the percentage of credit sales method for calculating bad debt expense.If your company has $216,000 in total sales,of which $178,000 are on credit,and its historical bad debt loss is 6% of credit sales,bad debt expense is:

A)$12,960.
B)$10,680.
C)$38,000.
D)$11,000

Question 55

Your company previously averaged about 20% of its total accounts receivable in the "over 90 days past due" category and now has 35% in this category.All else equal,using the aging of accounts receivable method,the amount of the bad debt adjustment will:

A)decline,thus increasing the ending balance of the allowance account.
B)increase,thus increasing the ending balance of the allowance account.
C)decline,thus reducing the ending balance of the allowance account.
D)increase,thus reducing the ending balance of the allowance account.

Question 56

Use the information above to answer the following question.If Johnstone Supplies,Inc. ,writes off $3,081 of uncollectible accounts during August,2014,the unadjusted account balance in the allowance for doubtful accounts on August 31,2014 will be:

A)$30,931.
B)$5,065.
C)$34,012.
D)$1,984.

Question 57

The beginning credit balance in the allowance for doubtful accounts is $12,656 and the ending credit balance is $14,348.If bad debt expense was $3,879,which of the following statements is true?

A)The allowance account was retroactively debited $2,187 for additional bad debts that became apparent in a future time period.
B)The allowance account was debited $2,187 for write-offs of actual bad debts.
C)The allowance account was credited $2,187 for recoveries of bad debts.
D)The allowance account was credited $2,187 for the difference between the percent of credit sales method and the aging of accounts receivable methoD.

Question 58

On average,5% of credit sales has been uncollectible in the past.At the end of the year,the balance of accounts receivable is $100,000 and the allowance for doubtful accounts has an unadjusted credit balance of $500.Net credit sales during the year were $150,000.Using the percentage of credit sales method,the estimated bad debt expense would be:

A)$5,000.
B)$7,000.
C)$7,500.
D)$8,000

Question 59

In 2014,Lawrence Company had gross sales of $750,000 on account and granted sales discounts of $15,000.On January 1,2014,the Allowance for Doubtful Accounts had a credit balance of $18,000.During 2014,$30,000 of uncollectible accounts receivable were written off.Past experiences indicate that 3% of net credit sales become uncollectible.Using the percentage of credit sales method,what would be the adjusted balance in the Allowance for Doubtful Accounts at December 31,2014?

A)$10,050.
B)$10,500.
C)$22,050.
D)$34,500.

Question 60

Net accounts receivable is:

A)gross accounts receivable minus cost of goods sold.
B)gross accounts receivable minus bad debt expense.
C)gross accounts receivable minus allowance for doubtful accounts.
D)gross accounts receivable minus current liabilities.

Question 61

IBM signs an agreement to lend one of its customers $200,000 to be repaid in one year at 5.5% interest.IBM would record this loan as:

A)notes payable.
B)accounts receivable.
C)notes receivable.
D)unearned revenue.

Question 62

Dry Corporation cannot pay off its account with Bone Corporation on a timely basis.Bone Corporation issues a $2,000,3-month,12% promissory note to Dry Corporation in settlement of an open accounts receivable.What entry will Bone Corporation make upon issuance?

A)Option A
B)Option B
C)Option C
D)Option D

Question 63

Generous Inc.lends Blue Inc.$40,000 on April 1,accepting a four-month,4.5% interest-bearing note.Generous Inc.prepares financial statements on April 30.What adjusting entry should be made by Generous Inc.before its financial statements are prepared?

A)Option A
B)Option B
C)Option C
D)Option D

Question 64

As of December 31,Frappa Company has a balance of $5,000 in accounts receivable.Of this amount,$500 is past due and the remainder is not yet due.Frappa has a credit balance of $45 in the allowance for doubtful accounts.Frappa Company estimates its bad debt losses using the aging of receivables method,with estimated bad debt loss rates equal to 1% of accounts not yet due and 10% of past due accounts.How would the required adjusting journal entry be recorded in the Allowance for Doubtful Accounts?

A)$95 (credit).
B)$55 (credit).
C)$50 (credit).
D)$45 (debit).

Question 65

Total doubtful accounts at the end of the year are estimated to be $25,000 based on an aging of accounts receivable.If the balance in the Allowance for Doubtful Accounts is a $7,000 debit before adjustment,what will be the amount of bad debt expense recorded for the period?

A)$7,000.
B)$18,000.
C)$25,000.
D)$32,000.

Question 66

A company lends its supplier $150,000 for 3 years at a 6% annual interest rate.Interest payments are to be made twice a year.The company initially records the transaction by:

A)debiting Notes Receivable for $150,000 and crediting Cash for $150,000.
B)debiting Cash for $150,000 and crediting Notes Payable for $150,000.
C)debiting Cash for $9,000 and crediting Interest Revenue for $9,000.
D)debiting Interest Receivable for $4,500 and crediting Interest Revenue for $4,500.

Question 67

On January 31,2014,Purrfect Pets receives a $4,680 interest payment on a note receivable representing two months of accumulated interest.One month of this interest was accrued and recorded during the year ended December 31,2013.Upon receiving the payment,the company would:

A)debit Interest Receivable for $2,340,debit Cash $2,340,and credit Interest Revenue for $4,680.
B)debit Cash for $4,680,credit Interest Revenue for $2,340,and credit Interest Receivable for $2,340.
C)debit Cash for $4,680,and credit Interest Receivable for $4,680.
D)debit Cash for $4,680 and credit Interest Revenue for $4,680.

Question 68

A company lends a major client $90,000 for one year at a 7% annual interest rate.Interest payments are to be made twice a year,and interest is accrued monthly.In July,the company receives an interest payment for January through June.The company would record receipt of the interest payment in which of the following ways?

A)Debit Interest Receivable for $3,150 and credit Interest Revenue for $3,150.
B)Debit Cash for $3,150 and credit Notes Receivable for $3,150.
C)Debit Interest Revenue for $3,150 and credit Cash for $3,150.
D)Debit Cash for $3,150 and credit Interest Receivable for $3,150.

Question 69

A company lends a major client $90,000 for one year at a 7% annual interest rate.Interest payments are to be made twice a year but the company wants to recognize interest earned on a monthly basis.On a month in which the company does not receive any interest payments,interest is recorded with:

A)a debit to Cash of $525 and a credit to Interest Revenue of $525.
B)a debit to Notes Receivable of $525 and a credit to Cash of $525.
C)a debit to Interest Receivable of $525 and a credit to Interest Revenue of $525.
D)no adjusting entry,since no transaction has occurreD.

Question 70

When interest is calculated for periods shorter than a year,the formula to calculate interest is:

A)I = P x R x T,where I = interest calculated,P = principal,R = annual interest rate,and T = number of months.
B)I = P x R x T,where I = interest calculated,P = principal,R = annual interest rate,and T = (number of months ÷ 12)
C)I = P x R x T,where I = interest calculated,P = principal,R = monthly interest rate,and T = (number of months ÷ 12).
D)I = (MV - P)/T,where I = interest calculated,MV = maturity value,P = principal and T = number of months.

Question 71

In reviewing the accounts receivable,the net receivables value is $17,000 before writing off a $1,500 account.What is the net receivables value after the write-off?

A)$17,000.
B)$1,500.
C)$18,500.
D)$15,500.

Question 72

A company lends its supplier $150,000 for 3 years at a 6% annual interest rate.Interest payments are to be made twice a year.Each interest payment will be for:

A)$9,000.
B)$13,500.
C)$4,500.
D)$27,000.

Question 73

Your company lent a customer $5,000 to satisfy the customer's overdue accounts receivable.The loan is for one year at an annual interest rate of 5%.Six months later the customer repays the principal and interest.The principal part of the repayment should be recorded as a:

A)debit to Cash and credit to Notes Receivable.
B)debit to Notes Receivable and credit to Accounts Receivable.
C)debit to Cash and credit to Accounts Receivable.
D)debit to Notes Receivable and credit to Cash.

Question 74

In the interest formula,the interest rate is on a(n)_____ basis;therefore,the time variable must reflect how many _____ out of _____ in the interest period.

A)monthly,months,6
B)annual,years,1
C)monthly,months,12
D)annual,months,12

Question 75

When a company lends cash to a customer who signs a promissory note:

A)net assets decrease for the current accounting period,but increase when the money is repaid.
B)net assets increase in the current accounting period but revenues increase when the money is repaid.
C)net assets increase and liabilities increase when the transaction occurs.
D)net assets and net income do not change when the transaction occurs.

Question 76

Plasma Inc. ,has net credit sales of $500,000 during the year.Based on historical information,Plasma estimates that 2% of net credit sales result in bad debts.At the beginning of the year,Plasma has a credit balance in its Allowance for Doubtful Accounts of $4,000.What amount of bad debt expense should Plasma recognize for the year,assuming no specific customer accounts were written off?

A)$4,000.
B)$6,000.
C)$10,000.
D)$14,000.

Question 77

Which of the following is true?

A)Accounts receivable decline as companies sell on credit.
B)Accounts receivable increase as companies receive payment.
C)Receivables turnover refers to how fast receivables are collected.
D)Days to Collect will increase as the receivables turnover increases.

Question 78

Preston Corporation issues a $3,000 note to Fulton Corporation on March 1,which carries interest at an annual rate of 5%.Interest is payable when the note matures on June 30.What entry will Fulton make at its year-end,April 30,if interest on the note has not previously been accrued?

A)Option A
B)Option B
C)Option C
D)Option D

Question 79

On January 1,a company lends a corporate customer $80,000 at 6% interest.The amount of interest revenue that should be recorded for the first quarter is:

A)$4,800.
B)$1,200.
C)$400.
D)$1,600.

Question 80

On July 1,2014,Icespresso Inc.signed a two-year $8,000 note receivable with 9 percent interest.At its due date,July 1,2016,the principal and interest will be received in full.Interest revenue should be reported on Icepresso's income statement for the year ended December 31,2014,in the amount of:

A)$1,440.
B)$720.
C)$420.
D)$360.