Deck 8: Receivables

Question 1

If the allowance method is used, the journal entry to record the reinstatement of an account previously written off in the current period includes a debit to Accounts Receivable and a credit to Bad Debt Expense.

Answer 1

False

Question 2

The use of an allowance for bad debts is required under the materiality principle.

Answer 2

False

Question 3

The percentage of sales approach for estimating bad debts is based on the idea that a percent of a company's credit sales for the period are uncollectible.

Answer 3

True

Question 4

Quality of receivables refers to the likelihood of collection without loss.

Question 5

The direct write-off method satisfies generally accepted accounting principles.

Question 6

Installment accounts receivable is another name for aging accounts receivable.

Question 7

Companies must follow both the matching principle and the materiality principle when considering the use of the direct write-off method.

Question 8

The aging of accounts receivable examines each account receivable to estimate the amount that is uncollectible.

Question 9

TechCom has sales of $350,000 and estimates that 0.5% of its sales are uncollectible.The amount of bad debt expense is $17,500.

Question 10

Credit sales are recorded by crediting an account receivable for a specific customer.

Question 11

The matching principle requires use of the direct write-off method.

Question 12

As long as a company accurately records credit sales information, it is not necessary to have accounts for specific customers.

Question 13

TechCom customer RDA Electronics paid off an $8,300 balance on its account receivable. TechCom should record the transaction as a debit to Accounts

Question 14

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable at the time it is determined to be uncollectible.

Question 15

TechCom has $40,000 in outstanding accounts receivable. Past experience suggests that5% of outstanding receivables are uncollectible. The current balance in the allowance for doubtful accounts is $2,500 debit. The required adjusting journal entry includes a debit to bad debt expense for $4,500.

Question 16

Accounts receivable arise from credit sales to customers by both retailers and wholesalers.

Question 17

The advantage of the allowance method of accounting for bad debts is that it identifies the customers who won't pay their bills.

Question 18

If a customer owes interest on a bill, Accounts Receivable is debited and InterestExpense is credited.

Question 19

The accounts receivable approach uses income statement relationships to estimate bad debts.

Question 20

The direct write-off method does not use an allowance for doubtful accounts account.

Question 21

The person that borrows money and signs a promissory note is called the payee.

Question 22

It is a bad business practice to accept a note receivable in exchange for an overdue account receivable.

Question 23

A maker who dishonours a note does not pay it at maturity.

Question 24

Augusto Diaz borrowed $1,000 and signed a 6-month promissory note at 11% interest.The total amount of interest is $110.00.

Question 25

The maturity date of a note is the day the note is signed.

Question 26

A company can raise cash by borrowing money, and then factoring its accounts receivable as security for the loan.

Question 27

The direct write-off method is used because it is simpler than the allowance method.

Question 28

The practice of placing dishonoured notes receivable into Accounts Receivable keeps only current notes receivable in the Notes Receivable account.

Question 29

Phuong Vo borrowed $5,000 and signed a 3-month promissory note at 10%. The total interest on the note is $125.

Question 30

The allowance method complies with the generally accepted accounting principle of matching.

Question 31

Notes receivable do not require a subsidiary ledger.

Question 32

The materiality principle is justification for using the direct-write-off method.

Question 33

The matching principle requires that accrued interest on outstanding accounts receivable be recorded at the end of an accounting period.

Question 34

The formula for computing interest on a note receivable is principal multiplied by interest rate multiplied by time.

Question 35

TechCom received a $1,000, 90-day, 10% note receivable from Danny Outlaw. The journal entry to record the note includes a debit to notes receivable.

Question 36

Receivables can be converted to cash by either selling them or using them as security for a loan.

Question 37

Notes receivable are classified as current liabilities.

Question 38

A promissory note is a written promise to pay a specified amount of money either on demand or at a definite future date.

Question 39

A dishonoured note receivable is reclassified as an account receivable.

Question 40

A payee of a note usually honours a note and pays it in full.

Question 41

A credit sale of $2,500 to a customer would result in:

A)A debit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the Accounts Receivable Ledger.
B)A credit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the Accounts Receivable Ledger.
C)A credit to Sales and a credit to the customer's account in the Accounts Receivable Ledger.
D)A credit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the Accounts Receivable Ledger.
E)A debit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the Accounts Receivable Ledger.

Question 42

Because pledged receivables only serve as collateral for a loan and are not sold, it is not necessary to disclose the pledging.

Question 43

The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales and multiplying the answer by 365.

Question 44

A high accounts receivable turnover rate in comparison with that of competitors suggests that the firm should tighten its credit policy.

Question 45

A company must have less than 30 days' sales uncollected in order to be adequately liquid.

Question 46

Compaq had net sales of $10,500 million. Its average account receivables were $1,750 million. Its accounts receivable turnover was 6.

Question 47

Accounts receivable accounts for specific customers are important because they show:

A)The basis for sending bills to customers.
B)How much each customer has paid.
C)How much each customer still owes.
D)How much each customer purchases.
E)All of these answers are correct.

Question 48

The days' sales uncollected ratio measures a company's ability to manage its debt.

Question 49

The matching principle requires:

A)The use of the direct write-off method for bad debts.
B)That bad debt expenses be reported in the same accounting period as the sales they helped generate.
C)The use of the allowance method of accounting for bad debts.
D)That bad debt expenses be reported in the same accounting period as the sales they helped generate and requires the use of the allowance method of accounting for bad debts.
E)That bad debt expenses be reported in the same accounting period as the sales they helped generate and requires the use of the direct write-off method for bad debts.

Question 50

A contingent liability is an obligation to make a future payment if an uncertain future event occurs.

Question 51

The days' sales uncollected ratio measures the liquidity of receivables.

Question 52

Accounts receivable turnover is calculated by dividing net sales by average accounts receivable.

Question 53

TechCom factored $35,000 of its accounts receivable and was charged a 2% factoringfee. The journal entry to record this would include a debit to Cash of $35,000; a debit toFactoring Fee Expense of $700; and a credit to Accounts Receivable of $35,700.

Question 54

Accounts receivable turnover shows how often a company converts its average accounts receivable balance into cash during the period.

Question 55

Z-Mart had $12,000 in accounts receivable and $320,000 in net sales for the period. To one decimal, Z-Mart's days' sales uncollected was 13.7 days.

Question 56

Firms maintain their own credit cards:

A)In order to speed up receipt of cash from the sale.
B)To earn interest on any balances not paid within a specified period.
C)To grant credit to approved customers.
D)To avoid the fees charged by credit card companies such as VISA.
E)All of these answers are correct.

Question 57

When a note is discounted to a bank without recourse, the bank assumes the risk of a bad debt loss and the original payee doesn't have a contingent liability.

Question 58

TechCom had net sales of $480,000 and average accounts receivable of $64,000. Its accounts receivable turnover was 7.5.

Question 59

Which accounting principle requires reporting expenses in the same period as the sales they helped to produce?

A)Materiality.
B)Cost.
C)Matching.
D)Business entity.
E)Going concern.

Question 60

Hasbro had $750 million in accounts receivable and $2,900 million in net sales for the period. Its days' sales uncollected was 29.8.

Question 61

The cash to be received at maturity on a $10,000, 8%, 90-day note receivable is:

A)$6,187.26.
B)$5,126.26.
C)$12,297.26.
D)$10,197.26.
E)$197.26.

Question 62

A 90-day note issued on July 10 matures on:

A)October 7.
B)October 8.
C)October 9.
D)October 10.
E)October 11.

Question 63

The person who signs a note receivable and promises to pay is the:

A)Payee.
B)Receiver.
C)Owner.
D)Maker.
E)Holder.

Question 64

Interest on $8,400 at 7% for 60 days is:

A)$65.25.
B)$96.66.
C)$52.65.
D)$36.45
E)$41.42

Question 65

TechCom receives a 10%, 90-day note for $2,500. The interest on the note is:

A)$36.99.
B)$58.79.
C)$61.64.
D)$50.00.
E)$87.50.

Question 66

A method of estimating bad debts expense that involves a detailed examination of outstanding accounts and that is usually the most reliable is the:

A)Direct write-off method.
B)Simplified balance sheet method.
C)Accounts receivable method.
D)Aging of accounts receivable method.
E)Income statement method.

Question 67

A promissory note:

A)Is a written promise to pay a specified amount of money at a certain date and is a liability to the payee.
B)Is a written promise to pay a specified amount of money at a certain date.
C)Is a liability to the payee.
D)Is an account receivable.
E)All of these answers are correct.

Question 68

The Liccorish Pizza bought $5,000 worth of merchandise from TechCom and signed a90-day, 10% promissory note for the $5,000. TechCom's journal entry to record the transaction is:

Question 69

Electron borrowed $75,000 from TechCom by signing a promissory note and pledging$85,000 in accounts receivable as security. TechCom's entry to record the transaction should include a:

A)Credit to Notes Receivable for $75,000.
B)Credit to Sales for $75,000.
C)Debit Notes Payable for $75,000.
D)Debit to Accounts Receivable for $75,000.
E)Debit to Notes Receivable for $75,000.

Question 70

The amount of bad debt expense can be estimated by:

A)The aging of accounts receivable approach.
B)The percent of accounts receivable approach.
C)The percent of sales approach.
D)Both the percent of sales approach and the percent of accounts receivable approach.
E)All of these answers are correct.

Question 71

TechCom ages its accounts receivables to determine the end of the period adjustment for bad debts. At the end of the year, management estimated that $12,750 of theaccounts receivable balances would be uncollectible. The Allowance for DoubtfulAccounts had a debit balance of $175. What entry should TechCom make at the end of the year, for the estimated bad debts expense?

Question 72

An accounting procedure that (1)estimates and reports bad debt expense from creditsales during the period of the sales and (2)reports accounts receivable at the amount of cash inflow that is expected from their collection is the:

A)Allowance method of accounting for bad debts.
B)Direct write-off method of accounting for bad debts.
C)Aging of accounts receivable.
D)Adjustment method for uncollectible debts.
E)Cash basis method of accounting for bad debts.

Question 73

The materiality principle:

A)Permits use of the direct write-off method.
B)States that an amount can be ignored if its effect on financial statements is unimportant to the user.
C)Prohibits use of the direct write-off method.
D)States that an amount can be ignored if its effect on financial statements is unimportant to the user and permits use of the direct write-off method.
E)Both permits and prohibits use of the direct write-off method.

Question 74

A promissory note from a customer:

A)Is a short-term investment.
B)Is a cash equivalent.
C)Is a note receivable.
D)Is a note payable.
E)Is an account receivable.

Question 75

On December 31 of the current year, TechCom's unadjusted trial balance included the following items: Accounts Receivable, debit balance of $107,250; Allowance forDoubtful Accounts, credit balance of $1,900. What amount should be debited to Bad Debt Expense, assuming 6% of outstanding accounts receivable as of December 31 of the current year, are estimated to be uncollectible?

A)$6,435.
B)$2,835.
C)$3,755.
D)$4,535.
E)$8,335.

Question 76

When a maker of a note honours a note:

A)The note is written.
B)The note is notarized.
C)The note is cosigned.
D)The note is paid off.
E)The note is signed.

Question 77

During the current year, TechCom concluded that a customer's $4,400 accountreceivable was uncollectible and that the account should be written off. What effect will this write-off have on TechCom's current year net income and balance sheet assumingthe allowance method is used to account for bad debts?

A)Decrease in net income; decrease in total assets.
B)No effect on net income or on total assets.
C)Decrease in net income; no effect on total assets.
D)Increase in net income; no effect on total assets.
E)No effect on net income; decrease in total assets.

Question 78

The maturity date of a note receivable:

A)Is the day the note is due to be paid.
B)Is the date of the first payment.
C)Is the day the note was signed.
D)Is the last day of the month.
E)Is the day of the credit sale.

Question 79

If the balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt being written off, the entry to record the write-off against the allowanceaccount results in:

A)No effect on the expenses of the current period.
B)A reduction in current assets.
C)A reduction in owner's equity.
D)A reduction in current liabilities.
E)An increase in the expenses of the current period.

Question 80

The accounting principle that requires financial statements to report all contingent liabilities is called:

A)Relevance.
B)Matching.
C)Materiality.
D)Full disclosure.
E)Evaluation.