Deck 9: Receivables

Question 1

Which of the following is an example of exercising internal control over receivables?

A) separating cash collection and credit approval duties
B) extending credit to all customers who apply for credit
C) combining the duties of the credit and accounting departments
D) allowing credit department employees to collect cash from customers

Answer 1

A

Question 2

An organization's receivables can be categorized into accounts receivable, notes receivable, and other receivables.

Answer 2

True

Question 3

Dividends receivable, interest receivable, and taxes receivable are generally categorized as other receivables.

Answer 3

True

Question 4

A receivable is a monetary claim against a business or an individual.

Question 5

The two major types of receivables are interest receivable and taxes receivable.

Question 6

Businesses must maintain a single Accounts Receivable account regardless of the number of customers.

Question 7

Separate customer accounts receivable are called subsidiary accounts.

Question 8

The collection period of accounts receivable is usually long: therefore, it is classified as a long-term asset on the balance sheet.

Question 9

Which of the following is a weak internal control over cash collections from receivables?

A) The credit department should have no access to cash.
B) A credit department should evaluate customers' credit applications to determine whether they meet the company's approval standards.
C) A company should have written approval standards for processing customers' credit applications.
D) In order to avoid losing sales, all customers' credit applications should be approved.

Question 10

The credit department must have access to cash in order to exercise effective internal control over receivables.

Question 11

A debtor is a party to a credit transaction who will receive the cash for the transaction at a later date.

Question 12

Accounts receivable are also known as trade receivables.

Question 13

The terms of payment for a note receivable are generally longer than that of an account receivable.

Question 14

A receivable occurs when a business sells goods or services to another party on account.

Question 15

Which of the following statements, regarding notes receivable, is incorrect?

A) Notes receivable usually have longer terms than accounts receivable.
B) A notes receivable is a written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future.
C) All notes receivable are considered long-term assets.
D) Notes receivable are sometimes called promissory notes.

Question 16

Which of the following is included in the category of other receivables?

A) interest receivable
B) accounts receivable
C) notes receivable
D) investments

Question 17

Notes receivable represents a written promise that a party will pay a fixed amount of principal plus interest on a stated maturity date.

Question 18

Markus Company maintains a separate accounts receivable account for each customer. On June 18, Markus sells $6,200 services on account to customer Anthony and $1,600 services on account to customer Walker. How will these two transactions affect the control and subsidiary accounts?

A) The control account, Accounts Receivable, will be increased with a debit of $7,800.
B) The individual customer accounts in the subsidiary ledger will be increased with credits.
C) After posting this sales transaction, the sum of the balances in subsidiary accounts receivable will not equal the control account balance.
D) The control account will have a debit balance and the subsidiary accounts will have a credit balance. This keeps the accounting equation in balance.

Question 19

A business maintains subsidiary accounts for each of its customers. On May 15, the business sells services on account: $2,500 to customer J. Simmons; $4,100 to customer A. Jones; and $1,300 to customer J. Williams. Which journal entry is needed to record this sales transaction?

Question 20

Which of the following statements is true?

A) Accounts receivable are more liquid than cash.
B) Notes receivable are always classified as current assets.
C) Notes receivable usually have longer collection terms than accounts receivable.
D) Accounts receivable are liabilities.

Question 21

Prairie Outfitters, Inc., a retailer, accepts payment through credit cards. During August, credit card sales amounted to $12,000. The processor charges a 3% fee. Assuming that the credit card processor uses the gross method, prepare the journal entries, on the books of Prairie Outfitters, for the credit card sales and the payment of fees. (Ignore cost of goods sold.)

Question 22

When a business accepts payment by credit cards or debit cards, a fee is paid to the card processor.

Question 23

On January 1, Davidson Services has the following balances: Accounts Receivable $21,000
Bad Debts Expense $0
Davidson has the following transactions during January: Credit sales of $150,000, collections of credit sales of $83,000, and write-offs of $20,000. Davidson uses the direct write-off method. The amount of Bad Debts Expense for January is ________.

A) $21,000
B) $36,145
C) $11,067
D) $20,000

Question 24

Under the direct write-off method, which of the following is included in the entry to write off an uncollectible account?

A) a credit to the Allowance for Bad Debts
B) a credit to the customer's Account Receivable
C) a debit to Allowance for Uncollectible Accounts
D) No entry is made to write off uncollectible accounts.

Question 25

Factoring is an option available to a business to reduce the risk of uncollectible accounts receivable.

Question 26

Clothesall, Inc., a retailer, accepts payment through credit cards. During August, credit card sales amounted to $12,000. The processor charges a 3% fee. Assume that the processor deposits the net amount. Prepare the journal entry for card sales. (Ignore cost of goods sold.)

Question 27

When a company is using the direct write-off method, and an account is written off, the journal entry consists of a ________.

A) debit to Accounts Receivable and a credit to Cash
B) credit to Accounts Receivable and a debit to Bad Debts Expense
C) debit to the Allowance for Bad Debts and a credit to Accounts Receivable
D) credit to Accounts Receivable and a debit to Interest Expense

Question 28

When a business factors its accounts receivables, the business ________.

A) uses the receivables as security for a loan
B) no longer has to deal with the collection of the receivables from the customers
C) receives the the total amount of the receivables from the factor
D) receives cash, less an applicable fee, after the factor collects from the customers

Question 29

The expense associated with the cost of uncollectible accounts receivable is known as bad debts expense.

Question 30

When a business pledges its accounts receivable, it transfers the right to collect cash from customers to the bank.

Question 31

Charms, Inc. has determined that an account receivable of $125 is uncollectible. The company uses the direct write-off method. Which of the following entries is required to record the write-off?

Question 32

Which of the following is a disadvantage when a business accepts credit cards or debit cards from customers?

A) The business bears the responsibility of collecting cash from the customer.
B) The business bears the risk of nonpayment by the customer.
C) The business pays a processing fee.
D) The business checks customers' credit ratings.

Question 33

When the credit card processor deposits the gross proceeds from credit and debit card sales ________.

A) there will be no fee charged for the transaction
B) the deposit is made on the last day of the month
C) the total sales less the processing fee assessed equals the net amount of cash deposited
D) the processing fees are deducted from the company's bank account by the processor

Question 34

Under the direct write-off method, the entry to write off an uncollectible account will include ________.

A) a debit to Bad Debts Expense account
B) a debit to the customer's Account Receivable
C) a credit to the Allowance for Bad Debts
D) No entry is made to write off uncollectible accounts.

Question 35

The following information is from the records of Armadillo Camera Shop: The company uses the direct write-off method for bad debts. What is the amount of bad debts expense?

A) $80,000
B) $42,000
C) $65,000
D) $18,000

Question 36

Sales through credit cards or debit cards transfer the risk of collection of receivables from the seller to the card issuer.

Question 37

Sales through credit cards and debit cards are journalized in the same way as sales on account.

Question 38

The direct write-off method of accounting for uncollectible receivables is primarily used by small, nonpublic companies.

Question 39

A business that accepts payments by credit and debit cards ________.

A) is usually unable to attract more customers
B) must check each customer's credit rating
C) generally receives proceeds from credit and debit card transactions 30 - 45 days after the sale
D) almost always pays a fee to the seller to cover the processing costs

Question 40

On January 1, A Plus Services has the following balances: Accounts Receivable $28,000 (debit)
Bad Debts Expense $0
A Plus Services has the following transactions during January: Credit sales of $110,000, collections of credit sales of $87,000, and write-offs of $19,000. A Plus Services uses the direct write-off method. At the end of January, the balance of Accounts Receivable is ________.

A) $15,027
B) $32,000
C) $24,023
D) $51,000

Question 41

Under both the allowance method and the direct-write off method of accounting for uncollectible accounts, the amount of bad debts expense is to be estimated at the end of each accounting period.

Question 42

The two methods of accounting for uncollectible receivables are ________.

A) the direct write-off method and the liability method
B) the asset method and the sales method
C) the allowance method and the liability method
D) the allowance method and the direct write-off method

Question 43

Prepare the journal entry to record an uncollectible account receivable of $10,000, using the direct write-off method.

Question 44

A company with significant amounts of accounts receivable experiences uncollectible accounts from time to time. If the company uses the direct write-off method, the effect of writing off an uncollectible receivable will be ________.

A) a reduction in net income
B) negligible on net income
C) an increase in total assets
D) a generation of positive cash flow

Question 45

Which of the following is true of the balance sheet presentation of the Allowance for Bad Debts?

A) It is reported as a current liability.
B) It is reported as an operating expense.
C) It is reported as a separate, independent line item under current assets.
D) It is shown as a contra account related to accounts receivable.

Question 46

A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see from which customers the company will not be able to collect is known as the allowance method.

Question 47

The direct write-off method for uncollectible accounts violates the matching principle.

Question 48

The net realizable value of Accounts Receivable is calculated by subtracting Bad Debts Expense from Accounts Receivable.

Question 49

Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts receivable.

Question 50

Customer A. Smith owed Stonebridge Electronics $325. On April 27, 2016, Stonebridge determined this account receivable to be uncollectible and wrote off the account. The company uses the direct write-off method. On July 15, 2016, Stonebridge received a check for $325 from the customer. How should the July 15, 2016 transaction be recorded?

Question 51

Which of the following statements is true of the direct write-off method?

A) GAAP requires public companies to follow the direct write-off method.
B) It provides better matching of revenues with expenses.
C) It results in more accurate net income than any other method.
D) It is only suitable for small companies that have very few uncollectible receivables.

Question 52

The direct write-off method is only acceptable for companies that have very few uncollectible receivables.

Question 53

Sunrays, Inc. wrote off the account of one of its customers, Brad Doe, in 2016 for $500. On January 21, 2017, Brad unexpectedly repaid his account in full. The company uses the direct write-off method to account for uncollectible receivables. Journalize the entries required for Sunrays, Inc. on January 21, 2017.

Question 54

Accounts Receivable has a balance of $34,000, and the Allowance for Bad Debts has a credit balance of $3,400. The allowance method is used. What is the net realizable value of Accounts Receivable before and after a $2,300 account receivable is written off?

A) $30,600; $30,600
B) $28,300; $28,300
C) $30,600; $28,300
D) $28,300; $32,900

Question 55

The Allowance for Bad Debts is a contra account to Accounts Receivable.

Question 56

The use of the allowance method to record bad debts expense violates the matching principle.

Question 57

For a company with significant uncollectible receivables, the direct write-off method is unsuitable because ________.

A) it overstates liabilities on the balance sheet
B) it violates the matching principle
C) it uses estimates for determining the bad debt expense
D) companies are not able to track customer payment histories

Question 58

In order to keep accurate records about the collection of cash for a previously written off account, collection of cash for a previously written off account, a business should re-establish the Accounts Receivable by debiting the receivable account.

Question 59

When a company uses the allowance method to measure bad debts, ________.

A) the Bad Debts Expense account is debited when an account is written off
B) the amount of bad debts expense is estimated at the end of the accounting period
C) the Allowance for Bad Debts account balance is added to the balance of the Accounts Receivable account to arrive at the net realizable value
D) the Allowance for Bad Debts account is debited when the bad debts expense is estimated

Question 60

In order to keep accurate records about the collection of cash for a previously written off account, collection of cash for a previously written off account, a business should re-establish the Accounts Receivable by crediting the receivable account.

Question 61

The percent-of-sales method calculates bad debts expense based on a percentage of net cash sales.

Question 62

The entry to write off an account receivable under the allowance method will ________.

A) reduce net income
B) have no effect on net income
C) increase total assets
D) increase net income

Question 63

Two methods of estimating uncollectible receivables are ________.

A) the allowance method and the amortization method
B) the aging-of-accounts-receivable method and the percent-of-sales method
C) the gross-up method and the direct write-off method
D) the direct write-off method and the percent-of-completion method

Question 64

Accounts Receivable has a balance of $6,000, and the Allowance for Bad Debts has a credit balance of $400. The allowance method is used. What is the net realizable value of Accounts Receivable after a $150 account receivable is written off?

A) $5,450
B) $5,750
C) $5,600
D) $6,000

Question 65

When using the allowance method, the receipt of a payment on receivables that have been written-off requires an entry to reverse the write-off to the Allowance for Bad Debts account and an entry to record the receipt of cash.

Question 66

On January 16, Whole Circle, Inc. sold $5,000 merchandise to Smith, on account. Whole Circle could not collect cash from Smith and wrote off the account. Prepare a journal entry to record the write-off, assuming Whole Circle uses the allowance method.

Question 67

When using the allowance method, after a company has previously written off an account, ________.

A) the company continues to send monthly statements to the customers whose accounts have been written off
B) the company cannot collect from these customers because their accounts have been written off
C) when a customer pays on an account that has been written off, the company needs to reverse the write-off to the Allowance for Bad Debts account and then record the receipt of cash
D) the company does not need to re-establish the receivable account

Question 68

The Allowance for Bad Debts account has a credit balance of $3,000 before the adjusting entry for bad debts expense. The company's management estimates that 5% of net credit sales will be uncollectible for the year 2017. Net credit sales for the year amounted to $290,000. What is the amount of Bad Debts Expense reported on the income statement for 2017?

A) $14,500
B) $17,500
C) $7,250
D) $11,500

Question 69

The percent-of-sales method calculates bad debts expense as a percentage of net credit sales.

Question 70

On January 16, 2017, Eliot Brothers Oil, Inc. sold $5,000 of merchandise to Bryce, on account. Eliot Brothers could not collect cash from Bryce and wrote off the account on December 31, 2017. On November 4, 2018, Bryce unexpectedly paid $5,000. Journalize the transactions on December 31, 2017 and November 4, 2018. (Eliot Brothers uses the allowance method.)

Question 71

When using the allowance method, the write-off of a receivable ________.

A) involves a contra-revenue account
B) reduces the amount of the Allowance for Bad Debts account
C) decreases net income
D) affects the net realizable value

Question 72

When using the allowance method, Allowance for Bad Debts is debited when an account receivable is written off.

Question 73

The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts.

Question 74

What is net realizable value? How is net realizable value affected when a receivable is written off under the allowance method?

Question 75

A company reports net accounts receivable of $154,000 on its December 31, 2017 balance sheet. The Allowance for Bad Debts has a credit balance of $17,000. What is the balance of Accounts Receivable?

A) $159,000
B) $154,000
C) $171,000
D) $137,000

Question 76

The following information is from the records of Pangolin Camera Shop: Bad expense is estimated by the aging-of-receivables method. Management estimates that $2,950 of accounts receivable will be uncollectible. Calculate the amount of net accounts receivable after the adjustment for bad debts.

A) $22,950
B) $22,050
C) $21,150
D) $20,800

Question 77

Grabbe Enterprises uses the allowance method to account for uncollectible receivables. When an uncollectible account is written off, ________.

A) the Bad Debt Expense account is debited
B) no entry is required because bad debt expense is estimated at the end of the accounting period
C) the write off has no effect on net income
D) the Allowance for Bad Debts account is credited

Question 78

Bad debt expense is not debited when a company writes off an account receivable when using the allowance method because the company has already recorded the Bad Debt Expense as an adjusting entry.

Question 79

During July 2017, Bridgeport Enterprises recorded the following:
Sales of $86,400 ($64,500 on account, $21,900 for cash)
Collections on account, $58,950
Write-offs of uncollectible receivables, $2,560
Recovery of receivable previously written off, $1,000
Journalize Bridgeport's transactions during July, assuming Bridgeport uses the allowance method.

Question 80

The percent-of-sales method, used to compute bad debt expense, is also known as the balance sheet approach.