Deck 7: Receivables and Investments

Question 1

One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching principle.

Answer 1

False

Question 2

The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for Doubtful Accounts.

Answer 2

False

Question 3

The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period.

Answer 3

False

Question 4

Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize bad debts under the allowance method.

Question 5

The accounts receivable turnover ratio is a measure of how well a company manages its receivables.

Question 6

Because the allowance method results in better matching, accounting standards require its use rather than the direct write-off method, unless bad debts are immaterial.

Question 7

If Ash Company had sales during the year of $10,000,000, an average accounts receivable of $2,000,000, and net income of $500,000, its accounts receivable turnover ratio would be 0.25.

Question 8

The maker of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

Question 9

The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.

Question 10

Selling on credit protects a company from the risk that some of its receivables will never be collected.

Question 11

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

Question 12

Accounts receivable are shown on the balance sheet at their net realizable value.

Question 13

The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.

Question 14

Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

Question 15

Typically, the lower the accounts receivable turnover ratio, the better.

Question 16

If accounts receivable turnover is faster, this means that fewer days are required to collect receivables.

Question 17

A high accounts receivable turnover ratio could mean that the company's credit policies may be too stringent.

Question 18

An aging schedule typically categorizes the various accounts by the length of time each invoice is outstanding.

Question 19

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

Question 20

Lewisburg Corp.had sales during the year of $15,000,000 and an average accounts receivable of $5,000,000.Its accounts receivable turnover ratio is 0.33 times.

Question 21

The alternate term for a credit card draft is an invoice.

Question 22

A decrease in accounts receivable represents an increase in a company's cash flow from operating activities.

Question 23

Whether investments are reported as current assets or noncurrent assets depends on the company's intent.

Question 24

Baggs buys $100,000 of Vista Company bonds on January 1, 2016 at face value.The bonds pay 10% interest semiannually on June 30 and December 31.If Baggs sells the bonds at 99 on July 1, 2016, there will be a loss reported on the income statement.

Question 25

The payee of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

Question 26

The equity method of accounting is used if the investor owns at least 20% of the investee and the investor is able to secure influence over the investee.

Question 27

The payee of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

Question 28

Securities issued by corporations as a form of ownership in the business, such as common and preferred stock, are called equity securities.

Question 29

Promissory notes are non-negotiable.

Question 30

Both stock and bond investments have maturity dates.

Question 31

A subsidiary is a separate legal entity that is owned or controlled by another entity.

Question 32

A note discounted with recourse means that if the original customer fails to pay the bank the total amount due on the maturity date of the note, the company that transferred the note to the bank is liable for the full amount.

Question 33

Purchases and sales of cash equivalents are reported as investing activities on a statement of cash flows.

Question 34

An increase in accounts receivable is reported on the statement of cash flows under the indirect method as an addition.

Question 35

A company invests excess cash in a certificate of deposit.At the end of an accounting period before the CD matures, the company will recognize interest expense.

Question 36

When a company discounts a promissory note at the bank, it receives cash at the same time it would if it held the note to maturity.

Question 37

The maker of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

Question 38

When a note is discounted at a bank, it is normally done with recourse.

Question 39

If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the amount of the sale in a case of nonpayment from a cardholder.

Question 40

When Company X buys stock in Company Y, Company X is referred to as the investee.

Question 41

The data presented below for Lynx Corp.is for the year ended December 31, 2016: $$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts Receivable (December 31,2016) } & 170,000 \\\text { Allowance for Doubtful Accounts [Cr. B alance] } & \\\quad \text { (Before adjustment at December 31, 2016) } & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$

-See the data for Lynx Corp. If Lynx Corp.estimates its bad debt to be 1% of net credit sales, what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?

A) $1,300
B) $9,700
C) $8,400
D) $11,000

Question 42

The data presented below for Lynx Corp.is for the year ended December 31, 2016: $$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts Receivable (December 31,2016) } & 170,000 \\\text { Allowance for Doubtful Accounts [Cr. B alance] } & \\\quad \text { (Before adjustment at December 31, 2016) } & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$

-See the data for Lynx Corp. If Lynx Corp.uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for 2016?

A) $12,700
B) $13,700
C) $14,000
D) $15,300

Question 43

Cash flows from purchases, sales, and maturities of investments are usually classified as operating activities.

Question 44

Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net realizable value of accounts receivable on the balance sheet?

A) The percentage of accounts receivable approach
B) The percentage of net credit sales approach
C) The direct write-off method
D) The uncollectible approach

Question 45

Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long?

A) The company may need to borrow to acquire operating cash.
B) The company may offer trade discounts to lengthen the collection period.
C) Cash flows from operations may be higher than expected for the company's sales.
D) The company should expand operations with its excess cash.

Question 46

The direct write-off method estimates the amount of bad debts before they occur.

Question 47

The following information was presented in the balance sheet of Gloria Company as of December 31, 2016: $$\begin{array}{l}\text {Trade accounts receivable, net of allowance for }\\\text { uncollectibles of \$ 100,000 }&\$1,600,000\\\end{array}$$ ? Which one of the following statements is true?

A) Gloria expects that $1,700,000 of accounts receivable will be collected after year end.
B) The balance in the Accounts Receivable account in Gloria's general ledger is $1,600,000.
C) The net realizable value of Gloria's accounts receivable is $1,600,000.
D) Gloria expects to collect only $1,500,000 from its customers.

Question 48

The most common type of receivables is accounts receivable.

Question 49

Which one of the following statements is true?

A) When a company uses a subsidiary ledger, the balance in the control account, Accounts Receivable, shows only the amount the company expects to collect from the accounts receivable, net of any expected uncollectible accounts.
B) An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers.
C) The balance in the control account, Accounts Receivable, should be equal to the sum of the balances in the subsidiary ledger for accounts receivable.
D) A subsidiary ledger takes the place of the control account for some companies.

Question 50

Which one of the following is not an accurate description of Allowance for Doubtful Accounts?

A) Contra account
B) Balance sheet account
C) Income statement account
D) Current asset account

Question 51

The data presented below for Lynx Corp.is for the year ended December 31, 2016: $$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts Receivable (December 31,2016) } & 170,000 \\\text { Allowance for Doubtful Accounts [Cr. B alance] } & \\\quad \text { (Before adjustment at December 31, 2016) } & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$

-See the data for Lynx Corp. If Lynx Corp.estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt expense for 2016?

A) $9,560
B) $9,700
C) $1,700
D) None of these choices

Question 52

If a company uses the allowance method to account for bad debts, when will the company's owners' equity decrease?

A) At the date a customer's account is written off
B) At the end of the accounting period when an adjusting entry for bad debts is recorded
C) At the date a customer's account is determined to be uncollectible
D) When the accounts receivable amount becomes past due

Question 53

If a company uses the direct write-off method of accounting for bad debts,

A) It is applying the matching principle.
B) It will record bad debt expense only when an account is determined to be uncollectible.
C) It will reduce the accounts receivable account at the end of the accounting period for estimated uncollectible accounts.
D) It will report accounts receivable in the balance sheet at their net realizable value.

Question 54

Fenchurch Corp.uses the direct write-off method to account for bad debts.What are the effects on the accounting equation of the entry to record the write-off of a customer's account balance?

A) Assets and liabilities decrease.
B) Assets and owners' equity decrease.
C) Owners' equity decrease and liabilities increase.
D) No effect; assets increase and decrease by the same amount.

Question 55

If a company uses the allowance method of accounting for bad debts, which one of the following statements is true?

A) It will report accounts receivable in the balance sheet at their net realizable value
B) It will record bad debts only when an account is determined to be uncollectible.
C) It will reduce the accounts receivable at the end of the accounting period for estimated uncollectible accounts.
D) It violates the matching principle.

Question 56

Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad debts expense with revenue on the income statement?

A) The percentage of accounts receivable approach
B) The percentage of net credit sales approach
C) The direct write-off method
D) The uncollectible approach

Question 57

The data presented below is for Falconi, Inc.for 2016. $\begin{array}{lr}\text { Credit sales during the year } & \$ 2,100,000 \\\text { Accounts receivable-December 31, 2016 } & 395,000 \\\text { Allowance for doubtful accounts-December 31,2016 } & 20,000 \\\text { Bad debt expense for the year } & 17,000\end{array}$ ? What amount will Falconi show on its year-end balance sheet for the net realizable value of its accounts receivable?

A) $378,000
B) $375,000
C) $358,000
D) $ 20,000

Question 58

On January 15, 2016, the accounts receivable balance was $7,000 and the balance in the allowance for doubtful accounts was $700.On January 16, 2016, a $200 uncollectible account was written-off.The net realizable value of accounts receivable on January 16 immediately after the write-off is:

A) $6,300
B) $6,800
C) $6,500
D) $7,900

Question 59

The data presented below is for Falconi, Inc.for 2016. $\begin{array}{lr}\text { Credit sales during the year } & \$ 2,100,000 \\\text { Accounts receivable-December 31, 2016 } & 395,000 \\\text { Allowance for doubtful accounts-December 31,2016 } & 20,000 \\\text { Bad debt expense for the year } & 17,000\end{array}$ ? What is the effect on liquidity when Falconi records its estimate for bad debt expense using the allowance method?

A) Liquidity decreases
B) Liquidity increases
C) Liquidity stays the same
D) Liquidity both increases and decreases

Question 60

Which one of the following is an accurate description of Allowance for Doubtful Accounts?

A) Contra account
B) Liability account
C) Revenue account
D) Expense account

Question 61

The data below is for Benton Corporation for 2016. $$\begin{array} { l r } \text { Accounts Receivable-January 1, 2016 } & \$ 334,000 \\\text { Credit sales during 2016 } & 850,000 \\\text { Collections from credit customers during 2016 } & 725,000 \\\text { Customer accounts written off as uncollectible during 2016 } & 12,000 \\\text { Allowance for Doubtful Accounts [Credit B alance] } & \\\text { (After write-off of uncollectible accounts) } & 1,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 13,200\end{array}$$ ?
?

-Refer to the data for Benton Corporation. ?
What is the balance of Accounts Receivable at December 31, 2016?

A) $209,000
B) $225,000
C) $447,000
D) $459,000

Question 62

The data presented below is for Mellon Corporation for the year ended December 31, 2016: $\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts Receivable (December 31, 2016) } & 250,000 \\\text { Allowance for Doubtful Accounts [Credit B al ance] (Before adjustment at December } & \\31,2016 &3,000 \\\text { Estimated amount of uncollectible accounts based on an aging analysis }&31,000\\\end{array}$

-Refer to the data for Mellon Corporation. ?
If Mellon estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt expense for 2016?

A) $25,800
B) $27,000
C) $28,800
D) $30,000

Question 63

The data presented below is for Mellon Corporation for the year ended December 31, 2016: $\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts Receivable (December 31, 2016) } & 250,000 \\\text { Allowance for Doubtful Accounts [Credit B al ance] (Before adjustment at December } & \\31,2016 &3,000 \\\text { Estimated amount of uncollectible accounts based on an aging analysis }&31,000\\\end{array}$

-Refer to the data for Mellon Corporation. ?
If Mellon uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for 2016?

A) $28,000
B) $31,000
C) $34,000
D) $50,000

Question 64

On January 1, 2016, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius Company carried balances of $20,000 and $550 respectively.During the year, the company reported $70,000 of credit sales.There were $400 of receivables written off as uncollectible in 2016.Cash collections of receivables amounted to $74,700.The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance. ​
The net realizable value of receivables appearing on the 2016 balance sheet will amount to:

A) $14,105
B) $14,155
C) $14,900
D) $15,450

Question 65

The data below is for Music Corporation for 2016. $$\begin{array} { l r } \text { Accounts receivable-January 1, 2016 } & \$ 236,000 \\\text { Credit sales during 2016 } & 820,000 \\\text { Collections from credit customers during 2016 } & 590,000 \\\text { Customer accounts written off as uncoll ectible during 2016 } & 8,000 \\\text { All owance for doubtful accounts-January 1, 2016 } & 8,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 9,600\end{array}$$

-Refer to the data for Music Corporation. If the aging approach is used to estimate bad debts, what is the balance in the Allowance for Doubtful Accounts after the bad debt expense adjustment?

A) $8,000
B) $8,100
C) $8,900
D) $9,600

Question 66

The data presented below is for Mellon Corporation for the year ended December 31, 2016: $\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts Receivable (December 31, 2016) } & 250,000 \\\text { Allowance for Doubtful Accounts [Credit B al ance] (Before adjustment at December } & \\31,2016 &3,000 \\\text { Estimated amount of uncollectible accounts based on an aging analysis }&31,000\\\end{array}$

-Refer to the information for Mellon Corporation. If Mellon uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?

A) $216,000
B) $219,000
C) $222,000
D) $250,000

Question 67

The data below is for Music Corporation for 2016. $$\begin{array} { l r } \text { Accounts receivable-January 1, 2016 } & \$ 236,000 \\\text { Credit sales during 2016 } & 820,000 \\\text { Collections from credit customers during 2016 } & 590,000 \\\text { Customer accounts written off as uncoll ectible during 2016 } & 8,000 \\\text { All owance for doubtful accounts-January 1, 2016 } & 8,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 9,600\end{array}$$

-Refer to the data for Music Corporation. If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2016?

A) $8,000
B) $8,100
C) $8,700
D) $8,900

Question 68

Allowance for Doubtful Accounts represents:

A) Cash set aside to make up for bad debt losses
B) The amount of uncollectible accounts written off to date
C) The difference between total sales made on credit and the amount collected from those credit sales
D) The difference between the gross amount of accounts receivable and the net realizable value of accounts receivable

Question 69

On January 1, 2016, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius Company carried balances of $20,000 and $550 respectively.During the year, the company reported $70,000 of credit sales.There were $400 of receivables written off as uncollectible in 2016.Cash collections of receivables amounted to $74,700.The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance. ​
The amount of bad debts expense recognized in the 2016 income statement will be:

A) $545
B) $595
C) $745
D) $795

Question 70

The data below is for Benton Corporation for 2016. $$\begin{array} { l r } \text { Accounts Receivable-January 1, 2016 } & \$ 334,000 \\\text { Credit sales during 2016 } & 850,000 \\\text { Collections from credit customers during 2016 } & 725,000 \\\text { Customer accounts written off as uncollectible during 2016 } & 12,000 \\\text { Allowance for Doubtful Accounts [Credit B alance] } & \\\text { (After write-off of uncollectible accounts) } & 1,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 13,200\end{array}$$ ?
?

-Refer to the data for Benton Corporation. If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense for 2016?

A) $ 2,900
B) $11,500
C) $23,500
D) $26,900

Question 71

The data presented below is for Mellon Corporation for the year ended December 31, 2016: $\begin{array}{lr}\text { Sales (100\% on credit) } & \$ 1,500,000 \\\text { Sales returns } & 60,000 \\\text { Accounts Receivable (December 31, 2016) } & 250,000 \\\text { Allowance for Doubtful Accounts [Credit B al ance] (Before adjustment at December } & \\31,2016 &3,000 \\\text { Estimated amount of uncollectible accounts based on an aging analysis }&31,000\\\end{array}$

-Refer to information for Mellon Corporation. If Mellon uses 2% of net credit sales to estimate its bad debts, what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?

A) $33,000
B) $31,800
C) $27,000
D) $25,800

Question 72

The data presented below for Lynx Corp.is for the year ended December 31, 2016: $$\begin{array} { l r } \text { Sales (100\% on credit) } & \$ 1,000,000 \\\text { Sales returns } & 30,000 \\\text { Accounts Receivable (December 31,2016) } & 170,000 \\\text { Allowance for Doubtful Accounts [Cr. B alance] } & \\\quad \text { (Before adjustment at December 31, 2016) } & 1,300 \\\text { Estimated amount of uncollectible accounts based on aging analysis } & 14,000\end{array}$$

-See the data for Lynx Corp. If Lynx Corp.uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?

A) $140,000
B) $156,000
C) $167,000
D) $184,000

Question 73

The data below is for Music Corporation for 2016. $$\begin{array} { l r } \text { Accounts receivable-January 1, 2016 } & \$ 236,000 \\\text { Credit sales during 2016 } & 820,000 \\\text { Collections from credit customers during 2016 } & 590,000 \\\text { Customer accounts written off as uncoll ectible during 2016 } & 8,000 \\\text { All owance for doubtful accounts-January 1, 2016 } & 8,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 9,600\end{array}$$

-Refer to the data for Music Corporation. What is the balance of Accounts Receivable at December 31, 2016?

A) $336,000
B) $448,400
C) $458,000
D) $466,000

Question 74

When using the allowance method, what are the effects on the accounting equation when a company writes off a bad debt?

A) Assets and stockholders' equity increase.
B) Assets and stockholders' equity decrease.
C) Assets increase and stockholders' equity decreases.
D) No effect on overall assets or equity.

Question 75

Which of the following statements is true regarding the two allowance methods used to account for bad debts?

A) The percentage of net credit sales approach takes into account the existing balance in the Allowance for Doubtful Accounts account.
B) The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account.
C) The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.
D) The direct write-off method does a better job of matching revenues and expenses.

Question 76

The following data concerns Wang Corporation for 2016: $\begin{array}{lr}\text { Credit sales during the year } & \$ 1,600,000 \\\text { Accounts Receivable-December } 31,2016 & 235,000 \\\text { Allowance for Doubtful Accounts-December } 31,2016 & 18,000 \\\text { Bad debt expense for the year } & 11,000\end{array}$ ? What amount will Wang show on its year-end balance sheet for the net realizable value of its accounts receivable?

A) $253,000
B) $235,000
C) $224,000
D) $217,000

Question 77

What are the effects on the accounting equation when a company makes the adjustment to record bad debt expense using the allowance method?

A) Assets and owners' equity increase.
B) Assets and owners' equity decrease.
C) Assets increase and owners' equity decreases.
D) Assets decrease and owners' equity increases.

Question 78

The entry required to recognize the bad debts expense for 2016 will act to:

A) Increase total assets and retained earnings
B) Decrease total assets and retained earnings
C) Decrease total assets and increase net income
D) Increase total assets and decrease net income

Question 79

Assuming a company uses the allowance method, the entry to recognize the write-off of the specific uncollectible accounts will act to:

A) Increase total assets and total equity
B) Increase total assets and decrease total equity
C) Decrease total assets and total equity
D) Not affect total assets or total equity

Question 80

The data below is for Benton Corporation for 2016. $$\begin{array} { l r } \text { Accounts Receivable-January 1, 2016 } & \$ 334,000 \\\text { Credit sales during 2016 } & 850,000 \\\text { Collections from credit customers during 2016 } & 725,000 \\\text { Customer accounts written off as uncollectible during 2016 } & 12,000 \\\text { Allowance for Doubtful Accounts [Credit B alance] } & \\\text { (After write-off of uncollectible accounts) } & 1,700 \\\text { Estimated uncollectible accounts based on an aging analysis } & 13,200\end{array}$$ ?
?

-Refer to the data for Benton Corporation. If the aging approach is used to estimate bad debts, what should the balance in the Allowance for Doubtful Accounts be after the bad debts adjustment?

A) $26,900
B) $14,900
C) $13,200
D) $11,500