Deck 6: Accounting for Sales

Question 1

When a company sells goods and receives non-cash items in return,

A)the seller estimates the fair market value of the non-cash item or the cash equivalent of the noncash item.
B)the seller receiving the non-cash item estimates its value as the original cost of the inventory sold.
C)the seller uses the buyers' cost for the non-cash item.
D)the seller uses one-half of the fair market value of the non-cash item.
E)both parties must realize that they are conducting a transaction that is not in accordance with GAAP.

Answer 1

A

Question 2

In order for revenue to be recognized,

A)goods or services must be delivered to the customer only.
B)cash or an asset virtually assured of being converted into cash must be received from the customer only.
C)goods or services must be delivered to the customer and cash or an asset virtually assured of being converted into cash must be received.
D)cash must be received from the customer only.
E)goods or services must be delivered to the customer and cash must be received from the customer.

Answer 2

C

Question 3

The revenue recognition principle relies only on the principle of receiving cash or an asset virtually assured of being converted into cash.

Answer 3

False

Question 4

Name the five steps for revenue recognition proposed by the joint discussions between the FASB and IASB.

Question 5

Cash Discounts on Sales are

A)a contra account to Accounts Receivable.
B)a contra account to Accounts Payable.
C)a contra account to gross sales.
D)an adjunct account to gross sales.
E)neither an addition nor a deduction to gross sales.

Question 6

Revenue is generally recognized at the point of sale.

Question 7

Assume the periodic inventory system is used.Karton Company sold inventory to Rabell Company for $3,400 with agreement from Rabell that payment will be made at the end of the month.Which of the following is the journal entry to be made by Karton Company?

Question 8

The difference between gross sales and net sales may include

A)Cash Discounts on Sales.
B)Sales Returns and Allowances.
C)Trade Discounts.
D)both A and B
E)both A and C

Question 9

Ganes Computing sold $70,000 of inventory on account to Markel Company on April 1,20X3.The company uses a periodic inventory system.Markel Company returned $2,000 of the inventory on April 20,20X3 because it did not fit the company's needs.Which of the following is the journal entry to be made by Ganes Computing for the return of inventory?

Question 10

Why is the timing of revenue recognition important?

A)Revenues increase net income.
B)Revenues reduce net income by triggering the recognition of certain expenses.
C)Revenues increase the declaration of dividends.
D)Increases in revenues result in higher retained earnings.
E)both A and B

Question 11

For a magazine company,subscription revenues are recognized when cash is received from the customer before delivery of the magazine.

Question 12

If the criteria to use the percentage of completion method are not met,a company must

A)use the completed contract method to recognize revenue.
B)use the completion revenue principle to recognize revenue.
C)confer with their client about cash collection expectations.
D)refer to IFRS and choose between one of the five available revenue recognition principles.
E)determine whether they are permitted to conduct business with a client.

Question 13

Flores Materials gave inventory to Jared Industries to settle short-term credit for $4,000.Which of the following is the journal entry to be made by Flores Materials?

Question 14

Sales returns and allowances

A)are accounted for by deducting the total amount from gross sales.
B)are accounted for by deducting the total amount from net sales.
C)are accounted for using a contra account called Trade Discounts.
D)are accounted for using a reduction account.
E)are not accounted for on the financial statements.

Question 15

A long term contract to provide services for New York City was awarded to Mason Technology on December 30,20X1.The 4-year contract is set for $160 million and payment is certain.Services are to be provided evenly over 20X2 through 20X5.Progress measures are dependable,the contract obligations are explicit and the buyer and seller are expected to meet their obligations.

A)In 20X2,Mason should recognize no revenue.
B)In 20X2,Mason should recognize $160 million in revenue.
C)In 20X3,Mason should recognize no revenue.
D)In 20X3,Mason should recognize $40 million in revenue.
E)In 20X3,Mason should recognize $160 million in revenue.

Question 16

Joint discussions between the FASB and IASB regarding accounting for revenues

A)are ongoing and may result in a new standard for revenue recognition.
B)have resulted in a 4 step process for revenue recognition.
C)have resulted in a 3 step process for revenue recognition.
D)were undertaken for the benefit of stockholders so that stock prices retain stability during unstable economic times.
E)have not been conducted and no discussions are in the foreseeable future.

Question 17

Quizno Contracting would like to utilize the percentage of completion method to recognize a building under construction for Balto Veterinary.However,the accountant is not sure whether Quizno Contracting is meeting GAAP expectations.It is appropriate for Quizno Contracting to apply the percentage of completion method EXCEPT when

A)progress measures are dependable.
B)contract obligations are precise and clear.
C)the buyer has agreed to use the completed contract method of revenue recognition.
D)both buyer and seller are expected to meet their obligations.
E)little or no uncertainty exists regarding payment by the buyer.

Question 18

Lazareth Machine Metals sold inventory to Talla Manufacturing for $5,000 cash.Which of the following is the journal entry made by Lazareth Machine Metals? Assume the periodic inventory system is used.

Question 19

A company reports revenue on its income statement using

A)gross sales less sales returns and allowances.
B)net sales less sales returns and allowances.
C)gross sales plus trade discounts.
D)net sales plus trade discounts.
E)gross sales less trade discounts plus sales returns and allowances.

Question 20

Trade discounts are journalized by

A)decreasing returns and allowances.
B)increasing returns and allowances.
C)decreasing gross sales.
D)increasing gross sales.
E)decreasing net sales.

Question 21

Which of the following statements is true?

A)Trade discounts and sales returns and allowances are listed on the income statement as deductions from gross sales.
B)Reports to shareholders often omit the details of revenue and show only net revenue.
C)Cash Discounts on Sales are listed on the income statement as an expense of doing business.
D)"Turnover" is commonly used in the United States to refer to net sales revenue.
E)Cash discounts must appear on cash flow statements.

Question 22

A sales return occurs when a buyer returns merchandise to the seller,and a sales allowance is when the seller allows a lower price to be charged to the customer.

Question 23

Revenue is generally recognized at the point of sale with a debit.

Question 24

Assume the periodic inventory system is used.Nicolla Company sold inventory for cash of $6,000.A week later,the inventory was returned and a cash refund was given to the customer.Nicolla's journal entry to record the return of the inventory would be which of the following?

Question 25

Assume the periodic inventory system is used.Madison Manufacturing gave a 4% trade discount to Tristan Company when it sold inventory for cash that normally sells for $12,000.Which of the following is the journal entry to be made by Madison Manufacturing?

Question 26

Thompson Manufacturing sold inventory to a customer for $400.The customer used a VISA bank card,which charges Thompson a 3% fee.The company uses the periodic inventory system.What asset results from this sale?

A)Accounts Receivable of $388
B)Cash of $400
C)Cash of $388
D)Sales of $388
E)Accounts Receivable of $400

Question 27

Assume the periodic inventory system is used.Krinkle Company sold inventory on account for $500 on May 8,20X3,with terms of 2/10,n/30.On May 16,20X3 the appropriate payment was received from the customer.Which of the following is the journal entry to record the May 16 transaction on Krinkle's books?

Question 28

What is one possible reason why the account Sales Returns and Allowances needs to be established as a contra account?

A)So that managers can keep a running balance of returned goods in order to be able to sell the damaged goods to the employees of the organization as an incentive
B)So that managers can produce more goods when goods get returned in order to hit monthly bonus levels
C)So that managers can make adjustments to the manufacturing process when goods are returned for defective reasons
D)So that factory foremen can manage when invoices are paid
E)So that factory foremen can control the amount of credit they grant customers

Question 29

Higgins Company accepts bank cards,which charge a fee of 4% on sales.The company had gross sales of $60,000,of which 25% were cash sales and the remainder was credit sales that are solely attributable to bank cards.The company uses the periodic inventory system.Which of the following is the journal entry for Higgins Company?

Question 30

In contrast to the gross method,the net method of accounting for cash discounts uses an ________ account.

A)Interest Revenue
B)Interest Expense
C)Cash Discounts on Sales
D)Cash Discounts for Bank Card
E)None of the above

Question 31

A company offers a 2% discount on payments received within 10 days of the invoice date.Otherwise full payment must be received within 30 days of the invoice date.If the invoice date is January 5,the payment date is January 13,and the company received the invoice on January 7,what is the amount that should be remitted assuming a gross sale of $1,000?

A)$200
B)$1,000
C)$1,020
D)$980
E)$196

Question 32

Casper Company sold inventory of $5,000 and accepted payment with a credit card.The credit card charges Casper Company a 2% fee on credit card sales.Casper uses the periodic inventory system.Which of the following journal entries reflects the sale made by Casper Company?

Question 33

Neslund Ornamentals offered a 2% trade discount to Parsons Retail Outlet for all purchases over $200,000.Parsons Retail Outlet purchased $300,000 from Neslund Ornamentals on account.Neslund uses the periodic inventory system.Which of the following is the journal entry made by Neslund Ornamentals to recognize the sale and the 2% trade discount?

Question 34

For a newspaper subscription,subscription revenue is always credited when cash is received from the customer.

Question 35

Assume the periodic inventory system is used.Sammy Company sold inventory on account for $300.A week later,the inventory was returned and a full credit was given to the customer.Which of the following would be Sammy's journal entry to record the return of the inventory?

Question 36

Wayne Company just purchased merchandise costing $700,which has payment terms of 2/10,n/45.Wayne Company is uncertain whether to take advantage of the discount.What is the annual interest rate implicit in the cash discount,assuming a 365-day year?

A)2)0%
B)3)0%
C)16.2%
D)20.9%
E)21.3%

Question 37

White Enterprises sold $100,000 of sales in January,but customers returned $10,000 of goods to White Enterprises during the month.In addition,White Enterprises gave cash discounts of $1,000 to its customers.The beginning balance of the allowance for uncollectible accounts was $2,000 and the company uses the aging of accounts receivable to account for uncollectible accounts.What is the net sales figure for the month of January for White Enterprises?

A)$89,000
B)$90,000
C)$92,000
D)$91,000
E)$100,000

Question 38

Trade discounts

A)apply one or more reductions to the gross selling price for a particular class of customers in accordance with a company's policies.
B)are offered in order to be competitive.
C)are offered to encourage certain customer behavior (to encourage early orders).
D)are not reported on the income statement
E)All of the above statements are true regarding trade discounts.

Question 39

Companies that offer cash discounts for prompt payment and use the gross method to account for them journalize the discount by

A)deducting the discount from the gross accounts receivable account.
B)using a separate account called Cash Discounts on Sales.
C)using a separate account called Trade Discounts on Sales.
D)adding the discount to the gross accounts receivable account.
E)deducting the discount from the revenue account.

Question 40

Payne Industries can borrow money from the local bank at 14%.The company just acquired inventory costing $2,900,which has terms of 2/10,n/30.Assuming a 365-day year,which of the following statements is true?

A)Do not pay within the discount period since the effective annual rate of the discount is 37.2%,while the cost to borrow money is 14%.
B)Pay within the discount period since the effective annual rate of the discount is 37.2%,while the cost to borrow money is 14%.
C)Do not pay within the discount period since the effective annual rate of the discount is 24%,while the cost to borrow money is 14%.
D)Pay within the discount period since the effective annual rate of the discount is 24%,while the cost to borrow money is 14%.
E)Do not pay within the discount period since the 2% discount is less than the 14% cost to borrow money.

Question 41

Martin Optical has found that 2% of credit sales turn into bad debts and it costs the company $2,000 in administration expenses per year to manage the bad debts.Martin Optical obtains $30,000 of credit sales each year that it would not otherwise obtain if it did not offer credit.In addition,the $30,000 of credit sales earns Martin Optical $12,000 per year.What is the net gain (loss)of continuing to offer credit to its customers?

A)$10,000
B)$12,000
C)$2,000
D)$9,400
E)$2,600

Question 42

There are no contra accounts on the income statement.

Question 43

Our House is a manufacturer of furniture.On June 16,20X9,Our House received an order from Old Fashioned,Inc.,for 15 living room sets at $1,500 per set.The furniture was delivered by Our House to Old Fashioned,Inc.,on June 30,20X9,at which time Our House billed Old Fashioned under the terms 2/30,n/60.Old Fashioned,Inc.,paid Our House on July 25.Assume Our House uses a periodic inventory system.
Prepare the appropriate journal entries for Our House as of the following dates:
a.June 16
b.June 30
c.July 25

Question 44

Selia Sewage Systems has sales of $900,000,of which 25% are cash sales and the remainder is on credit.As of year-end,but before the bad debts adjustment,the Allowance for Uncollectible Accounts has a credit balance of $300,and Accounts Receivable has a debit balance of $60,000.If it is determined that the company will not collect from Colltor and from Mortana for the amounts of $330 and $680,respectively,what journal entry would Selia prepare?

Question 45

A retailer accepting a bank card such as VISA or Master Card does not have the responsibility of collecting cash on account.

Question 46

Net sales is always equal to total sales revenue less sales returns and allowances.

Question 47

Net sales is equal to total sales revenue plus sales returns and allowances and sales discounts.

Question 48

Axle Motors Inc.has a December 31 year-end.On November 28,20X2,the company sold inventory for $600 on account with the terms 2/10,n/30.On February 28,20X3,the company recognized the account as uncollectible.If Axle Motors Inc.uses the specific write-off method,what can be said with respect to the matching principle?

A)The matching principle is not violated using the specific write-off method.
B)20X2 earnings are overstated by $600,and 20X3 earnings are understated by $600.
C)20X2 earnings are understated by $600,and 20X3 earnings are overstated by $600.
D)20X2 earnings are overstated by $600,and 20X3 earnings are overstated by $600.
E)20X2 earnings are understated by $600,and 20X3 earnings are understated by $600.

Question 49

The credit terms 2/4,n/30 means that the customers may take a 4% cash discount if they pay within 30 days.

Question 50

Which of the following statements associated with the allowance method for bad debts is false?

A)The write-off of an uncollectible account does not affect the accounts receivable subsidiary ledger.
B)The write-off of an uncollectible account does not affect the total amount of current assets.
C)The write-off of an uncollectible account does not affect current liabilities.
D)The write-off of an uncollectible account does not affect the income statement.
E)The write-off of an uncollectible account does not affect stockholders' equity.

Question 51

If a company normally sells merchandise for $5,000,but allows a $200 trade discount,then the company would state that its revenue on this transaction was $4,800.

Question 52

The following information pertains to results obtained during the month of October 20X9 for Hawkins Hearing Center:
Of the gross sales,$245,000 were sales made to customers who used their bank cards.The bank card company charged Hawkins Hearing Center a 3% fee.
Prepare the revenue section of the income statement for Hawkins Hearing Center for the month ended October 31,20X9.

Question 53

Axle Motors Inc.has a December 31 year-end.On November 28,20X2,the company sold inventory for $600 on account with the terms 2/10,n/30.On February 28,20X3,the company recognized the account as uncollectible.What is the journal entry for Axle Motors,Inc.on February 28,20X3,if the company uses the specific write-off method?

Question 54

Retailers accept bank cards such as VISA and Master Card in order to get cash immediately rather than waiting for the customers to pay in due course.

Question 55

Companies should always take advantage of cash discounts even if they have to borrow money from the bank to do so.

Question 56

Brandon Corporation generated $98,000 in credit sales during 20X2.In February 20X3,Brandon realized that $13,500 of the accounts receivable generated from the 20X2 credit sales were uncollectible.Brandon seldom experiences bad debts losses; therefore,it used the specific write-off method.Using the matching principle,what is the effect on 20X3 and 20X2 net income as a result of the write-off?

A)20X3 net income is understated by $13,500,while 20X2 net income is overstated by $13,500.
B)20X3 net income is overstated by $13,500,while 20X2 net income is understated by $13,500.
C)20X3 net income is neither overstated nor understated,but 20X2 net income is understated by $13,500.
D)20X3 net income is overstated by $13,500,but 20X2 net income is neither overstated nor understated.
E)There is no effect on either year's net income as revenues and expenses are properly matched.

Question 57

The credit terms 2/10,n/30 means that the customers may take a 2% cash discount if they pay within 10 days.

Question 58

On February 27,20X9,Best Appliances Ever agreed to sell 60 refrigerators to a local home construction company.The sales contract stated that the normal selling price of the refrigerators was $500 each,but a 4% trade discount was given due to the size of the order.The terms of the sales are 2/10,n/30.The refrigerators are to be delivered on March 20,20X9.The invoice was dated March 20,20X9.The customer paid the appropriate amount on March 28.
A.What is the gross revenue that Best Appliances Ever should recognize for the month ending March 31,20X9?
B.What is the net revenue that Best Appliances Ever should recognize for the month ending March 31,20X9?

Question 59

Selia Sewage Systems has sales of $900,000,of which 25% are cash sales and the remainder is on credit.As of year-end,but before the bad debts adjustment,the Allowance for Uncollectible Accounts has a credit balance of $300,and Accounts Receivable has a debit balance of $60,000.If bad debts are estimated to be 1.5% of credit sales,what journal entry will Selia Sewage Systems need to prepare in order to estimate bad debts?

Question 60

Which of the following is NOT an attribute of the Allowance for Uncollectible Accounts?

A)The balance in the account increases when an uncollectible account is written off.
B)It is on the asset side of the balance sheet.
C)It is a contra account.
D)It reduces Accounts Receivable.
E)It normally has a credit balance.

Question 61

A bad debts recovery has what effect on the balance sheet under the allowance method for bad debts?

A)It has no effect on total assets or stockholders' equity.
B)It decreases assets and decreases stockholders' equity.
C)It increases assets and decreases stockholders' equity.
D)It decreases assets and has no effect on stockholders' equity.
E)It has no effect on assets and decreases owner's equity.

Question 62

When bad debts recoveries occur,the write-off should be reversed and the collection handled as a normal receipt on account.

Question 63

Nolan Company had total credit sales for the past year of $800,000.As of year-end,but before estimating bad debts,the company had a $70,000 debit balance in accounts receivable and a $600 debit balance in the Allowance for Uncollectible Accounts.Upon examination of the accounts receivable,it was found that 55% of the balance was 1-30 days old,30% was 31-60 days old,9% were 61-90 days old,and 6% were over 90 days old.Nolan Company estimates the following bad debts percentages: 1-30 days 10%
31-60 days 25%
61-90 days 40%
Over 90 days 80%
Which of the following is the journal entry necessary to estimate bad debts using the aging method?

Question 64

An aging schedule reveals $6,500 of uncollectible accounts.The Allowance for Uncollectible Accounts currently has a credit balance of $250.The adjusting entry amount should be $6,250.

Question 65

Accountants generally do not use the specific write-off method because it violates the matching principle.

Question 66

The Allowance for Uncollectible Accounts may have a debit balance before the adjusting entry is prepared.

Question 67

The write-off of a specific account for bad debts has what effect on the balance sheet under the allowance method?

A)It has no effect on total assets or stockholders' equity.
B)It decreases assets and decreases stockholders' equity.
C)It increases assets and decreases stockholders' equity.
D)It decreases assets and has no effect on stockholders' equity.
E)It has no effect on assets and decreases owner's equity.

Question 68

When an organization sells on credit,it is essentially reducing the risk that a portion of the accounts receivable balance will never be collected.

Question 69

Emerz Corporation had sales of $850,000,of which 20% were cash sales.As of year-end,the balance in the Allowance for Uncollectible Accounts before adjusting for bad debts was a $400 debit.The company estimates bad debts as 10% of ending accounts receivable or 1.5% of credit sales.What is the balance in the Allowance for Uncollectible Accounts after Emerz Corporation estimates bad debts using a percentage of credit sales?

A)$9,800
B)$10,200
C)$10,600
D)$12,350
E)$12,750

Question 70

Emerz Corporation had sales of $850,000,of which 20% were cash sales.As of year-end,the balance in the Allowance for Uncollectible Accounts before adjusting for bad debts was a $400 debit.The company estimates bad debts as 10% of ending accounts receivable or 1.5% of credit sales.The ending balance in Accounts Receivable is $72,000.What is the balance in the Allowance for Uncollectible Accounts if Emerz Corporation estimates bad debts using a percentage of ending accounts receivable?

A)$6,800
B)$7,200
C)$7,600
D)$85,000
E)$84,600

Question 71

The accounts receivable subsidiary ledger

A)is not effected by the write-off of individual accounts.
B)provides the supporting detail (i.e.,individual customer names and amounts owed)for the general ledger account "Accounts Receivable."
C)is kept for both the "Accounts Receivable" and the "Allowance for Uncollectible Accounts" accounts.
D)is only kept by companies that use the allowance method of estimating bad debts.
E)All of the above are true statements.

Question 72

Assume Credit Categories uses the allowance method for bad debts.Credit Categories wrote off the $400 account of P.Miller on February 19,20X3.On October 8,20X3 Credit Categories received a check for $400 from P.Miller.Which of the following is(are)the journal entry(ies)that Credit Categories will make on October 8,20X3?
E)No journal entry is required on October 8,20X3.

Question 73

A contra asset account is created under the allowance method because of the inability to write down a specific customer's account at the time bad debts expense is recognized.

Question 74

The estimation of bad debts expense,using the allowance method,has what effect on the balance sheet?

A)It has no effect on assets and decreases stockholders' equity.
B)It decreases assets and decreases stockholders' equity.
C)It increases assets and increases stockholders' equity.
D)It decreases assets and increases stockholders' equity.
E)It increases assets and decreases stockholders' equity.

Question 75

The accounts used in the journal entry for the estimation of bad debts is the same whether a firm uses the percentage of sales,percentage of accounts receivable,or the aging method to estimate bad debts expense.

Question 76

In the aging of accounts receivable method,one would expect the bad debts percentages to increase as the age of the accounts receivable increases.

Question 77

The specific write-off method assumes all sales are fully collectible until proved otherwise.

Question 78

Emerz Corporation had sales of $850,000,of which 20% were cash sales.As of year-end,the balance in the Allowance for Uncollectible Accounts before adjusting for bad debts was a $400 debit.The company estimates bad debts as 10% of ending accounts receivable or 1.5% of credit sales.What is the journal entry that Emerz Corporation will make if it estimates bad debts by using a percentage of credit sales?

Question 79

The allowance method has two basic elements: (1)an estimate of the amount of accounts receivable that will ultimately be uncollectible and (2)a contra account that contains the estimate and is deducted from the accounts receivable.

Question 80

Reporting Standards,Inc.recovered a bad debt from Plodding,Inc.in October 20X3 in the amount of $350 that was previously written off by Reporting Standards,Inc.in November 20X2.Reporting Standards,Inc.utilizes the percentage of sales method to estimate bad debts.What journal entry is required in October 20X3?