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

Question 1

The allowance for doubtful accounts is not used in the direct write off method.

Answer 1

True

Question 2

When bad debts exceed the amount estimated and written off in the previous accounting period,the company is required to issue amended financial statements.

Answer 2

False

Question 3

The allowance for doubtful accounts is a contra-asset account.

Answer 3

True

Question 4

The amount of the principal of a notes receivable depends on the maturity date.

Question 5

The smaller the receivables turnover ratio the larger the days to collect measure will be.

Question 6

Companies of similar size operating in the same country tend to have similar receivables turnover ratios.

Question 7

Write-off method affects income statement as an additional expense is incurred when an account is written-off.

Question 8

The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method.

Question 9

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.

Question 10

Trade accounts receivable are created by selling goods or services on credit.

Question 11

A higher receivables turnover ratio is a warning sign indicating that the company is allowing a longer time period for customers to pay.

Question 12

Analysts often interpret a sudden decline in the receivables turnover ratio as a signal of a developing problem.

Question 13

The receivables turnover ratio is calculated using the average net accounts receivable.

Question 14

In a competitive market it is necessary to extend credit to at least some customers in order to avoid losing market share to competitors.

Question 15

There is a cost of extending credit to customers even when the company is able to collect its accounts receivable in full.

Question 16

When a company receives an interest payment on a note,the entire payment must then be recorded as revenue.

Question 17

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

Question 18

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.

Question 19

Interest on notes receivable is recorded as revenue when the cash is received.

Question 20

The receivables turnover ratio indicates how many times,on average,the process of selling to and collecting the sales proceeds from customers occurs during the accounting period.

Question 21

Assume the Mirtha Company had the following balances at year-end. $\begin{array}{|l|r|r|}\hline \text { From the Balance Sheet } & 2018 & 2017 \\\hline \text { Accounts Receivable } & 1,560,200 & 1,210,92 \\\hline \text { Allowance for Doubtful Accounts } & (79,000) & (64,600) \\\hline \text { Accounts Receivable, Net } & 1,481,200 & 1,146,320\\\hline\end{array}$ Assume the company recorded no write-offs or recoveries during 2018.What was the amount of bad debt expense reported in 2018?

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

Question 22

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

Question 23

Which of the following methods is required by Canada Revenue Agency for accounting for bad debt for tax purposes:

A)Direct write-off method
B)Allowance method
C)Percentage of sales method
D)Aging of accounts method

Question 24

If a company did not extend credit to customers:

A)its gross revenue would rise.
B)its costs of credit would rise but so would its revenue.
C)its costs of credit would fall but so would its revenue.
D)gross profit would rise.

Question 25

A subsidiary account refers to an account that is to be written off.

Question 26

All else being equal,an increase in the average net receivables necessarily implies an increase in days to collect.

Question 27

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 non-payment.
D)the administrative costs associated with extending credit.

Question 28

Direct write-off method violates the matching principle.

Question 29

The direct write-off method is acceptable under IFRS,but not under ASPE.

Question 30

The balance in the Allowance for Doubtful Accounts will always differ from the balance in Bad Debt Expense.

Question 31

A company extends credit to customers because it expects the:

A)benefits from the rise in sales revenue to be greater than the cost of extending credit.
B)interest charged to be greater than the cost of extending credit.
C)tax savings from a lower net income to be greater than the cost of extending credit.
D)because its borrowing cost is lower than the cost of extending credit.

Question 32

Extending credit to customers will result in which of the following additional costs?

A)Increased employer costs will be incurred to evaluate customer credit worthiness,track what each customer owes,and follow up to ensure correction.
B)Bad debt expense will result when amounts cannot be collected from customers.
C)Delayed receipt of cash may result requiring the company to take out short-term loans and incur interest costs.
D)All of the answers are acceptable.

Question 33

All else being equal,net sales revenue and days to collect have an inverse relationship.

Question 34

Both the percentage of credit sales and aging of accounts receivable methods are acceptable under ASPE and IFRS.

Question 35

Allowance for Doubtful Accounts is a temporary account.

Question 36

Companies do not need to explain to financial statement users how uncollectable receivables are accounted for because they do not need this information.

Question 37

Allowance for Doubtful Accounts is a contra-asset account.

Question 38

The collection of a note receivable is accounted for like the collection of an account receivable.

Question 39

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.

Question 40

Bad Debt Expense is a temporary account.

Question 41

The beginning balance in the allowance for doubtful accounts is $12,656 and the ending 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 42

Your company has averaged about 26% of its accounts receivable in the "over 90 days past due" category and 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 un-collectible.

Question 43

An Allowance for Doubtful Accounts is a contra-account paired with:

A)expenses.
B)cash.
C)net income.
D)accounts receivable.

Question 44

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,revenue,and expenses remain the same.

Question 45

At the end of the accounting period,The Grass is Greener Corporation 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 46

Net accounts receivable is:

A)gross accounts receivable minus cost of goods sold.
B)also known as net pre-tax income.
C)gross accounts receivable minus allowance for doubtful accounts.
D)also known as net after-tax income.

Question 47

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 a 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)$5,500.
D)Cannot be determined; the aging of accounts receivable method cannot be used as the information provided can only be used for calculating the percentage of credit sales method.

Question 48

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)fall,increasing the ending balance of the allowance account.
B)rise,increasing the ending balance of the allowance account.
C)fall,decreasing the ending balance of the allowance account.
D)rise,decreasing the ending balance of the allowance account.

Question 49

Over the past five years,a company had average annual credit sales of $320,000 and an average annual net write-offs of $2,000.Credit sales in the current year are $300,000.Using the percentage of credit sales method,what should the company record as an estimate of bad debt expense?

A)$2,000
B)$1,875
C)$20,000
D)$6,000 Estimated average uncollectible% = $2,000/$320,000 = .00625
Bad Debt Expense = estimated uncollectible% * Credit Sales
= )00625 * $300,000 = $1,875.

Question 50

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 paid.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. Using the allowance method,Bad Debt Expense is debited and the contra-asset account,Allowance for Doubtful Accounts,is credited for $120 ($6,000 * .02).

Question 51

Purrfect Pets sells a $1,500 aquarium to a customer on account.This would be recorded under:

A)non-trade receivables.
B)cash.
C)trade accounts receivable.
D)notes receivable.

Question 52

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 new balance in the allowance for doubtful accounts account will be:

A)$8,300.
B)$5,400.
C)$2,900.
D)Cannot be determined from the information given. The balance in the allowance account will be increased by the amount of the bad debt expense recorded at the end of the year.
$140,000 * .04 = $5,600
$5600 + 2,700 = $8,300.

Question 53

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 paid.According to the revenue recognition principle and the expense recognition 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)all of the answers are acceptable.

Question 54

$\text { Johnstone Supplies, Inc. Accounts Receivable Aging Report, July 31, } 2018$
$$\begin{array} { | r | r | r | } \hline \text { Accounts receivable by due dute } & \text { Account Tatal } & \text { Estimated \% uncollectible } \\\hline \text { Not yet due } & \$ 126,500 & 2 \% \\\hline 1 - 30 \text { days past due } & \$ 89,200 & 12 \% \\\hline \text { 31-60 days past due } & \$ 53,600 & 18 \% \\\hline \text { Over 60 days past due } & \$ 31,800 & 35 \% \\\hline\end{array}$$ The unadjusted balance of the allowance for doubtful accounts of Johnstone Supplies,Inc.,is $28,947 on July 31,2018.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 55

$\text { Johnstone Supplies, Inc. Accounts Receivable Aging Report, July 31, } 2018$
$$\begin{array} { | r | r | r | } \hline \text { Accounts receivable by due dute } & \text { Account Tatal } & \text { Estimated \% uncollectible } \\\hline \text { Not yet due } & \$ 126,500 & 2 \% \\\hline 1 - 30 \text { days past due } & \$ 89,200 & 12 \% \\\hline 31 - 60 \text { days past due } & \$ 53,600 & 18 \% \\\hline \text { Over 60 days past due } & \$ 31,800 & 35 \% \\\hline\end{array}$$ If Johnstone Supplies,Inc.,writes off $3,081 of un-collectible accounts during August,2018,the unadjusted balance in the allowance for doubtful accounts account on August 31,2018 will be:

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

Question 56

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

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

Question 57

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

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

Question 58

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

Question 59

During the year,a company 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 60

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 a 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)Cannot be determined; the percent of credit sales method cannot be used,as the information provided can only be used for calculating the aging of accounts receivable method. $150,000 * .05 = $7,500.

Question 61

When interest is calculated for periods shorter than a year,the formula to calculate interest is I = P * R * T,where:

A)I = interest calculated,P = principal,R = annual interest rate,and T = number of months.
B)I = interest calculated,P = principal,R = annual interest rate,and T = (number of months / 12)
C)I = interest calculated,P = principal,R = monthly interest rate,and T = (number of months / 12).
D)none of the choices are correct.

Question 62

The amount of uncollectible accounts at the end of the year is estimated,using the aging of receivables method,to be $25,000.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 debts expense for the period?

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

Question 63

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

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

Question 64

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 65

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

A)biannual; months; 6
B)annual; years; 1
C)biannual; half-years; 2
D)annual; months; 12

Question 66

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

A)$8,000.
B)$17,000.
C)$25,000.
D)$33,000. 25,000 - 8,000 = 17,000
After adjustment,the balance in the allowance account should be $25,000.Since the balance before adjustment is $8,000,bad debt expense of $17,000 must be recorded to bring the allowance account to the desired ending balance of $25,000.

Question 67

In 2017,Lawrence Company had gross sales of $750,000 on account and granted sales discounts of $15,000.On January 1,2017,the Allowance for Doubtful Accounts account had a credit balance of $18,000.During 2017,$30,000 of uncollectible accounts receivable were written off.Past experiences indicate that 3% of net credit sales become uncollectible.Using the percentage of net credit sales method,what would be the adjusted balance in the Allowance for Doubtful Accounts at December 31,2017?

A)$10,050.
B)$10,500.
C)$22,050.
D)$34,500. $735,000 * .03 = $22,050
30,000 - (18000 + 22,050)= 10,050.

Question 68

A company lends its CEO $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:

A)$9,000.
B)$750.
C)$4,500.
D)$1,500. Each interest payment is equal to 6/12 of the annual interest amount.150,000 * .06 * 6/12 = $4,500.

Question 69

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 70

Total doubtful accounts at the end of the year is estimated,using the aging of receivables method,to be $25,000.If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before adjustment,what will be the amount of bad debts expense for the period?

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

Question 71

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:

A)is $12,960.
B)is $10,680.
C)is $38,000.
D)cannot be determined from the information given. The % of credit sales method estimates bad debt expense by multiplying the historical % by the current period's credit sales.Any existing balance in the allowance account is ignored.$178,000 * .06 = $10,680.

Question 72

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

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

Question 73

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

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

Question 74

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.In 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. If no cash is received but the interest is earned,the adjusting entry will be an increase to interest receivable (debit)and an increase to interest revenue (credit).$90,000 * .07 * 1/12 = $525.

Question 75

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.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. If monthly entries have been made to accrue the interest earned,then 6 months of interest has already been recorded as Interest Revenue and Interest Receivable.So when the payment is received,the interest receivable is decreased (credited)and Cash is increased (debited).90,000 * .07 * 6/12 = $3,150.

Question 76

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 77

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

A)Accounts Receivable and a credit to Allowance for Doubtful Accounts.
B)Bad Debts Expense and a credit to Allowance for Doubtful Accounts.
C)Allowance for Doubtful Accounts and a credit to Accounts Receivable.
D)Loss on Credit Sales and a credit to Accounts Receivable.

Question 78

A company lends its CEO $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 assets for $150,000 and crediting liabilities 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 79

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. When the % of credit sales method is used,the amount of the entry to record Bad Debt Expense is based on the historical % of bad debt losses and is not adjusted for any balance in the allowance for doubtful accounts.
$500,000 * .02 = 10,000.

Question 80

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. One quarter is 3 months,so the time period is 3/12.$80,000 * .06 * 3/12 = $1,200