Deck 5: Short-Term Investments and Receivables

Question 1

All marketable securities are considered to be short-term investments.

Answer 1

True

Question 2

Short-term investments are investments that a company plans to hold for one year or less.

Answer 2

True

Question 3

The purchase of short-term investments:

A) increases assets
B) increases liabilities
C) increases equity
D) has no effect on assets

Answer 3

D

Question 4

Smart-T Corporation purchased an investment in April for $10,000. If Smart-T Corporation sold this investment on May 30^th for $12,000. They would have a realized gain.

Question 5

One method of establishing proper internal control over collections of accounts receivable is to:

A) make all disbursements by cheque
B) set up a petty cash fund
C) establish a bank lock-box
D) designate an authorized cheque signer

Question 6

A ledger that contains a separate account for each customer is called an accounts receivable:

A) control ledger
B) current ledger
C) trade ledger
D) subsidiary ledger

Question 7

Olive Corporation purchases Branch Inc shares on June 21 for $220,000. On October 1 Olive receives a cash dividend of $2,500 from Branch Inc. On December 31^st the value of Olive Corporation's investment in Branch has decreased in value to $210,000.
Prepare journal entries needed on June 21, October 1, and December 31, 2014.

Question 8

Vance Corporation purchases UXB shares on May 10 for $120,000. On October 15^th Vance receives a cash dividend of $1,200 from UXB. On December 31^st the value of Vance Corporation's investment in UXB has increased in value to $150,000.
Prepare journal entries needed on May 10, October 15, and December 31, 2014.

Question 9

Unrealized gains or losses on short-term investments are reported using:

A) A liability account
B) An asset account
C) An expense account
D) A revenue account

Question 10

Two major types of receivable include: account receivables and notes payable.

Question 11

What are 'held-for-trading investments'?

Question 12

Corporations invest in a short-term investment:

A) to park cash temporarily
B) to sell it for more than its cost
C) to generate a higher profile
D) to park cash temporarily and to increase income

Question 13

Investments held by a corporation are always classified as current assets.

Question 14

Receivables are monetary claims against others.

Question 15

Short-term investments:

A) are equity securities
B) are debt securities
C) may be classified as either debt or equity securities
D) represents Accounts Receivable and notes receivable on the balance sheet

Question 16

Zeep Company purchased shares of Zoop Inc on June 30, 2014 for $7,500. At the end of August these shares are now worth $6,500. Zeep has an unrealized loss on this investment.

Question 17

A critical element of internal control over collections of accounts receivables is:

A) depositing the cash from the cash register on a daily basis
B) setting up a petty cash account
C) using a cheque writing machine
D) the separation of cash-handling and cash-accounting duties

Question 18

Under a lock-box system, customers' payments are initially received by the company's:

A) accounts receivable department
B) treasurer's department
C) purchasing department
D) bank

Question 19

January 1, 2013 Orange Tree Spa invests in $100,000 worth of Apple Spa shares to hold as a short term investment. On December 31, 2013, this investment now has a market value of $105,000.
On May 1, 2014 Orange Tree Spa sells their Apple Spa shares for $95,000. Prepare the required entries for Orange Tree Spa.

Question 20

Short term investment purchases are initially recorded at their cost.

Question 21

Under the allowance method, the entry to write off a $1,425 uncollectible account includes:

A) a debit to Accounts Receivable for $1,425
B) a credit to Bad Debt Expense for $1,425
C) a credit to Allowance for Uncollectible Accounts for $1,425
D) a debit to Allowance for Uncollectible Accounts for $1,425

Question 22

Which of the following accounts is a contra-account to Accounts Receivable?

A) Sales Discounts
B) Sales Returns and Allowances
C) Allowance for Uncollectible Accounts
D) Bad Debt Expense

Question 23

One method of establishing internal controls over receivables is to establish a bank lock-box.

Question 24

Briefly state the main issues in controlling and managing the collection of receivables.

Question 25

For good internal control over cash, the handling of cash and the record keeping for receivables should be separated.

Question 26

After a customer's account has been written off under the allowance method, the customer sends the company the amount owed. Before the receipt of cash can be recorded, the company must first:

A) debit Allowance for Uncollectible Accounts
B) credit Bad Debt Expense
C) debit Accounts Receivable
D) credit Accounts Receivable

Question 27

Explain how net realizable value for accounts receivable is calculated. On which financial statement is net realizable value shown?

Question 28

Net accounts receivable is equal to accounts receivable less the allowance for uncollectible accounts.

Question 29

Under the allowance method, the entry to record the bad debts estimate includes a:

A) debit to Accounts Receivable
B) credit to Accounts Receivable
C) debit to Allowance for Uncollectible Accounts
D) debit to Bad Debt Expense

Question 30

Under the direct write-off method, the entry to record the estimated bad debts:

A) is not done
B) includes a credit to Allowance for Uncollectible Accounts
C) includes a debit to Allowance for Uncollectible Accounts
D) includes a debit to Bad Debt Expense

Question 31

The account that shows the amount of accounts receivable that the business does not expect to collect is:

A) Allowance for Uncollectible Accounts
B) net Accounts Receivable
C) Sales Returns and Allowances
D) Sales Discounts

Question 32

Which principle of accounting prescribes the use of the allowance method of accounting for bad debts?

A) full disclosure principle
B) historical cost principle
C) revenue recognition principle
D) matching principle

Question 33

Under the allowance method, the entry to reinstate an account previously written off:

A) increases total assets
B) increases net income
C) decreases net income
D) has no effect on net income

Question 34

Under the allowance method for estimating uncollectible accounts, the entry to record the estimated bad debts:

A) increases total assets
B) reduces net income
C) has no effect on total assets
D) has no effect on net income

Question 35

What category of account is the Allowance for Uncollectible Accounts account?

A) contra-asset account
B) contra-revenue account
C) contra-expense account
D) expense account

Question 36

Global Alliance Ltd has just established a lock-box account at a local bank. Explain what this is and why it would be used. Identify the specific element of internal control that the use of a lock-box addresses.

Question 37

The Bad Debt Expense account is classified:

A) as a contra-asset account
B) as part of cost of goods sold
C) as the cost to the seller of extending credit
D) deducted from Accounts Receivable account on the balance sheet

Question 38

Net accounts receivable is calculated as:

A) sales less sales returns and allowances
B) accounts receivable less bad debt expense
C) accounts receivable less allowance for uncollectible accounts
D) accounts receivable plus allowance for uncollectible accounts

Question 39

One of the benefits of extending credit to customers is the possibility of increased sales.

Question 40

Under the allowance method for estimating uncollectible accounts, the entry to write off an account:

A) reduces total assets
B) reduces net income
C) has no effect on total assets
D) increases net income

Question 41

Smart-T Corporation uses the aging-of-accounts-receivable method to estimate uncollectible receivables. At year end Smart-T estimates that $4,750 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a credit balance of $200. Bad debt expense to be reported on the income statement is:

A) $4,750
B) $4,950
C) $4,550
D) $200

Question 42

Under the aging-of-accounts-receivable method:

A) the balance in accounts receivable prior to adjustment must be considered
B) the balance in Allowance for Uncollectible Accounts prior to adjustment is ignored
C) the balance in Allowance for Uncollectible Accounts prior to adjustment must be considered
D) the balance in Bad Debt Expense prior to adjustment must be considered

Question 43

Allowance for Doubtful Accounts is a contra account to short term investments.

Question 44

Under the direct write-off method, the entry to write off an uncollectible account of $1,250 includes:

A) a debit to Accounts Receivable for $1,250
B) a credit to Bad Debt Expense for $1,250
C) a debit to Bad Debt Expense for $1,250
D) a debit to Allowance for Uncollectible Accounts for $1,250

Question 45

Using the aging-of-accounts-receivable method, you estimate that total uncollectible accounts are $3,800. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $1,100. The amount of the adjusting entry should be:

A) $4,900
B) $3,800
C) $2,700
D) $1,100

Question 46

The allowance method of accounting for bad debts records collection losses on the basis of estimates rather than waiting to determine which customers will not pay.

Question 47

Using the percentage-of-sales method, you estimate that total uncollectible accounts are $4,500. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,400. The amount of the adjusting entry is:

A) $1,400
B) $3,100
C) $4,500
D) $5,900

Question 48

Under the percentage-of-sales method, the estimate of bad debts for the period:

A) is based on the balance in the Accounts Receivable account
B) is based on aging accounts receivable
C) is based on a percentage of net credit sales
D) is based on a percentage of net accounts receivable

Question 49

Livelink Incorporated use the percentage-of-sales method to estimate uncollectible receivables. Net credit sales for the current year amount to $1,000,000 and management estimates 3% will be uncollectible. Allowance for Doubtful Accounts prior to adjustment has a debit balance of $1,900. The amount of expense reported on the income statement will be:

A) $31,900
B) $30,000
C) $28,100
D) $1,900

Question 50

Under the allowance method, the entry to write off an account that has been deemed uncollectible has no impact on the net income of the firm.

Question 51

Using the aging-of-accounts-receivable method to estimate uncollectible receivables, Records Management Corp. estimates that $8,000 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a debit balance of $2,000. Bad debt expense to be reported on the income statement is:

A) $10,000
B) $8,000
C) $6,000
D) $2,000

Question 52

Under the allowance method, if bad debt write-offs during the year exceed the allowance amount, the balance in Allowance for Uncollectible Accounts at year end prior to adjustment:

A) should be deducted from Accounts Receivable
B) will be zero
C) will be a debit
D) should be adjusted by debiting it to bring the balance back to zero

Question 53

The direct write-off method does not meet the requirements of the:

A) matching principle
B) revenue recognition principle
C) full disclosure principle
D) historical cost principle

Question 54

When an account is written off using the direct write-off method, total assets will:

A) remain the same
B) increase
C) decrease
D) cannot be determined

Question 55

Using the aging-of-accounts-receivable method to estimate uncollectible receivables, CMU Corporation estimates that $3,750 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a credit balance of $600. Bad debt expense to be reported on the income statement is:

A) $4,350
B) $3,750
C) $3,150
D) $600

Question 56

When an account is written off using the direct write-off method, net income will:

A) remain the same
B) increase
C) decrease
D) cannot be determined

Question 57

Lifecycle Management Corporation uses the percentage-of-sales method to estimate uncollectible receivables. Net credit sales for the current year amount to $2,000,000 and management estimates 5% will be uncollectible. Allowance for doubtful accounts prior to adjustment has a credit balance of $10,000. The amount of expense reported on the income statement will be:

A) $110,000
B) $100,000
C) $90,000
D) $10,000

Question 58

Under the allowance method, the entry to record the estimated bad debts for the period includes a credit to Accounts Receivable.

Question 59

Using the percentage-of-sales method, you estimate that total uncollectible accounts are $4,500. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $1,400. The amount of the adjusting entry is:

A) $5,900
B) $4,500
C) $3,100
D) $1,400

Question 60

Using the aging-of-accounts-receivable method, you estimate that total uncollectible accounts are $3,800.The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,100. The amount of the adjusting entry should be:

A) $4,900
B) $3,800
C) $2,700
D) $1,100

Question 61

There are two basic ways to estimate uncollectible receivables: the percentage-of-sales method and the aging-of-receivables method.

Question 62

The December 31, 2014 unadjusted trial balance of Eel Creek Ltd. (Eel) disclosed the following balances:
Additionally, the firm has given up trying to collect on $19,000 from a customer who recently declared bankruptcy. Eel's management has not yet written off the amount but intends to do so before the company's books are closed for the year. The firm does not use the direct write-off method to estimate bad debt expense.
Provide the entry for the write-off.

Question 63

Describe the effect on the financial statements of each of the following transactions, assuming the allowance method of estimating bad debts is used:
a. adjusting the books to record the estimated bad debts
b. writing off an account as uncollectible
c. recovery of an account previously written off as uncollectible

Question 64

The interest on a $50,000 note at 9% for 4 months is:

A) $1,500
B) $1,125
C) $4,500
D) $18,000

Question 65

The person or business to whom the signer of a promissory note promises a future payment is called the:

A) maker
B) payee
C) principal party
D) drawer

Question 66

The December 31, 2014 unadjusted trial balance of Eel Creek Ltd. (Eel) disclosed the following balances:
Additionally, the firm has given up trying to collect on $19,000 from a customer who recently declared bankruptcy. Eel's management has not yet written off the amount but intends to do so before the company's books are closed for the year. The firm does not use the direct write-off method to estimate bad debt expense.
Provide the entry to record bad debt expense for 2014 assuming the firm uses the percentage of credit sales method for recording bad debt expense. On the average Eel has experienced a 8% rate of uncollectible accounts over the past 5 years.

Question 67

IXOS Ltd. accepted an eighteen-month, $15,000, 8% note from ECM Corporation on June 1, 2014. The amount of interest to be accrued on December 31, 2014, is:

A) $1,800
B) $1,200
C) $700
D) $600

Question 68

Record entries for the following transactions for UTF-8 Corp. UTF-8 Corp. maintains an Allowance for Uncollectible Accounts.
a. Sold merchandise on account to Java Ltd., $1,800.
b. Sold merchandise on account to Centera, $759.
c. Wrote off both the Java Ltd. and the Centera accounts.
d. Centera unexpectedly paid off his account in full.

Question 69

Many companies use both the percentage-of-sales and the aging method to establish their allowance for doubtful accounts.

Question 70

A written promise to pay a specified amount of money at a particular future date is called a(n):

A) account receivable
B) promissory note
C) maturity note
D) unearned revenue

Question 71

For each of the following independent situations, compute net accounts receivable.
a. Accounts Receivable has a balance of $14,000. The Allowance for Uncollectible Accounts has a credit balance prior to adjustment of $300. An aging schedule prepared on December 31 reveals $1,100 of uncollectible accounts.
b. Accounts Receivable has a balance of $25,700. The Allowance for Uncollectible Accounts has a debit balance prior to adjustment of $400. An aging schedule prepared on December 31 reveals $2,300 of uncollectible accounts.
c. Accounts Receivable has a balance of $84,000. The Allowance for Uncollectible Accounts has a credit balance prior to adjustment of $300. Net credit sales for the year are $250,000 and 3% is estimated to be uncollectible.
d. Accounts Receivable has a balance of $83,000. The Allowance for Uncollectible Accounts has a debit balance prior to adjustment of $400. Net credit sales for the year are $250,000 and 3% is estimated to be uncollectible.

Question 72

Prepare adjusting journal entries for the following independent situations.
a. The Allowance for Uncollectible Accounts has a $700 credit balance prior to adjustment. Net credit sales during the year are $425,000 and 4% are estimated to be uncollectible.
b. The Allowance for Uncollectible Accounts has a $400 debit balance prior to adjustment. Based on an aging schedule of accounts receivable prepared on December 31, $11,800 of accounts receivable are estimated to be uncollectible.
c. The Allowance for Uncollectible Accounts has a $900 credit balance prior to adjustment. Based on an aging schedule of accounts receivable prepared on December 31, $14,500 of accounts receivable are estimated to be uncollectible.
d. The Allowance for Uncollectible Accounts has a $300 debit balance prior to adjustment. Net credit sales during the year are $550,000 and 3% are estimated to be uncollectible.

Question 73

Waterloo Limited accepts a note to settle an overdue account from a customer. The journal entry on Waterloo Limited's books will include a:

A) debit to Accounts Receivable
B) debit to Note Receivable
C) credit to Note Receivable
D) debit to Note Payable

Question 74

When a note matures, the payee should record:

A) interest payable
B) interest expense
C) interest revenue
D) unearned revenue

Question 75

The interest on a $50,000 note at 12% for 60 days is:

A) $56,000.00
B) $1,000.00
C) $44,000.00
D) $986.30

Question 76

On the maturity date, the payee of a note will:

A) debit Cash, credit Note Receivable and Interest Revenue
B) debit Cash, credit Note Payable and Interest Expense
C) debit Cash, credit Note Receivable and Interest Expense
D) debit Cash, credit Note Payable and Interest Revenue

Question 77

Optura Computer Company uses the allowance method to account for bad debts. Indicate the effect of each of the following transactions on gross Accounts Receivable, the Allowance for Uncollectible Accounts, net Accounts Receivable, and Bad Debt Expense. Use (+) for increase, (-) for decrease, and (0) for no effect.
a. A customer pays
b. 1% of $500,000 in
c. 5% of $100,000 in
d. An account

Question 78

When estimating uncollectible receivables based on the percentage-of-sales method, the adjusting entry will include a credit to Accounts Receivable.

Question 79

StorageTek Corporation gathered the following information from its accounting records for the year ended December 31, 2014, prior to adjustment:
Allowance for Uncollectible Accounts, prior to
StorageTek Corporation uses the allowance method of accounting for bad debts and estimates bad debts at 2.5% of net credit sales.
Required:
a. Prepare the adjusting entry on December 31, 2014.
b. Determine the balance in the Allowance for Uncollectible Accounts account after the adjusting entry is recorded.
c. Show how the receivables would be reported on the December 31, 2014, balance sheet for StorageTek Corporation.

Question 80

When a note matures, the maker should record:

A) interest expense
B) interest revenue
C) interest receivable
D) unearned revenue