Deck 7: Cash and Receivables

Question 1

Unless specific sales criteria are met, the factoring of accounts receivable with recourse is accounted for as a loan.

Answer 1

True

Question 2

Cash equivalents would include investments in marketable equity securities as long as management intends to sell the securities in the next three months.

Answer 2

False

Question 3

From a financial accounting perspective, the main purposes of a system of internal control are to improve the accuracy and reliability of accounting information and to safeguard assets.

Answer 3

True

Question 4

Securitization of receivables is a type of secured borrowing.

Question 5

The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a company in managing its investment in receivables.

Question 6

The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value.

Question 7

Using the balance sheet approach, bad debt expense is an indirect result of estimating the net realizable value of accounts receivable.

Question 8

COSO defines internal control as a process, affected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in:

A)Effectiveness and efficiency of operations.
B)Reliability of financial advice.
C)Compliance with local ordinances.
D)All of these are correct.

Question 9

Recognizing sales returns when they occur could result in an overstatement of income in the period of the related sale.

Question 10

Important elements of an internal control system for cash disbursements include each of the following except:

A)Only authorized personnel should sign checks.
B)All expenditures should be authorized before a check is prepared.
C)All disbursements, other than very small disbursements, should be made by check.
D)The same person that prepares the check should also record it the proper journal.

Question 11

Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/09: What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?

A)$ 9,450.
B)$12,450.
C)$ 7,450.
D)$19,650.

Question 12

In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges.

Question 13

In a good system of internal control, the person who initiates a transaction should be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records.

Question 14

Depending on the circumstances, the classification of a compensating balance may be either current or noncurrent, and the arrangement should be disclosed in the notes.

Question 15

In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors.

Question 16

Discounts on notes receivable are recognized as interest earned over the term of the related note.

Question 17

Cash equivalents do not include:

A)Money market funds.
B)High grade marketable equity securities.
C)U.S.treasury bills.
D)Commercial paper.

Question 18

Cash may not include:

A)Foreign currency.
B)Money orders.
C)Restricted cash.
D)Undeposited customer checks.

Question 19

The journal entry to record the replenishment of a petty cash fund includes a credit to the petty cash fund.

Question 20

The net method of accounting for cash discounts requires adjusting entries for discounts taken.

Question 21

The allowance for uncollectible accounts is a:

A)Deferred charge to expense.
B)Contra asset account.
C)Deferred revenue account.
D)Quasi-liability account.

Question 22

What Bad debt expense would Dinty report in its first-year income statement?

A)$ 50,000
B)$ 82,000
C)$114,000
D)Can't be determined from the given information Bad debts expense Write-offs = Change in Allowance balance.So, Bad debts expense = Change in Allowance balance of $82,000 + Write-offs of $32,000 = $114,000.

Question 23

Which of the following does not change the balance in accounts receivable?

A)Returns on credit sales.
B)Collections from customers.
C)Bad debts expense adjusting entry.
D)Write-offs.

Question 24

The balance in accounts receivable at the beginning of 2009 was $300. During 2009, $1,600 of credit sales were recorded. If the ending balance in accounts receivable was $250 and $100 in accounts receivable were written off during the year, the amount of cash collected from customers during 2009 was:

A)$1,600.
B)$1,650.
C)$1,550.
D)$1,900.$300 + 1,600 100 250 = $1,550.

Question 25

Compensating balances represent:

A)Funds in a bank account that can't be spent.
B)Balances in a payroll checking account.
C)Accounts that are subject to bank service charges.
D)Accounts on which banks pay interest, e.g., NOW accounts.

Question 26

Logistics Company had the following items listed in its trial balance at 12/31/09: Included in the checking account balance is $50,000 of restricted cash that Bank of the East requires as a compensating balance for the $300,000 note. What amount will Logistics include in its year-end balance sheet as cash and cash equivalents?

A)$412,000.
B)$462,000.
C)$392,000.
D)$442,000.

Question 27

Calistoga's 2009 bad debt expense is:

A)$1,720.
B)$1,650.
C)$1,505.
D)$1,575.

Question 28

What is the balance in the allowance for sales returns account at the end of 2009?

A)$11,000.
B)$39,000.
C)$43,000.
D)$ 4,000.$32,000 + 39,000 ($650,000 6%) 28,000 = $43,000

Question 29

Calistoga's adjusted allowance for uncollectible accounts at December 31, 2009, is:

A)$1,575.
B)$1,505.
C)$1,650.
D)$1,720.

Question 30

Memorex Disks sells computer disk drives with right-of-return privileges. Returns are material and reasonably predictable. Memorex should:

A)Not record sales until the right to return has expired.
B)Record an allowance for sales returns in the year of the sale.
C)Debit sales returns in the period of the return.
D)Debit sales in the period of the return.

Question 31

Calistoga's accounts receivable at December 31, 2009, are:

A)$467,000.
B)$473,280.
C)$465,280.
D)$469,280.

Question 32

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting accounts receivable and debiting:

A)Sales.
B)Sales discounts.
C)Sales returns.
D)Sales allowances.

Question 33

False Value's 2009 income statement would report net sales of:

A)$622,000.
B)$607,000.
C)$646,000.
D)$611,000.$650,000 39,000 ($650,000 6%) = $611,000

Question 34

The following information relates to Halloran Co.'s accounts receivable for 2009: What amount should Halloran report for accounts receivable, before allowances, at December 31, 2009?

A)$1,040,000.
B)$ 970,000.
C)$ 760,000.
D)None of these.

Question 35

What accounts receivable balance would Dinty report in its first year-end balance sheet?

A)$196,000
B)$218,000
C)$230,000
D)None of these is correct.Credit sales Cash collections Write-offs = Change in Accounts receivable So, $2,200,000 1,950,000 32,000 = $218,000.

Question 36

Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom's would credit accounts receivable and debit:

A)Sales.
B)Sales discount.
C)Sales returns.
D)Sales allowances.

Question 37

Cash that is restricted and not available for current operations is reported in the balance sheet as:

A)Equity.
B)Investments.
C)Liabilities.
D)A separate section between liabilities and equity.

Question 38

Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending balance of accounts receivable. During 2009, Chez Fred's credit sales and collections were $125,000 and $131,000, respectively. What was the balance of accounts receivables on January 1, 2009, if $180 in accounts receivable were written off during 2009 and if the allowance account had a balance of $750 on 12/31/09?

A)$5,820.
B)$31,000.
C)$31,180.
D)None of these is correct.Therefore, A/R, 1/1/09 = $31,180

Question 39

Collection of accounts receivable that previously have been written off results in an increase in cash and an increase in:

A)Accounts receivable.
B)Allowance for uncollectible accounts.
C)Bad debts expense.
D)Retained earnings.

Question 40

Accounts receivable are normally reported at the:

A)Present value of future cash receipts.
B)Current value plus accrued interest.
C)Expected amount to be received.
D)Current value less expected collection costs.

Question 41

A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity date. Mild Max would debit:

A)A loss on dishonored receivable.
B)A receivable.
C)Dishonored note expense.
D)Interest expense.

Question 42

When you use an aging schedule approach for estimating uncollectible accounts:

A)Bad debts expense is measured indirectly, and the allowance for uncollectible accounts balance is measured directly.
B)Bad debts expense is measured indirectly, and the allowance for uncollectible accounts balance is measured indirectly.
C)Bad debts expense is measured directly, and the allowance for uncollectible accounts balance is measured directly.
D)Bad debts expense is measured directly, and the allowance for uncollectible accounts balance is measured indirectly.

Question 43

Priscilla's Exotic Pets discounted a note receivable without recourse and the sales criteria were met. The discounting is recorded as:

A)A secured borrowing.
B)Only note disclosure of the arrangement is required.
C)A sale.
D)None of these.

Question 44

Drebin Security Systems sold merchandise to a customer in exchange for a $50,000, 5-year, noninterest-bearing note when an equivalent loan would carry 10% interest. Drebin would record sales revenue on the date of sale equal to:

A)$50,000.
B)Zero.
C)The future value of $50,000 using a 10% interest rate.
D)The present value of $50,000 using a 10% interest rate.

Question 45

Rahal's 2009 bad debt expense is:

A)$2,100.
B)$2,340.
C)$4,080.
D)None of these is correct.The correct answer is:

Question 46

Baker Inc. acquired equipment from the manufacturer on 10/1/09 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/10 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2009 year-end financial statements, what is its imputed annual interest rate?

A)2%
B)4%
C)6%
D)None of these is correct.$9,000 was interest for 3 months in 2009.The note lasts 6 months, so 2 $9,000 = $18,000 is the total interest for 6 months; the rest is principal.$18,000/$900,000 = 2% for 6 months, or 4% annually.

Question 47

At December 31, 2008, Gill Co reported accounts receivable of $216,000 and an allowance for uncollectible accounts of $8,400. During 2009, accounts receivable increased by $22,000 after a $7,800 write-off of bad debts. An analysis of Gill Co.'s December 31, 2009, accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. Bad debt expense for 2009 would be:

A)$6,540.
B)$7,800.
C)$7,140.
D)None of these is correct.

Question 48

Frasquita acquired equipment from the manufacturer on 6/30/09 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/10 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2009 year-end financial statements, what would the manufacturer record in its 2009 income statement for this transaction?

A)$15,000 of interest revenue
B)$25,000 of interest revenue
C)$15,000 of interest revenue and $525,000 of sales revenue
D)$550,000 of sales revenue $15,000 was interest for 6 months in 2009.The note lasts 10 months, so 10/6 $15,000 = $25,000 is the total interest for 10 months; the rest ($525,000) is principal, which is the sales revenue for the manufacturer of the equipment.

Question 49

At December 31, 2009, Amy Jo's Appliances had unadjusted account balances in accounts receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2009 write-offs of $6,450 in bad debts. An analysis of Amy Jo's December 31, 2009, accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for 2009 should be:

A)$6,220.
B)$6,450.
C)$5,250.
D)None of these is correct.

Question 50

Nontrade receivables do not include:

A)Sales to customers.
B)Loans to employees.
C)Income tax refund receivable.
D)Advances to affiliated companies.

Question 51

Which of the following is recorded by a credit to Accounts receivable?

A)Sale of inventory on account.
B)Estimating the annual allowance for uncollectible accounts.
C)Estimating annual sales returns.
D)Write-off of bad debts.

Question 52

In Dinty's adjusting entry for bad debts at year-end, which of these would be included?

A)Debit to bad debt expense for $114,000
B)Credit to allowance for uncollectible accounts for $82,000
C)Debit to accounts receivable for $32,000
D)All of these are correct.

Question 53

At January 1, 2009, Farley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on past experience, 2 percent of Farley's credit sales have been uncollectible. During 2009, Farley wrote off $650,000 of accounts receivable. Credit sales for 2009 were $18,000,000. In its December 31, 2009 balance sheet, what amount should Farley report as allowance for uncollectible accounts?

A)$230,000.
B)$360,000.
C)$590,000.
D)$880,000.$18,000,000 2% = $360,000 + 520,000 650,000 = $230,000.

Question 54

Rahal's accounts receivable at December 31, 2009, are:

A)$90,500.
B)$88,160.
C)$82,500.
D)$80,160.

Question 55

Long-term notes receivable issued for noncash assets at an unrealistically low interest rate will be:

A)Discounted at an imputed interest rate.
B)Recorded at the contract amount.
C)Recorded at an amount equal to the future cash flows.
D)Accounted for on the installment basis.

Question 56

If a company uses the balance sheet approach to estimate bad debt expense, bad debt expense for a period can be determined by:

A)Multiplying net credit sales by the bad debt experience ratio.
B)Adding the beginning balance in the allowance for uncollectible accounts to the provision for uncollectible accounts and deducting the desired ending balance in the allowance for uncollectible accounts.
C)Multiplying ending accounts receivable in each age category by the expected loss ratio for each age category.
D)Taking the difference between the unadjusted balance in the allowance account and the desired balance.

Question 57

Frankenstein Enterprises received two notes from customers for sales that it made to them in 2009. The notes included: Note A: Dated 5/31/09, principal of $120,000 and interest due 3/31/10.
Note B: Dated 7/1/09, principal of $200,000 and interest at 8% annually, due on 4/1/10.
Frankenstein had accrued interest receivable from these notes of $14,400 on its 12/31/09 balance sheet. What amount of interest revenue would Frankenstein earn on these notes during 2010?

A)Above $12,000.
B)Between $7,000 and 10,000.
C)Less than $5000.
D)None of these is correct.Note A earns 9.14% annually.During 2010, Note A is held for 3 months, so it earns $120,000 .0914 3/12 = $2,742.Note B also is held for 3 months and earns 8% annually, so $200,000 .08 4/12 = $4,000.So the total interest revenue earned in 2010 is $6,742.Note: This question requires the use of the interest rate answer solved in question 103.

Question 58

Frankenstein Enterprises received two notes from customers for sales that it made to them in 2009. The notes included: Note A: Dated 5/31/09, principal of $120,000 and interest due 3/31/10.
Note B: Dated 7/1/09, principal of $200,000 and interest at 8% annually, due on 4/1/10.
Frankenstein had accrued interest receivable from these notes of $14,400 in its 12/31/09 balance sheet. What is annual interest rate on Note A?

A)9.14%
B)8%
C)9.74%
D)9.44% Note B accrued interest for 6 months during 2009: $200,000 .08 6/12 = $8,000.The rest of the interest accrued, $6,400 was from Note A which was held for 7 months in 2009.So, we have the following: $120,000 annual interest rate 7/12 = $6,400.Thus, the annual interest rate on Note A would be ($6,400 / 120,000) 12/7 = 9.14%.

Question 59

Rahal's adjusted allowance for uncollectible accounts at December 31, 2009, is:

A)$4,340.
B)$4,100.
C)$3,800.
D)$4,040.

Question 60

Frasquita acquired equipment from the manufacturer on 6/30/09 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/10 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2009 year-end financial statements, at what amount would it record the equipment on its 6/30/09 balance sheet?

A)$500,000
B)$515,000
C)$550,000
D)$525,000.$15,000 was interest for 6 months in 2009.The note lasts 10 months, so 10/6 $15,000 = $25,000 is the total interest for 10 months; the rest ($525,000) is principal, which is the cost of the equipment purchased.

Question 61

Which of the following is considered a sale of receivables:

A)Pledging receivables.
B)Assigning receivables.
C)Factoring receivables without recourse.
D)None of these.

Question 62

Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2009. The note, along with interest at 6%, is due on June 30, 2010. On September 30, 2009, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?

A)$40,600.
B)$36,000.
C)$39,220.
D)$36,820 .

Question 63

The transferor is considered to have surrendered control over its receivables if:

A)The transferred assets have been isolated from the transferor.
B)Each transferee has the right to pledge or exchange the assets it received.
C)The transferor does not maintain effective control over the transferred assets through either repurchase or redemption agreements before maturity or the ability to cause the transferee to return the assets.
D)All of these must occur.

Question 64

On April 1 of the current year, Troubled Company factored receivables with a carrying value of $85,000 for $60,000 in cash from Scrooge Lenders. The transfer was made without recourse. On April 1, Troubled would

A)Credit deferred interest expense for $25,000.
B)Credit factored accounts receivable for $85,000.
C)Debit discount on liability for $25,000.
D)Debit loss on sale of receivables for $25,000.

Question 65

Huckabee's 2009 average collection period is:

A)69 days.
B)116 days.
C)111 days.
D)73 days.

Question 66

The purpose of assigning accounts receivable is to:

A)Satisfy a court order.
B)Complete the legal prerequisites to record their sale.
C)Comply with form and content rules of bankruptcy proceedings.
D)Provide collateral for a loan.

Question 67

Accounting for the pledging of accounts receivable as collateral for a loan requires:

A)Reporting the receivables net of the borrowed amount.
B)Removal of the pledged receivables from current assets and including them with noncurrent investments.
C)Disclosure of the arrangement in notes to the financial statements.
D)None of these.

Question 68

Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the end of July, the balance in the general ledger checking account was $2,750 and the bank balance on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited were $400. The bank statement revealed that a check written for $120 was incorrectly recorded by Brockton as a $220 disbursement. The bank statement listed service charges and NSF check charges totaling $150. The corrected cash balance is:

A)$2,270.
B)$2,550.
C)$2,470.
D)$2,700.$2,750 + 100 ($220 120) 150 = $2,700, or $2,980 680 + 400 = $2,700

Question 69

On October 18, 2009, Flying Chicken sold 2,000 pounds of chicken to Healthier Grocery for $3,400, subject to terms 2/10, n30. Flying Chicken uses the gross method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on October 26, 2009.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on November 15, 2009.

Question 70

On May 12, 2009, Falwell Computing sold five computers to Computing Plus for $10,000, subject to terms 3/10, n30. Falwell uses the net method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on May 20, 2009.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on June 5, 2009.

Question 71

On March 12, 2009, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for $10,000, subject to terms 2/10, n30. Admiral uses the gross method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on March 20, 2009.
3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on April 5, 2009.

Question 72

Hazelton Manufacturing prepares a bank reconciliation at the end of every month. At the end of May, the general ledger checking account showed a balance of $1,360 and the bank statement showed a bank balance of $1,445. Outstanding checks totaled $350 and deposits in transit were $150. The bank statement listed service charges of $30 and NSF checks totaling $85. The corrected cash balance is:

A)$1,130.
B)$1,160.
C)$1,245.
D)$1,445.$1,360 30 85 = $1,245, or $1,445 350 + 150 = $1,245

Question 73

The journal entry to replenish the petty cash fund includes:

A)A credit to petty cash and a debit to various expenses for $126.
B)A debit to petty cash and a credit to cash for $150.
C)A credit to cash and a debit to various expenses for $126.
D)None of these.

Question 74

A company's investment in receivables is influenced by several variables, including:

A)The level of sales.
B)The nature of the product or service sold.
C)The credit and collection policies.
D)All of these are correct.

Question 75

Alliance Software began 2009 with accounts receivable of $115,000. All sales are made on credit. Sales and cash collections from customers for the year were $780,000 and $700,000, respectively. Cost of goods sold for the year was $450,000. What was Alliance's receivables turnover ratio for 2009?

A)4.00.
B)5.03.
C)2.90.
D)6.78.

Question 76

In deciding whether financing with receivables is a secured borrowing or a sale, the critical element is the extent to which:

A)The stated interest rates differ from market interest rates.
B)The age of the receivables transferred differs from the average age of the receivables.
C)The transferor of the receivable surrenders control over the assets transferred.
D)The transferee relies on funds from the transferor to maintain operations.

Question 77

On July 18, 2009, Philly Furniture Factory sold twenty reclining rockers to Dave's Discount Furniture for $8,000, subject to terms 2/10, n30. Philly uses the net method of accounting for sales discounts.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 26, 2009.
3. Prepare the journal entry to record receipt of the payment assuming the correct amount was received on August 15, 2009.

Question 78

The following information pertains to Jacobsen Co.'s accounts receivable at December 31, 2009: During 2009, Jacobsen wrote off $18,000 in receivables and recovered $6,000 that had been written off in prior years. Jacobsen's December 31, 2008, allowance for uncollectible accounts was $40,000. Under the aging method, what amount of allowance for uncollectible accounts should Jacobsen report at December 31, 2009?

A)$28,000.
B)$31,400.
C)$55,400.
D)$49,400.

Question 79

Huckabee's 2009 receivables turnover is:

A)3.69.
B)5.00.
C)5.26.
D)3.16.

Question 80

The journal entry to establish the petty cash fund includes:

A)A credit to petty cash and a debit to cash for $150.
B)A debit to petty cash and a credit to cash for $150.
C)A credit to cash and a debit to various expenses for $126.
D)A credit to petty cash and a debit to various expenses for $126.