Deck 7: Cash and Receivables

Question 1

Bank overdrafts are always offset against the cash account in the balance sheet.

Answer 1

False

Question 2

Cash equivalents are investments with original maturities of six months or less.

Answer 2

False

Question 3

Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

Answer 3

True

Question 4

Short-term, highly liquid investments may be included with cash on the balance sheet.

Question 5

When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

Question 6

The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible.

Question 7

Companies record and report long-term notes receivable at the present value of the cash they expect to collect.

Question 8

Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been.

Question 9

For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay.

Question 10

In the gross method, sales discounts are reported as a deduction from sales.

Question 11

All claims held against customers and others for money, goods, or services are reported as current assets.

Question 12

Trade receivables include notes receivable and advances to officers and employees.

Question 13

Savings accounts are usually classified as cash on the balance sheet.

Question 14

Notes receivable are generally reported as noncurrent assets.

Question 15

Certificates of deposit are usually classified as cash on the balance sheet.

Question 16

The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet.

Question 17

Companies include postdated checks and petty cash funds as cash.

Question 18

When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

Question 19

The receivables turnover ratio is computed by dividing net sales by the ending net receivables.

Question 20

The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable.

Question 21

Which of the following items should not be included in the Cash caption on the balance sheet?

A)Coins and currency in the cash register
B)Checks from other parties presently in the cash register
C)Amounts on deposit in checking account at the bank
D)Postage stamps on hand

Question 22

Which of the following is considered cash?

A)Certificates of deposit (CDs)
B)Money market checking accounts
C)Money market savings certificates
D)Postdated checks

Question 23

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment.Such a discount is called a(n)

A)trade discount.
B)nominal discount.
C)enhancement discount.
D)cash discount.

Question 24

Trade discounts are

A)not recorded in the accounts; rather they are a means of computing a price.
B)used to avoid frequent changes in catalogues.
C)used to quote different prices for different quantities purchased.
D)all of the above.

Question 25

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach

A)gives a reasonably correct statement of receivables in the balance sheet.
B)best relates bad debt expense to the period of sale.
C)is the only generally accepted method for valuing accounts receivable.
D)makes estimates of uncollectible accounts unnecessary.

Question 26

The category "trade receivables" includes

A)advances to officers and employees.
B)income tax refunds receivable.
C)claims against insurance companies for casualties sustained.
D)none of these.

Question 27

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and

A)is acceptable as a means to pay current liabilities.
B)has a current market value that is greater than its original cost
C)bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
D)is so near its maturity that it presents insignificant risk of changes in interest rates.

Question 28

Which of the following methods of determining annual bad debt expense best achieves the matching concept?

A)Percentage of sales
B)Percentage of ending accounts receivable
C)Percentage of average accounts receivable
D)Direct write-off

Question 29

Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because

A)most short-term receivables are not interest-bearing.
B)the allowance for uncollectible accounts includes a discount element.
C)the amount of the discount is not material.
D)most receivables can be sold to a bank or factor.

Question 30

Which of the following methods of determining bad debt expense does not properly match expense and revenue?

A)Charging bad debts with a percentage of sales under the allowance method.
B)Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.
C)Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
D)Charging bad debts as accounts are written off as uncollectible.

Question 31

At the beginning of 2006, Finney Company received a three-year zero-interest-bearing $1,000 trade note.The market rate for equivalent notes was 8% at that time.Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006.What effect did this accounting for the note have on Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively?

A)Overstate, overstate, understate, zero
B)Overstate, understate, understate, understate
C)Overstate, overstate, overstate, overstate
D)None of these

Question 32

Bank overdrafts, if material, should be

A)reported as a deduction from the current asset section.
B)reported as a deduction from cash.
C)netted against cash and a net cash amount reported.
D)reported as a current liability.

Question 33

Deposits held as compensating balances

A)usually do not earn interest.
B)if legally restricted and held against short-term credit may be included as cash.
C)if legally restricted and held against long-term credit may be included among current assets.
D)none of these.

Question 34

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as

A)a deduction from sales in the income statement.
B)an item of "other expense" in the income statement.
C)a deduction from accounts receivable in determining the net realizable value of accounts receivable.
D)sales discounts forfeited in the cost of goods sold section of the income statement.

Question 35

Which of the following should be recorded in Accounts Receivable?

A)Receivables from officers
B)Receivables from subsidiaries
C)Dividends receivable
D)None of these

Question 36

Which of the following is true when accounts receivable are factored without recourse?

A)The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.
B)The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
C)The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.
D)The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

Question 37

Which of the following is not considered cash for financial reporting purposes?

A)Petty cash funds and change funds
B)Money orders, certified checks, and personal checks
C)Coin, currency, and available funds
D)Postdated checks and I.O.U.'s

Question 38

Travel advances should be reported as

A)supplies.
B)cash because they represent the equivalent of money.
C)investments.
D)none of these.

Question 39

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?

A)A percentage of sales adjusted for the balance in the allowance
B)A percentage of sales not adjusted for the balance in the allowance
C)A percentage of accounts receivable not adjusted for the balance in the allowance
D)An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

Question 40

What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?

A)As offsets to capital.
B)By means of footnotes only.
C)As assets but separately from other receivables.
D)As trade notes and accounts receivable if they otherwise qualify as current assets.

Question 41

Which of the following statements is incorrect regarding the classification of accounts and notes receivable?

A)Segregation of the different types of receivables is required if they are material.
B)Disclose any loss contingencies that exist on the receivables.
C)Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.
D)Valuation accounts should be ap?propriately offset against the proper receivable accounts.

Question 42

Peterson Company has the following items at year-end: $\begin{array}{lr}\text { Cash in bank } & \$ 30,000 \\\text { Petty cash } & 500 \\\text { Short-term paper with maturity of } 2 \text { months } & 8,200 \\\text { Postdated checks } & 2,100\end{array}$ Peterson should report cash and cash equivalents of

A)$30,000.
B)$30,500.
C)$38,700.
D)$40,800.

Question 43

Burnett Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $15,000.During 2007, it wrote off $10,800 of accounts and collected $3,150 on accounts previously written off.The balance in Accounts Receivable was $300,000 at 1/1 and $360,000 at 12/31.At 12/31/07, Burnett estimates that 5% of accounts receivable will prove to be uncollectible.What should Burnett report as its Allowance for Doubtful Accounts at 12/31/07?

A)$7,200.
B)$7,350.
C)$10,350.
D)$18,000.

Question 44

On January 1, 2007, Mann Company borrows $2,000,000 from National Bank at 11% annual interest.In addition, Mann is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%.The effective interest that Mann pays on its $2,000,000 loan is

A)10.0%.
B)11.0%.
C)11.5%.
D)11.6%.

Question 45

Marshell Company has cash in bank of $15,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000.Marshell should report cash of

A)$13,000.
B)$15,000.
C)$18,000.
D)$19,000.

Question 46

Use the following information for questions
A trial balance before adjustments included the following: $\begin{array}{lrr}&\text { Debit } & \text { Credit }\\\text { Sales } & & \$ 425,000 \\\text { Sales returns and allowance } & \$ 14,000 & \\\text { Accounts receivable } & 43,000 & \\\text { Allowance for doubtful accounts } & & 760\end{array}$

-If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is

A)$3,540.
B)$4,300.
C)$4,224.
D)$5,060.

Question 47

Holtzman Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $10,000.During 2007, it wrote off $7,200 of accounts and collected $2,100 on accounts previously written off.The balance in Accounts Receivable was $200,000 at 1/1 and $240,000 at 12/31.At 12/31/07, Holtzman estimates that 5% of accounts receivable will prove to be uncollectible.What is Bad Debt Expense for 2007?

A)$2,000.
B)$7,100.
C)$9,200.
D)$12,000.

Question 48

Delgado Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $20,000.During 2007, it wrote off $14,400 of accounts and collected $4,200 on accounts previously written off.The balance in Accounts Receivable was $400,000 at 1/1 and $480,000 at 12/31.At 12/31/07, Delgado estimates that 5% of accounts receivable will prove to be uncollectible.What is Bad Debt Expense for 2007?

A)$4,000.
B)$14,200.
C)$18,400.
D)$24,000.

Question 49

The following information is available for Reagan Company: $\begin{array} { l } \text {Allowance for doubtful accounts at December 31, 2006 }&\$8,00\\ \text { Credit sales during 2007 }&400,000\\ \text {Accounts receivable deemed worthless and written off during 2007 }&9,000\\\end{array}$
As a result of a review and aging of accounts receivable in early January 2008, however, it has been determined that an allowance for doubtful accounts of $5,500 is needed at December 31, 2007.What amount should Reagan record as "bad debt expense" for the year ended December 31, 2007?

A)$4,500
B)$5,500
C)$6,500
D)$13,500

Question 50

Horvath Company has the following items at year-end: $\begin{array}{lr}\text { Cash in bank } & \$ 20,000 \\\text { Petty cash } & 300 \\\text { Short-term paper with maturity of } 2 \text { months } & 5,500 \\\text { Postdated checks } & 1,400\end{array}$ Horvath should report cash and cash equivalents of

A)$20,000.
B)$20,300.
C)$25,800.
D)$27,200.

Question 51

Sandler Company has the following account balances at year-end: $\begin{array}{lr}\text { Accounts receivable } & \$ 80,000 \\\text { Allowance for doubtful accounts } & 4,800 \\\text { Sales discounts } & 3,200\end{array}$ Sandler should report accounts receivable at a net amount of

A)$72,000.
B)$75,200.
C)$76,800.
D)$80,000.

Question 52

The accounts receivable turnover ratio is computed by dividing

A)gross sales by ending net receivables.
B)gross sales by average net receivables.
C)net sales by ending net receivables.
D)net sales by average net receivables.

Question 53

Simpson Company has the following account balances at year-end: $\begin{array}{lr}\text { Accounts receivable } & \$ 60,000 \\\text { Allowance for doubtful accounts } & 3,600 \\\text { Sales discounts } & 2,400\end{array}$ Simpson should report accounts receivable at a net amount of

A)$54,000.
B)$56,400.
C)$57,600.
D)$60,000.

Question 54

Use the following information for questions
A trial balance before adjustments included the following: $\begin{array}{lrr}&\text { Debit } & \text { Credit }\\\text { Sales } & & \$ 425,000 \\\text { Sales returns and allowance } & \$ 14,000 & \\\text { Accounts receivable } & 43,000 & \\\text { Allowance for doubtful accounts } & & 760\end{array}$

-If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is

A)$6,700.
B)$8,220.
C)$8,500.
D)$9,740.

Question 55

At the close of its first year of operations, December 31, 2007, Linn Company had accounts receivable of $540,000, after deducting the related allowance for doubtful accounts.During 2007, the company had charges to bad debt expense of $90,000 and wrote off, as uncollectible, accounts receivable of $40,000.What should the company report on its balance sheet at December 31, 2007, as accounts receivable before the allowance for doubtful accounts?

A)$670,000
B)$590,000
C)$490,000
D)$440,000

Question 56

Rusch Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $12,000.During 2007, it wrote off $8,640 of accounts and collected $2,520 on accounts previously written off.The balance in Accounts Receivable was $240,000 at 1/1 and $288,000 at 12/31.At 12/31/07, Rusch estimates that 5% of accounts receivable will prove to be uncollectible.What should Rusch report as its Allowance for Doubtful Accounts at 12/31/07?

A)$5,760.
B)$5,880.
C)$8,280.
D)$14,400.

Question 57

If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)?

A)1%
B)12%
C)18%
D)30%

Question 58

Before year-end adjusting entries, Bass Company's account balances at December 31, 2007, for accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000, respectively.An aging of accounts receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible.The net realizable value of accounts receivable after adjustment is

A)$582,500.
B)$537,500.
C)$492,500.
D)$555,000.

Question 59

During the year, Jantz Company made an entry to write off a $4,000 uncollectible account.Before this entry was made, the balance in accounts receivable was $50,000 and the balance in the allowance account was $4,500.The net realizable value of accounts receivable after the write-off entry was

A)$50,000.
B)$49,500.
C)$41,500.
D)$45,500.

Question 60

Hamilton Company has cash in bank of $10,000, restricted cash in a separate account of $3,000, and a bank overdraft in an account at another bank of $1,000.Hamilton should report cash of

A)$9,000.
B)$10,000.
C)$12,000.
D)$13,000.

Question 61

Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account

A)increases the allowance for uncollectible accounts.
B)has no effect on the allowance for uncollectible accounts.
C)has no effect on net income.
D)decreases net income.

Question 62

Which of the following is a method to generate cash from accounts receivable?

Question 63

Use the following information for questions
Henry Co.assigned $400,000 of accounts receivable to Easy Finance Co.as security for a loan of $335,000.Easy charged a 2% commission on the amount of the loan; the interest rate on the note was 10%.During the first month, Henry collected $110,000 on assigned accounts after deducting $380 of discounts.Henry accepted returns worth $1,350 and wrote off assigned accounts totaling $2,980.
The amount of cash Henry received from Easy at the time of the transfer was

A)$301,500.
B)$327,000.
C)$328,300.
D)$335,000.

Question 64

May Co.prepared an aging of its accounts receivable at December 31, 2007 and determined that the net realizable value of the receivables was $300,000.Additional information is available as follows: $\begin{array} { l } \text {Allowance for uncollectible accounts at \( 1 / 1 / 07 \)-credit balance }&\$34,000\\ \text { Accounts written off as uncollectible during 2007}&23,000\\ \text {Accounts receivable at \( 12 / 31 / 07 \) }&325,000\\ \text { Uncollectible accounts recovered during 2007}&5,000\\\end{array}$
For the year ended December 31, 2007, May's uncollectible accounts expense would be

A)$25,000.
B)$23,000.
C)$16,000.
D)$9,000.

Question 65

Use the following information for questions
Henry Co.assigned $400,000 of accounts receivable to Easy Finance Co.as security for a loan of $335,000.Easy charged a 2% commission on the amount of the loan; the interest rate on the note was 10%.During the first month, Henry collected $110,000 on assigned accounts after deducting $380 of discounts.Henry accepted returns worth $1,350 and wrote off assigned accounts totaling $2,980.
Entries during the first month would include a

A)debit to Cash of $110,380.
B)debit to Bad Debt Expense of $2,980.
C)debit to Allowance for Doubtful Accounts of $2,980.
D)debit to Accounts Receivable of $114,710.

Question 66

Marley Company received a seven-year zero-interest-bearing note on February 22, 2007, in exchange for property it sold to O'Rear Company.There was no established exchange price for this property and the note has no ready market.The prevailing rate of interest for a note of this type was 7% on February 22, 2007, 7.5% on December 31, 2007, 7.7% on February 22, 2008, and 8% on December 31, 2008.What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2007 and 2008, respectively?

A)0% and 0%
B)7% and 7%
C)7% and 7.7%
D)7.5% and 8%

Question 67

On the December 31, 2007 balance sheet of Yount Co., the current receivables consisted of the following: $\begin{array}{lc}\text { Trade accounts receivable } & 75,000 \\\text { Allowance for uncollectible accounts } & (2,000) \\\text { Claim against shipper for goods lost in transit (November 2007) } & 3,000 \\\text { Selling price of unsold goods sent by Yount on consignment } &\\ \text {at \( 130 \% \) of cost (not included in Yount 's ending inventory) }&26,000\\ \text {Security deposit on lease of warehouse used for storing }\\ \text { some inventories }&30,000\\ \text { Total }&\$132,000\\\end{array}$ At December 31, 2007, the correct total of Yount 's current net receivables was

A)$76,000.
B)$102,000.
C)$106,000.
D)$132,000.

Question 68

Joe Novak Corporation factored, with recourse, $100,000 of accounts receivable with Huskie Financing.The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances.Joe Novak estimates the recourse obligation at $2,400.What amount should Joe Novak report as a loss on sale of receivables?

A)$ -0-.
B)$3,000.
C)$5,400.
D)$10,400.

Question 69

Mike McKinney Corporation had accounts receivable of $100,000 at 1/1.The only transactions affecting accounts receivable were sales of $600,000 and cash collections of $550,000.The accounts receivable turnover is

A)4.0.
B)4.4.
C)4.8.
D)6.0.

Question 70

For the year ended December 31, 2007, Colt Co.estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable.The following data are available: $\begin{array} { l } \text {Allowance for uncollectible accounts, \( 1 / 1 / 07 \) }&\$56,000\\ \text { Provision for uncollectible accounts during 2007 }&\\ \text {\( (2 \% \) on credit sales of \( \$ 2,000,000) \) }&40,000\\ \text { Uncollectible accounts written off, \( 11 / 30 / 07 \)}&46,000\\ \text { Estimated uncollectible accounts per aging. 12/31/07 }&69,000\\\end{array}$
After year-end adjustment, the uncollectible accounts expense for 2007 should be

A)$46,000.
B)$62,000.
C)$69,000.
D)$59,000.

Question 71

On January 1, 2006, Marr Co.exchanged equipment for a $400,000 zero-interest-bearing note due on January 1, 2009.The prevailing rate of interest for a note of this type at January 1, 2006 was 10%.The present value of $1 at 10% for three periods is 0.75.What amount of interest revenue should be included in Marr's 2007 income statement?

A)$0
B)$30,000
C)$33,000
D)$40,000

Question 72

On December 31, 2007, Eller Corporation sold for $75,000 an old machine having an original cost of $135,000 and a book value of $60,000.The terms of the sale were as follows: $15,000 down payment
$30,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction.What should be the amount of the notes receivable net of the unamortized discount on December 31, 2007 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)

A)$52,773.
B)$67,773.
C)$60,000.
D)$105,546.

Question 73

Mortonson Corporation factored, with recourse, $300,000 of accounts receivable with Huskie Financing.The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances.Mortonson estimates the recourse obligation at $7,200.What amount should Mortonson report as a loss on sale of receivables?

A)$ -0-.
B)$9,000.
C)$16,200.
D)$31,200.

Question 74

Use the following information for questions
On February 1, 2007, Norton Company factored receivables with a carrying amount of $300,000 to Koch Company.Koch Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables.Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Norton Company for February.
Assume that Norton factors the receivables on a with recourse basis.The recourse obligation has a fair value of $1,500.The loss to be reported is

A)$9,000.
B)$10,500.
C)$15,000.
D)$25,500.

Question 75

Use the following information for questions
On February 1, 2007, Norton Company factored receivables with a carrying amount of $300,000 to Koch Company.Koch Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables.Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Norton Company for February.
Assume that Norton factors the receivables on a without recourse basis.The loss to be reported is

A)$0.
B)$9,000.
C)$15,000.
D)$24,000.

Question 76

On June 1, 2007, Watt Corp.loaned Hall $300,000 on a 12% note, payable in five annual installments of $60,000 beginning January 2, 2008.In connection with this loan, Hall was required to deposit $3,000 in a zero-interest-bearing escrow account.The amount held in escrow is to be returned to Hall after all principal and interest payments have been made.Interest on the note is payable on the first day of each month beginning July 1, 2007.Hall made timely payments through November 1, 2007.On January 2, 2008, Watt received payment of the first principal installment plus all interest due.At December 31, 2007, Watt's interest receivable on the loan to Hall should be

A)$0.
B)$3,000.
C)$6,000.
D)$9,000.

Question 77

King Co.'s allowance for uncollectible accounts was $95,000 at the end of 2007 and $90,000 at the end of 2006.For the year ended December 31, 2007, King reported bad debt expense of $13,000 in its income statement.What amount did King debit to the appropriate account in 2007 to write off actual bad debts?

A)$5,000
B)$8,000
C)$13,000
D)$18,000

Question 78

Nottingham Corporation had accounts receivable of $100,000 at 1/1.The only transactions affecting accounts receivable were sales of $900,000 and cash collections of $850,000.The accounts receivable turnover is

A)6.0.
B)6.6.
C)7.2.
D)9.0.

Question 79

The following accounts were abstracted from Todd Co.'s unadjusted trial balance at December 31, 2007: $\begin{array}{lrr}&\text { Debit } & \text { Credit }\\\text { Accounts receivable } & \$ 750,000 \\\text { Allowance for uncollectible accounts } & 8,000 & \\\text { Net credit sales } & & \$ 3,000,000\end{array}$ Todd estimates that 2% of the gross accounts receivable will become uncollectible.After adjustment at December 31, 2007, the allowance for uncollectible accounts should have a credit balance of

A)$60,000.
B)$52,000.
C)$23,000.
D)$15,000.