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Financial Accounting, 11^th edition

Test Bank and Video Questions

By Pratt and Peters

Chapter 6: The Current Asset Classification, Cash, and Accounts Receivable

For Instructor Use Only

Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.

Table of Contents

Multiple Choice Questions 2

Matching Questions 28

Short Problems 30

Short Essay Questions 41

Data Analytic Questions 49

Video Questions 51

Multiple Choice Questions

1) Current assets are assets which:

A) can be used immediately to retire liabilities.

B) are newly acquired.

C) have been converted into cash in the previous year.

D) are intended to be converted into cash within one year.

Diff: Easy

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 1 / None

2) A company's operating cycle may be described as:

A) the period of time that is typically required for a company to convert cash into inventory and inventory into cash.

B) the period of time from the beginning of operations until a company liquidates all of its assets.

C) always a one-year time period.

D) a cycle that is established at the discretion of the Board of Directors.

Diff: Easy

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 2 / None

3) Cash may consist of:

A) coin and currency, loans to employees, and money orders.

B) petty cash, officer imprest accounts, and employee savings accounts.

C) money orders, postage stamps, and currency.

D) checking accounts, savings accounts, and bank drafts.

Diff: Easy

Learning Objective: 6.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 3 / None

4) A compensating balance is:

A) cash held by a foreign government.

B) a balance maintained by the company to pay the employees' payroll.

C) a minimum cash balance that must be maintained on deposit.

D) items which are not cash, but equivalent to cash.

Diff: Easy

Learning Objective: 6.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 4 / None

5) Which of the following are components of the quick ratio?

A) Cash and prepaid insurance

B) Cash and accounts receivable

C) Accounts receivable and inventory

D) All current assets except accounts receivable

Diff: Easy

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 5 / None

6) Which of the following are components of the current ratio?

A) Accounts receivable and short-term investments

B) Inventory, retained earnings, and accounts payable

C) Accounts payable, dividends, and cash

D) Short term investments, equipment, and land

Diff: Medium

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 6 / None

7) Management will often choose accounting methods to:

A) increase selling prices of a company's products.

B) reduce repair costs on the company's equipment.

C) manipulate net income from one period to the next to boost the company's stock price.

D) increase working capital.

Diff: Medium

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 7 / None

8) If a company with a current ratio of 2.0 accrues $2,000 in interest receivable, then its current ratio will:

A) change, but not enough information is provided to determine if it will increase or decrease.

B) decrease.

C) remain the same.

D) increase.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 8 / None

9) If a company with working capital of $210,000 pays $4,000 to reduce bonds payable, then its working capital will:

A) increase.

B) decrease.

C) remain the same.

D) Not enough information to determine.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 9 / None

10) The allowance for bad debts is:

A) an 'other revenue' account.

B) a contra accounts receivable account.

C) an 'other expense' account.

D) a contra expense.

Diff: Easy

Learning Objective: 6.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 10 / None

11) The net realizable value of receivables is calculated as the face value of the receivables less adjustments for:

A) sales returns.

B) actual uncollected amounts adjusted for purchase discounts.

C) bad debts already written off.

D) sales returns and estimated uncollectible accounts.

Diff: Medium

Learning Objective: 6.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 11 / None

12) The face (gross) amount of accounts receivable at year end for Rio Inc. was $20,000. It was estimated at that time that 5% of the accounts will not be collected, and $800 of accounts receivable were written off during the year. The year-end net realizable value of accounts receivable is:

A) $19,200.

B) $18,200.

C) $20,000.

D) $19,000.

Explanation: $20,000 - (5% × $20,000) = $19,000

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 12 / None

13) Under the allowance method of accounting for bad debts, the recognition of bad debt expense:

A) increases current assets and decreases net income.

B) decreases current assets and increases net income.

C) increases current assets and net income.

D) decreases current assets and net income.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 13 / None

14) Under the allowance method of accounting for bad debts, the write-off of an account receivable determined to be uncollectible:

A) decreases the current ratio.

B) increases the current ratio.

C) has no effect on the current ratio.

D) decreases working capital.

Diff: Easy

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 14 / None

15) Delvin Co. uses the percentage of credit sales approach in estimating its bad debt expense. The total estimate calculated by multiplying a percentage times the net sales revenue for the period will be equal to:

A) the debit balance required in the allowance for bad debts after the recognition of bad debt expense.

B) the credit balance required in the allowance for bad debts after the recognition of bad debt expense.

C) the difference between the beginning and the ending accounts receivable balance.

D) the amount of bad debt expense.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 15 / None

16) Maradonna Co. uses an aging schedule of accounts receivable in estimating its bad debt expense. The total estimate, which appears on the aging schedule, will be equal to:

A) the amount of bad debt expense on the company's income statement.

B) the debit balance required in the allowance account prior to the recognition of bad debt expense.

C) the increase in bad debt expense as a result of the estimate.

D) the credit balance required in the allowance account after the recognition of bad debt expense.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 16 / None

17) On December 1, 2020, Smith Company delivered a shipment of goods to a Danish customer for a price of 160,000 euros. On that date 1.3 U.S. dollars could be exchanged for 1 euro. If Smith closes its books on December 31 and 1 U.S. dollar is trading for 1 euro at that time, the adjusting entry that Smith would record would include:

A) a credit to Exchange Rate Gain for $48,000.

B) a debit to Accounts Receivable for $20,800.

C) a debit to Exchange Rate Loss for $48,000.

D) a debit to Sales for $48,000.

Explanation: ($160,000 × 1.3) - ($160,000 × 1) = $48,000

Diff: Medium

Learning Objective: 6.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 17 / None

18) Under the allowance method of accounting for bad debts, the actual write-off of an account receivable determined to be uncollectible:

A) decreases current assets.

B) has no effect on current assets.

C) increases current assets.

D) occurs in the same accounting period as the sale.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 18 / None

19) Polo, Inc. uses the allowance method of accounting for bad debts. During July, Torey's account was written off as uncollectible. The write-off of Torey's account:

A) increases both the current and quick ratios.

B) decreases the current ratio and has no effect on the quick ratio.

C) has no effect on the current and quick ratios.

D) increases the current ratio and has no effect on the quick ratio.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 19 / None

20) Alma Company uses the allowance method of accounting for bad debts. Alma:

A) is violating the matching principle.

B) will record bad debt expense only when an account is determined to be uncollectible.

C) reduces the accounts receivable ledger balance when it books the bad debt expense.

D) will report accounts receivable in the balance sheet at their net realizable value.

Diff: Medium

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 20 / None

21) A company's allowance for bad debts is $4,000 and $3,000 on 1/1/21 and 1/1/20, respectively. During 2020, bad debt expense was estimated to be 6% of net credit sales of $100,000. During 2020, the amount of accounts written off as uncollectible amounts to:

A) $6,000.

B) $7,000.

C) $5,000.

D) $4,000.

Explanation: $3,000 + (6% × $100,000) - $4,000 = $5,000

Diff: Hard

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 21 / None

22) The journal entry to record the recovery of a previously written off $2,000 account receivable (for customer Leno Company) under the allowance method would include:

A) a credit to Bad Debt Expense.

B) a credit to Cash.

C) a debit to Accounts Payable — Leno Company.

D) a credit to Allowance for bad debts.

Diff: Medium

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 22 / None

23) The allowance method of accounting for bad debts best reflects the net realizable value of accounts receivable on the balance sheet when:

A) the direct write-off method is used.

B) the percentage of net credit sales approach is used to estimate uncollectibles.

C) the percentage of accounts receivable approach is used to estimate uncollectibles.

D) a company accelerates cash receipts during the accounting period.

Diff: Medium

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 23 / None

24) If a company's collection period for accounts receivable is considered to be excessively long, then:

A) the company may want to invest excess cash from receivable collections in the stock market.

B) the company might examine its billing procedures in order to expedite collection from customers.

C) customer returns should be disallowed in order to increase the collection of cash.

D) cash flows from operations will be unaffected.

Diff: Medium

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 24 / None

25) During the year, Caltech Inc.'s accounts receivable turnover rate increased from 10 to 12 times. The company makes credit sales only. The best explanation for the increase is that:

A) the company's credit department did a better follow up with customers whose account balances became past due.

B) the company has recently dropped its credit check policy.

C) the company reduced the size of its credit department.

D) the company has more customers at the end of the year than it had at the beginning of the year.

Diff: Medium

Learning Objective: 6.1

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 25 / None

26) Summers, Inc. uses the allowance method to account for bad debts. The entry to record the write-off of a customer's account balance decreases:

A) assets and owners' equity.

B) assets and decreases liabilities.

C) owners' equity and revenues.

D) the accounts receivable account.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 26 / None

27) If a company uses the allowance method to account for bad debts, the company's owners' equity will decrease:

A) at the end of the accounting period when an adjusting entry to estimate bad debts is recorded.

B) on the date a customer's account is determined to be uncollectible.

C) when the accounts receivable amount becomes past due.

D) on the date a customer's account is written off.

Diff: Medium

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 27 / None

28) Managers must understand how transactions affect working capital:

A) because GAAP does not allow companies with weak working capital to obtain loans.

B) because lenders often use this to assess a company's ability to meet current obligations.

C) so that management can avoid transactions that increase working capital.

D) in anticipation of meeting creditors guidelines before issuing new stock.

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 28 / None

29) Which of the following would be separately reported as restricted cash in the balance sheet or footnotes to the financial statement?

A) $8,000 in the savings account at First Bank

B) $200 in a petty cash drawer

C) $10,000 cash in an escrow account at Guarantee Bank

D) $4,000 in a checking account at Second Rate Bank

Diff: Medium

Learning Objective: 6.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 29 / None

30) On March 1, 2020, Silver Corp. sold goods to a Chinese company for 10,000 Chinese yuan (10,000 RMB) to be paid on April 1, 2020. The exchange rates on March 1 and April 1, 2020 are US$8.00 = 1 RMB and US$8.50 = 1 RMB, respectively. What is Silver's revenue in US dollars and its 2020 exchange gain or loss?

A) Sales revenue = US $80,000; Exchange gain US $5,000

B) Sales revenue = US $85,000; Exchange loss US $5,000

C) Sales revenue = US $80,000; Exchange loss US $5,000

D) Sales revenue = US $85,000; Exchange gain US $5,000

Explanation: Sales = 10,000 × $8.00 = $80,000; Gain = [10,000 × ($8.50 - $8.00)] = $5,000

Diff: Medium

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 30 / None

31) Which one of the following is not measured by the current ratio?

A) The ability of a company to pay its current debts as they come due.

B) Amounts that will come due within the next accounting period.

C) Amounts due within the next operating cycle as of the end of the accounting period.

D) Cash flows anticipated in future accounting periods.

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 31 / None

32) In general, companies:

A) use working capital and current and quick ratios as low-cost surrogates for cash flow measures.

B) place little importance on managing current assets.

C) have large amounts of current assets comprised of cash only.

D) are moving away from cash flow accounting.

Diff: Easy

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 32 / None

33) The procedures designed to ensure that the cash account on the balance sheet reflects the actual amount of cash in the company's possession are referred to as:

A) compensating balances.

B) record controls.

C) physical controls.

D) cash budgeting.

Diff: Easy

Learning Objective: 6.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 33 / None

34) A company that maintains a cash balance of more than is necessary for its day-to-day needs:

A) is likely to have cash flow problems.

B) is slowing down its asset turnover ratio.

C) is likely to have a very low solvency.

D) has a problem with physical controls.

Diff: Medium

Learning Objective: 6.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 34 / None

35) Which of the following is used to cover day-to-day office expenses?

A) Petty cash

B) Bad debts

C) Cash restrictions

D) Compensating balances

Diff: Easy

Learning Objective: 6.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 35 / None

36) An exchange rate:

A) is the cash amount received from a customer who takes advantage of a cash discount.

B) is the value of one currency in terms of another currency.

C) seldom varies from one accounting period to the next.

D) is ignored by multinational companies.

Diff: Easy

Learning Objective: 6.5

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 36 / None

37) Hedging is used to:

A) reduce risks associated with holding receivables denominated in foreign currencies.

B) calculate the current ratio for multinational companies.

C) translate foreign currency into U.S. dollars.

D) 'window dress' uncollectible accounts.

Diff: Easy

Learning Objective: 6.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 37 / None

38) Tyson Corp. uses the aging method to estimate bad debts. The bookkeeper provided the following schedule as of March 30th, 2020:

Account Age Balance Noncollection Probability

Current $50,000 3%

1 – 30 days past due 40,000 4%

31 – 60 days past due 10,000 8%

Over 60 days past due 5,000 15%

What is the amount of receivables deemed uncollectible?

A) $1,650

B) $4,650

C) $3,400

D) $105,000

Explanation: ($50,000 × 3%) + ($40,000 × 4%) + ($10,000 × 8%) + ($5,000 × 15%) = $4,650

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 38 / None

39) At the beginning of 2020, Cyrus Corp.'s allowance for bad debts is $12,500.

During 2020, $4,250 was written off as uncollectible. At December 31, the company used an aging schedule of accounts receivable and determined that $10,530 of the accounts receivable would probably be uncollectible. What would be the bad debt expense that should be reported on Cyrus's 2020 income statement?

A) $5,720

B) $26,780

C) $2,280

D) $18,280

Explanation: $12,500 - $4,250 + X = $10,530; X = $2,280

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 39 / None

40) Before adjusting entries, Kilby Corp's accounts receivable and allowance for bad debts are $745,000 and $7,000 (credit balance), respectively. Using an aging schedule of accounts receivable, it is determined that $60,000 of the accounts receivable would probably be uncollectible. Calculate the net realizable value of Truman's receivables at year end.

A) $681,000

B) $695,000

C) $809,000

D) $685,000

Explanation: $745,000 - $60,000 = $685,000

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 40 / None

41) The following information concerning the current assets and current liabilities of Mason Company at December 31, 2020, is presented below.

Current Assets

Cash $ 6,700

Accounts receivable $7,900

Less Allowance (70) 7,830

Inventory 2,270

Prepaid expenses 500

Total $17,300

Current Liabilities

Accounts payable $ 9,000

Wages payable 500

Taxes payable 200

Rent payable 1,600

Notes payable 2,000

Total $13,300

Based on this information, how would the current ratio be affected if Mason collects some accounts receivable and then uses $9,000 cash to pay off the accounts payable?

A) The current ratio would increase from 1.30 to 1.93.

B) The current ratio would increase from 0.74 to 4.02.

C) The current ratio would decrease from 1.30 to 0.62.

D) The current ratio would increase from 1.09 to 1.61.

Explanation: Before: $17,300/$13,300 = 1.30; After: $8,300/$4,300 = 1.93

The current ratio would increase.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 41 / None

42) The following information concerning the current assets and current liabilities of Mason Company at December 31, 2020, is presented below.

Current Assets

Cash $ 6,700

Accounts receivable $7,900

Less Allowance (70) 7,830

Inventory 2,270

Prepaid expenses 500

Total $17,300

Current Liabilities

Accounts payable $ 9,000

Wages payable 500

Taxes payable 200

Rent payable 1,600

Notes payable 2,000

Total $13,300

Based on this information, how would the quick ratio be affected if Mason purchased $1,300 of inventory on account?

A) The quick ratio would decrease from 1.30 to 1.21.

B) The quick ratio would not change.

C) The quick ratio would decrease from 1.09 to 1.00.

D) The quick ratio would decrease from 1.09 to 1.21.

Explanation: Before: ($6,700 + $7,830)/$13,300 = 1.09

After: ($6,700 + $7,830)/($13,300 + $1,300) = 1.00

The quick ratio would decrease. Note that inventory is not a quick asset.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 42 / None

43) The following information concerning the current assets and current liabilities of Mason Company at December 31, 2020, is presented below.

Current Assets

Cash $ 6,700

Accounts receivable $7,900

Less Allowance (70) 7,830

Inventory 2,270

Prepaid expenses 500

Total $17,300

Current Liabilities

Accounts payable $ 9,000

Wages payable 500

Taxes payable 200

Rent payable 1,600

Notes payable 2,000

Total $13,300

Based on this information, what would the quick ratio be if Mason sold all of its inventory for $6,000 cash?

A) The quick ratio would decrease from 1.09 to 0.19.

B) The quick ratio would decrease from 1.30 to 0.85.

C) The quick ratio would increase from 1.30 to 1.54.

D) The quick ratio would increase from 1.09 to 1.54.

Explanation: Before: ($6,700 + $7,830)/$13,300 = 1.09

After: ($6,700 + $7,830 + $6,000)/$13,300 = 1.54

The quick ratio would increase.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 43 / None

44) Sanchez Inc. sells to customers only on credit. For the year ended December 31, 2020, the following information is provided:

What is the balance of the Accounts Receivable account at December 31, 2020?

A) $1,525,000

B) $590,000

C) $205,000

D) $135,000

Explanation: $230,000 + $850,000 - $470,000 - $7,000 - $13,000 = $590,000

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 44 / None

45) Sanchez Inc. sells to customers only on credit. For the year ended December 31, 2020, the following information is provided:

If Sanchez estimates bad debts at 5% of net credit sales, how much is bad debt expense?

A) $34,000

B) $15,200

C) $23,400

D) $42,150

Explanation: 5% × ($850,000 - $7,000) = $42,150

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 45 / None

46) The balances of the allowance for bad debts on the balance sheets dated December 31 of 2020 and 2019 were $2,000 and $7,000, respectively. During 2020, bad debt expense was $12,000. What is the amount of accounts receivable that were written off as uncollectible during 2020?

A) $22,000

B) $8,000

C) $17,000

D) $2,000

Explanation: $7,000 + $12,000 - $2,000 = $17,000

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 46 / None

47) The following information is provided for Atlanta, Inc.

How much is the balance in the Accounts Receivable account at December 31, 2020?

A) $193,600

B) $158,600

C) $202,600

D) $203,600

Explanation: $198,000 + $4,600 = $202,600

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 47 / None

48) The following information is provided for Atlanta Inc.

What is the amount of the net realizable value of the receivables at December 31, 2020?

A) $198,000

B) $154,000

C) $193,600

D) $190,400

Explanation: $198,000

Diff: Easy

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 48 / None

49) The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2020. All sales are on account.

Accounts and related balances at December 31, 2020 before adjustment:

Debit Credit

Accounts receivable $46,000

Allowance for bad debts $ 680

Sales (all on account) 500,000

Sales returns 3,000

Aging Schedule of Accounts Receivable:

Age Amount % Uncollectible

0 – 30 days $14,000 5%

30 – 60 days 20,000 8%

Over 60 days 12,000 12%

If Diane uses the aging schedule of accounts receivable to determine bad debts, what is the bad debt expense for the year ending December 31, 2020?

A) $4,280

B) $3,600

C) $3,680

D) $3,060

Explanation: Desired balance of Allowance for Bad Debts:

$14,000 × .05 = $ 700

$20,000 × .08 = 1,600

$12,000 × .12 = 1,440

$ 3,740

Beginning balance $ 680

Less desired balance (3,740)

Bad debt expense $ 3,060

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 49 / None

50) The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2020. All sales are on account.

Accounts and related balances at December 31, 2020 before adjustment:

Debit Credit

Accounts receivable $46,000

Allowance for bad debts $ 680

Sales (all on account) 500,000

Sales returns 3,000

Aging Schedule of Accounts Receivable:

Age Amount % Uncollectible

0 – 30 days $14,000 5%

30 – 60 days 20,000 8%

Over 60 days 12,000 12%

If Diane uses the aging schedule of accounts receivable to determine bad debts, what is the Allowance for bad debts balance at December 31, 2020?

A) $3,000

B) $4,280

C) $2,920

D) $3,740

Explanation: Desired balance of Allowance for bad debts:

$14,000 × .05 = $ 700

$20,000 × .08 = 1,600

$12,000 × .12 = 1,440

$3,740

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 50 / None

51) The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2020. All sales are on account.

Accounts and related balances at December 31, 2020 before adjustment:

Debit Credit

Accounts receivable $46,000

Allowance for bad debts $ 680

Sales (all on account) 500,000

Sales returns 3,000

Aging Schedule of Accounts Receivable:

Age Amount % Uncollectible

0 – 30 days $14,000 5%

30 – 60 days 20,000 8%

Over 60 days 12,000 12%

If Diane uses the aging schedule of accounts receivable to determine bad debts, what is the net realizable value of accounts receivable on the 2020 financial statements?

A) $46,000

B) $42,260

C) $42,320

D) $30,400

Explanation: Net realizable value = $46,000 - $3,740 (($14,000 × .05) + ($20,000 × .08) + ($12,000 × .12)) = $42,260

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 51 / None

52) The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2020. All sales are on account.

Accounts and related balances at December 31, 2020 before adjustment:

Debit Credit

Accounts receivable $46,000

Allowance for bad debts $ 680

Sales (all on account) 500,000

Sales returns 3,000

Aging Schedule of Accounts Receivable:

Age Amount % Uncollectible

0 – 30 days $14,000 5%

30 – 60 days 20,000 8%

Over 60 days 12,000 12%

If Diane Company estimates bad debts as 6% of net credit sales, what is the amount of bad debt expense to be reported on the income statement for the period ending December 31, 2020?

A) $27,019

B) $29,820

C) $30,000

D) $29,779

Explanation: Bad debt expense = ($500,000 - $3,000) × 6% = $29,820

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 52 / None

53) On December 1, 2020, Sedona Trading Co. sold goods to a German company for 25,000 euros to be collected on January 12, 2021. The exchange rates on December 1 and December 31, 2020 were US$1.10 = 1 euro and US$1.08 = 1 euro, respectively. What is Sedona's sales revenue in U.S. dollars?

A) $27,500

B) $27,000

C) $25,000

D) $22,727

Explanation: Sales revenue = $1.10 × 25,000 = US$27,500

Diff: Medium

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 53 / None

54) On December 1, 2020, Sedona Trading Co. sold goods to a German company for 25,000 euros to be collected on January 12, 2021. The exchange rates on December 1 and December 31, 2020 were US$1.10 = 1 euro and US$1.05 = 1 euro, respectively. What is Sedona's exchange gain or loss for 2020?

A) $1,250 Exchange Gain

B) $2,500 Exchange Loss

C) $1,250 Exchange Loss

D) $2,500 Exchange Gain

Explanation: Exchange loss = ($1.10 − $1.05) × 25,000 = US$1,250

Diff: Medium

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 54 / None

Matching Questions

55) For each item listed in 1 through 5 below, place the letter of the best description selected from a through e in the space provided. You may use each letter more than once or not at all.

Descriptions

a. (Accounts receivable / sales) × 365

b. Amount of Accounts Receivable to be collected

c. Proper matching achieved

d. Used to reduce risk

e. Cash-purchase-sale-cash

_______ 1. Operating cycle

_______ 2. Net realizable value

_______ 3. Allowance method

_______ 4. Collection period (days)

_______ 5. Hedging

1. e

2. b

3. c

4. a

5. d

Diff: Easy

Learning Objective: 6.1; 6.2; 6.3; 6.4; 6.5

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Matching Question 1 / None

56) For each item numbered 1 through 5 below, identify the letter of the best description by selecting from items a through e below. You may use each letter more than once or not at all.

Descriptions

a. Intention is to convert into cash within one year

b. Current assets /current liabilities

c. Current assets - current liabilities

d. Expected to pay with the use of current assets

e. (Cash + marketable securities + accounts receivable) divided by current liabilities

_______ 1. Current liabilities

_______ 2. Current assets

_______ 3. Quick ratio

_______ 4. Working capital

_______ 5. Current ratio

1. d

2. a

3. e

4. c

5. b

Diff: Easy

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Matching Question 2 / None

57) For each item listed in 1 through 5, place the letter (a through e) of the best description in the space provided. You may use each letter more than once or not at all.

Descriptions

a. Occurs when a customer brings back merchandise for a refund

b. Uses multiple bad debt rates

c. Results from adjusting accounts receivable for expected cash receipts

d. Deduction, other than returns, to compute net realizable value

e. Estimated cash value

f. Arises from normal credit sales transactions with customers

_______ 1. Sales returns

_______ 2. Accounts receivable

_______ 3. Cash discounts

_______ 4. Net realizable value

_______ 5. Aging schedule

1. a

2. f

3. d

4. e

5. b

Diff: Easy

Learning Objective: 6.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 3 / None

Short Problems

58) At the beginning of 2020, Flagstaff Corp.'s allowance for bad debts is $10,000. During 2020, $7,000 was written off as uncollectible. On December 31, the company used an aging schedule of accounts receivable and determined that $8,000 of the accounts receivable would probably be uncollectible. Calculate bad debt expense to be reported on Flagstaff's 2020 income statement.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 1 / None

59) Before adjusting entries, Dormont Corp's accounts receivable and allowance for bad debts are $800,000 and $7,000 (credit balance), respectively. Using an aging schedule of accounts receivable, it is determined that $44,000 of the accounts receivable would probably be uncollectible. Calculate the net realizable value of Dormont's receivables at year end.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 2 / None

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2020, to answer the problems below. Each problem is independent of the others.

Current Assets

Cash $1,700

Accounts Receivable $2,900

Less Allowance (70) 2,830

Inventory 2,270

Prepaid expenses 300

Total $7,100

Current Liabilities

Accounts payable $4,000

Wages payable 300

Taxes payable 200

Rent payable 800

Notes payable 1,000

Total $6,300

60) How would the current ratio be affected if Ryan collects some accounts receivable and then uses $4,000 cash to pay off the accounts payable?

The current ratio would increase.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 3 / None

61) Calculate Ryan's working capital, current ratio, and quick ratio at December 31, 2020.

Current ratio: $7,100/$6,300 = 1.13

Quick ratio: ($1,700 + $2,830)/$6,300 = 0.72

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 4 / None

62) How would the quick ratio be affected if Ryan purchased $500 of inventory on account?

After: ($1,700 + $2,830) / ($6,300 + $500) = 0.67

The quick ratio would decrease. Note that inventory is not a quick asset.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 5 / None

63) How would the current ratio be affected if Ryan collects $600 from customers for amounts owed?

The current ratio would not change. Cash and accounts receivable are both current.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 6 / None

64) What would the quick ratio be if Ryan sold all of its inventory for $5,000 cash?

After: ($1,700 + $2,830 + $5,000) / $6,300 = 1.51

The quick ratio would increase.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 7 / None

65) How would the current ratio be affected if Ryan paid off its wages and taxes?

After: ($7,100 - $500) / ($6,300 - $200 - $300) = 1.14

The current ratio would increase slightly.

Diff: Hard

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 8 / None

66) Brocton Inc. sells to customers only on credit. For the year ended December 31, 2020, the following information is provided:

Sales revenue $550,000

Accounts receivable, 1/01/20 240,000

Allowance for bad debts, 12/31/20 (before adjustment for bad debts) 600

Collections during 2020 580,000

Accounts written off as uncollectible during 2020 14,000

Sales returns 6,000

A. Determine the balance of the Accounts Receivable account at December 31, 2020.

B. If Brocton estimates bad debts at 3% of net credit sales, how much is bad debt expense?

A. $240,000 + $550,000 - $580,000 - $6,000 - $14,000 = $190,000

B. 3% × ($550,000 - $6,000) = $16,320

Diff: Hard

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Short Problem 9 / None

67) Before adjusting entries, Martin's accounts receivable and allowance for bad debts are $65,000 and $1,500 (debit balance), respectively. Using an aging schedule of accounts receivable, it is determined that $4,000 of the accounts receivable would probably be uncollectible. Calculate bad debt expense to be reported on Martin's current year's income statement.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 10 / None

68) The balances of the allowance for bad debts on the balance sheets dated December 31 of 2020 and 2019 were $1,000 and $4,000, respectively. During 2020, bad debt expense was $9,000. What is the amount of accounts receivable that were written off as uncollectible during 2020?

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 11 / None

69) The following information is provided for Garland Inc. Answer the questions that follow.

Balance Sheet 2020 2019

Cash and cash equivalents $98,000 $114,000

Accounts Receivables, less allowance for bad debts

of $3,000 (2020) and $1,800 (2019) 165,000 132,000

A. How much is the balance in the Accounts Receivable account at December 31, 2020?

B. What is the amount of the Net Realizable Value of the receivables at December 31, 2020?

A. $165,000 + $3,000 = $168,000

B. $165,000

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 12 / None

70) The balances of the allowance for bad debts on the balance sheets dated December 31 of 2020 and 2019 were $21,000 and $14,000, respectively. During 2020, $13,000 of accounts receivable were written off as uncollectible. How much bad debt expense is recognized during 2020?

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 13 / None

71) Before adjusting entries, Clark's accounts receivable and allowance for bad debts are $42,000 and $300 (credit balance), respectively. Clark determined that 0.4% of net sales would probably be uncollectible. Sales during the year were $500,000 and sales returns amounted to $6,000. Calculate the net realizable value of accounts receivable on Clark's balance sheet at year-end.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 14 / None

72) Use the information that follows taken from the unadjusted trial balance and aging schedule of Behrend Company on December 31, 2020 to answer the questions below. All sales are on account.

Accounts and related balances at December 31, 2020 before adjustment:

Debit Credit

Accounts receivable $47,000

Allowance for bad debts $ 420

Sales (all on account) 400,000

Sales returns 2,000

Aging Schedule of Accounts Receivable:

Age Amount % Uncollectible

0-30 days $15,000 2%

30-60 days 18,000 7%

Over 60 days 14,000 13%

If Behrend uses the aging schedule of accounts receivable to determine bad debts, determine the following:

A. Bad debt expense for the year ending December 31, 2020

B. Allowance for bad debts balance at December 31, 2020

C. Net realizable value of accounts receivable on the 2020 financial statements

A. Desired balance of Allowance for Bad Debts:

$15,000 × .02 = $ 300

$18,000 × .07 = 1,260

$14,000 × .13 = 1,820

$ 3,380

Beginning balance $ 420

Less desired balance (3,380)

Bad debt expense $ 2,960

B.

Allowance for bad debts $ 420

Current period estimate 2,960

Ending allowance for bad debts $ 3,380

C.

Net realizable value = $47,000 - $3,380 = $43,620

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 6 min.

Title/Media Ref.: Short Problem 15 / None

Use the information that follows from the financial statements of Pines Company at December 31, 2020, to answer the questions that follow.

Accounts payable $ 2,000

Accounts receivable 3,000

Capital stock 8,000

Cash 5,000

Inventory 19,000

Land 24,000

Notes payable (short-term) 5,000

Cost of goods sold 12,000

Retained earnings 21,000

Sales revenue 20,000

73) Calculate total current assets for Pines Company at December 31, 2020.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 16 / None

74) Calculate total current liabilities for Pines Company at December 31, 2020.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 17 / None

75) Calculate total working capital for Pines Company at December 31, 2020.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 18 / None

76) Calculate the current ratio for Pines Company at December 31, 2020.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 19 / None

77) Calculate the quick ratio for Pines Company at December 31, 2020.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 20 / None

78) On December 1, 2020, Casio Trading Co. sold goods to a German company for 20,000 euros to be collected on January 12, 2021. The exchange rates on December 1 and December 31, 2020 are US$1.10 = 1 euro and US$1.15 = 1 euro, respectively. Calculate Casio's revenue in U.S. dollars and its exchange gain or loss for 2020.

Exchange gain = ($1.15 − $1.10) × 20,000 = US$1,000

Diff: Medium

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 21 / None

79) On December 11, 2020, Bisbee Co. purchased capsules from a Canadian company for 10,000 Canadian dollars (10,000 C$) to be paid on January 2, 2021. The exchange rates on December 11 and December 31, 2020 are US$0.79 = 1C$ and US$0.82 = 1C$, respectively. What is the cost of the capsules in U.S. dollars and the 2020 exchange loss?

Exchange loss = ($0.82 − $0.79) × 10,000 = US$300

Diff: Medium

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 22 / None

80) On December 1, 2020, Mason Company delivered a shipment of goods to a Swiss customer for a price of 150,000 euros. If on that date 1.3 U.S. dollars could be exchanged for 1 euro, what entry would Mason record in equivalent U.S. dollars?

Accounts receivable 195,000

Sales 195,000

(150,000 × $1.30)

Diff: Easy

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 23 / None

81) The following are partial balance sheets for Pedro Co, dated December 31:

2019 2020

Accounts receivable $55,000 $68,000

Allowance for bad debts (5,000) (11,000)

Net realizable value $50,000 $57,000

During 2020, $4,000 of accounts receivable were written off as uncollectible. Calculate the amount of bad debt expense recognized on Pedro's 2020 income statement.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 24 / None

82) Paxton's aging schedule of its accounts receivable on December 31 follows:

Account Age Balance Non-Collection Likelihood

1-30 days $100,000 3%

31-90 days 70,000 7%

Over 90 days 40,000 10%

The balance in Paxton's allowance for bad debts immediately prior to December 31 adjusting entries is $700 credit. Determine bad debt expense and the net realizable value of the December 31 accounts receivable.

(.03 × $100,000) + (.07 × $70,000) + (.1 × $40,000) = $11,900.

Bad debt expense is $11,200 ($11,900 - $700).

The net realizable value of accounts receivable is $210,000 ($100,000 + $70,000 + $40,000) - $11,900 = $198,100.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Short Problem 25 / None

83) On 12/31/19, Phoebe Company's balance sheet revealed a $7,000 balance in its allowance for bad debts. During 2020, $2,000 of accounts were written off and $500 of accounts receivable previously written off were collected. On 12/31/20, bad debt expense was estimated to be 5% on net credit sales, which were $400,000. Calculate the balance in the allowance for bad debts on 12/31/20.

Diff: Medium

Learning Objective: 6.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 26 / None

Short Essay Questions

84) Briefly describe hedging.

Diff: Medium

Learning Objective: 6.5

Bloom's: Knowledge

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 1 / None

85) The Porsha Bank has provided its auditor with the following selected financial data for 2020:

Cash $ 7,000

Loans receivable–current $21,000

Allowance for bad debts (3,000) 18,000

Total current assets $25,000

Loans receivable–long-term $36,000

Allowance for bad debts (4,000) $32,000

Current liabilities $19,000

2020 net income $30,000

In reviewing the loans outstanding, the auditors were troubled by the collectability of some of the loans to Brazilian companies. In fact, Porsha Bank has been making new loans in Brazil so that they can make interest payments on loans already outstanding. The economic situation in Brazil has forced the auditors to insist that Porsha Bank increase its allowance for its current loans to $9,000 and for its non-current loans to $16,000. Porsha Bank decided to adhere to their auditors' suggestions.

Indicate the effects of adopting the auditor's allowance requirements on Porsha Bank's current ratio and 2020 net income.

Diff: Hard

Learning Objective: 6.1; 6.3; 6.4

Bloom's: Analysis

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 10 min.

Title/Media Ref.: Short Essay Question 2 / None

86) Why might an operating cycle of one company differ from an operating cycle of another company?

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 3 / None

87) What accounting requirements brought significant opposition from the banking industry?

Diff: Medium

Learning Objective: 6.4

Bloom's: Knowledge

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Short Essay Question 4 / None

88) Identify the limitations of current asset classification.

Diff: Medium

Learning Objective: 6.1

Bloom's: Knowledge

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 5 / None

89) A company has a significant debit or credit accumulation in the pre-adjustment balance of allowance for bad debts over several periods.

Required:

(1) What would this indicate?

(2) How can users detect the source of this problem?

(2) Users can detect the balance sheet misstatements by comparing the amount in the allowance account to such numbers as sales and accounts receivable across time. Unusual deviations or well-defined trends may reveal a problem in estimating bad debts, which may raise questions about management's competence and/or incentives.

Diff: Hard

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 6 min.

Title/Media Ref.: Short Essay Question 6 / None

90) Preston Bank had $50 million of receivable loans outstanding as of December 31, and recorded net income for the year of $770,000. Preston did not provide for any uncollectible loans because the loans were collateralized by real estate. That is, if the loans were to default, Preston would obtain the title to the real estate for which the loans were made. However, during the audit of Preston's financial statements, the auditors determined that $5 million of the outstanding loans would probably be dishonored (uncollectible). Because during the last three years real estate values have deteriorated, the auditors also investigated the real estate that backed these collateralized loans and found that the market value of that real estate was negligible.

Recalculate Preston's loans receivable on December 31 and current net income to an amount that would be acceptable to the auditors.

Diff: Hard

Learning Objective: 6.4

Bloom's: Analysis

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Short Essay Question 7 / None

91) What is 'window dressing' and how is it practiced?

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 8 / None

92) The following is a partial balance sheet for Quenton Company dated December 31, 2020:

Current assets

Cash $20,000

Accounts receivable $45,000

Allowance for bad debts (3,000)

Net realizable value 42,000

Inventory 33,000

Total current assets $95,000

Current liabilities $65,000

During 2020, $4,000 of accounts receivable were written off as uncollectible and bad debt expense (based on an aging schedule) recognized on Quenton's 2020 income statement was $8,000. However, the president of the company believes that $2,500 of these receivables were written off too soon. She believes that there is a good chance that they will be collected next year. There is some historical evidence to support the president's position.

Quenton also happens to have a debt covenant requiring it to maintain a current ratio of 1.5. The president believes that by reversing the write off of $2,500 of accounts receivable, the current assets will increase to $97,500 and the current ratio will be 1.5.

However, the chief financial officer does not agree. He states that a better approach to increase the current ratio to 1.5 is to use some of the $20,000 cash balance to pay off accounts payable. If the company paid off $5,000 of accounts payable, for example, the current ratio would become the minimum 1.5 required by the debt covenant.

Comment, with numerical illustration, on the president's and chief financial officer's positions.

Accounts receivable $47,500

Allowance for bad debts (5,500)

Net realizable value $42,000

Thus, total current assets and the current ratio would not change. Under the allowance method of accounting for bad debts, the write-off of an account decreases both accounts receivable and allowance for bad debts, leaving the carrying value of net accounts receivable unaffected. If we follow the president's suggestion, the current ratio is still 1.46 ($95,000/$65,000), which is less than the 1.5 required by the debt covenant.

The CFO is correct because if $5,000 of accounts payable were paid, the current assets would decrease by $5,000 to $90,000, and current liabilities would also decrease by $5,000 to $60,000. The resulting current ratio would meet the 1.5 minimum.

Diff: Hard

Learning Objective: 6.5

Bloom's: Analysis

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 12 min.

Title/Media Ref.: Short Essay Question 9 / None

93) Why is too much cash undesirable?

Diff: Easy

Learning Objective: 6.2

Bloom's: Comprehension

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Essay Question 10 / None

94) Why is the timing of recording a receivable important?

Diff: Medium

Learning Objective: 6.4

Bloom's: Comprehension

AACSB/AICPA: Communication; Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Short Essay Question 11 / None

Data Analytic Questions

Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.

Key ratios for furniture manufacturer La-Z-Boy for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.

Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income

95) One of the primary drivers for the change in asset turnover from 2018 to 2019 was:

A) The change in long-term asset turnover.

B) The change in operating expenses as a percent of sales.

C) The change in the amount of leverage in the capital structure.

D) The change in accounts receivable turnover.

Diff: Hard

Learning Objective: 6.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 1 / None

96) Which of the following is consistent with the change in accounts receivable turnover across the 3-year period?

A) Higher accounts receivables balances as a percent of sales.

B) Slower cash collection from customers.

C) The change in inventory turnover.

D) The change in long-term asset turnover.

Diff: Hard

Learning Objective: 6.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 2 / None

97) Which of the following was a primary driver to the change in ROE?

A) The change in ROA.

B) The change in capital structure leverage.

C) The change in asset turnover.

D) The change in accounts receivable turnover.

Diff: Hard

Learning Objective: 6.5

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 3 / None

98) Which of the following statements is false?

A) The ROE analysis provides evidence that La-Z-Boy's customer collection policies are not currently a major problem.

B) The decrease in ROA was driven more by the speed with which La-Z-Boy was turning over its assets than by the company's ability to control its total expenses.

C) The change in asset turnover was driven partially by La-Z-Boy's ability to turn over its inventories more quickly.

D) The change in La-Z-Boy's current ratio across the 3-year period is consistent with the change in its accounts receivable turnover.

Diff: Hard

Learning Objective: 6.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 4 / None

Video Questions

99) Dupont has chosen not to provide a description of a lawsuit filed against the company in its annual report, asserting that the dollar amount of the claim is too small to make a difference to a reader. Which of the following concepts below best applies to this case?

A) Materiality

B) Valuation

C) Objectivity

D) Classification

E) Relevance

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Disclosure Question

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 1 / Video: Disclosure, valuation, and the current classification. www.wiley.com/go/pratt/financialaccounting11e

100) Johnson & Johnson relies primarily on the straight-line method of computing depreciation, which in turn determines the depreciation expense dollar amount on the company's income statement. Which of the following concepts best applies to this case?

A) Materiality

B) Valuation

C) Objectivity

D) Classification

E) Relevance

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 2 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

101) Boeing's definition of current assets is different from Safeway's because Boeing's current operating cycle is much longer. Which of the following concepts best applies to this case?

A) Materiality

B) Valuation

C) Objectivity

D) Classification

E) Relevance

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 3 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

102) Assets like Hewlett Packard's property, plant & equipment are carried on the balance sheet at original cost less accumulated depreciation instead of market values because estimating the market values of these assets is too subjective. Which of the following concepts best applies to this case?

A) Materiality

B) Valuation

C) Objectivity

D) Classification

E) Relevance

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 4 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

103) The color of Facebook's home office building is not disclosed in the company's annual report. Which of the following concepts best applies to this case?

A) Materiality

B) Valuation

C) Objectivity

D) Classification

E) Relevance

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Disclosure Question

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 5 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

104) Which of the following is not true about a company's current operating cycle?

A) Current operating cycles vary significantly across different companies in different industries.

B) Current operating cycles are important in determining the definition of a company's current assets.

C) Current operating cycles indicate how long it takes companies to finance the acquisition of their major assets.

D) The same asset could be classified as current by one company and non-current by another company because the two companies have different current operating cycles.

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 6 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

105) On its 2015 income statement Microsoft reports "other income (net)" of $346 million. Included in this number are gains on the sale of various kinds of investments held by the company. Into which of the following categories should this item be classified on the income statement?

A) Operating revenues

B) Operating expenses

C) Non-operating items

D) Adjustments to revenues

E) Adjustments to expenses

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Disclosure Question

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 7 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

106) During 2015 Microsoft paid $3.7 billion dollars in cash to acquire other companies. Into which of the following categories should this item be classified on Microsoft's statement of cash flows?

A) Cash provided (used) by operating activities

B) Cash provided (used) by investing activities

C) Cash provided (used) by financing activities

D) Increases in the cash balance

E) Decreases in the cash balance

Diff: Medium

Learning Objective: 6.1

Bloom's: Comprehension

AACSB/AICPA: None / FC: Disclosure Question

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 8 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

107) During 2015 Microsoft's current ratio increased from 2.47 to 2.48. Which of the following statements follows from this fact?

A) Microsoft's operating income has increased.

B) Microsoft's ability to control its expenses has improved.

C) Microsoft's non-current obligations have decreased as a percent of its total assets.

D) Microsoft's current assets have increased relative to its current liabilities.

E) The fact that Microsoft's current ratio increased has no bearing on Microsoft's solvency position.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 9 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

108) Which of the following would accurately describe a possible effect of the increase in Microsoft's current ratio described in the previous question?

A) The likelihood of Microsoft going bankrupt as predicted by Altman's Z-score would likely decrease.

B) The likelihood of Microsoft violating a debt covenant requiring the maintenance of a minimum amount of working capital would increase.

C) Microsoft's credit rating, as determined by Dun & Bradstreet's 14 key financial ratios, would likely decrease.

D) Investors would likely assess Microsoft's solvency position to have deteriorated a little.

Diff: Medium

Learning Objective: 6.1

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Disclosure, valuation and the current classification Video: Question 10 / Video: Disclosure, valuation and the current classification. www.wiley.com/go/pratt/financialaccounting11e

109) The accounts receivable account is normally located in which section of the financial statements?

A) Non-current asset section of the balance sheet.

B) Revenue section of the income statement.

C) Operating section of statement of cash flows.

D) Current asset section of the balance sheet.

Diff: Easy

Learning Objective: 6.3

Bloom's: Knowledge

AACSB/AICPA: None / FC: Disclosure Question

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 1 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

110) The concept "net" accounts receivable means that:

A) gross accounts receivable has been reduced by accumulated depreciation.

B) the gross revenues associated with the accounts receivable have been reduced by actual bad debts.

C) gross accounts receivable have been reduced by an estimate of future bad debts.

D) gross accounts receivable has been reduced by actual accounts receivable write offs.

Diff: Easy

Learning Objective: 6.3

Bloom's: Knowledge

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 2 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

111) Accounts receivable arise when:

A) revenues are booked prior to the receipt of cash.

B) revenues are booked after the receipt of cash.

C) revenues are booked at the same time as the receipt of cash.

D) revenues are booked after expenses have been reasonably estimated.

Diff: Easy

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 3 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

112) Which of the following companies would likely not have to worry about accounts receivable and the associated bad debts?

A) Retailers who offer their own credit cards.

B) Major manufacturers who own their own financial subsidiaries.

C) Financial institutions.

D) Small restaurants that only accept cash or visa/master cards as payment from customers.

Diff: Easy

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 4 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

113) Which of the following statements is not true about the "allowance for bad debts" account?

A) Since it is increased on the right (credit) side, it is a liability.

B) It is a contra-asset account used to reduce accounts receivable on the balance sheet for estimated bad debts.

C) When specific accounts receivable are written off, this account is reduced.

D) Its balance is listed on the asset side of the balance sheet, where it appears as a negative number.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 5 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

114) Which of the following statements is not true about the aging method of estimating bad debts?

A) It is a popular bad debt estimation method for receivables control purposes.

B) It bases the bad debt estimate on the historical percentage of bad debts compared to sales on the income statement.

C) It establishes the bad debt estimate by placing accounts into different categories according to their ages and then assigning different collection percentages to each category.

D) The estimate resulting from the aging method is the "net" accounts receivable dollar amount.

Diff: Medium

Learning Objective: 6.3

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 6 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

115) Under the percentage of credit sales approach to estimating bad debts:

A) the resulting estimate determines the dollar amount of the bad debt write offs.

B) the resulting estimate is the "net" accounts receivable dollar amount.

C) the bad debt expense is reduced by any recoveries of past receivables write offs.

D) the resulting estimate is the bad debt expense recorded on the income statement.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 7 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

116) Subsidiary ledger accounts differ from general ledger accounts in that they:

A) map directly to the numbers on the financial statements.

B) normally have larger balances than the general ledger accounts.

C) provide detailed information about the components of the dollar values recorded in the general ledger accounts.

D) are temporary accounts while general ledger accounts are permanent accounts.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 8 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

117) Bad debt recoveries:

A) do not affect net income.

B) increase net income.

C) decrease net income.

D) decrease liabilities.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 9 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

118) Bad debt write-offs:

A) do not affect net income.

B) increase net income.

C) decrease net income.

D) decrease assets.

Diff: Medium

Learning Objective: 6.3

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Accounts receivable and uncollectibles (bad debts) - Nordstrom Video: Question 10 / Video: Accounts receivable and uncollectibles (bad debts) - Nordstrom. www.wiley.com/go/pratt/financialaccounting11e

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