Cash And Receivables Verified Test Bank Ch.7

Intermediate Accounting, 10e (Spiceland)

Chapter 7 Cash and Receivables

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

Difficulty: 1 Easy

Topic: Cash and cash equivalents

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Internal control

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Internal control

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Restricted cash and compensating balances

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

5) Under IFRS, an overdraft in a cash account at one bank can be offset against a positive balance in the account at another bank for purposes of reporting cash on the company's balance sheet.

Difficulty: 1 Easy

Topic: IFRS—Cash and cash equivalents

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

7) Sales returns and sales discounts are both examples of variable consideration that must be accounted for when receivables are recognized.

Difficulty: 1 Easy

Topic: Sales returns; Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.; 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

8) Sales returns and trade discounts are both examples of variable consideration that must be accounted for when receivables are recognized.

Difficulty: 1 Easy

Topic: Sales returns; Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.; 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

9) Recognizing sales returns only when merchandise is returned could result in an overstatement of income in the period of the related sale.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

10) If cash has been collected from a customer, recognizing estimated sales returns results in recognizing a refund liability.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

11) If cash has not yet been collected from a customer, such that an account receivable is outstanding, recognizing estimated sales returns results in recognizing a refund liability.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

12) The allowance method for estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to their appropriate carrying value.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

13) Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so.

Difficulty: 1 Easy

Topic: IFRS—Accounts and notes receivable

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

14) Under IFRS, accounts receivable can be accounted for as "available for sale" if that approach is elected upon initial recognition of the receivable.

Difficulty: 1 Easy

Topic: IFRS—Accounts and notes receivable

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

15) Using the balance sheet approach, bad debt expense is an indirect result of estimating the appropriate balance for the allowance for uncollectible accounts.

Difficulty: 1 Easy

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

16) The income statement approach to calculating bad debt expense should not be used if it results in a carrying value of accounts receivable that is materially different from what would be obtained under a balance sheet approach.

Difficulty: 1 Easy

Topic: Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

17) The "income statement approach" and the "direct write-off method" are two ways to refer to the same method for recognizing bad debts expense.

Difficulty: 1 Easy

Topic: Uncollectible accounts receivable; Uncollectible accounts—Income statement approach

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

19) Interest on interest-bearing notes is deducted from the face amount to determine cash proceeds at the inception of a note.

Difficulty: 1 Easy

Topic: Notes receivable—interest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Remember

AACSB: Reflective Thinking; Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

20) If a long-term noninterest-bearing note is received in exchange for merchandise sold, the amount of sales revenue recognized will be greater than the amount of the note.

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Financing with receivables—with recourse

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

22) Securitization of receivables is a type of secured borrowing.

Difficulty: 1 Easy

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

23) Under IFRS, transfer of risks and rewards of ownership, rather than transfer of control, is the primary factor determining whether a factored receivable can be treated as sold rather than as part of a secured borrowing.

Difficulty: 1 Easy

Topic: IFRS—Transfers of receivables

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Bank reconciliation—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Bank reconciliation—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

Difficulty: 1 Easy

Topic: Petty cash—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

28) When a creditor changes the original terms of a debt agreement in a troubled debt restructuring, the receivable is revalued based on the discounted present value of currently expected cash flows at the loan's original effective rate.

Difficulty: 1 Easy

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

29) When assessing credit losses on estimated uncollectible notes receivable, the discounted cash flow technique is often used, discounting at the current interest rate in effect when the credit loss is estimated or re-estimated.

Difficulty: 1 Easy

Topic: CECL model—Credit loss on receivables

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Remember

AACSB: Reflective Thinking; Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

30) Under the CECL approach, credit losses are only recognized when it is probable that the receivable is uncollectible.

Difficulty: 2 Medium

Topic: CECL model—Credit loss on receivables

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

31) Under the CECL approach used in U.S. GAAP, bad debts are only recognized for losses that are expected to occur more than a year in the future when a receivable has deteriorated in credit quality.

Difficulty: 1 Easy

Topic: CECL model—Credit loss on receivables

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

32) Under the ECL approach used in IFRS, expected credit losses are only recognized for losses that occur more than a year in the future when a receivable has deteriorated in credit quality.

Difficulty: 1 Easy

Topic: IFRS—Credit loss on receivables

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

33) Under IFRS, bad debts related to accounts receivable are not recognized.

Difficulty: 1 Easy

Topic: IFRS—Credit loss on receivables

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; BB Legal / Keyboard Navigation

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

A) Only authorized personnel should sign checks.

B) All expenditures should be authorized before a check is prepared.

C) All disbursements, other than very small disbursements, should be made by check.

D) The same person that prepares the check should also record it in the proper journal.

Difficulty: 1 Easy

Topic: Internal control

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

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

A) Effectiveness and efficiency of operations.

B) Reliability of financial advice.

C) Compliance with local ordinances.

D) All of these answer choices are correct.

Difficulty: 1 Easy

Topic: Internal control

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis / Keyboard Navigation

36) Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/2021:

What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?

A) $9,450.

B) $12,450.

C) $7,450.

D) $19,650.

Difficulty: 3 Hard

Topic: Cash and cash equivalents

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

37) Cash equivalents do not include:

A) Money market funds.

B) High grade marketable equity securities.

C) U.S. treasury bills.

D) Commercial paper.

Difficulty: 1 Easy

Topic: Cash and cash equivalents

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

38) Cash may not include:

A) Foreign currency.

B) Money orders.

C) Restricted cash.

D) Undeposited customer checks.

Difficulty: 1 Easy

Topic: Cash and cash equivalents; Restricted cash and compensating balances

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.; 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

39) Compensating balances represent:

A) Cash in a bank account that can't be spent

B) Balances in a payroll checking account.

C) Accounts that are subject to bank service charges.

D) Accounts on which banks pay interest, e.g., NOW accounts.

Difficulty: 1 Easy

Topic: Restricted cash and compensating balances

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) Equity.

B) Investments.

C) Liabilities.

D) A separate section between liabilities and equity.

Difficulty: 1 Easy

Topic: Restricted cash and compensating balances

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

41) Logistics Company had the following items listed in its trial balance at 12/31/2021:

Included in the checking account balance is $50,000 of restricted cash that Bank of the East requires as a compensating balance for the $300,000 note. What amount will Logistics include in its year-end balance sheet as cash and cash equivalents?

A) $412,000.

B) $462,000.

C) $392,000.

D) $442,000.

Difficulty: 3 Hard

Topic: Cash and cash equivalents

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

42) Which of the following is true about reporting cash under IFRS?

A) Cash accounts include loans made to customers, but not to related parties.

B) Overdrafts typically cannot be offset against positive balance in other cash accounts on the balance sheet.

C) Cash overdrafts are not allowed.

D) Overdrafts typically are not shown as current liabilities on the balance sheet.

Difficulty: 2 Medium

Topic: IFRS—Cash and cash equivalents

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

43) Wilson Company had the following cash balance items listed in its trial balance at 12/31/2021:

If Wilson reports under IFRS, its 12/31/2021 balance sheet would show what cash balance?

A) ($5,000).

B) $55,000.

C) $60,000.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: IFRS—Cash and cash equivalents

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Apply

AACSB: Diversity; Knowledge Application

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

44) Wilson Company had the following cash balance items listed in its trial balance at 12/31/2021:

If Wilson reports under U.S. GAAP, its 12/31/2021 balance sheet would show what cash balance?

A) ($5,000).

B) $55,000.

C) $60,000.

D) None these answer choices are correct.

Difficulty: 3 Hard

Topic: Cash and cash equivalents

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

45) On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for sales discounts.

What is the correct entry for Flores on November 10?

A)

B)

C)

D)

Difficulty: 1 Easy

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

46) On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for sales discounts.

What is the correct entry for Flores on November 17, assuming the correct payment was received on that date?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

47) On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for sales discounts.

What is the correct entry for Flores on December 5, assuming the correct payment was received on that date?

A)

B)

C)

D)

Difficulty: 1 Easy

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

48) Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for sales discounts.

What entry would Oswego make on April 12?

A)

B)

C)

D)

Difficulty: 1 Easy

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

49) Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for sales discounts.

What entry would Oswego make on April 23, assuming the customer made the correct payment on that date?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for sales discounts.

What entry would Oswego make on June 10, assuming the customer made the correct payment on that date?

A)

B)

C)

D)

Difficulty: 1 Easy

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

51) On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for sales discounts.

What entry would Cherokee make on November 10?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for sales discounts.

What entry would Cherokee make on November 17, assuming the correct payment was received on that date?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

53) On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for sales discounts.

What entry would Cherokee make on December 10, assuming the correct payment was received on that date?

A)

B)

C)

D)

Difficulty: 3 Hard

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

54) Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for sales discounts.

What entry would Harvey's make on April 12?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

55) Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for sales discounts.

What entry would Harvey's make on April 23, assuming the customer made the correct payment on that date?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

56) Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for sales discounts.

What entry would Harvey's make on June 10, assuming the customer made the correct payment on that date?

A)

B)

C)

D)

Difficulty: 3 Hard

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Sales.

B) Sales discounts.

C) Allowance for uncollectible accounts.

D) Accounts receivable.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) Sales.

B) Sales discount.

C) Sales returns.

D) Sales allowances.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) Not record sales until the right to return has expired.

B) Record a refund liability in the year of the sale.

C) Debit sales returns in the period of the return.

D) Debit sales in the period of the return.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

60) During 2021, its first year of operations, Ashbaugh Industries recorded sales of $21,000,000 and experienced returns of $1,400,000. Returns are accounted for as they occur, with additional estimated returns accrued at the end of the period.  Cost of goods sold totaled $12,600,000,000 (60% of sales). The company estimates that 8% of all sales will be returned. The year-end adjusting journal entry to account for anticipated sales returns would include a:

A) Credit to sales returns of $280,000.

B) Credit to refund liability of $280,000.

C) Debit to sales returns of $1,680,000.

D) Debit to cost of sales of $168,000.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

61) Galaxy sells used video games for cash and provides a one-week return right. Returns are material and reasonably predictable. Galaxy should:

A) Not record sales until the right to return has expired.

B) Record a contra-receivable in the year of the sale.

C) Recognize a refund liability associated with estimated returns.

D) Credit sales in the period of the return.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

62) False Value Hardware began 2021 with a credit balance of $32,000 in the refund liability account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2021, customers returned merchandise for credit of $28,000 to their accounts.

What is the balance in the refund liability account at the end of 2021?

A) $11,000.

B) $39,000.

C) $43,000.

D) $21,000.

Difficulty: 3 Hard

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

63) False Value Hardware began 2021 with a credit balance of $32,000 in the refund liability account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2021, customers returned merchandise for credit of $28,000 to their accounts.

False Value Hardware's 2021 income statement would report net sales of:

A) $622,000.

B) $607,000.

C) $646,000.

D) $611,000.

Difficulty: 3 Hard

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

64) Rusty Hardware makes only cash sales. It began 2021 with a credit balance of $32,000 in the refund liability account. Sales during 2021 were $600,000. Rusty estimates that 6% of all sales will be returned. During 2021, customers returned merchandise for credit of $28,000 to their accounts.

What is the balance in the refund liability account at the end of 2021?

A) $32,000.

B) $39,000.

C) $43,000.

D) $40,000.

Difficulty: 3 Hard

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

65) Rusty Hardware makes only cash sales. It began 2021 with a credit balance of $32,000 in the refund liability account. Sales during 2021 were $600,000. Rusty estimates that 6% of all sales will be returned. During 2021, customers returned merchandise for credit of $28,000 to their accounts.

Rusty's 2021 income statement would report net sales of:

A) $600,000.

B) $564,000.

C) $568,000.

D) $604,000.

Difficulty: 3 Hard

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

66) Accounts receivable are normally reported at the:

A) Present value of future cash receipts.

B) Current value plus accrued interest.

C) Expected amount to be collected.

D) Current value less expected collection costs.

Difficulty: 1 Easy

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

67) The allowance for uncollectible accounts is a:

A) Deferred charge to expense.

B) Contra asset account.

C) Deferred revenue account.

D) Quasi-liability account.

Difficulty: 1 Easy

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

68) A company uses the allowance method to account for bad debts. What is the effect on each of the following accounts of the collection of an account previously written off?

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) Accounts receivable.

B) Allowance for uncollectible accounts.

C) Bad debts expense.

D) Retained earnings.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

70) Which of the following does not reduce the balance in accounts receivable?

A) Returns on credit sales.

B) Collections from customers.

C) Recognizing bad debts expense.

D) Write-offs.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

71) Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending balance of accounts receivable. During 2021, Chez Fred's credit sales and collections were $125,000 and $131,000, respectively. What was the balance of accounts receivable on January 1, 2021, if $180 in accounts receivable were written off during 2021 and if the allowance account had a balance of $750 on December 31, 2021?

A) $5,820.

B) $31,000.

C) $31,180.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

72) The following information relates to Halloran Co.'s accounts receivable for 2021:

What amount should Halloran report for accounts receivable, before allowances, at December 31, 2021?

A) $1,040,000.

B) $970,000.

C) $760,000.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

73) Calistoga Produce estimates bad debt expense at 1/2% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $471,000 and $1,650, respectively, at December 31, 2020. During 2021, Calistoga's credit sales and collections were $315,000 and $319,000, respectively, and $1,720 in accounts receivable were written off.

Calistoga's accounts receivable at December 31, 2021, are:

A) $467,000.

B) $473,280.

C) $465,280.

D) $469,280.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

74) Calistoga Produce estimates bad debt expense at 1/2% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $471,000 and $1,650, respectively, at December 31, 2020. During 2021, Calistoga's credit sales and collections were $315,000 and $319,000, respectively, and $1,720 in accounts receivable were written off.

Calistoga's 2021 bad debt expense is:

A) $1,720.

B) $1,650.

C) $1,505.

D) $1,575.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

75) Calistoga Produce estimates bad debt expense at 1/2% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $471,000 and $1,650, respectively, at December 31, 2020. During 2021, Calistoga's credit sales and collections were $315,000 and $319,000, respectively, and $1,720 in accounts receivable were written off.

Calistoga's final balance in its allowance for uncollectible accounts at December 31, 2021, is:

A) $1,575.

B) $1,505.

C) $1,650.

D) $1,720.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

76) The balance in accounts receivable at the beginning of 2021 was $300. During 2021, $1,600 of credit sales were recorded. If the ending balance in accounts receivable was $250 and $100 in accounts receivable were written off during the year, the amount of cash collected from customers during 2021 was:

A) $1,600.

B) $1,650.

C) $1,550.

D) $1,900.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

77) In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,200,000, and cash collections from credit customers totaled $1,950,000.

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

A) $50,000.

B) $82,000.

C) $114,000.

D) Can't be determined from the given information

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

78) In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,200,000, and cash collections from credit customers totaled $1,950,000.

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

A) $196,000.

B) $218,000.

C) $230,000.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

79) In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,200,000, and cash collections from credit customers totaled $1,950,000.

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

A) Debit to bad debt expense for $114,000.

B) Credit to allowance for uncollectible accounts for $82,000.

C) Debit to accounts receivable for $32,000.

D) All of these answer choices are correct.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

80) For 2021, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively, at December 31, 2020. During 2021, Rahal's credit sales and collections were $404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off.

Rahal's accounts receivable at December 31, 2021, are:

A) $90,500.

B) $88,160.

C) $82,500.

D) $80,160.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

81) For 2021, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively, at December 31, 2020. During 2021, Rahal's credit sales and collections were $404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off.

Rahal's 2021 bad debt expense is:

A) $2,100.

B) $2,340.

C) $4,080.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

82) For 2021, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively, at December 31, 2020. During 2021, Rahal's credit sales and collections were $404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off.

Rahal's final balance in its allowance for uncollectible accounts at December 31, 2021, is:

A) $4,340.

B) $4,100.

C) $3,800.

D) $4,040.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

83) The following aging information pertains to Jacobsen Co.'s accounts receivable at December 31, 2021:

During 2021, Jacobsen wrote off $18,000 in receivables and recovered $6,000 that had been written off in prior years. Jacobsen's December 31, 2020, allowance for uncollectible accounts was $40,000. Using the balance sheet approach, what amount of allowance for uncollectible accounts should Jacobsen report at December 31, 2021?

A) $55,400.

B) $28,000.

C) $49,400.

D) $31,400.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement; FN Risk Analysis / Keyboard Navigation

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

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

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

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

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

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

85) Which of the following is recorded by a credit to accounts receivable?

A) Sale of inventory on account.

B) Estimating the annual allowance for uncollectible accounts.

C) Estimating annual sales returns.

D) Write-off of bad debts.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) Multiplying net credit sales by the bad debt experience ratio.

B) Adding the beginning balance in the allowance for uncollectible accounts to the provision for uncollectible accounts and deducting the desired ending balance in the allowance for uncollectible accounts.

C) Multiplying ending accounts receivable in each age category by the expected loss ratio for each age category.

D) Taking the difference between the unadjusted balance in the allowance account and the desired balance of the allowance account.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

87) As of January 1, 2021, Farley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Farley's credit sales have been uncollectible. During 2021, Farley wrote off $650,000 of accounts receivable. Credit sales for 2021 were $18,000,000. In its December 31, 2021, balance sheet, what amount should Farley report as allowance for uncollectible accounts?

A) $230,000.

B) $360,000.

C) $590,000.

D) $880,000.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

88) As of January 1, 2021, Barley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Barley's gross accounts receivable have been uncollectible. During 2021, Barley wrote off $650,000 of accounts receivable. Barley's gross accounts receivable as December 31, 2021 is $18,000,000.

In its December 31, 2021, balance sheet, what amount should Barley report as allowance for uncollectible accounts?

A) $230,000.

B) $360,000.

C) $490,000.

D) $880,000.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

89) As of January 1, 2021, Barley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Farley's gross accounts receivable have been uncollectible. During 2021, Farley wrote off $650,000 of accounts receivable. Barley's gross accounts receivable as December 31, 2021 is $18,000,000.

How much bad debt expense should Barley record for 2021?

A) $230,000.

B) $360,000.

C) $490,000.

D) $880,000.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

90) San Mateo Company had the following account balances at December 31, 2021, before recording bad debt expense for the year:

San Mateo is considering the following approaches for estimating bad debts for 2021:

• Based on 3% of credit sales

• Based on 6% of year-end accounts receivable

What amount should San Mateo charge to bad debt expense at the end of 2021 under each method?

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 3 Hard

Topic: Uncollectible accounts—Balance sheet approach; Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

91) As of December 31, 2020, Gill Co. reported accounts receivable of $216,000 and an allowance for uncollectible accounts of $8,400. During 2021, accounts receivable increased by $22,000 (that change includes $7,800 of bad debts that were written off). An analysis of Gill Co.'s December 31, 2021, accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. Bad debt expense for 2021 would be:

A) $6,540.

B) $7,800.

C) $7,140.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

92) As of December 31, 2021, Amy Jo's Appliances had unadjusted account balances in accounts receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2021 write-offs of $6,450 in bad debts. An analysis of Amy Jo's December 31, 2021, accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for 2021 should be:

A) $6,220.

B) $6,450.

C) $5,250.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

93) Nontrade receivables do not include:

A) Sales to customers.

B) Loans to employees.

C) Income tax refund receivable.

D) Advances to affiliated companies.

Difficulty: 1 Easy

Topic: Notes receivable

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) Discounted at an imputed interest rate.

B) Recorded at the contract amount.

C) Recorded at an amount equal to the future cash flows.

D) Accounted for on the installment basis.

Difficulty: 1 Easy

Topic: Notes receivable

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

95) Long-term interest-bearing notes receivable issued at an unrealistically low interest rate will be:

A) Discounted at an imputed interest rate.

B) Recorded at the contract amount.

C) Recorded at an amount equal to the future cash flows.

D) Accounted for on the installment basis.

Difficulty: 1 Easy

Topic: Notes receivable

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

96) A journal entry to record receipt of interest on an interest-bearing notes receivable will include a:

A) credit to cash.

B) credit to interest revenue.

C) debit to notes receivable.

D) debit to bad debt expense.

Difficulty: 1 Easy

Topic: Notes receivable

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

97) On June 1, Parson Assoc. sold equipment to Arleo and agreed to accept a 3-month, $50,000, 10% interest-bearing note in payment at a time when the prevailing rate of interest for similar transactions was 10%. When the note was collected upon maturity, Parson would recognize interest revenue of:

A) $0

B) $1,250.

C) $2,500.

D) $3,750.

Difficulty: 1 Easy

Topic: Notes receivable

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) A secured borrowing.

B) Only note disclosure of the arrangement is required.

C) A sale.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Financing with receivables—without recourse

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

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

A) $50,000.

B) Zero.

C) The future value of $50,000 using a 10% interest rate.

D) The present value of $50,000 using a 10% interest rate.

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) A loss on dishonored receivable.

B) A receivable.

C) Dishonored note expense.

D) Interest expense.

Difficulty: 2 Medium

Topic: Financing with receivables—with recourse

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

101) Peecher accepted a three-year, noninterest-bearing note in exchange for merchandise sold. Which of the following is true?

A) Peecher would credit a discount on notes receivable when recording the sale.

B) Peecher would debit interest revenue over the life of the note.

C) Peecher would debit notes receivable when the note is collected.

D) Peecher would multiply sales revenue by the effective interest rate to determine interest revenue each period.

Difficulty: 1 Easy

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

102) Baker Inc. acquired equipment from the manufacturer on 10/1/2021 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2022 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2021 year-end financial statements, what is its imputed annual interest rate?

A) 2%.

B) 4%.

C) 6%.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

103) Frasquita acquired equipment from the manufacturer on 6/30/2021 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2022 to satisfy the obligation in full.

If Frasquita accrued interest of $15,000 on the note in its 2021 year-end financial statements, what amount would it have recorded the equipment for on 6/30/2021?

A) $500,000.

B) $515,000.

C) $550,000.

D) $525,000.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

104) Frasquita acquired equipment from the manufacturer on 6/30/2021 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2022 to satisfy the obligation in full.

If Frasquita accrued interest of $15,000 on the note in its 2021 year-end financial statements, what would the manufacturer record in its 2021 income statement for this transaction?

A) $15,000 of interest revenue.

B) $25,000 of interest revenue.

C) $15,000 of interest revenue and $525,000 of sales revenue.

D) $550,000 of sales revenue.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

105) Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2021. The notes included:

Note A: Dated 5/31/2021, principal of $120,000 and interest due 3/31/2022.

Note B: Dated 7/1/2021, principal of $200,000 and interest at 8% annually, due on 4/1/2022.

Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2021 balance sheet.

The annual interest rate on Note A is closest to:

A) 9.14%.

B) 8%.

C) 9.74%.

D) 9.44%.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

106) Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2021. The notes included:

Note A: Dated 5/31/2021, principal of $120,000 and interest due 3/31/2022.

Note B: Dated 7/1/2021, principal of $200,000 and interest at 8% annually, due on 4/1/2022.

Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2021 balance sheet.

Assume Frankenstein views the financing component of these sales to be significant. What amount of interest revenue would Frankenstein earn on these notes during 2022?

A) Above $12,000.

B) Between $7,000 and 10,000.

C) Less than $5,000.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

107) Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2021. The note was accepted as payment of a delinquent receivable of $2,500.

What is the correct entry to record the note?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

108) Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2021. The note was accepted as payment of a delinquent receivable of $2,500.

The cash collection on July 1, 2021, would be recorded as:

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

109) Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2021. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%.

What is the correct entry to record the note?

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

110) Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2021. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%.

The entry to record interest on December 31, 2021 would be:

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

111) Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2021. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%.

The cash collection on December 31, 2022, would be recorded as:

A)

B)

C)

D)

Difficulty: 2 Medium

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

112) Which of the following is considered a sale of receivables?

A) Pledging receivables.

B) Assigning receivables.

C) Factoring receivables without recourse.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

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

A) The transferred assets have been isolated from the transferor.

B) Each transferee has the right to pledge or exchange the assets it received.

C) The transferor does not maintain effective control over the transferred assets through either repurchase or redemption agreements before maturity or the ability to cause the transferee to return the assets.

D) All of these answer choices must occur.

Difficulty: 1 Easy

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

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

A) Reporting the receivables net of the borrowed amount.

B) Removal of the pledged receivables from current assets and including them with noncurrent investments.

C) Disclosure of the arrangement in notes to the financial statements.

D) None of these answer choices are correct.

Difficulty: 1 Easy

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

115) In deciding whether financing with receivables is a secured borrowing or a sale under U.S. GAAP, the critical element is the extent to which:

A) The transferee has received substantially all the risks and rewards of ownership.

B) The age of the receivables transferred differs from the average age of the receivables.

C) The transferor of the receivable surrenders control over the assets transferred.

D) The transferee relies on assets received from the transferor to maintain operations.

Difficulty: 2 Medium

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Decision Making / Keyboard Navigation

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

A) The transferee has received substantially all the risks and rewards of ownership.

B) The age of the receivables transferred differs from the average age of the receivables.

C) The transferor of the receivable surrenders control over the assets transferred.

D) The transferee relies on assets received from the transferor to maintain operations.

Difficulty: 2 Medium

Topic: IFRS—Transfers of receivables

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; BB Resource Management; FN Decision Making / Keyboard Navigation

117) The purpose of assigning accounts receivable is to:

A) Satisfy a court order.

B) Complete the legal prerequisites to record their sale.

C) Comply with form and content rules of bankruptcy proceedings.

D) Provide collateral for a loan.

Difficulty: 2 Medium

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

118) Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2021. The note, along with interest at 6%, is due on June 30, 2022. On September 30, 2021, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?

A) $40,600.

B) $36,000.

C) $39,220.

D) $36,820.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Credit deferred interest expense for $25,000.

B) Credit factored accounts receivable for $85,000.

C) Debit discount on liability for $25,000.

D) Debit loss on sale of receivables for $25,000.

Difficulty: 2 Medium

Topic: Financing with receivables—without recourse

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

120) If a company adopts an accounts receivable factoring program, and accounts for the factoring as a sale of receivables, which of the following is true in the period the company starts the program (all else equal)?

A) The accounts receivable balance will increase.

B) Cash flow from operations may increase.

C) A retroactive restatement is necessary due to a change in accounting principle.

D) The factoring arrangement needs to be with a consolidated entity to qualify for sale accounting.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

121) Assume a company has been maintaining a receivables factoring program for the past five years and has been experiencing the same level of sales, factoring, and bad debts over that period. Customers typically pay their receivables within 60 days. Which of the following is true with respect to the current period (all else equal)?

A) The accounts receivable balance will decrease.

B) Cash flow from operations is stable.

C) Net income is likely to decline.

D) Accounts receivable payable within 60 days cannot be factored.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation

122) Which of the following is not true regarding accounting for transfers of receivables under IFRS?

A) Transfers of receivables sometimes are treated as a sale of receivables.

B) Transfers of receivables sometimes are treated as a secured borrowing.

C) Transfers of receivables can be treated as a sale if the transferee is a QSPE.

D) Transfer of substantially all the risk and rewards of ownership is an important consideration.

Difficulty: 2 Medium

Topic: IFRS—Transfers of receivables

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; BB Resource Management; FN Measurement / Keyboard Navigation

123) Trell Corporation transferred $50,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 80% of the factored amount to Trell and retains the remaining 20%. When the bank collects the receivables, it will remit to Trell the retained amount less a fee equal to 3% of the total amount factored. Trell estimates a fair value of its 20% interest in the receivables of $8,000 (not including the 3% fee). Trell will show an amount receivable from factor of:

A) $10,000.

B) $8,500.

C) $8,000.

D) $6,500.

Difficulty: 2 Medium

Topic: Financing with receivables—without recourse

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) The level of sales.

B) The nature of the product or service sold.

C) The credit and collection policies.

D) All of these answer choices are correct.

Difficulty: 1 Easy

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Risk Analysis / Keyboard Navigation

125) Excerpts from Huckabee Company's December 31, 2021 and 2020, financial statements are presented below:

Huckabee's 2021 receivables turnover (rounded) is:

A) 3.69.

B) 5.00.

C) 5.26.

D) 3.16.

Difficulty: 2 Medium

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

126) Excerpts from Huckabee Company's December 31, 2021 and 2020, financial statements are presented below:

Huckabee's 2021 average collection period (rounded) is:

A) 69 days.

B) 116 days.

C) 111 days.

D) 73 days.

Difficulty: 3 Hard

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

127) Alliance Software began 2021 with accounts receivable of $115,000. All sales are made on credit. Sales and cash collections from customers for the year were $780,000 and $700,000, respectively. Cost of goods sold for the year was $450,000. What was Alliance's receivables turnover ratio (rounded) for 2021?

A) 4.00.

B) 5.03.

C) 2.90.

D) 6.78.

Difficulty: 3 Hard

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: BB Resource Management; FN Measurement / Keyboard Navigation

128) On July 1, 2021, Cromartie Furniture established a $150 petty cash fund. A check for $150 was made out to the petty cash custodian. During July, the petty cash custodian paid the following bills from the petty cash fund:

At the end of July the petty cash fund was replenished.

The journal entry to establish the petty cash fund includes:

A) A credit to petty cash and a debit to cash for $150.

B) A debit to petty cash and a credit to cash for $150.

C) A credit to cash and a debit to various expenses for $126.

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

Difficulty: 2 Medium

Topic: Petty cash—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

129) On July 1, 2021, Cromartie Furniture established a $150 petty cash fund. A check for $150 was made out to the petty cash custodian. During July, the petty cash custodian paid the following bills from the petty cash fund:

At the end of July the petty cash fund was replenished.

The journal entry to replenish the petty cash fund includes:

A) A credit to petty cash and a debit to various expenses for $126.

B) A debit to petty cash and a credit to cash for $150.

C) A credit to cash and a debit to various expenses for $126.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Petty cash—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) $1,130.

B) $1,160.

C) $1,245.

D) $1,445.

Difficulty: 3 Hard

Topic: Bank reconciliation—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) $2,270.

B) $2,550.

C) $2,470.

D) $2,700.

Difficulty: 3 Hard

Topic: Bank reconciliation—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

132) Which of the following is true about accounting for a troubled debt restructuring?

A) If a receivable is expected to be uncollectible, it is remeasured at the discounted present value of the cash flows that were originally expected to be collected, but at a revised discount rate.

B) Receivables are not remeasured; instead, fair values are obtained from reliable factors.

C) If a receivable is continued, but with modified terms, a loss is typically recorded.

D) Receivables are never settled outright at the time of a restructuring.

Difficulty: 2 Medium

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation

133) Brewer Inc. is owed $200,000 by Carol Co. under a 10% note with two years remaining to maturity. Due to financial difficulties Carol Co. did not pay the prior year's interest. Brewer agrees to settle the receivable (and accrued interest) in exchange for a cash payment of $150,000. The journal entry that Brewer would make to record this transaction would include a loss on troubled debt restructuring as bad debt expense in the amount of:

A) $0.

B) $20,000.

C) $50,000.

D) $70,000.

Difficulty: 2 Medium

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

134) The O'Hara Group is owed $1,000,000 by Hilton Enterprises under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. O'Hara agrees to restructure the note under terms that yield a present value of $880,000. The journal entry that O'Hara would make to record this transaction would include a loss on troubled debt restructuring as bad debt expense in the amount of:

A) $0.

B) $80,000.

C) $200,000.

D) $220,000.

Difficulty: 2 Medium

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

135) The Nile Group is owed $1,000,000 by Scorpion Enterprises under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. Nile estimates credit losses with respect to this receivable and calculates that it will only receive amounts equal to a present value of $880,000. The journal entry that O'Hara would make to record this transaction would include a credit loss as bad debt expense in the amount of:

A) $0.

B) $80,000.

C) $200,000.

D) $220,000.

Difficulty: 2 Medium

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

136) The Salamander Company has evaluated its receivables, and has identified the following possible credit losses:

• Note #1 has recently deteriorated in credit quality. For Note #1, Salamander estimates the present value of credit losses occurring in the next twelve months is $50,000, and the present value of credit losses occurring after twelve months is $20,000.

• Note #2 has not deteriorated in credit quality. For Note #2, Salamander estimates the present value of credit losses occurring in the next twelve months is $5,000, and the present value of credit losses occurring after twelve months is $10,000.

If Salamander is using the CECL model, it would recognize a bad debt expense of:

A) $50,000.

B) $55,000.

C) $75,000.

D) $85,000.

Difficulty: 2 Medium

Topic: CECL model—Credit loss on receivables

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

137) The Salamander Company has evaluated its receivables, and has identified the following possible credit losses:

• Note #1 has recently deteriorated in credit quality. For Note #1, Salamander estimates the present value of credit losses occurring in the next twelve months is $50,000, and the present value of credit losses occurring after twelve months is $20,000.

• Note #2 has not deteriorated in credit quality. For Note #2, Salamander estimates the present value of credit losses occurring in the next twelve months is $5,000, and the present value of credit losses occurring after twelve months is $10,000.

If Salamander is reporting under IFRS and therefore uses the ECL model, it would recognize a bad debt expense of:

A) $50,000.

B) $55,000.

C) $75,000.

D) $85,000.

Difficulty: 2 Medium

Topic: IFRS—Credit loss on receivables

Learning Objective: 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

138) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Internal control; Sales returns; Uncollectible accounts receivable; Uncollectible accounts—Balance sheet approach

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.; 07-04 Describe the accounting treatment for merchandise returns.; 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

139) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Internal control; Uncollectible accounts receivable; Uncollectible accounts—Income statement approach; Notes receivable—interest-bearing; Financing with receivables—with recourse

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.; 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.; 07-07 Describe the accounting treatment of notes receivable.; 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

140) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Sales discounts; Uncollectible accounts receivable; Financing with receivables

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.; 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

141) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 1 Easy

Topic: Restricted cash and compensating balances; Sales discounts; Financing with receivables; Receivables management and ratios

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.; 07-03 Distinguish between the gross and net methods of accounting for cash discounts.; 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.; 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

142) Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.

Difficulty: 2 Medium

Topic: Restricted cash and compensating balances; Sales discounts; Sales returns; Uncollectible accounts receivable; Uncollectible accounts—Balance sheet approach; Uncollectible accounts—Income statement approach; Financing with receivables—without recourse

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.; 07-03 Distinguish between the gross and net methods of accounting for cash discounts.; 07-04 Describe the accounting treatment for merchandise returns.; 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.; 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

143) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms with respect to accounting under IFRS. Match each phrase with the number for the correct term.

Difficulty: 2 Medium

Topic: Cash and cash equivalents; Internal control; Uncollectible accounts receivable; Financing with receivables; Troubled debt restructuring—App B; IFRS—Accounts and notes receivable; IFRS—Credit loss on receivables

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.; 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.; 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.; Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Understand

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Critical Thinking; FN Measurement

144) Costa Co. has the following cash balances at local banks as of 12/31/2021:

National Bank: $100,000

K&P Bank: 25,000

Insolvent Trust: (5,000)

Required:

1. Prepare the Current Assets and Current Liabilities section of Costa's 2021 balance sheet, assuming Parker reports under U.S. GAAP.

2. Prepare the Current Assets and Current Liabilities section of Costa's 2021 balance sheet, assuming Parker reports under IFRS.

Difficulty: 2 Medium

Topic: Cash and cash equivalents; IFRS—Cash and cash equivalents

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.; 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Apply

AACSB: Diversity; Knowledge Application

AICPA/Accessibility: BB Global; FN Measurement

145) On May 12, 2021, Falwell Computing sold five computers to Computing Plus for $10,000, subject to terms 3/10, n/30. Falwell uses the net method of accounting for sales discounts.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on May 20, 2021.

3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on June 5, 2021.

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

146) On July 18, 2021, Philly Furniture Factory sold 20 reclining rockers to Dave's Discount Furniture for $8,000, subject to terms 2/10, n/30. Philly uses the net method of accounting for sales discounts.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 26, 2021.

3. Prepare the journal entry to record receipt of the payment assuming the correct amount was received on August 15, 2021.

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

147) On March 12, 2021, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for $10,000, subject to terms 2/10, n/30. Admiral uses the gross method of accounting for sales discounts.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on March 20, 2021.

3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on April 5, 2021.

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

148) On October 18, 2021, Flying Chicken sold 2,000 pounds of chicken to Healthier Grocery for $3,400, subject to terms 2/10, n/30. Flying Chicken uses the gross method of accounting for sales discounts.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on October 26, 2021.

3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on November 15, 2021.

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

149) On June 14, 2021, Rumsfeld Company sold 100 air-conditioning units to Powell Heating and Cooling. The units list for $600 each, but Powell was granted a 25% trade discount. All of Rumsfeld's sales are subject to terms 2/10, n/30. Rumsfeld uses the gross method of accounting for sales discounts.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on June 22, 2021.

3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 10, 2021.

Difficulty: 3 Hard

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

150) On February 14, 2021, Prime Company sold 50 air-conditioning units to L&P Heating and Cooling. The units list for $700 each, but L&P was granted a 30% trade discount. All of Prime's sales are subject to terms 2/10, n/30. Prime uses the net method of accounting for sales discounts.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on February 22, 2021.

3. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on March 10, 2021.

Difficulty: 3 Hard

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

151) Beethoven Music Company started business in March 2021. Sales for its first year were $400,000. Beethoven priced its merchandise to yield a 45% gross profit based on sales dollars. Industry statistics suggest that 10% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $30,000 in sales. Beethoven uses a perpetual inventory system.

Required:

Prepare summary journal entries to record (1) sales, (2) sales returns, and (3) the year-end adjusting entry for estimated sales returns. Assume that cash has not yet been collected for merchandise that could yet be returned.

Difficulty: 3 Hard

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

Use this information to answer the following questions:

The following note disclosure is taken from the 2021 annual report to shareholders of Winchester International Corporation.

NOTE 5: ALLOWANCE FOR LOAN LOSSES

The allowance for loan loss is maintained at a level to absorb probable losses inherent in the loan portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans.

The following is a summary of the changes in the allowances for loan losses for three years:

At December 31,

(In thousands) 2021 2020 2019

Balance at beginning of year $ 91,809 73,658 66,201

Allowances from purchase transactions 1,851 10,980 3,647

Provisions charged to operations 14,400 11,800 9,000

Subtotal 108,060 96,438 78,848

Charge-offs (11,575) (6,816) (7,406)

Recoveries 1,822 2,187 2,216

Net charge-offs (9,753) (4,629) (5,190)

Balance at end of year $ 98,307 91,809 73,658

Winchester also reported (in thousands) in its comparative balance sheet that it held Loans receivable, net, of $6,869,11 and $6,819,209 at December 31, 2021, and December 31, 2020, respectively.

152) What kind of account is the Allowance for Loan Losses in Winchester's financial statements?

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

153) Using a T-account for the Allowance for Loan Losses, identify the changes in the account during 2021.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

154) How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?

Difficulty: 2 Medium

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Create

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: BB Resource Management; FN Risk Analysis

155) Is there any evidence in Winchester's disclosures above that are consistent with earnings management?

Difficulty: 2 Medium

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis

156) For each posted entry in the Allowance account during 2021, indicate the remaining entry(ies) in other accounts.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

157) If Winchester is using the balance sheet approach to determining loan losses and the Allowance account balance, what percentage did it use in 2021?

Difficulty: 3 Hard

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

Use this information to answer the following questions:

The following information is taken from the 2015 annual report to shareholders of Hewlett-Packard (HP) Co.

For Fiscal 2015 For Fiscal 2014

Provision for doubtful accounts $ 46 million $25 million

At Fiscal Year-end 2015 At Fiscal Year-end 2014

Accounts receivable, net 13,363 million 13,832 million

Accounts receivable, gross 13,552 million 14,064 million

158) What is the balance in HP's allowance for doubtful accounts at the end of the fiscal years 2015 and 2014, respectively?

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

159) What kind of account is the provision for doubtful accounts in HP's financial statements?

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

160) Using a T-account for the allowance for doubtful accounts, identify the changes in the account during fiscal year 2015.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

161) How could a company with receivables like HP be able to manage earnings in applying generally accepted accounting principles?

Difficulty: 2 Medium

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Create

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis

162) Is there any evidence in HP's disclosures above that are consistent with earnings management?

Difficulty: 2 Medium

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

163) If HP is using the balance sheet approach to determining bad debt expense, what percentage of year-end gross receivables did it use in 2015 and 2014, respectively?

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

164) For each posted entry in the allowance account during 2015, prepare the journal entry.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

165) During Burns Company's first year of operations, credit sales totaled $140,000 and collections on credit sales totaled $105,000. Burns estimates that bad debt losses will be 1.5% of credit sales. By year-end, Burns had written off $300 of specific accounts as uncollectible.

Required:

1. Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense.

2. Show the year-end balance sheet presentation for accounts receivable.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

166) During Bricker Company's first year of operations, credit sales totaled $200,000 and collections on credit sales totaled $145,000. Bricker estimates that $1,000 of its ending accounts receivable balance will not be collected. By year-end, Bricker had written off $330 of specific accounts as uncollectible.

Required:

1. Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense.

2. Show the year-end balance sheet presentation for accounts receivable.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

167) A summary of Klugman Company's December 31, 2021, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:

Age Group Amount %

0-60 days $60,000 .5

61-90 days 22,000 1.0

91-120 days 3,000 10.0

Over 120 days 1,000 50.0

The allowance for uncollectible accounts had a balance of $1,400 on January 1, 2021. During the year, bad debts of $750 were written off.

Required:

Prepare all journal entries for 2021 with respect to bad debts and the allowance for uncollectible accounts.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

168) A summary of London Fashion's December 31, 2021, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:

Age Group Amount %

0-60 days $40,000 0.5

61-90 days 15,000 1.5

91-120 days 2,000 15.0

Over 120 days 800 80.0

The allowance for uncollectible accounts had a balance of $1,600 at January 1, 2021. During the year bad debts of $1,150 were written off.

Required:

Prepare all 2021 journal entries with respect to bad debts and the allowance for uncollectible accounts.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

169) On December 31, 2020, Central Freight reported an allowance for uncollectible accounts of $15,300. During 2021, Central wrote off $17,000 in accounts receivable. Included in the write-off was Roskoff Corp.'s account in the amount of $750. Roskoff subsequently paid this balance. At December 31, 2021, an analysis of the accounts receivable aging schedule indicated the need for an allowance for uncollectible accounts of $14,900.

Required:

Prepare all implied journal entries relative to bad debt expense and the allowance for uncollectible accounts.

Difficulty: 3 Hard

Topic: Uncollectible accounts—Balance sheet approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

170) Cordova, Inc., reported the following receivables in its December 31, 2020, year-end balance sheet:

Current assets:

Accounts receivable, net of $52,000 in allowance for

uncollectible accounts $384,000

Interest receivable 19,000

Notes receivable 400,000

Additional information:

1. The notes receivable account consists of two notes, a $100,000 note and a $300,000 note. The $100,000 note is dated October 31, 2020, with principal and interest payable on October 31, 2021. The $300,000 note is dated March 31, 2020, with principal and 8% interest payable on March 31, 2021.

2. During 2021, sales revenue totaled $2,120,000, $1,980,000 cash was collected from customers, and $41,000 in accounts receivable were written off. All sales are made on a credit basis. Bad debt expense is recorded at year-end by adjusting the allowance account to an amount equal to 8% of year-end gross accounts receivable.

Required:

1. In addition to sales revenue, what revenue and expense amounts related to receivables will appear in Cordova's 2021 income statement?

2. Calculate the receivables turnover ratio for 2021.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable; Uncollectible accounts—Balance sheet approach; Notes receivable—interest-bearing; Receivables management and ratios

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.; 07-07 Describe the accounting treatment of notes receivable.; 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

171) AT&T's financial statements for the 2015 and 2014 fiscal years contained the following information:

Balance Sheets ($ in millions) 2015 2014

Current assets:

Accounts receivable, net of allowances for

doubtful accounts of $704 and $454 $16,532 $14,527

Income Statements ($ in millions) 2015 2014

Revenues $146,801 $132,447

In addition, the statement of cash flows disclosed bad debt expense of $1,416 million in 2015 and $1,032 million in 2014.

Required:

1. Determine the amount of actual bad debt write-offs made during 2015.

2. Determine the amount of cash collected from customers during 2015.

3. Compute the receivables turnover ratio for 2015.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable; Receivables management and ratios

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

172) Tokyo Imports received a six-month, noninterest-bearing note for $100,000 from Tall Mart in exchange for goods that have a fair value of $95,000. Tokyo uses a periodic inventory system, and views the financing component of this transaction to be significant.

Required:

1. Prepare the journal entry to record the sale.

2. Compute the effective annual rate of interest.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

173) Montana Minerals sold coal to Beta Electric, receiving a six-month, noninterest-bearing note for $200,000. The fair value of the goods sold to Beta is $192,000. Montana uses a periodic inventory system, and views the financing component of this transaction to be significant.

Required:

1. Prepare the journal entry to record the sale.

2. Compute the effective annual rate of interest.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

174) On January 1, 2021, Happy Tubs sold a hot tub to Monica, receiving a two-month, noninterest-bearing note in exchange for a hot tub that normally sells for $8,000. The note is for an amount that achieves an effective interest rate of 10% per year, and Happy Tubs views the financing component of this transaction to be significant.

Required:

1. Prepare the journal entry to record the sale.

2. Prepare any adjusting entry necessary on December 31, 2021.

3. Prepare any adjusting entry necessary on December 31, 2022.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

175) On December 1, 2021, General Mole borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivable as collateral. Additionally, General Mole was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest.

Required:

Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

176) On October 1, 2021, Watergate Hotels borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivables as collateral. Additionally, Watergate was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest.

Required:

Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

177) On February 1, 2021, Stealth Trucks sold a diesel rig to Kansas Transports for $250,000, receiving a $50,000 down payment and a 12-month, 10% note for the balance. Principal and interest are due at maturity, and the 10% interest rate reflected the market rate of interest at the time of sale. On August 1, 2021, Kansas Transports discounted the note without recourse at the First South Bank at 12% interest.

Required:

Prepare all required journal entries at August 1 to recognize interest revenue and the discounting of the note.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

178) On June 30, 2021, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $400,000 in accounts receivable to Dogwood Finance Company without recourse for a 5% fee. Option Two calls for Blondie to transfer the $400,000 in receivables to Dogwood with recourse. Dogwood's charges a 4% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $3,000 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 10% of the receivables is $25,000 (ignoring the factoring fee).

Required:

1. Prepare any necessary journal entry or entries if receivables are factored under Option One.

2. Prepare any necessary journal entry or entries if receivables are factored under Option Two.

Difficulty: 3 Hard

Topic: Financing with receivables—with recourse; Financing with receivables—without recourse

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

179) The Fitzgerald Company maintains a checking account at the Bank of the North. The bank provides a bank statement along with canceled checks on the last day of each month. The October 31, 2021, bank statement included the following information:

Balance, October 1, 2021 $ 32,690

Deposits 86,000

Checks processed (75,200)

Service charges (350)

NSF checks (1,600)

Monthly loan payment deducted

directly by bank from account

(includes $400 in interest) (3,400)

Balance, October 31, 2021 $ 38,140

The company's general ledger cash (checking) account had a balance of $42,544 at the end of October. Deposits outstanding totaled $4,224, and all checks written by the company were processed by the bank except for those totaling $5,620. In addition, a check for $500 for the purchase of office furniture was incorrectly recorded by the company as a $50 disbursement. The bank correctly processed the check during October.

Required:

1. Prepare a bank reconciliation for the month of October.

2. Prepare the necessary journal entries at the end of October to adjust the general ledger cash account.

Difficulty: 3 Hard

Topic: Bank reconciliation—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

180) The petty cash fund of Western Glass Company contained the following items on November 30, 2021:

Currency and coins $ 23

Receipts for the following expenditures:

Delivery charges $42

Office supplies 50

Restaurant receipt for entertaining a customer 110 202

An I.O.U. from an employee 25

Total $250

The petty cash fund was established on November 1, 2021, with a transfer of $250 from cash to the petty cash account.

Required:

Prepare the journal entries to establish the petty cash account and to replenish the fund at the end of November.

Difficulty: 3 Hard

Topic: Petty cash—App A

Learning Objective: Appendix 7A Cash Controls.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

181) Sarduchi Imports owes Radnor S&L $50 million under an 8% note with three years remaining to maturity. Due to financial difficulties of Sarduchi, the previous year's interest ($4 million) was not received. Radnor believes that the present value of all amounts it eventually will collect from Sarduchi is $25 million.

Required: Compute the credit loss that the bank would record, and prepare a journal entry to record the credit loss as bad debt expense.

Difficulty: 2 Medium

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

182) Belushi, Inc. owes Cusack County Trust $40 million under a 5% note with six years remaining to maturity. Due to financial difficulties of Belushi, the previous year's interest ($2.5 million) was not received. Cusack believes there is a 20% chance that Belushi will default on the note, and that, if Belushi defaults, the present value of all amounts Cusack eventually will collect is $22.5 million.

Required: Compute the expected credit loss that Cusack would record as its bad debt expense.

Difficulty: 3 Hard

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

183) Guido Properties owes First State Bank $60 million under a 7% note with two years remaining to maturity. Due to financial difficulties of Guido, the previous year's interest ($4.2 million) was not received. The bank agrees to settle the note receivable and accrued interest receivable in exchange for land having a fair value of $44 million. Assume that $5 million of bad debt expense has previously been accrued for this loan, resulting in a balance of $5 million in the allowance for uncollectible accounts before this settlement.

Required: Compute the loss on troubled debt restructuring that the bank would record as its bad debt expense upon settlement of the note and interest.

Difficulty: 2 Medium

Topic: Troubled debt restructuring—App B

Learning Objective: Appendix 7B Accounting for a Troubled Debt Restructuring.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

184) Define what it is meant by internal control.

Difficulty: 2 Medium

Topic: Internal control

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis

185) Describe some key elements of an internal control system for cash.

Difficulty: 2 Medium

Topic: Internal control

Learning Objective: 07-01 Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis

186) Cash is the most liquid of all assets but is not always reported under current assets. Explain this statement.

Difficulty: 2 Medium

Topic: Restricted cash and compensating balances

Learning Objective: 07-02 Explain the possible restrictions on cash and their implications for classification in the balance sheet.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

187) Although the net method is theoretically more sound, many companies use the gross method of accounting for sales discounts related to sales on account. Explain this statement.

Difficulty: 2 Medium

Topic: Sales discounts

Learning Objective: 07-03 Distinguish between the gross and net methods of accounting for cash discounts.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

188) Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period for which accounts receivable remain outstanding.

Difficulty: 2 Medium

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

189) Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period.

Difficulty: 1 Easy

Topic: Sales returns

Learning Objective: 07-04 Describe the accounting treatment for merchandise returns.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

190) Briefly explain why the direct write-off of uncollectible accounts is not permitted by GAAP if bad debts are material.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

191) Last year, Simpson Company had a receivables turnover ratio of 12. Homer, Simpson's president, was delighted when the ratio went to 18 for this year. This year, Simpson's long-standing credit terms of net 30 were changed to net 10. Should Homer be happy? Explain.

Difficulty: 2 Medium

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Evaluate

AACSB: Analytical Thinking

AICPA/Accessibility: FN Risk Analysis

192) You have recently been hired as the assistant controller for Clayton, Inc., a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the chief financial officer. The controller has assigned the task of preparing the year-end adjusting entry for bad debts to you. The allowance for uncollectible accounts has a credit balance of $86,000 before the year-end adjustment. Your analysis indicates that an appropriate balance for the allowance account is $210,000. After showing your analysis to the controller, she tells you to adjust the allowance account to $310,000. Tactfully, you ask the controller for an explanation for the amount and she tells you, "We are having a really good year. Let's bump up the allowance."

Required: Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.

Bloom's: Create

AACSB: Reflective Thinking; Ethics; Communication

AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis

193) Briefly compare and contrast the income statement and balance sheet approaches to estimating bad debt expense. In your answer, indicate which approach, if either, is superior.

Difficulty: 2 Medium

Topic: Uncollectible accounts—Balance sheet approach; Uncollectible accounts—Income statement approach

Learning Objective: 07-06 Describe how to estimate the allowance for uncollectible accounts and introduce the CECL model.

Bloom's: Evaluate

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: BB Critical Thinking; FN Measurement

194) Companies can have accounts receivable from ordinary trade customers and from related parties (e.g., directors, employees or large shareholders). How does U.S. GAAP differ from IFRS in its requirements regarding separate disclosure of trade receivables and related-party receivables? Why might separate disclosure of related party receivables be useful?

Difficulty: 3 Hard

Topic: Uncollectible accounts receivable; IFRS—Accounts and notes receivable

Learning Objective: 07-05 Describe the accounting treatment of anticipated uncollectible accounts receivable.; 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Understand

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Critical Thinking; FN Measurement

Use this information to answer the following questions:

The following note disclosure appeared in a recent annual report of Halliburton:

Our receivables are generally not collateralized. Included in notes and accounts receivable are notes with varying interest rates totaling $12 million at December 31. At December 31, 39% of our consolidated receivables related to our United States government contracts, primarily for projects in the Middle East.

195) Explain the reason that Halliburton indicates that its receivables include notes with varying interest rates totaling $12 million at December 31. What significance does this have to the reader?

Difficulty: 2 Medium

Topic: Notes receivable—interest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

196) Explain the reason that Halliburton indicates that its receivables are generally not collateralized. What significance does this have to the reader?

Difficulty: 2 Medium

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: BB Resource Management; FN Measurement

197) Explain the transactions that typically would affect the discount on notes receivable account.

Difficulty: 3 Hard

Topic: Notes receivable—noninterest-bearing

Learning Objective: 07-07 Describe the accounting treatment of notes receivable.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Critical Thinking; FN Measurement

198) A company's investment in receivables is affected by several related variables. Give an example of this interrelationship.

Difficulty: 2 Medium

Topic: Receivables management and ratios

Learning Objective: 07-09 Describe the variables that influence a company's investment in receivables and calculate the key ratios used by analysts to monitor that investment.

Bloom's: Create

AACSB: Reflective Thinking

AICPA/Accessibility: BB Resource Management; FN Risk Analysis

199) Explain how a company could manipulate cash flow from operations by changing the extent to which it factors accounts receivable and treats those factoring arrangements as sales of receivables.

Difficulty: 3 Hard

Topic: Financing with receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: BB Resource Management; FN Risk Analysis

200) Explain briefly how IFRS and U.S. GAAP differ in determining whether a transfer of an accounts receivable qualifies as a sale.

Difficulty: 3 Hard

Topic: Financing with receivables; IFRS—Transfers of receivables

Learning Objective: 07-08 Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale.; 07-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and receivables.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Critical Thinking; FN Measurement