CHAPTER 8

ACCOUNTING FOR rECEIVABLES

CHAPTER STUDY OBJECTIVES

1. Prepare journal entries for accounts receivable transactions. Accounts receivable are recorded at the invoice price. Their amounts are reduced by sales returns and allowances and sales discounts. Accounts receivable subsidiary ledgers are used to keep track of individual account balances. When interest is charged on a past-due receivable, this interest is added to the accounts receivable balance and is recognized as interest revenue. Some retailers issue their own credit cards and these are accounted for as a type of accounts receivable transaction.

2. Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts. Accounts receivable must be reported at their carrying amount on the balance sheet. The allowance method is used to record the estimated uncollectible accounts in the Allowance for Doubtful Accounts. The carrying amount of the receivables is equal to the gross accounts receivable minus the allowance. There are two approaches that can be used to estimate uncollectible accounts: (a) percentage of receivables, or (b) percentage of sales. The percentage of receivables approach emphasizes determining the correct carrying amount of the accounts receivable. An aging schedule is usually used with the percentage of receivables approach where percentages are applied to different categories of accounts receivable to determine the allowance for doubtful accounts. The percentage of sales approach emphasizes achieving the most accurate matching of expenses to revenues. A percentage is applied to credit sales to determine the bad debt expense.

When a specific account receivable is determined to be uncollectible, the account is written off and the allowance is reduced. When a previously written off account is collected, the entry previously made to write off the account is reversed and the collection is recorded.

3. Prepare journal entries for notes receivable transactions. Notes receivable are recorded at their principal amount. Interest is earned from the date the note is issued until it matures and must be recorded in the correct accounting period. Interest receivable is recorded in a separate account from the note. Like accounts receivable, notes receivable are reported at their carrying amount.

Notes are normally held to maturity. At that time, the principal plus any unpaid interest is due and the note is removed from the accounts. If a note is not paid at maturity, it is said to be dishonoured. If eventual collection is still expected, an account receivable replaces the note receivable and any unpaid interest. Otherwise, the note must be written off.

4. Demonstrate the presentation, analysis, and management of receivables. Each major type of receivable should be identified in the balance sheet or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts/notes is required to be reported in the balance sheet or the notes to the financial statements. Bad debt expense is reported in the income statement as an operating expense.

The liquidity of receivables can be evaluated by calculating the receivables turnover and collection period ratios. The receivables turnover is calculated by dividing net credit sales by average gross accounts receivable. This ratio measures how efficiently the company is converting its receivables into sales. The collection period converts the receivables turnover into days, dividing 365 days by the receivables turnover ratio. It shows the number of days, on average, it takes a company to collect its accounts receivable. The combination of the collection period and days sales in inventory is a useful way to measure the length of a company’s operating cycle.

Companies may accelerate the collection of cash by using the receivables to secure a loan or by selling the receivables.

TRUE-FALSE STATEMENTS

1. Trade receivables occur when two companies trade or exchange notes receivables.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

2. Other receivables are receivables that are due at times other than the month end.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

3. A note receivable is a formal instrument of credit issued as proof of a debt between a debtor and the company.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

4. Other receivables include nontrade receivables such as loans to company officers.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

5. Accounts receivable are normally classified as a current liability on the company’s balance sheet.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

6. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

7. Accounts receivable are the result of cash and credit sales.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

8. The three primary accounting problems with accounts receivable are: (1) recognizing, (2) amortizing, and (3) disposing.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

9. A subsidiary accounts receivable ledger is only used by companies who have perpetual inventory.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

10. If a customer does not pay their account within 30 days, then interest charges will always be assessed on their account balance.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

11. Sales on credit cards that are not associated with a bank are reported as credit sales, not cash sales.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

12. Sales on bank credit cards are typically reported as cash sales.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

13. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

14. Carrying amount is the collectible amount of a receivable.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

15. Bad debt expense is sometimes called uncollectible account expense.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

16. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

17. Under the allowance method, no attempt is made to match bad debt expense to sales revenues in the same accounting period.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

18. Under the percentage of receivables method, if sales increase then the bad debt expense will also increase.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

19. Under the allowance method, the carrying amount of receivables is the same both before and after an account has been written off.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

20. Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

21. A note receivable is honoured when it is not paid in the allotted time period.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

22. Interest revenue would increase if the interest rate on a note receivable was increased.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

23. A promissory note is a written promise to pay a specific amount of money on demand or at a definite time.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

24. A note receivable must always have an interest rate attached to it.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

25. A note receivable is dishonoured when it is not paid in the allotted time period.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

26. A dishonoured note receivable will have a new maturity assigned to it at the time of the default.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

27. A dishonoured note is normally returned to the accounts receivable account when it is dishonoured.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

28. The accounts receivable turnover ratio measures how quickly a company collects its accounts receivable.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

29. The accounts receivable turnover is calculated as the net credit sales divided by the average gross accounts receivable.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

30. The collection period for accounts receivable is the receivables turnover divided by the days in the year.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

31. A collection period of more than 30 days will result in faster cash flow for the company than a collection period of 15 days.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

32. The collection period should be the same for all industries.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

33. The collection period can be used to assess the length of the company’s operating cycle.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

34. Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

35. The gross amount of receivables and the allowance for doubtful accounts must be reported in the balance sheet.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

36. One of the most common ways to speed up cash flow from accounts receivable is to borrow money from the bank using the accounts receivable as collateral.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

37. Notes or accounts receivables that result from sales transactions are often called

a) sales receivables.

b) nontrade receivables.

c) trade receivables.

d) merchandise receivables.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

38. Which of the following companies is the least likely to have cash sales?

a) drug store

b) Air Canada

c) Algonquin College

d) aircraft manufacturer

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

39. A retailer that issues their own credit cards would recognize which of the following assets when a sale is made?

a) Cash

b) Credit Card Receivable

c) Notes Receivable

d) Accounts Receivable

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

40. The term "receivables" refers to

a) amounts due from individuals or companies.

b) merchandise to be collected from individuals or companies.

c) cash to be paid to creditors.

d) cash to be paid to customers

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

41. Which one of the following is not a primary accounting issue associated with accounts receivable?

a) depreciating accounts receivable

b) recognizing accounts receivable

c) valuing accounts receivable

d) accelerating cash receipts from receivables

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

42. Interest revenue would not normally be recorded in which of the following situations?

a) notes receivable

b) an overdue accounts receivable

c) a note receivable that has been dishonoured

d) a bank credit card transaction

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

43. Most companies that sell on account record the collection of an accounts receivable in

a) both the subsidiary ledger and the general ledger.

b) the general ledger only.

c) the subsidiary ledger only.

d) Collections on account do not have to be recorded as all collections are deposited in the bank and will therefore be recorded on the bank statement.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

44. Which of the following would require two journal entries?

a) to record sales of merchandise on account in a perpetual inventory system

b) to record sales of merchandise on account in a periodic inventory system

c) to record cash purchases of inventory

d) to record collection of accounts receivable

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

45. Retailers often add a financing charge to a customer’s accounts receivable balance

a) if the customer fails to purchase additional merchandise.

b) if the customer pays more than the required amount.

c) if the account is not paid within a specified period of time.

d) if the account is not paid within five days.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

46. A customer uses their Better Life Gym credit card to charge a treadmill at Better Life Gym. The price is $ 1,000 and the interest charge is 18% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and interest is added to the customer's account. What is the amount of the interest?

a) $ 30

b) $ 15

c) $ 180

d) $ 6

Difficulty: Medium

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

47. A customer uses their Gary’s Sport Shop credit card to charge a treadmill at Gary's Sport Shop. The price is $ 1,000 and the financing charge is 18% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and interest is added to the customer's account. The accounts affected by the journal entry made by Gary's Sport Shop to record the interest are

a) Accounts Receivable

Cash

b) Cash

Interest Receivable

c) Credit Card Receivable

Interest Payable

d) Credit Card Receivable

Interest Revenue

Difficulty: Medium

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

48. If a department store fails to make the entry to accrue the interest due from customers,

a) credit card receivables will be overstated.

b) interest revenue will be understated.

c) interest expense will be overstated.

d) interest expense will be understated.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

49. The two most common types of receivables are

a) accounts receivable and notes receivable.

b) notes receivable and other receivables.

c) trade receivables and other receivables.

d) accounts receivable and trade receivables.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

50. Accounts receivables are generally expected to be collected in

a) 120 days.

b) 90 days.

c) 60 days.

d) 30 days.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

51. When interest is added to a customer’s account balance, the seller increases the

a) cash account.

b) interest expense account.

c) accounts receivable account.

d) accounts payable account.

Difficulty: Easy

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

52. Which of the following is used to track individual customer accounts?

a) trial balance

b) general journal

c) subsidiary ledger

d) general ledger

Difficulty: Medium

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

53. Tacklebox Company charges 19% interest on all unpaid Tacklebox’s credit card transactions beyond 30 days. On September 30, Bass had a balance owing of $ 6,500 on the credit card that was now past due. What adjusting entry would be recorded by Tacklebox on September 30 for Bass’s unpaid balance?

a) Debit to Credit Card Receivable and credit to Interest Revenue for $ 101.51.

b) Debit to Accounts Receivable and credit to Sales for $ 6,500.

c) Debit to Accounts Receivable and credit to Interest Revenue for $ 101.51.

d) Debit to Credit Card Receivable and a credit to Sales for $ 6,500.

Difficulty: Medium

Learning Objective: Prepare journal entries for accounts receivable transactions.

Section Reference: Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

54. Under the allowance method, writing off an uncollectible account

a) affects only balance sheet accounts.

b) affects both balance sheet and income statement accounts.

c) affects only income statement accounts.

d) is not acceptable practice.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

55. Under the allowance method, writing off an uncollectible account

a) will increase profit.

b) will decrease profit.

c) will have no effect on total assets reported on the balance sheet.

d) will increase and decrease profit.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

56. The net amount reported on the balance sheet for accounts receivable is generally referred to as the

a) carrying amount.

b) book value.

c) fair value.

d) cash-equivalent value.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

57. If a company fails to record estimated bad debt expense,

a) accounts receivable are understated.

b) expenses are understated.

c) revenues are understated.

d) liabilities are understated.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

58. If a company fails to record estimated bad debt expense,

a) profit will be understated.

b) profit will be overstated.

c) there will be no effect on profit.

d) receivables will be understated.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

59. At December 31, 2021, Equipment Ltd. has gross accounts receivable of $ 127,000. There is a $ 10,000 credit balance in the allowance for doubtful accounts. Management estimates bad debts to be 15% of accounts receivable. The company’s bad debt expense for 2021 is

a) $ 10,000.

b) $ 9,050.

c) $ 2,160.

d) $ 7,550.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

60. At December 31, 2021, Montana Mining Equipment has gross accounts receivable of $ 127,000. There is a $ 10,000 credit balance in the allowance for doubtful accounts. Bad debts are estimated to be 15% of accounts receivable. The allowance for doubtful accounts at December 31, 2021 is

a) $ 10,000.

b) $ 19,050.

c) $ 1,500.

d) $ 17,550.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

61. When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when

a) a sale is made.

b) an account becomes bad and is written off.

c) management estimates the amount of uncollectibles.

d) a customer's account becomes past-due.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

62. When an account becomes uncollectible and must be written off,

a) allowance for doubtful accounts will be credited.

b) allowance for doubtful accounts will be debited

c) bad debt expense will be debited.

d) accounts receivable will be debited

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

63. When a company uses the allowance method to account for uncollectible accounts, the collection of an account that had been previously written off

a) will increase profit.

b) will decrease profit.

c) will not affect profit.

d) will increase sales.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

64. An aging of a company's accounts receivable indicates that $ 4,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $ 1,100 credit balance, the adjusting entry required to record estimated uncollectible accounts will include a

a) debit to Bad Debt Expense for $ 4,000.

b) debit to Allowance for Doubtful Accounts for $ 2,900.

c) debit to Bad Debt Expense for $ 2,900.

d) credit to Accounts Receivable for $ 4,000.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

65. A debit balance in the Allowance for Doubtful Accounts

a) is the normal balance for that account.

b) indicates that actual bad debt write offs have exceeded previous estimates for uncollectible accounts.

c) indicates that actual bad debt write offs have been less than what was estimated.

d) can only occur if an incorrect accounting entry was recorded.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

66. An alternative name for Bad Debt Expense is

a) Office Expense.

b) Uncollectible Accounts Expense.

c) Collection Expense.

d) Interest Expense.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

67. An increase in the bad debt expense would not be caused by

a) an increase in cash sales.

b) poor economic climate.

c) an increase in credit sales.

d) a decrease in the quality of customers.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

68. A reasonable amount of uncollectible accounts is evidence

a) that the credit policy is too strict.

b) that the credit policy is too lenient.

c) of a sound credit policy.

d) of poor judgements on the part of the credit manager.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

69. Credit losses are are considered

a) an avoidable cost of doing business.

b) an internal control weakness.

c) a necessary risk of doing business.

d) avoidable unless there is a recession.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

70. The best managed companies will have

a) no uncollectible accounts.

b) a very strict credit policy.

c) a very lenient credit policy.

d) some accounts that will prove to be uncollectible.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

71. An aging of a company’s accounts receivable indicates $ 10,000 is estimated to be uncollectible. The company has a $ 2,000 debit balance in its allowance for doubtful accounts. The adjustment to record estimated credit losses for the period will require a(n)

a) $ 8,000 debit to Bad Debt Expense.

b) $ 8,000 credit to the Allowance for Doubtful Accounts.

c) $ 12,000 debit to Bad Debt Expense.

d) $ 12,000 credit to Accounts Receivable.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

72. When the allowance method of accounting for uncollectible accounts is used, bad debt expense is recorded

a) in the year after the credit sale is made.

b) in the same year as the credit sale.

c) as each credit sale is made.

d) when an account is written off as uncollectible.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

73. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a

a) debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.

b) debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.

c) debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.

d) debit to Bad Debt Expense and a credit to Accounts Receivable.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

74. Under the allowance method of accounting for uncollectible accounts,

a) the carrying amount of accounts receivable is greater before an account is written off than after it is written off.

b) Bad Debt Expense is debited when a specific account is written off as uncollectible.

c) the carrying amount of accounts receivable in the balance sheet is the same before and after an account is written off.

d) Allowance for Doubtful Accounts is closed each year to the owner’s capital account.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

75. Allowance for Doubtful Accounts on the balance sheet

a) is offset against total current assets.

b) increases the carrying amount of accounts receivable.

c) appears under the heading "Current Liabilities."

d) decreases gross accounts receivable.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

76. When an account is written off using the allowance method, the

a) carrying amount of total accounts receivable will increase.

b) allowance account will decrease.

c) allowance account will increase.

d) gross accounts receivable will stay the same.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

77. If an account is collected after having been previously written off,

a) the allowance account should be debited.

b) Bad Debt Expense should be credited.

c) the carrying amount of accounts receivable will remain unchanged.

d) there will be both a debit and a credit to Accounts Receivable.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

78. When an account is written off using the allowance method, gross accounts receivable

a) is unchanged and the allowance account increases.

b) increases and the allowance account increases.

c) decreases and the allowance account decreases.

d) decreases and the allowance account increases.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

79. In 2020,Planet Express . wrote off a $ 2,000 accounts receivable from IPS Inc. In late 2021, IPS paid the full amount of the receivable. After the repayment has been recorded, the balance in

a) accounts receivable will be $ 2,000 higher.

b) bad debt expense will be $ 2,000 lower.

c) accounts receivable will be the same as before the collection was recorded.

d) allowance for doubtful accounts will be $ 2,000 lower.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

80. The percentage of receivables approach for estimating uncollectible accounts emphasizes

a) the balance sheet.

b) the relationship between accounts receivable and bad debt expense.

c) income statement relationships.

d) the relationship between sales and accounts receivable.

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

81. Resolve Inc. has prepared the following aging schedule for the company at December 31, 2021. The company uses the percentage of receivables approach to estimate uncollectible accounts.

Number of Days Outstanding

Total 0–30 31–60 61–90 91–120 Over 120

Accounts

receivable $ 375,000 $ 220,000 $ 90,000 $ 40,000 $ 10,000 $ 15,000

% uncollectible 1% 4% 8% 16% 30%

Estimated

uncollectible accounts$ 15,100 $ 2,200 $ 3,600 $ 3,200 $ 1,600 $ 4,500

Assuming the company has a $ 2,500 credit balance in the allowance account at the beginning of the period, the journal entry to record bad debt expense will include a

a) debit to Bad Debt Expense for $ 15,100.

b) credit to Bad Debt Expense for $ 12,600.

c) debit to the Allowance account for $ 15,100.

d) credit to the Allowance account for $ 12,600.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

82. Stain Removal Ltd. has prepared the following aging schedule for the company at December 31, 2021. The company uses the percentage of receivables approach to estimate uncollectible accounts.

Number of Days Outstanding

Total 0–30 31–60 61–90 91–120 Over 120

Accounts

receivable $ 375,000 $ 220,000 $ 90,000 $ 40,000 $ 10,000 $ 15,000

% uncollectible 1% 4% 8% 16% 30%

Estimated

uncollectible accounts $ 15,100 $ 2,200 $ 3,600 $ 3,200 $ 1,600 $ 4,500

Assume that the company has a $ 1,000 debit balance in the allowance account before any adjustment for the current year’s bad debt expense. The entry to record uncollectible accounts will include a

a) debit to Bad Debt Expense for $ 15,100.

b) credit to Bad Debt Expense for $ 16,100.

c) debit to the Allowance account for $ 15,100.

d) credit to the Allowance account for $ 16,100.

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

83. An increase in the allowance for doubtful accounts would not be caused by which of the following?

a) a declining economic climate

b) an increase in cash sales

c) credit problems with the company’s customers

d) an increase in accounts receivable

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

84. Which of the following does not affect a company’s bad debt expense?

a) total accounts receivable

b) cash sales

c) credit sales

d) contingent sales

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

85. During the current year, City Wok Co. determined that Ming Lee’s $ 2,600 account receivable was uncollectible and should be written off. Which of the following best describes the impact of this write off on the current year’s income statement and balance sheet?

a) decrease in net income and no effect on total assets

b) decrease in net income and decrease in total assets

c) no effect on net income and decrease in total assets

d) no effect on net income and no effect on total assets

Difficulty: Easy

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

86. Karma Is Us Co. uses the percentage of sales approach each period to estimate uncollectible accounts. During the current year, Karma determined that bad debt expense should be $ 11,250. Assuming an opening debit balance in the allowance for doubtful accounts of $ 950, what adjustment should be made to the allowance for doubtful accounts during the current year?

a) credit for $ 12,200

b) credit for $ 10,300

c) credit for $ 11,250

d) no adjustment required

Difficulty: Medium

Learning Objective: Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

Section Reference: Valuing Accounts Receivable

CPA: Financial Reporting

AACSB: Analytic

87. Interest revenue is usually associated with

a) accounts receivable.

b) notes receivable.

c) doubtful accounts.

d) both a) and b).

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

88. The receivable that is usually evidenced by a formal instrument of credit is a(n)

a) trade receivable.

b) note receivable.

c) accounts receivable.

d) note payable.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

89. Any interest accrued on a note receivable

a) increases the carrying amount of the note receivable.

b) is recorded separately as interest receivable.

c) is recorded as a reduction of interest expense.

d) requires a debit to Accounts Receivable.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

90. Assuming a note was written to settle an account receivable, the entry to record this transaction would include a

a) debit Accounts Receivable.

b) credit Notes Receivable.

c) credit Bad Debt Expense.

d) credit Accounts Receivable.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

91. A note receivable differs from an account receivable in that

a) a note receivable is a formal promise to pay; an account receivable is an informal promise to pay.

b) a note receivable is used for purchases over $ 1,000.

c) a note is used for a receivable that extends beyond one year.

d) there is no difference between an account receivable and a note receivable; they are interchangeable terms.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

92. Neil Construction Co. receives a note receivable from Sonny Plastics Inc. as settlement of an overdue account receivable. The note is for three months and bears an annual interest rate of 8%. The original accounts receivable balance was $ 800. When the note is collected, Neil Construction Co. will recognize interest revenue of

a) $ 64.

b) $ 864.

c) $ 16.

d) $ 816.

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

93. Neil Construction Co. receives a note receivable from Sonny Plastics Inc. as settlement of an overdue account receivable. The note is for three months and bears an annual interest rate of 8%. The original accounts receivable balance was $ 800. At the end of the three-month period, Neil Construction Co. will pay Sonny Plastics Inc.

a) $ 64.

b) $ 864.

c) $ 16.

d) $ 816.

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

94. A promissory note

a) is not a formal credit instrument.

b) may be used to settle an accounts receivable.

c) has the party to whom the money is due as the maker.

d) cannot be sold to another party.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

95. A promissory note details all of the following except

a) the payee.

b) the amount of the note.

c) the interest rate.

d) the purpose for which the funds were borrowed.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

96. The two key parties to a promissory note are the

a) maker and a bank.

b) creditor and the payee.

c) maker and the payee.

d) sender and the receiver.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

97. The principal amount of a $ 2,000, 7%, 2-month note receivable is

a) $ 2,023.

b) $ 2,014.

c) $ 2,000.

d) $ 2,140.

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

98. The total interest on a $ 13,000, 6-month 8% note is

a) $ 1,040.

b) $ 800.

c) $ 520.

d) $ 13,800.

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

99. A company that receives an interest-bearing note receivable will

a) debit Notes Payable for the principal amount of the note.

b) credit Notes Payable for the principal amount of the note.

c) debit Notes Receivable for the principal amount of the note.

d) credit Notes Receivable for the principal amount of the note.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

100. Wu Company receives a $ 5,000, 3-month, 12% promissory note from Enola Company in settlement of an accounts receivable. What entry will Wu Company make upon receiving the note?

a) Notes Receivable – Enola Company 5,150

Accounts Receivable—Enola Company 5,150

b) Notes Receivable – Enola Company 5,150

Accounts Receivable—Enola Company 5,000

Interest Revenue 150

c) Notes Receivable – Enola Company 5,000

Interest Receivable 150

Accounts Receivable—Enola Company 5,000

Interest Revenue 150

d) Notes Receivable – Enola Company 5,000

Accounts Receivable—Enola Company 5,000

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

101. Which of the following statements about short-term notes receivable is false?

a) They may have a related allowance account called Allowance for Doubtful Notes Receivable.

b) They are always reported at the principal amount.

c) They may use the same calculations as accounts receivable to determine thr carrying amount.

d) They are reported in current assets.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

102. Singh Company lends Newell Company $ 40,000 on January 1 and accepts a three-month, 5% promissory note in exchange. Singh Company prepares financial statements on January 31. What adjusting entry should be made before preparing the financial statements?

a) Note Receivable-Newell Company 40,000

Cash 40,000

b) Interest Receivable 167

Interest Revenue 167

c) Cash 167

Interest Revenue 167

d) Interest Receivable 500

Interest Revenue 500

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

103. A dishonoured note receivable that is eventually expected to be collected should be

a) written off as an uncollectible by the payee.

b) transferred to an accounts receivable by the payee.

c) carried in the payee’s accounting records as a long-term asset.

d) presented in the financial statements under the heading, “dishonoured notes.”

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

104. Steinberg Co. loaned Field Co. $ 10,000, accepting a 4-month, 4.5% promissory note in exchange. On the due date, Field Co. indicated that it could not pay at the present time. Steinberg would make the following entry at the time the note is dishonoured:

a) Accounts Receivable-Field Co. 10,000

Interest Expense 150

Notes Receivable-Field Co. 10,150

b) Accounts Receivable-Field Co. 10,150

Notes Receivable-Field Co. 10,000

Interest Revenue 150

c) Notes Receivable-Field Co. 10,000

Accounts Receivable-Field Co. 10,000

d) Accounts Receivable-Field Co. 10,000

Notes Receivable-Field co. 10,000

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

105. In a promissory note, the party making the promise to pay is called the

a) maker.

b) payee.

c) creditor.

d) vendor.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

106. Which of the following is not a similarity between notes receivable and accounts receivable?

a) They are both credit instruments.

b) Both can be sold to another party.

c) Both are reported at carrying amount.

d) Both are due within 30 days.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

107. After recording interest on a note receivable, the balance in the note receivable account should equal

a) the principal amount still outstanding.

b) the principal amount of the note less accrued interest.

c) the principal amount plus accrued interest.

d) the total accrued interest.

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

108. When a note is dishonoured, the journal entry required would include

a) a credit to notes receivable for the total interest accrued on the note.

b) a credit to notes receivable for the principal amount of the note.

c) a debit to notes receivable for the principal amount of the note.

d) a credit to notes receivable for the principal amount of the note plus accrued interest

Difficulty: Easy

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

109. Griffin Graphics accepted a 7%, 60-day note for $ 21,500 from Chillout Plastics. What is the total interest on the note receivable?

a) $ 1,505.00

b) $ 1,257.60

c) $ 505.00

d) $ 247.40

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

110. Griffin Graphics accepted a 7%, 60-day note for $ 21,500 from Chillout Plastics. What is the total cash to be received on maturity of this note receivable?

a) $ 20,000.00

b) $ 21,747.40

c) $ 23,005.00

d) $ 22,757.60

Difficulty: Medium

Learning Objective: Prepare journal entries for notes receivable transactions.

Section Reference: Notes Receivable

CPA: Financial Reporting

AACSB: Analytic

111. The sale of receivables by a business

a) indicates that the business is in financial difficulty.

b) is generally the major revenue item on its income statement.

c) is an indication that the business is owned by a finance company.

d) can be a quick way to generate cash for operating needs.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

112. Which of the following receivables would not be classified as an "other receivable"?

a) advance to an employee

b) recoverable sales taxes

c) notes receivable

d) interest receivable

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

113. The collection period ratio is a measure of the company’s

a) liquidity.

b) solvency.

c) efficiency.

d) profitability.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

114. How is the allowance for doubtful accounts presented in the financial statements?

a) as an expense in the income statement

b) as a contra account beneath accounts receivable on the balance sheet

c) as an accrued liability on the balance sheet

d) as a decrease to owner’s equity in the statement of owner’s equity

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

115. The financial statement presentation of receivables shows

a) that short-term receivables are reported following cash and short-term investments.

b) short-term receivables reported in the noncurrent asset section.

c) all receivables summarized in one account.

d) an allowance account for each receivable.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

116. During 2021, Jerico’s sales increased by 20%. If accounts receivable increased by 40%, this may indicate that

a) the company’s collections have improved.

b) the company may be increasing sales by loosening its credit policies.

c) the company’s collection policies have become more aggressive.

d) the company’s management is focusing on cash sales.

Difficulty: Medium

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

117. As a general rule, the average collection period for accounts receivable should not exceed

a) the inventory turnover period.

b) the credit terms.

c) one month.

d) the average age of accounts receivable.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

118. In 2021 Keliso Co. had credit sales of $ 1,800,000 and sales returns related to these sales of $150,000. Its comparative balance sheet at December 31, 2021, showed the following:

2021 2020

Accounts receivable $ 800,000 $ 675,000

Less: Allowance for doubtful accounts 72,000 65,000

Carrying amount $ 728,000 $ 610,000

Keliso’s receivable turnover for 2021 is

a) 2.24.

b) 2.44.

c) 2.47.

d) 2.69.

Difficulty: Application

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

119. In 2021 Keliso Co. had credit sales of $ 1,800,000 and sales returns related to these sales of $150,000. Its comparative balance sheet at December 31, 2021 showed the following:

2021 2020

Accounts receivable $ 800,000 $ 675,000

Less: Allowance for doubtful accounts 72,000 65,000

Carrying amount $ 728,000 $ 610,000

The company’s average collection period for 2021 is

a) 136 days.

b) 148 days.

c) 150 days.

d) 163 days.

Difficulty: Medium

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

120. An increase in a company’s average collection period is most likely related to a(n)

a) increase in sales.

b) tightening of the company’s credit policy.

c) loosening of the credit terms.

d) decrease in sales.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

121. An increase in a company’s average collection period is most likely not related to

a) a worsening economy.

b) credit problems with the company’s customers.

c) an increase in cash sales.

d) an increase in accounts receivable.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

122. When the controller reviewed the aged customer list, he found that there was a large accounts receivable that was 60 days overdue. The name of the customer was the same last name as the company’s president, who had a very uncommon name. The action that the controller should take would be to

a) ignore the situation.

b) send the account to a collection agency and let them deal with it.

c) give the account to a junior clerk and ask them to make a call.

d) bring the account to the attention of the company president and ask him for his advice on collection.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

123. Bad debt expense is reported in the income statement as

a) cost of goods sold.

b) operating expenses.

c) contra-revenue.

d) unusual items.

Difficulty: Easy

Learning Objective: Demonstrate the presentation, analysis, and management of receivables.

Section Reference: Statement Presentation and Management of Receivables

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONs

124. Match the items below by entering the appropriate code letter in the space provided.

A. Aging of receivables E. Percentage of receivables approach

B. Bank credit card F. Collection period

C. Promissory note G. Dishonoured note

D. Trade receivables H. Receivables turnover ratio

1. Amounts owed by customers from the sale of goods and services

2. Sales using this type of credit card are usually treated the same as cash sales

3. Analysis of customer account balances by length of time they have been unpaid

4. Emphasizes determining the correct carrying amount of accounts receivable

5. A written promise to pay a specified amount on demand or at a definite time

6. A note that is not paid in full at maturity

7. Assesses a company’s efficiency in converting its credit sales into cash

8. Number of days on average to collect trade receivables.