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Testbank

to accompany

Financial accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 12: Receivables

Multiple-choice questions

1. The text classifies accounts receivables into which broad types?

a. Debtors, receivables, promissory notes

b. Trade receivables, other receivables, sundry receivables

c. Accounts receivable, bills receivable, other receivables

d. Promissory notes, accounts receivable, prepayments

Correct answer: c

Learning objective 12.1 ~ define the different types of receivables.

2. When a credit sale involving GST is recorded, the sales account:

a. has the GST added.

b. is input taxed.

c. includes the GST.

d. excludes the GST.

Correct answer: d

Learning objective 12.1 ~ define the different types of receivables.

3. Which of the following would not be classified as ‘other receivables’?

a. Loans to directors

b. Amount owing from a credit sale

c. Interest receivable

d. Amounts receivable from the sale of non-current assets

Correct answer: b

Learning objective 12.1 ~ define the different types of receivables.

4. When a credit sale involving GST is recorded the accounts receivable account:

a. includes the GST.

b. excludes the GST.

c. is input taxed.

d. has the GST deducted.

Correct answer: a

Learning objective 12.1 ~ define the different types of receivables.

5. Which of the following is not one of the ways in which the asset ‘other receivables’ could be recognised?

a. Loan to executive director

b. Sale of machinery on credit

c. Rent receivable

d. Prepaid insurance

Correct answer: d

Learning objective 12.1 ~ define the different types of receivables.

6. The of accounts receivables is measured at gross receivables less anticipated future bad debts.

a. expected value.

b. fair value.

c. discounted value.

d. estimated value.

Correct answer: b

Learning objective 12.2 ~ define accounts receivable, and discuss how accounting recognises and values them.

7. Accounts receivable are usually valued in the balance sheet at:

a. Market value

b. Historical cost

c. The lower of cost and net realisable value

d. Gross amount less allowance for expected bad debts

Correct answer: d

Learning objective 12.2 ~ define accounts receivable, and discuss how accounting recognises and values them.

8. Allowing customers to buy on credit is only profitable if the costs associated with granting credit are less than the profit on the increased sales generated. Which of the following is not one of the additional costs of selling on credit?

a. Sales commission

b. Credit checks on customers

c. Additional record keeping

d. The cost of collecting outstanding debts

Correct answer: a

Learning objective 12.2 ~ define accounts receivable, and discuss how accounting recognises and values them.

9. The main problem that exists in valuing accounts receivables is:

a. estimating the value of goods that may be returned.

b. keeping track of the amount that is owed by individual debtors.

c. estimating the amount of receivables that will become bad.

d. reconciling the debtor’s control account with the debtor’s subsidiary ledger.

Correct answer: c

Learning objective 12.2 ~ define accounts receivable, and discuss how accounting recognises and values them.

10. Which of the following statements is incorrect?

a. A debt is bad as soon as the receivable has passed its due date.

b. Bad debts are a cost of selling on credit.

c. An outstanding debt may be turned over to a collection agency.

d. Bad debts should be deducted as an expense in the same accounting period in which the credit sale is recognised.

Correct answer: a

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

11. Under the income statement method of estimating likely bad debts:

a. an estimate of bad debts is made by the accountant.

b. a percentage, based on past experience, is applied to profit.

c. accounts receivable are ‘aged’ to establish likely bad debts.

d. a percentage, based on past experience, is applied to credit sales.

Correct answer: d

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

12. The allowance for doubtful debts account had a balance of $4500 before bad debts of $1000 were written off and the allowance was adjusted to 10% of the accounts receivable balance of $22 000. The new amount of allowance for doubtful debts that is deducted from accounts receivable in the balance sheet is:

a. $1400.

b. $2200.

c. $1200.

d. $1000.

Correct answer: b

Feedback: $2200 = $22 000 x 10%

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

13. After writing off bad debts of $1800 the allowance for doubtful debts account balance was $600 credit. What is the correct general journal entry to record an adjustment to bring the allowance for doubtful debts to 10% of accounts receivable of $22 000?

a. DR Bad debts expense $1600; CR Allowance for doubtful debts $1600

b. DR Allowance for doubtful debts $1600; CR Bad debts expense $1600

c. DR Bad debts expense $1600; CR Accounts receivable $1600

d. DR Allowance for doubtful debts $1600; CR Accounts receivable $1600

Correct answer: a

Feedback: DR Bad debts expense $1600; CR Allowance for doubtful debts $1600 ($22 000 x 10% = $2200) ($2200 – $600 = $1600).

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

14. Watson Company calculated that this year's estimated bad debts expense will be $5800. The unadjusted balance of the allowance for doubtful debts account is $4200. What effect will the necessary adjusting entry have on the following accounts?

Gross accounts receivable: bad debts expense: allowance for doubtful debts.

a. No effect: increase: decrease.

b. No effect: increase: increase.

c. Increase: increase: no effect.

d. Increase: increase: increase.

Correct answer: b

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

15. Jax Co Ltd has the following balances in its general ledger.

Accounts receivable $28 000

Less allowance for doubtful debts – 4 000

$ 24 000

If a debt for $3000, previously provided for as doubtful, is written off as bad, what is the estimated net realisable value of accounts receivable after the write off?

a. $25 000

b. $27 000

c. $24 000

d. $28 000

Correct answer: c

Feedback: $24 000 = $25 000 – $1 000.

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

16. Which statement regarding the direct write-off method of bad debts is not true?

a. Future bad debts are not required to be estimated.

b. The method is justified on the basis of simplicity.

c. Bad debts are matched against the related sales revenue.

d. Bad debts are written off when they are determined to be uncollectable.

Correct answer: c

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

17. Baxter Ltd recorded sales of $480 000 during the year with $350 000 being on credit. Bad debts in the past have averaged 2% of credit sales. Using the income statement method, the amount to provide for estimated bad debt expense for the year is:

a. nil.

b. $7 000

c. $9 600

d. $2 600

Correct answer: b

Feedback: Under the income statement method estimated bad debts expense is $7000 = 2% x $350 000.

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

18. When the direct write off method is used, the general journal entry to write off bad debts is:

a. DR Bad debts expense; CR Accounts receivable

b. DR Accounts receivable; CR Bad debts expense

c. DR Allowance for doubtful debts; CR Accounts receivable

d. DR Accounts receivable; CR Allowance for doubtful debts

Correct answer: a

Learning objective 12.3 Debit bad debts expense; credit accounts receivable.

19. What is the effect on the financial statements if no adjustment is made for doubtful debts?

a. Assets are overstated and profit is understated.

b. Assets are understated and profit is overstated.

c. Assets are overstated and profit is overstated.

d. Assets are understated and profit is understated.

Correct answer: c

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

20. Courtney uses the allowance method of accounting for bad and doubtful debts. When she received notice that a debtor, who owed her $5 000, was in liquidation she decided to write off the debt as bad. What is the general journal entry to record the write off?

a. DR Bad debts expense $5 000; CR Allowance for doubtful debts $5 000

b. DR Bad debts expense $5 000; CR Accounts receivable $5 000

c. DR Allowance for doubtful debts $5 000; CR Bad debts expense $5 000

d. DR Allowance for doubtful debts $5 000; CR Accounts receivable $5 000

Correct answer: d

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

21. A debtor’s account that was previously written-off has now been collected in full. Why should the accounts receivable for the debtor be re-established?

a. To restore the credit rating of the debtor.

b. So that the debits equal the credits.

c. So that assets are not understated.

d. So that expenses are not overstated.

Correct answer: a

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

22. John Jones calculates that this year’s estimated bad debts expense will be $13 800. When John makes the adjusting entry, the effect will be:

Bad debt Allowance for Gross accounts

expense doubtful debts receivable

a. No effect Decrease No effect

b. No effect Increase Decrease

c. Increase Increase No effect

d. Increase No effect Decrease

Correct answer: c

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

23. Which statement concerning the allowance for doubtful debts account is not true?

a. Allowance for doubtful debts normally has a credit balance.

b. Allowance for doubtful debts is used to adjust receivables for estimated bad debts because individual debtor’s balances cannot be removed from the ledger unless there is indisputable evidence they are bad.

c. Allowance for doubtful debts is a contra-asset account designed to reduce receivables to estimated realisable value.

d. Allowance for doubtful debts represents cash set aside to cover losses incurred as a consequence of customers being declared bankrupt.

Correct answer: d

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

24. Carton Recyclers recorded sales of $180 000 during the year (net of GST). Of these, 60% were on credit. Bad debts have averaged 1% of credit sales. The entry to estimate bad debt expense for the year is which of the following?

a. DR Bad debts expense $1080; CR Allowance for doubtful debts $1080

b. DR Bad debts expense $1800; CR Allowance for doubtful debts $1800

c. DR Bad debts expense $1080; CR Accounts receivable $1080

d. DR Bad debts expense $1800; CR Accounts receivable $1800

Correct answer: a

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

25. While reviewing the books of Simon’s Pest Control Service you discover that no adjusting entry was made for estimated bad debts traceable to sales in 2018 (the company's first year of operation). Assuming this error is not corrected, which of the following is true at year-end 2018?

a. Assets are correct, profit is overstated

b. Assets are overstated, profit is overstated

c. Assets are understated, profit is overstated

d. Liabilities are overstated, profit is understated

Correct answer: b

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

26. The balances for Grose Ltd at 16 April are:

Accounts receivable $49 350

Allowance for doubtful debts (5 800) $43 550

If an account for $1200 is written off on 15 June, what is the estimated realisable value of accounts receivable after the write-off? (Ignore any GST adjustment for the purposes of this question.)

a. $42 350

b. $43 550

c. $44 750

d. $48 150

Correct answer: b

Feedback: DR Allowance for doubtful debts $1200; CR Accounts receivable $1200 has no effect on the estimated realisable value of accounts receivable.

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

27. On 31 December 2019 Miner Resources decided to finally write off as a bad debt a receivable of $6600 (including $600 GST) from Underground Pty Ltd (in liquidation). If Miner Resources uses the allowance method, the correct entry to write off the debt is:

a. DR Allowance for doubtful debts $6000; CR Bad debts expense $6000

b. DR Bad debts expense $6600; CR Accounts receivable $6600

c. DR Bad debts expense $6600; CR GST payable $600; CR Accounts receivable $6000

d. DR Allowance for doubtful debts $6000, DR GST payable $600; CR Accounts receivable $6600

Correct answer: d

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

28. Which of the following is the general journal entry to provide for estimated bad debts under the allowance method?

a. DR Bad debts expense; CR Allowance for doubtful debts

b. DR Allowance for doubtful debts; CR Bad debts expense

c. DR Accounts receivable; CR Bad debts expense

d. DR Bad debts expense; CR Accounts receivable

Correct answer: a

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

29. The allowance for doubtful debts account has a balance at the start of the year of $2000. At the end of the year debts of $880, including $80 GST, are to be written off and the allowance for doubtful debts is to be adjusted to 10% of the closing accounts receivable balance of $33 000 (including $3000 GST). The amount for bad and doubtful debts appearing in the income statement for the year will be:

a. $3000.

b. $1800.

c. $1200.

d. $3300.

Correct answer: b

Feedback: $1800 = $3000 – $1200 ($2000 – $800).

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

30. Which statement is not true in relation to bad debts recovered?

a. The accounts receivable should be re-established to maintain a complete history of the customer's activity and restore their credit rating.

b. The recovery is recorded by effectively reversing the entry originally made to write off the receivable.

c. The entry to reinstate the accounts receivable is DR Accounts receivable and CR Bad debts recovered.

d. The entry made following reinstatement of the account receivable to record the recovery is DR Bad debts recovered and CR Accounts receivable.

Correct answer: d

Feedback: The entry made following reinstatement of the account receivable is debit bank and credit accounts receivable.

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

31. Which of the following statements is incorrect in relation to the direct write-off method of accounting for bad debts?

a. There is no contra asset account for estimated doubtful debts.

b. Bad debts are charged as an expense at the time an account is determined to be uncollectable.

c. The entry to write off bad debts is DR Bad debts expense, DR GST payable, CR Accounts receivable.

d. Bad debts expense is recorded in the same period in which its related sales revenue is included as income.

Correct answer: d

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

32. Black Beauty Co has the following balances in its general ledger:

Accounts receivable $47 000

Less allowance for doubtful debts (3 000)

$44 000

If a debt for $500, previously provided for as doubtful, is written off as bad, what is the estimated net realisable value of accounts receivable after the write off?

a. $44 000

b. $46 500

c. $43 500

d. $44 500

Correct answer: a

Feedback: $44 000 = $46 500 – $2500

Learning objective 12.3 ~ explain the nature of bad and doubtful debts and how to account for them.

33. One of the measures that can be undertaken to reduce bad debts before they occur is:

a. a credit check.

b. a reminder notice.

c. use of a debt collector.

d. issue of a monthly statement to the debtor.

Correct answer: a

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

34. Which of the following are an issue in a firm’s management of its accounts receivable?

1. Deciding which customers to offer credit to.
2. Minimising the costs of carrying accounts receivables.
3. Following up slow paying customers.

a. I and II only

b. II and III only

c. I, II and III

d. None of them are an issue.

Correct answer: c

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

35. Which of the following statements is not true?

a. If an entity is too generous in extending credit bad debts will occur.

b. Generally, entities offer too much credit to customers.

c. If credit policies are too strict valuable customers may be lost.

d. A credit report from a credit rating agency is an important method of checking on customer’s credit history.

Correct answer: b

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

36. In managing accounts receivable, the term ‘factoring’ relates to:

a. ageing the receivables.

b. calculating the amount of bad debts expense.

c. the proportion of debts expected to become bad.

d. selling the accounts receivable to a business that will then collect the debts.

Correct answer: d

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

37. The major issuers of credit cards in Australia are banks but there are also some credit cards that are issued by non-bank organisations. Which of the following is not a credit card issued by a bank?

a. Visa

b. Bankcard

c. American Express

d. MasterCard

Correct answer: c

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

38. Which of the following indicates an improvement in the management of accounts receivable?

a. An increase in the average collection time for accounts receivable.

b. A change in the average collection period from 34 days to 39 days.

c. An extension of the time taken to collect debts to beyond the allowed credit period.

d. A change in the number of times debtors are turned over per year from 8.32 times to 10.85 times.

Correct answer: d

Feedback: A change in the number of times debtors are turned over per year from 8.32 times to 10.85 times indicates an improvement in the management of accounts receivable. A turnover of 8.32 times p.a. = a collection period of 43.9 days whereas a turnover of 10.85 times p.a. = a collection period of 33.64 days.

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

39. For Maxwell Ltd the correct general journal entry for a sale of $6600, including GST, paid for by the customer with a bank issued credit card, is:

a. DR Bank $6600; CR Sales $6600

b. DR Bank $6600; CR Sales $6000; CR GST payable $600

c. DR Bank $6000; DR GST payable $600; CR Sales $6600

d. DR Accounts receivable $6600; CR Sales $6000; CR GST payable $600

Correct answer: b

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

40. Which of the following are internal controls relating to accounts receivable?

1. Sending monthly statements of account to customers.
2. Reviewing slow paying accounts.
3. Regular reconciliation of the debtors control account and the subsidiary ledger.
4. Separating the functions of maintaining the accounts receivables with processing of cash receipts.
5. Allowing debtors discount for early settlement.

a. I III and V only.

b. I, II and IV only

c. I, II, III, and IV only

d. I, II, III, IV and V.

Correct answer: c

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

41. The formula for calculating the average collection period for accounts receivable in days is:

a. Average receivables divided by net credit sales

b. Net credit sales divided by average receivables

c. 365 divided by average receivables

d. Average receivables x 365 divided by net credit sales

Correct answer: d

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

42. The selling of accounts receivable as a means of quickly raising cash, minimising debt collecting expenses and minimising bad debt losses is known as:

a. ageing.

b. factoring.

c. diverting.

d. transferring.

Correct answer: b

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

43. Which statement concerning the receivables turnover ratio is true?

a. It is calculated as total sales divided by average receivables.

b. A change in the ratio from 4.1 times to 3.5 times is a favourable change.

c. It is a measure of how many times the average receivables balance is converted into cash during a year.

d. If the receivables turnover ratio is divided into 365 this gives the average number of days it takes to sell receivables.

Correct answer: c

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

44. Which of the following statements concerning the accounting treatment of bank issued credit card sales is correct?

a. The business does not retain a copy of the transaction slip.

b. The sale is recorded like a credit sale in the books of the seller.

c. The treatment of bank issued credit card sales is the same as the treatment of non-bank issued credit card sales.

d. A ‘merchant fee’ for the month’s sales is debited to the firm’s bank statement at month-end.

Correct answer: d

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

45. Which of the following are internal controls relating to accounts receivable?

 Bad debt write-offs are authorised by a responsible officer.

II. All cash receipts are stored in a locked safe.

 Monthly statements of account are sent to customers.

a. III only

b. II and III only

c. I and III only

d. I, II and III

Correct answer: c

Feedback: All cash receipts are stored in a locked safe is an internal control but it is not related to accounts receivable.

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

46. Which statement concerning bank issued credit card fees (merchant fees) is incorrect?

a. Credit card fees are subject to GST.

b. They are calculated by the bank once a month.

c. They are calculated as a flat charge regardless of sales.

d. They are recorded by the firm as a debit to the merchant fees expense account and a credit to bank.

Correct answer: c

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

47. Which of the following statements concerning the factoring of accounts receivable is true?

a. A disadvantage of factoring can be its high cost.

b. Credit cards are a form of factoring (i.e. the credit card firm specialises in the collection of accounts receivable).

c. A typical journal entry to record the sale of accounts receivable is DR Bank; DR Service charge expense; CR Accounts receivable control.

d. All of the above options are true.

Correct answer: d

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

48. A debit card (EFPTOS) sale is essentially recorded by the seller:

a. as a cash sale.

b. as a credit sale.

c. as a bill payable.

d. as a bill receivable.

Correct answer: a

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.

49. Maxine’s Flower Shop had bank issued credit card sales of $1650 including GST. The correct entry to record the sales is:

a. Cash 1650

GST payable 150

Sales revenue 1500

b. Accounts receivable 1650

Sales revenue 1650

c. Accounts receivable 1500

GST payable 150

Sales revenue 1350

d. Cash 1500

Sales revenue 1500

Correct answer: a

Learning objective 12.4 ~ identify the principles involved in the management and control of accounts receivable.