CHAPTER 8

REPORTING AND ANALYZING RECEIVABLES

CHAPTER LEARNING OBJECTIVES

1. Explain how companies recognize accounts receivable. Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

Companies record accounts receivable when they provide a service on account or at the point-of-sale of merchandise on account. Sales returns and allowances and cash discounts reduce the amount received on accounts receivable.

2. Describe how companies value accounts receivable and record their disposition. The two methods of accounting for uncollectible accounts are the allowance method and the direct write-off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach.

3. Explain how companies recognize, value, and dispose of notes receivable. The formula for computing interest is: Face value of note  annual interest rate  Time in terms of one year. Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. However, similar to accounts receivable, in many cases, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off.

4. Describe the statement presentation of receivables and the principles of receivables management. Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement.

To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary. The accounts receivable turnover and the average collection period both are useful in analyzing management’s effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information. If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.

Difficulties:

Easy: 174

Medium: 108

Hard: 9

Question List by Section

Recognition of Accounts Receivable: 62, 63,

Types of Receivables: 1, 2, 3, 4, 5, 58, 59, 60, 61, 64, 65 66, 67, 69, 230, 231, 265, 266

Recognizing Accounts Receivable: 6, 7, 8, 68, 70, 72, 232, 233, 245

Valuation and Disposition of Accounts Receivable: 71, 283, 284,

Valuing Accounts Receivable: 9, 24, 73, 87, 88, 89, 101, 102, 103, 136, 138, 140, 246, 247, 248, 249, 268, 269, 270, 280

Direct Write-off Method for Uncollectible Accounts: 17, 18, 23, 27, 28, 30, 92, 94, 100, 128, 129, 144

Allowance Method for Uncollectible Accounts: 10, 11, 20, 21, 22, 25, 26, 75, 76, 82, 84, 86, 90, 104, 123, 153, 159, 234, 237, 250, 251, 252, 253, 254, 255, 267, 272

Recording Estimated Uncollectibles: 12, 13, 29, 74, 79, 81, 91, 95, 105, 106, 107, 110

Recording the Write-off of an Uncollectible Account: 14, 19, 30, 31, 77, 83, 85, 108, 111, 113, 114, 115, 125, 133, 134, 135, 142, 271

Recovery of an Uncollectible Account: 33, 93, 112,

Estimating the Allowance: 10, 15, 16, 32, 80, 96, 97, 98, 99, 109, 116, 117, 118, 119, 120, 121, 122, 124, 126, 127, 130, 131, 132, 137, 139, 141, 235, 236, 238

Disposing of Accounts Receivable: 143, 145, 146, 239, 256

Sale of Receivables to a Factor: 34, 78, 147, 148, 154, 155, 157, 273

National Credit Card Sales: 149, 150, 35, 36, 156, 281, 282

Accounting for Credit Card Sales: 151, 152, 158, 160

Notes Receivable: 37, 38, 39, 161, 162, 163, 171, 172, 173, 285, 286

Determining the Maturity Date: 40, 177, 240, 274

Computing Interest: 38, 39, 40, 41, 42, 43, 44, 48, 164, 165, 166, 167, 168, 169, 170, 178, 179, 180, 241, 257,

Recognizing Notes Receivable: 45, 174, 175,

Valuing Notes Receivable: 169, 176

Disposition of Notes Receivable: 184, 258, 259, 261, 262

Honor of Notes Receivable: 172, 186, 188, 190, 191, 192, 260, 275

Accrual of Interest Receivable: 171, 187, 242, 243

Dishonor of Notes Receivable: 46, 47, 183, 185, 189, 276, 286, 287

Receivables Presentation and Management:

Financial Statement Presentation of Receivables: 49, 50, 193, 199,

Managing Receivables: 195, 225, 288, 289

Extending Credit: 194, 226, 227

Establishing a Payment Period: 228

Monitoring Collections: 51, 52, 53, 229, 277

Evaluating Liquidity of Receivables: 54, 55, 196, 197, 198, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 244, 263, 264, 278,

Accelerating Cash Receipts: 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 223, 224,

Data Analytics and Receivables Management: 56, 57

TRUE-FALSE STATEMENTS

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

2. Trade receivables can be an account receivable or a note receivable.

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

4. Advances to employees are referred to as accounts receivable.

5. Both accounts receivable and notes receivable represent claims expected to be collected in cash.

6. Accounts receivable are one of a company’s least liquid assets.

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

8. Accounts Receivable are usually the least significant type of claim held by a company.

9. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and any cash discounts.

10. 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.

11. The allowance method of accounting for bad debts violates the matching principle.

12. When using the allowance method, bad debt expense is recorded when an individual customer defaults.

13. Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

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

15. The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the Allowance for Doubtful Accounts in the calculation of bad debts expense.

16. Under the accounts receivable aging method, the balance in Allowance for Doubtful Accounts must be considered prior to adjusting for estimated uncollectible accounts.

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

18. The Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

19. When the allowance method is used to account for bad debts, the write-off of an account receivable results in an expense at the time of write-off.

20. Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.

21. The Allowance for Doubtful Accounts is a liability account.

22. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.

23. If bad debt losses are significant, the direct write-off method is acceptable for financial reporting purposes.

24. Bad debt losses are a cost of selling on credit.

25. The allowance method of accounting for bad debts violates the matching principle.

26. The Allowance for Doubtful Accounts is similar to Accumulated Depreciation in that it shows the total of all accounts written off over the years.

27. The direct write-off method of recognizing uncollectible accounts is not in accordance with generally accepted accounting principles.

28. When using the direct write-off method, year-end adjustments for bad debt expense must be made.

29. When using the allowance method, year-end adjustments for bad debt expense must be made.

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

31. Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.

32. An aging schedule is prepared only for accounts receivable that have been past due for more than one year.

33. When an account receivable that was previously written off is collected, it is first necessary to reverse the entry to reinstate the customer’s account before recording the collection.

34. A factor buys receivables from businesses for a fee and collects the payment directly from customers.

35. A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.

36. If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.

37. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

38. The two key parties to a note are the maker and the payee.

39. In a promissory note, the party to whom payment is to be made is called the maker.

40. In determining a note's maturity date, the date the note is issued is included, but the due date is omitted.

41. When the term of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.

42. The interest rate on a note is always expressed as an annual rate.

43. Interest on a 6-month, 10 percent, $10,000 note is calculated by multiplying $10,000 × 0.10 × 6/12.

44. The basic formula for computing interest on an interest-bearing note is the face value of note × annual interest rate × time in terms of one year.

45. When a note is written to settle an open account, no entry is necessary.

46. A dishonored note is a note that is not paid in full at maturity.

47. If a promissory note is dishonored, the payee should not record interest revenue.

48. The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Revenue.

49. Both the gross amount of Accounts Receivables and the Allowance for Doubtful Accounts should be reported in the balance sheet.

50. Bad debt expense and interest revenue are reported in the income statement under other revenues and expenses.

51. If a company has a significant concentration of credit risk, it is not required to discuss that in its notes to its financial statements as that could increase the related risk.

52. A concentration of credit risk is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.

53. If a company has significant concentrations of credit risk, it must discuss this risk in the notes to its financial statements.

54. The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.

55. The average collection period is frequently used to assess the effectiveness of a company’s credit and collection policies.

56. Visualization software presents data in sophisticated graph format and can enhance

successful receivables management.

57. Data analytics of receivables uses descriptive analysis to evaluate customers’ purchasing patterns.

MULTIPLE-CHOICE QUESTIONS

58. Interest is usually associated with

a. accounts receivable.

b. notes receivable.

c. doubtful accounts.

d. bad debts.

59. 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. income tax receivable.

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

a. Advance to an employee

b. Refundable income tax

c. Notes receivable

d. Interest receivable

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

a. sales receivables.

b. nontrade receivables.

c. trade receivables.

d. merchandise receivables.

62. 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 debtors.

63. Receivables are

a. one of the most liquid assets and thus are always considered current assets.

b. claims that are expected to be collected in cash.

c. shown on the income statement at cash realizable value.

d. always the result of revenue recognition.

64. Nontrade receivables should be reported separately from trade receivables. Why is this statement either true or false?

a. It is true because trade receivables are current assets and nontrade receivables are long-term.

b. It is false because all current receivables must be grouped together in one account.

c. It is true because nontrade receivables do not result from business operations and should not be included with accounts receivable.

d. It is false because management can decide how to report receivables.

65. Ace Delights is a corporation that sells breakfast cereal. Based on the accounts listed below, what are Ace’s total trade receivables?

Income tax refund due $ 500

Advance due to the company from

the company president 300

3-month note due from Ace’s main customer 2,000

Interest due this month on the above note 100

Due and unpaid from this month’s sales 9,000

Due and unpaid from last month’s sales 1,000

a. $10,000

b. $12,000

c. $11,000

d. $12,900

66. Which of the following would probably be the most significant type of a claim held by a company?

a. notes receivable

b. nontrade receivables

c. accounts receivable

d. interest receivable

67. A1 Service Company had the following items to report on its balance sheet:

Based on this information, what amount should appear in the "Other Receivables" category?

a. $20,300

b. $13,650

c. $15,030

d. $17,250

68. On January 15, Acme Wholesale Company sells merchandise on account to Jones Associates for $5,000 with terms 3/10, n/30. On January 20, Jones returns $1,000 of this merchandise to Acme. On January 24, payment is received from Jones for the balance due. What is the amount of cash received?

a. $4,000

b. $3,880

c. $3,850

d. $2,800

69. Which of the following represent the three classifications of receivables?

1. Accounts receivable, notes receivable, and other receivables
2. Accounts to be collected, accounts estimated that will not be collected, accounts that were not collected
3. Receivables that are recognized, receivables that are valued, receivables that are accelerated
4. Interest-related receivables, receivables from customers, receivables from employees/ officers

70. A1 Sports sells athletic equipment. On November 14, they sold $4,000 of uniforms to Middleboro Middle School, terms 2/10, n/30. On November 21, they received an order from Bay High School for $2,400 of custom printed bats to be produced in December. On November 30, Middleboro Middle School returned $400 of defective merchandise. A1 has received no payments from either school as of month-end. What amount will be reported as accounts receivable, net on the balance sheet as of November 30?

a. $6,400

b. $6,000

c. $4,000

d. $3,600

71. Three accounting issues associated with accounts receivable are

a. depreciating, returns, and valuing.

b. depreciating, valuing, and collecting.

c. recognizing, valuing, and disposing.

d. accrual, bad debts, and disposing.

72. A1 Supply Company on July 15 sells merchandise on account to Acme Co. for $3,000, terms 2/10, n/30. On July 20, Acme Co. returns $1,200 of merchandise to A1 Supply Company. On July 24, payment is received from Acme Co. for the balance due. What is the amount of cash received?

a. $1,800

b. $1,764

c. $1,740

d. $3,000

73. Which one of the following is not an accounting problem (issue) associated with accounts receivable?

a. Depreciating accounts receivable

b. Recognizing accounts receivable

c. Valuing accounts receivable

d. Accelerating cash receipts from accounts receivable

74. Accounts receivable are valued and reported on the balance sheet

a. in the investments section.

b. at gross amounts less sales returns and allowances.

c. at cash realizable value.

d. only if they are not past due.

75. Which of the following is one reason that companies estimate uncollectible accounts?

a. To identify which customers’ accounts will become uncollectible

b. To write off the amounts which will not be collected from customers

c. To match the expense associated with receivables against the related revenues

d. To determine the total amount owed by customers

76. Which one of the following indicates when Bad Debt Expense should be recorded?

a. Each time a credit sale is made

b. At the end of an accounting period during the adjusting process

c. Whenever a customer gets behind in paying for receivables

d. Whenever an account is written off as uncollectible

77. What happens when a company writes off an uncollectible account under the allowance method?

a. The cash realizable value of total accounts receivable stays the same.

b. Expenses increase.

c. The Allowance for Doubtful Accounts account increases.

d. The amount the company expects to collect from its total accounts receivable declines.

78. What occurs when a company factors its receivables?

1. An estimate for bad debts is made
2. Accounts are written off
3. Receivables are sold
4. An aging analysis is performed

79. At what point in time does a company recognize an expense when it uses the allowance method of accounting for uncollectible accounts?

a. When a customer’s account is identified as being uncollectible

b. In the same period as the revenue is recognized

c. At the time expenses related to the collection activities are incurred

d. At the time the account is written off

80. Acme Discount Wholesale Company has a $145,000 balance in Accounts Receivable and a $420 debit balance in Allowance for Doubtful Accounts at year-end just prior to recording adjusting entries. Credit sales for the period totaled $960,000. How much is the amount of the bad debt adjusting entry if Acme estimates that 1.5% of its receivables will be uncollectible?

a. $2,595

b. $2,175

c. $14,400

d. $1,755

81. The Allowance for Doubtful Accounts is necessary because

a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.

b. uncollectible accounts that are written off must be accumulated in a separate account.

c. a liability results when a credit sale is made.

d. management needs to accumulate all the credit losses over the years.

82. The account Allowance for Doubtful Accounts is classified as a(n)

a. liability.

b. contra account to Bad Debt Expense.

c. expense.

d. contra account to Accounts Receivable.

83. Under the allowance method, bad debt expense is recorded

a. when an individual account is written off.

b. when the loss amount is known.

c. for an amount that the company estimates it will not collect.

d. several times during the accounting period.

84. The expense recognition principle

a. requires that all credit losses be recorded when an individual customer cannot pay.

b. necessitates the recording of an estimated amount for bad debts.

c. results in the recording of a known amount for bad debt losses.

d. is not involved in the decision of when to expense a credit loss.

85. 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 an acceptable practice.

86. The net amount expected to be received in cash from receivables is termed the

a. cash realizable value.

b. cash-good value.

c. gross cash value.

d. cash-equivalent value.

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

a. cash realizable value is understated.

b. expenses are understated.

c. revenues are understated.

d. receivables are understated.

88. If the amount in Bad Debt Expense is understated at year-end

a. net income will be understated.

b. stockholders’ equity will be understated.

c. Allowance for Doubtful Accounts will be overstated.

d. the cash realizable value of accounts receivable will be overstated.

89. If the amount in Bad Debt Expense is overstated at year-end

a. net income will be overstated.

b. stockholders’ equity will be overstated.

c. Allowance for Doubtful Accounts will be understated.

d. the cash realizable value of accounts receivable will be understated.

90. The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded

a. in the same period as allowed for tax purposes.

b. in the period of the sale.

c. for an exact amount.

d. in the period of the loss.

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

a. a sale is made.

b. an account becomes bad and is written off.

c. management estimates the amount of uncollectible accounts.

d. a customer's account becomes past due.

92. When the direct write-off method is used, when an account becomes uncollectible and must be written off

a. Allowance for Doubtful Accounts should be credited.

b. Accounts Receivable should be credited.

c. Bad Debt Expense should be credited.

d. Sales Revenue should be debited.

93. The collection of an account that had been previously written off under the allowance method of accounting for uncollectible accounts

a. will increase income in the period it is collected.

b. will decrease income in the period it is collected.

c. requires a correcting entry for the period in which the account was written off.

d. does not affect income in the period it is collected.

94. The direct write-off method of accounting for uncollectible accounts

a. emphasizes the matching of expenses with revenues.

b. emphasizes balance sheet relationships.

c. emphasizes cash realizable value.

d. is not generally accepted as a basis for estimating bad debts.

95. An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 credit balance, the adjustment for the period will require a

a. debit to Bad Debt Expense for $9,000.

b. debit to Allowance for Doubtful Accounts for $6,600.

c. debit to Bad Debt Expense for $6,600.

d. credit to Allowance for Doubtful Accounts for $9,000.

96. An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 debit balance, the adjustment for the period will require a

a. debit to Bad Debt Expense for $9,000.

b. debit to Bad Debt Expense for $12,200.

c. credit to Allowance for Doubtful Accounts for $5,800.

d. credit to Allowance for Doubtful Accounts for $9,000.

97. An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 credit balance, the adjustment for the period will require a

a. credit to Bad Debt Expense for $9,000.

b. debit to Allowance for Doubtful Accounts for $5,800.

c. debit to Bad Debt Expense for $5,800.

d. credit to Allowance for Doubtful Accounts for $9,000.

98. An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 debit balance, the adjustment for the period will require a

a. debit to Bad Debt Expense for $9,000.

b. debit to Allowance for Doubtful Accounts for $11,400.

c. debit to Bad Debt Expense for $11,400.

d. credit to Allowance for Doubtful Accounts for $9,000.

99. A debit balance in the Allowance for Doubtful Accounts account

a. is the normal balance for that account.

b. indicates that actual write-offs have been greater than what was estimated.

c. indicates that actual write-offs have been less than what was estimated.

d. cannot occur if the percentage of receivables method of estimating uncollectibles is used.

100. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited

a. when a credit sale is past due.

b. at the end of each accounting period.

c. whenever a predetermined amount of credit sales have been made.

d. when an account is determined to be uncollectible.

101. An alternative name for Bad Debt Expense is

a. Deadbeat Expense.

b. Uncollectible Accounts Expense.

c. Collection Expense.

d. Credit Loss Expense.

102. Bad Debt Expense is considered

a. an avoidable cost in doing business on a credit basis.

b. an internal control weakness.

c. a necessary risk of doing business on a credit basis.

d. avoidable unless there is a recession.

103. Two methods of accounting for uncollectible accounts are the

a. allowance method and the accrual method.

b. allowance method and the net realizable method.

c. direct write-off method and the accrual method.

d. direct write-off method and the allowance method.

104. The allowance method of accounting for uncollectible accounts is required if

a. the company makes any credit sales.

b. uncollectibles are significant in amount.

c. the company is a retailer.

d. the company charges interest on accounts receivable.

105. Bad Debt Expense is reported on the income statement as

a. part of cost of goods sold.

b. an expense subtracted from net sales to determine gross profit.

c. an operating expense.

d. a contra revenue account.

106. 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.

107. To record estimated uncollectibles 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 Loss on Credit Sales and a credit to Accounts Receivable.

108. Under the allowance method of accounting for uncollectibles,

a. the cash realizable value 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 cash realizable value 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 Income Summary.

109. The balance in Allowance for Doubtful Accounts must be considered prior to the end of period adjustment when using which of the following methods?

a. Cash realizable method

b. Direct write-off method

c. Accrual method

d. Allowance method

110. Allowance for Doubtful Accounts on the balance sheet

a. is offset against total current assets.

b. increases the cash realizable value of accounts receivable.

c. appears under the heading "Other Assets."

d. is deducted from accounts receivable.

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

a. cash realizable value of total accounts receivable will increase.

b. net accounts receivable will decrease.

c. allowance account will increase.

d. net accounts receivable will stay the same.

112. Using the allowance method, if an account is collected after having been previously written off

a. the Allowance for Doubtful Accounts account should be debited.

b. only Accounts Receivable is credited.

c. both income statement and balance sheet accounts will be affected.

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

113. You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to

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

b. debit Allowance for Doubtful Accounts and credit Accounts Receivable.

c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts.

d. debit Bad Debt Expense and credit Accounts Receivable.

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

115. Under the allowance method, when a specific account is written off

a. total assets will be unchanged.

b. net income will decrease.

c. total assets will decrease.

d. total assets will increase.

116. The percentage of receivables basis for estimating uncollectible accounts emphasizes

a. cash realizable value.

b. the relationship between accounts receivable and bad debts expense.

c. income statement relationships.

d. the relationship between sales and accounts receivable.

117. Ace Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $250,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Ace Company make if the Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment?

a. Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000

b. Bad Debt Expense 7,500

Allowance for Doubtful Accounts 7,500

c. Bad Debt Expense 7,500

Accounts Receivable 7,500

d. Bad Debt Expense 10,000

Accounts Receivable 10,000

118. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $55,000. If the balance of the Allowance for Doubtful Accounts is an $11,000 debit before adjustment, what is the credit balance after adjustment?

a. $55,000

b. $11,000

c. $66,000

d. $44,000

119. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $55,000. If the balance of the Allowance for Doubtful Accounts is an $11,000 debit before adjustment, what is the amount of bad debt expense for that period?

a. $55,000

b. $11,000

c. $66,000

d. $44,000

120. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is a $6,000 credit before adjustment, what is the amount of bad debt expense for that period?

a. $45,000

b. $39,000

c. $51,000

d. $6,000

121. Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is a $6,000 debit before adjustment, what is the balance after adjustment?

a. $45,000

b. $51,000

c. $39,000

d. $6,000

122. Acme Pet Supply Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $250,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Acme make if the Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment?

a. Bad Debt Expense 17,500

Allowance for Doubtful Accounts 17,500

b. Bad Debt Expense 5,000

Allowance for Doubtful Accounts 5,000

c. Bad Debt Expense 12,500

Allowance for Doubtful Accounts 12,500

d. Bad Debt Expense 10,000

Accounts Receivable 10,000

123. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts

a. total assets decrease.

b. total assets are unchanged.

c. net income is unchanged.

d. liabilities decrease.

124. One might infer from a debit balance in Allowance for Doubtful Accounts that

a. a posting error has been made.

b. more accounts have been written off than had been estimated.

c. the direct method is being used.

d. Bad Debt Expense has been overestimated.

125. In reviewing the accounts receivable, the cash realizable value is $28,000 before the write-off of a $2,000 account. What is the cash realizable value after the write-off?

a. $28,000

b. $2,000

c. $30,000

d. $26,000

126. In 2025, the A1 Service Co. had net credit sales of $900,000. On January 1, 2025, the Allowance for Doubtful Accounts had a credit balance of $22,500. During 2025, $36,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $240,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2025?

a. $24,000.

b. $37,500.

c. $46,500.

d. $36,000.

127. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record Bad Debt Expense

a. is relevant when using the percentage-of-receivables basis.

b. is relevant when using the direct write-off method.

c. is relevant to both the percentage-of-receivables basis and the direct write-off method.

d. will never show a debit balance at this stage in the accounting cycle.

128. The direct write-off method of accounting for uncollectibles

a. uses an allowance account.

b. uses a contra asset account.

c. does not require estimates of bad debt losses.

d. is the preferred method under generally accepted accounting principles.

129. Under the direct write-off method of accounting for uncollectible accounts,

a. the allowance account is increased for the actual amount of bad debt at the time of write-off.

b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off.

c. balance sheet relationships are emphasized.

d. bad debt expense is always recorded in the period in which the revenue was recorded.

130. Net credit sales for the month are $900,000. The accounts receivable balance is $192,000. The allowance is calculated as 5% of the receivables balance using the percentage-of-receivables basis. If the Allowance for Doubtful Accounts has a credit balance of $6,000 before adjustment, what is the balance after adjustment?

a. $ 9,600

b. $ 3,600

c. $15,600

d. $ 9,900

131. In 2025, Ace Auto Service Company had net credit sales of $2,250,000. On January 1, 2025, Allowance for Doubtful Accounts had a credit balance of $54,000. During 2025, $90,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $600,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2025?

a. $ 60,000

b. $ 25,000

c. $ 96,000

d. $ 90,000

132. An analysis and aging of the accounts receivable of Acme Marine Service Company at December 31 reveal these data:

Accounts receivable $3,200,000

Allowance for doubtful accounts per books before adjustment (credit) 200,000

Amounts expected to become uncollectible 260,000

What is the cash realizable value of the accounts receivable at December 31 after adjustment?

a. $2,740,000

b. $3,000,000

c. $3,200,000

d. $2,940,000

133. The bookkeeper/cashier at Ace Enterprises recorded the following journal entry:

Allowance for Doubtful Accounts 1,000

Accounts Receivable – Richard James 1,000

Which one of the following statements is false?

a. This entry is only prepared on the last day of the accounting period.

b. There should be written authorization for this transaction from someone who does not have responsibilities related to recording cash.

c. There could be a violation of internal control policies.

d. James’ account was written off because it was determined to be uncollectible.

134. The following information is related to December 31, 2024 balances.

• Accounts receivable $1,400,000
• Allowance for doubtful accounts (credit) (120,000)
• Cash realizable value 1,280,000

During 2025, sales on account were $390,000 and collections on account were $230,000. The company wrote off $22,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $144,000. The change in the cash realizable value from 12/31/24 to 12/31/25 was

a. $136,000 increase.

b. $160,000 increase.

c. $114,000 increase.

d. $138,000 increase.

135. The following information is related to December 31, 2024 balances.

• Accounts receivable $1,400,000
• Allowance for doubtful accounts (credit) (120,000)
• Cash realizable value 1,280,000

During 2025, sales on account were $390,000 and collections on account were $230,000. The company wrote off $22,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $144,000. Bad debt expense for 2025 is:

a. $46,000.

b. $24,000.

c. $144,000.

d. $ 2,000.

136. During 2025, A1 Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,800 which had been written off as uncollectible in 2024. As a result of these transactions, the change in the accounts receivable balance from the beginning of the year to the end of the year indicates a

a. $402,200 increase.

b. $192,000 increase.

c. $186,200 increase.

d. $408,000 increase.

137. A1 Marine Corporation’s unadjusted trial balance includes the following balances (assume normal balances):

• Accounts receivable $1,865,000
• Allowance for doubtful accounts $ 35,500

Uncollectibles are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?

a. $119,400

b. $76,400

c. $74,270

d. $114,030

138. The following information is related to December 31, 2024 balances.

• Accounts receivable $3,150,000
• Allowance for doubtful accounts (credit) (270,000)
• Cash realizable value $2,880,000

During 2025, sales on account were $870,000 and collections on account were $516,000. The company wrote off $48,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $324,000. The change in the cash realizable value from 12/31/24 to 12/31/25 was a

a. $300,000 increase.

b. $354,000 increase.

c. $252,000 increase.

d. $306,000 increase.

139. The following information is related to December 31, 2024 balances:

Accounts receivable $3,150,000

Allowance for doubtful accounts (credit) (270,000)

Cash realizable value 2,880,000

During 2025, sales on account were $870,000 and collections on account were $516,000. The company wrote off $48,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $324,000. Bad debt expense for 2025 is

a. $102,000.

b. $ 54,000.

c. $324,000.

d. $ 6,000.

140. During 2025, Acme Inc. had sales on account of $792,000, cash sales of $324,000, and collections on account of $504,000. In addition, the company collected $8,700 which had been written off as uncollectible in 2024. As a result of these transactions, the change in the accounts receivable indicates a

a. $603,300 increase.

b. $288,000 increase.

c. $279,300 increase.

d. $612,000 increase.

141. Ace Auto Service’s unadjusted trial balance includes the following balances (assume normal balances):

Accounts Receivable $1,119,000

Allowances for Doubtful Accounts 21,300

Uncollectibles are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?

a. $67,140

b. $45,840

c. $44,562

d. $68,418

142. A write-off of specific accounts receivable under the allowance method

a. increases bad debt expense for the accounting period.

b. should occur on the last day of the accounting period.

c. decreases the cash realizable value of accounts receivable.

d. should be formally approved by an authorized employee.

143. Which one of the following is not a reason that a company may sell its receivables?

1. The amount due from customers is relatively large compared to other assets owned by a company.
2. Factoring companies possess expertise in accounts receivable processing and collections.
3. Selling receivables is a reasonable source of cash, often less costly than loans.
4. Billing and collecting amounts due from customers is time-consuming and costly.

144. The direct write-off method is acceptable for financial reporting purposes only if the bad debt losses are insignificant.

a. This is a false statement because the direct write-off method violates the matching principle.

b. This is a true statement based on the concept of materiality.

c. This is a false statement because the direct write-off method can only be used for tax reporting.

d. This is a true statement because companies can choose either the direct write-off or the allowance method for financial reporting, as long as they consistently apply the method.

145. Which of the following is a reason why a company might sell its receivables?

a. The company has excess cash on hand.

b. The company wants to lengthen the cash-to-cash operating cycle.

c. The company has sufficient expertise in collections.

d. The company needs cash and borrowing costs are high.

146. What is the traditional disposition of accounts receivable?

a. The accounts are collected and removed from the records.

b. The accounts are written off as uncollectible.

c. The accounts are sold to a factor to accelerate cash receipts.

d. The accounts are dishonored then subsequently collected.

147. The entry to record the sale of accounts receivables to a factor typically includes a debit to

a. Allowance for Uncollectible Accounts.

b. Bad Debt Expense.

c. Service Charge Expense.

d. Interest Expense

148. Which of the following statements is false regarding the factoring of accounts receivable?

a. The service charge incurred when a company often factors its receivables is reported as an operating expense.

b. When a company factors its receivables, it collects the receivables and remits the cash to the factor.

c. Factoring of a company’s accounts receivable shortens its cash-to-cash operating cycle.

d. Factoring arrangements vary widely but typically a fee of between 1 and 3% is charged.

149. The parties involved when national credit cards are used for retails sales include all of the following except.

a. the national credit card company

b. the supplier

c. the customer

d. the retailer

150. Which of the following is not one of the advantages to the retailer of accepting national credit cards?

a. To retailer receives cash more quickly.

b. The issuer investigates the creditworthiness of customers.

c. The retailer absorbs any losses from uncollectible accounts.

d. The issuer maintains customer accounts.

151. The entry to record sales revenue when a national credit card is used includes a debit to

a. Accounts Receivable.

b. Sales Discounts.

c. Cash.

d. Unearned Revenue.

152. Katy Perry purchases $2,000 of equipment from Ace Equipment Supply Co., using her Capital One Visa Card. Capital One charges a service fee of 2%. The entry to record this transaction by Ace includes

a. a debit to Cash for $1,960.

b. a debit to Accounts Receivable for $2,000

c. a credit to Sales Revenue for $1,960.

d. a credit to Sales Discounts for $40.

153. Under the allowance method of accounting for uncollectibles, why must uncollectible accounts receivable be estimated at the end of the accounting period?

a. To allow the collection department to schedule work for the next accounting period.

b. To determine the gross realizable value of accounts receivable.

c. The IRS rules require the company to make the estimate.

d. To match bad debt expense to the period in which the revenues were earned.

154. If a company sells its accounts receivable to a factor

a. the seller pays a fee to the factor.

b. the factor pays a fee to the seller.

c. there is a gain on the sale of the receivables.

d. the seller defers recognition of sales revenue until the account is collected.

155. Acme Furniture factors $700,000 of receivables to A1 Factors, Inc. A1 Factors assesses a 3% service charge on the amount of receivables sold. Acme Furniture factors its receivables regularly with A1 Factors. What journal entry does Acme make when factoring these receivables?

a. Cash 679,000

Loss on Sale of Receivables 21,000

Accounts Receivable 700,000

b. Cash 679,000

Accounts Receivable 679,000

c. Cash 500,000

Accounts Receivable 679,000

Gain on Sale of Receivables 21,000

d. Cash 679,000

Service Charge Expense 21,000

Accounts Receivable 700,000

156. When customers make purchases with a national credit card, the retailer

a. is responsible for maintaining customer accounts.

b. is not involved in the collection process.

c. absorbs any losses from uncollectible accounts.

d. receives cash equal to the full price of the merchandise sold.

157. On April 5, Ace’s Boutique accepted a Visa card for a $750 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a

a. credit to Cash of $735.

b. debit to Cash of $750.

c. debit to Service Charge Expense of $15.

d. credit to Service Charge Expense of $15.

158. Acme Retailers accepted $40,000 of Discover credit card charges for merchandise sold on August 1. Discover charges 4% for its credit card use. The entry to record this transaction by Acme Retailers will include a credit to Sales Revenue of $40,000 and a debit to (or debits to)

a. Cash for $38,400 and Service Charge Expense for $1,600.

b. Accounts receivable for $38,400 and Service Charge Expense for $2,400.

c. Cash for $40,000.

d. Accounts Receivable for $40,000.

159. Acme Inc. reported the following item in its balance sheet at December 31, 2024:

Accounts receivable, net of $940 allowance……………………………..$56,300

Which statement is true?

a. Acme’s customers owe $56,300.

b. During the year, customers charged $56,300 on account.

c. The balance owed by customers is $55,360.

d. Acme expects its customers to pay $56,300.

160. The retailer considers Visa and MasterCard sales as

a. cash sales.

b. promissory sales.

c. credit sales.

d. contingent sales.

161. A promissory note

a. is not a formal credit instrument.

b. may be used to settle accounts receivable.

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

d. cannot be factored (sold) to another party.

162. Which of the following is not true regarding a promissory note?

a. Promissory notes may not be transferred to another party by endorsement.

b. Promissory notes may be sold to another party.

c. Promissory notes give a stronger legal claim to the holder than accounts receivable.

d. Promissory notes may be bearer notes and not specifically identify the payee by name.

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

a. maker and a bank.

b. debtor and the payee.

c. maker and the payee.

d. sender and the receiver.

164. When calculating interest on a promissory note of less than one year, with the maturity date stated in terms of days, the

a. maker pays more interest if 365 days are used instead of 360.

b. maker pays the same interest regardless if 365 or 360 days are used.

c. payee receives more interest if 360 days are used instead of 365.

d. payee receives less interest if 360 days are used instead of 365.

165. The interest on a $10,000, 10%, 1-year note receivable is

a. $10,000.

b. $1,000.

c. $11,000.

d. $10,900.

166. The interest on a $20,000, 6%, 60-day note receivable is

a. $1,200.

b. $200.

c. $400.

d. $600.

167. The interest on a $15,000, 6%, 90-day note receivable is

a. $900.

b. $450.

c. $225.

d. $675.

168. The interest on a $25,000, 10%, 1-year note receivable is

a. $250.

b. $208.

c. $2,500.

d. $27,500.

169. The interest on a $15,000, 6%, 60-day note receivable is

a. $75.

b. $900

c. $450.

d. $150.

170. The interest on a $10,000, 9%, 90-day note receivable is

a. $225.

b. $900.

c. $75.

d. $150.

171. A note receivable is a negotiable instrument which

a. eliminates the need for a bad debt allowance.

b. can be transferred to another party by endorsement.

c. takes the place of checks in a business firm.

d. can only be collected by a bank.

172. When a company receives an interest-bearing note receivable, it will

a. debit Notes Receivable for the maturity value of the note.

b. credit Notes Receivable for the maturity value of the note.

c. debit Notes Receivable for the face value of the note.

d. credit Notes Receivable for the face value of the note.

173. The face value of a note refers to the amount

a. that can be received if sold to a factor.

b. borrowed plus interest received at maturity from the maker.

c. at which the note receivable is recorded.

d. remaining after a service charge has been deducted.

174. Rosen Company receives a $9,000, 3-month, 6% promissory note from Bay Company in settlement of an open accounts receivable. What entry will Rosen Company make upon receiving the note?

a. Notes Receivable 9,135

Accounts Receivable—Bay Company 9,135

b. Notes Receivable 9,135

Accounts Receivable—Bay Company 9,000

Interest Revenue 135

c. Notes Receivable 5,000

Interest Receivable 135

Accounts Receivable—Bay Company 9,000

Interest Revenue 135

d. Notes Receivable 9,000

Accounts Receivable—Bay Company 9,000

175. Acme Company receives a $10,000, 3-month, 6% promissory note from A1 Company in settlement of an open accounts receivable. What entry will Acme make upon receiving the note?

a. Notes Receivable 10,150

Accounts Receivable—A1 Company 10,150

b. Notes Receivable 10,150

Accounts Receivable— A1Company 10,000

Interest Revenue 150

c. Notes Receivable 10,000

Interest Receivable 150

Accounts Receivable—A1 Company 10,000

Interest Revenue 150

d. Notes Receivable 10,000

Accounts Receivable—A1 Company 10,000

176. Short-term notes receivable

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

b. are reported at their gross realizable value.

c. use the same estimations and computations as accounts receivable to determine cash realizable value.

d. are typically classified as noncurrent assets

177. A 90-day note dated June 30, 2025 would mature on

a. September 30, 2025.

b. September 27, 2025.

c. September 28, 2025.

d. September 29, 2025.

178. The interest rate for a three-month loan would normally be stated in terms of which of the following rates of interest?

a. Daily

b. Monthly

c. Quarterly

d. Annual

179. Ace Beauty Supply Company has a 90-day note that carries an annual interest rate of 8%. If the amount of the total interest on the note is equal to $900, then what is the principal of the note?

a. $11,250

b. $45,000

c. $64,800

d. $28,800

180. Acme Service Company has a $60,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $4,500, then what is the duration of the note in months?

a. 6 months

b. 4 months

c. 12 months

d. 9 months

181. Ace Finance Company lends Acme Industries $40,000 on August 1, 2025, accepting a 9-month, 9% interest note. If Ace prepares its financial statements as of December 31, 2025, what adjusting entry must it make?

a. Interest Receivable 1,500

Interest Revenue 1,500

b. Accounts Receivable 1,500

Interest Receivable 1,500

c. Cash 1,500

Interest Revenue 1,500

d. Notes Receivable 1,500

Interest Revenue 1,500

182. Ace Finance Company lends Acme Industries $40,000 on August 1, 2025, accepting a 9-month, 9% interest note. If Ace accrued interest at its December 31, 2025 year-end, what entry must it make to record the collection of the note and interest at its maturity date?

a. Cash 42,700

Notes Receivable 40,000

Interest Revenue 2,700

b. Cash 42,700

Notes Receivable 42,700

c. Notes Receivable 40,000

Interest Receivable 1,500

Interest Revenue 1,200

Cash 42,700

d. Cash 42,700

Notes Receivable 40,000

Interest Receivable 1,500

Interest Revenue 1,200

183. Ace Finance Company lends Acme Industries $40,000 on January 1, 2025, accepting a 9-month, 9% interest note. If Acme dishonors the note and does not pay it in full at maturity but Young expects that it will eventually be able to collect the debt, which of the following entries would most likely be made by Ace Finance Company?

a. Cash 40,000

Notes Receivable 40,000

b. Accounts Receivable 40,000

Notes Receivable 40,000

c. Accounts Receivable 42,700

Notes Receivable 40,000

Interest Revenue 2,700

d. Accounts Receivable 42,700

Notes Receivable 40,000

Interest Receivable 2,700

184. Which of the following is a way of disposing of a note receivable?

a. Holding it until it is paid on the maturity date.

b. Selling it to receive cash before the maturity date.

c. Writing it off when the maker defaults on the maturity date.

185. A dishonored note receivable

a. is no longer negotiable.

b. must be written off by the lender.

c. creates a claim against the maker for the amount of principal only.

d. is one that is not paid in full within 10 days of maturity.

186. The maturity value of a $60,000, 9%, 40-day note receivable dated July 3 is

a. $60,000.

b. $66,000.

c. $65,400.

d. $60,600.

187. A1 Finance Company lends Ace Manufacturing Company $40,000 on April 1, accepting a four-month, 6% interest note. A1 Finance Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared?

a. Note Receivable 40,000

Cash 40,000

b. Interest Receivable 200

Interest Revenue 200

c. Cash 200

Interest Revenue 200

d. Interest Receivable 600

Interest Revenue 600

188. The maturity value of a $10,000, 6%, 60-day note receivable dated February 10th is

a. $10,100.

b. $10,050.

c. $10,000.

d. $10,600.

189. When a note is dishonored, the payee’s entry includes a

a. debit to Interest Revenue.

b. credit to Accounts Receivable.

c. debit to Interest Expense.

d. credit to Notes Receivable.

190. A note receivable is issued in December. When the note is paid the following February, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a

a. credit to Interest Receivable.

b. credit to Cash.

c. debit to Notes Receivable.

d. debit to Interest Revenue.

191. The maturity value of a $50,000, 12%, 3-month note receivable is

a. $51,500.

b. $50,600.

c. $56,000.

d. $50,500.

192. Ace Finance Co. holds A1 Supply Inc.’s $30,000, 120-day, 9% note. The entry made by Ace when the note is collected, assuming no interest has previously been accrued is:

a. Cash 30,000

Notes Receivable 30,000

b. Accounts Receivable 30,900

Notes Receivable 30,000

Interest Revenue 900

c. Cash 30,900

Notes Receivable 30,000

Interest Revenue 900

d. Accounts Receivable 30,900

Notes Revenue 30,000

Interest Revenue 900

193. All of the following statements regarding the financial statement presentation of receivables are true except:

a. Short-term receivables are reported in the current assets section of the balance sheet.

b. The gross amount of receivables less the allowance for doubtful accounts is equal to the net receivables.

c. Short-term receivables are reported above the short-term investments in the balance sheet.

d. Companies report bad debt expense under "Selling Expenses" in the operating expenses section of the income statement.

194. Which of the following is least likely to help a company minimize losses related to uncollectible accounts receivables?

a. Require potential customers to provide bank guarantees.

b. Ask a potential customer for references regarding payment history.

c. Increase the estimate of uncollectible accounts at the end of each period.

d. Check a potential customer's credit rating.

195. Which one of the following is not a principle of sound accounts receivable management?

a. Determine to whom to extend credit.

b. Delay cash receipts from receivables if necessary.

c. Monitor collections.

d. Determine a payment period.

196. The accounts receivable turnover is computed by dividing

a. total sales by average net accounts receivables.

b. total sales by ending net accounts receivables.

c. net credit sales by average net accounts receivables.

d. net credit sales by ending net accounts receivables.

197. The accounts receivable turnover is used to analyze

a. profitability.

b. liquidity.

c. risk.

d. long-term solvency.

198. A high accounts receivable turnover ratio indicates

a. the company’s sales are increasing.

b. a large proportion of the company’s sales are on credit.

c. customers are making payments very quickly.

d. customers are making payments slowly.

199. Ace Mattress Supply sells mattresses for cash and on credit. At the end of 2025, the following appeared in the company’s balance sheet:

Accounts receivable, net of $2,460 allowance……………………$166,200

Which one of the following statements for Ace Mattress Supply is correct?

1. Customers owe $168,660 to Ace Mattress Supply.,
2. Ace Mattress Supply expects to collect $163,470 from customers.
3. Ace Mattress Supply wrote off $2,460 of uncollectible accounts during 2025.
4. The cash realizable value of Ace Mattress Supply’s accounts receivable totals $163,740.

200. The accounts receivable turnover is used to calculate

a. the average collection period in days.

b. market risk.

c. return on assets.

d. current ratio.

201. The average collection period for receivables is computed by dividing 365 days by

a. net credit sales.

b. average accounts receivable.

c. ending accounts receivable.

d. accounts receivable turnover.

202. The financial statements of the A1 Manufacturing Company report net credit sales of $360,000 and net accounts receivable of $50,000 and $30,000 at the beginning of the year and the end of the year, respectively. What is the accounts receivable turnover for Nelson?

a. 4.5 times

b. 7.2 times

c. 12.0 times

d. 9.0 times

203. The financial statements of the Acme Manufacturing Supply Company report net credit sales of $360,000 and net accounts receivable of $50,000 and $30,000 at the beginning of the year and the end of the year, respectively. What is the average collection period for accounts receivable in days?

a. 81.1

b. 40.6

c. 50.7

d. 30.4

204. The financial statements of the A1 Manufacturing Service Center report net credit sales of $600,000 and net accounts receivable of $80,000 and $40,000 at the beginning of the year and the end of the year, respectively. What is the accounts receivable turnover for A1?

a. 10.0 times

b. 15.0 times

c. 7.5 times

d. 5.0 times

205. The financial statements of the Acme Equipment Company report net credit sales of $600,000 and net accounts receivable of $80,000 and $40,000 at the beginning of the year and the end of the year, respectively. What is the average collection period for accounts receivable in days?

a. 24.3 times

b. 73.0 times

c. 36.5 times

d. 48.7 times

206. A popular variation of the accounts receivable turnover is the

a. credit risk ratio.

b. concentration of credit risk.

c. bad debts ratio.

d. average collection period.

207. The accounts receivable turnover

a. is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period.

b. can be used to compute the average collection period.

c. is a method of evaluating the solvency of net accounts receivable.

d. is only important to internal users of accounting information.

208. A1 Salon Supply Corporation had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000. Net accounts receivable at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover?

a. 8.0

b. 10.0

c. 6.7

d. 4.8

209. Ace Discount Retail Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 6. What is its average collection period (days)?

a. 90

b. 40

c. 61

d. 48

210. All of the following statements are true regarding the average collection period except:

a. it is a popular variant of the accounts receivable turnover.

b. it is used to assess the effectiveness of a company's credit and collection policies.

c. it should generally exceed the credit term period.

d. its increase may suggest a decline in the financial health of customers.

211. In the table below the information for four companies is provided.

If Company D's net credit sales are $435,000, what is its average net accounts receivable?

a. $17,262

b. $30,000

c. $63,075

d. $109,620

212. In the table below the information for four companies is provided.

Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?

a. Company A

b. Company B

c. Company C

d. Company D

213. A1 Retailers accepted $80,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by A1 Retailers will include a credit to Sales Revenue of $80,000 and a debit to (or debits to)

a. Cash $76,800 and Service Charge Expense $3,200.

b. Accounts Receivable $76,800 and Service Charge Expense $3,200.

c. Cash $76,800 and Interest Expense $3,200.

d. Accounts Receivable $80,000.

214. Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30

a. represent common business practices.

b. represent ways to accelerate receivables collections.

c. result in collections that are less than the gross accounts receivable.

215. Factoring arrangements

a. are ways to accelerate receivable collections.

b. involve no commissions or service charges because the factor is guaranteed collections on the due date.

c. are only used by businesses that are insolvent.

d. are mainly used in the fast food industry.

216. Company A accepted a national credit card for a $9,000 purchase. The cost of the goods sold is $7,200. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?

a. Increase by $1,746.

b. Increase by $1,800.

c. Increase by $1,530.

d. Increase by $8,730.

217. Company X accepted a national credit card for a $10,000 purchase. The cost of the goods sold is $8,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?

a. Increase by $1,940.

b. Increase by $2,000.

c. Increase by $1,700.

d. Increase by $9,700.

218. A company sells $800,000 of accounts receivable to a factor for cash, incurring a 2% service charge. The entry to record the sale should not include a

a. debit to Interest Expense for $16,000.

b. debit to Cash for $784,000.

c. debit to Service Charge Expense for $16,000.

d. credit to Accounts Receivable for $800,000.

219. 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 captive finance company.

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

220. If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)

a. operating expense.

b. interest expense.

c. other expense.

d. contra asset.

221. The sale or transfer of accounts receivable in order to raise funds is called

a. pledging.

b. factoring.

c. leasing.

d. collateralizing.

222. A captive finance company refers to

a. a finance company that is owned by individuals who borrow money from the company.

b. finance companies that won't allow early repayment of loans.

c. a company that is wholly owned by another company and provides financing to purchasers of its owner company's goods.

d. any company that issues a major credit card.

223. Receivables might be sold to

a. lengthen the cash-to-cash operating cycle.

b. take advantage of deep discounts on the cash realizable value of receivables.

c. generate cash quickly.

d. finance companies at an amount greater than cash realizable value.

224. A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables?

a. The loss section of the income statement will increase each time receivables are sold.

b. The credit to Accounts Receivable is less than the debit to Cash when the receivables are sold.

c. Operating expenses will increase each time accounts are sold.

d. The other expenses section of the income statement will increase each time receivables are sold.

225. Which of the following is not a step in managing receivables?

a. Monitor collections

b. Evaluate the solvency of receivables

c. Accelerate cash receipts

d. Determine which customers should be extended credit

226. One concern if a company’s credit policy is too “tight” is that

a. many customers will not pay their accounts.

b. customers will be late in paying accounts

c. sales will be lost.

d. customers will need to provide letters of credit.

227. One downside to having a credit policy that is too “loose” is that

a. some customers will pay their accounts late or not pay their accounts at all.

b. cash payments to suppliers will be accelerated.

c. sales will be lost to competitors.

d. the cash-to-cash operating cycle will be shortened.

228. In establishing a payment period, a company should consider

a. supplier’s policies.

b. competitor’s policies.

c. its profit margin.

d. its gross margin.

229. By monitoring the accounts receivable aging schedule, companies can

a. identify opportunities to take purchase discounts.

b. determine which customers need additional inventory.

c. monitor whether a customer’s credit risk is increasing.

d. calculate length of the cash-to-cash operating cycle.

BRIEF EXERCISES

Be. 230

Presented below are various receivable transactions entered into by Renner Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet.

a. Advanced $1,000 to a trusted employee.

b. Accepted a $2,000 promissory note from a customer as payment on account.

c. Determined that a $10,000 income tax refund is due from the IRS.

d. Sold goods to a customer on account for $5,000.

e. Recorded $500 accrued interest on a note receivable due next year.

f. Loaned a company officer $4,000.

Ex. 245

On January 10, Kim Kardashian uses her Aprio Co. credit card to purchase merchandise from Aprio Co. for $2,600. On February 10, she is billed for the amount due of $2,600. On February 12, Kardashian pays $1,600 on the balance due. On March 10, Kardashian is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12.

Instructions

Prepare the entries on Aprio Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. Omit cost of goods sold entries.

Ex. 246

At the beginning of the current period, Ace Corp. had balances in Accounts Receivable of $200,000 and in Allowance for Doubtful Accounts of $9,000 (credit). During the period, it had credit sales of $650,000 and collections of $590,000. It wrote off as uncollectible accounts receivable of $5,000. However, a $3,000 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $20,000 at the end of the period.

Instructions

(a) Prepare the entries to record sales and collections during the period. Omit cost of goods sold entries.

(b) Prepare the entry to record the write-off of uncollectible accounts during the period.

(c) Prepare the entries to record the recovery of the uncollectible account during the period.

(d) Prepare the entry to record bad debt expense for the period.

(e) Determine the ending balances in Accounts Receivable and Allowance for Doubtful Accounts.

(f) Calculate the cash realizable value of the receivables at the end of the period.

Ex. 247

The December 31, 2024 balance sheet of the A1 Discount Supply Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2025, the following transactions occurred: sales on account $1,550,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of $8,000 were collected.

Instructions

(a) Journalize the 2025 transactions. Omit cost of goods sold entries.

(b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at December 31, 2025?

Ex. 248

An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Assume that at 12/31, the correct balance of the Allowance account before adjustment is $-0-.

Dec. 17 Cash 3,000

Sales Discounts 60

Accounts Receivable 3,060

(To record collection of 12/4 sales of $3,000, terms 2/10, n/30)

27 Cash 1,200

Bad Debt Expense 1,200

(Collection of account previously written off as

uncollectible under allowance method)

31 Bad Debt Expense 1,800

Allowance for Doubtful Accounts 1,800

(To recognize estimated uncollectibles based on 3% of

accounts receivable of $600,000)

Instructions

Prepare the correcting entries. Errors were identified at the end of the year.

Ex. 249

Prepare journal entries to record the following transactions entered into by the Acme Company, Omit cost of goods sold entries.

2024

June 1 Received a $10,000, 6%, 1-year note from Luke Bryan as full payment on his account.

Nov. 1 Sold merchandise on account to Ace, Inc., for $14,000, terms 2/10, n/30.

Nov. 5 Ace, Inc., returned merchandise worth $1,000.

Nov. 9 Received payment in full from Ace, Inc.

Dec. 31 Accrued interest on Bryan's note.

2025

June 1 Luke Bryan honored his promissory note by sending the face amount plus interest.

Ex. 250

Ace Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 2024 and December 31, 2025 appear below:

12/31/2024 12/31/2025

Net Credit Sales $400,000 $500,000

Accounts Receivable 80,000 100,000

Allowance for Doubtful Accounts 4,000 ?

Instructions

(a) Record the following events in 2025.

Aug. 10 Determined that the account of Ryan Seacrest for $900 is uncollectible.

Sept. 12 Determined that the account of Katy Perry for $3,000 is uncollectible.

Oct. 10 Received a check for $300 as payment on account from Ryan Seacrest, whose account had previously been written off as uncollectible.

(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2025. Assume that only transactions in part a impacted the Allowance for Doubtful Accounts in 2025.

(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2025?

Ex. 251

Ace Manufacturing Company had a $300 credit balance in Allowance for Doubtful Accounts at December 31, 2025, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following:

Estimated Percentage

Uncollectible

Current Accounts $170,000 1%

1–30 days past due 15,000 3%

31–60 days past due 12,000 6%

61–90 days past due 5,000 15%

Over 90 days past due 9,000 30%

Total Accounts Receivable $211,000

Instructions

(a) Prepare the adjusting entry on December 31, 2025 to recognize bad debts expense.

(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $300 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts.

Ex. 252

On December 31, 2024, when its Allowance for Doubtful Accounts had a credit balance of $1,500, Acme Garden Supply Company estimates that 6% of its accounts receivable balance of $95,000 will become uncollectible. On March 3, 2025, Acme determined that Bernie Madoff’s account of $950 was uncollectible. On May 15, 2025, Madoff paid the amount previously written off.

Instructions

Prepare the journal entries for December 31, 2024, March 3, 2025, and May 15, 2025.

Ex. 253

The percentage of receivables approach to estimating bad debt expense is used by A1 Auto Supply Company. On February 28 (the fiscal year-end), the firm had accounts receivable in the amount of $585,000, and Allowance for Doubtful Accounts had a credit balance of $370 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. On March 10, an accounts receivable from Tom Jones for $2,100 was determined to be uncollectible and written off. However, on March 31, Jones received an inheritance and immediately paid his past due account in full.

(a) Prepare the journal entries made by A1 Auto Supply Company on the following dates:

1. February 28

2. March 10

3. March 31

(b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31.

Ex. 254

Acme Computer Store has credit sales of $450,000 in 2024 and a debit balance of $600 in the Allowance for Doubtful Accounts at year-end. As of December 31, 2024, $130,000 of accounts receivable remains uncollected. The credit manager of Acme prepared an aging schedule of accounts receivable and estimates that $7,800 will prove to be uncollectible.

On March 4, 2025, the credit manager authorizes a write-off of the $1,000 balance owed by J. Myers.

Instructions

(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2024.

(b) Show the balance sheet presentation of Accounts Receivable on December 31, 2024.

(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $145,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,000. Make the appropriate entry to record the write-off of the Myers account. Also, show the balance sheet presentation of Accounts Receivable before and after the write-off.

Ex. 255

A1 Salon Supply Company has accounts receivable of $95,100 at March 31, 2025. An analysis of the accounts shows these amounts:

Balance, March 31

Month of Sale 2025 2024

March $65,000 $75,000

February 12,600 8,000

December and January 10,100 2,400

October and November 7,400 1,100

$95,100 $86,500

Credit terms are 2/10, n/30. At March 31, 2025, there is a $2,500 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company's estimates of uncollectibles are as shown below:

Estimated Percentage

Age of Accounts Uncollectible

Current 2%

1–30 days past due 7

31–90 days past due 25

Over 90 days past due 50

Instructions

(a) Determine the total estimated uncollectible accounts receivable at March 31, 2025.

(b) Prepare the adjusting entry at March 31, 2025 to record bad debts expense.

Ex. 256

Ace Supply Company has the following accounts in its general ledger at July 31: Accounts Receivable $49,000 and Allowance for Doubtful Accounts $3,400. During August, the following transactions occurred.

Aug. 15 Sold $30,000 of accounts receivable to A1 Factors, Inc. who assesses a 2% finance charge.

25 Made sales of $2,500 on Visa credit cards. The credit card service charge is 3%.

28 Made sales of $4,000 on Ace Supply credit cards.

Instructions

(a) Journalize the transactions. Omit cost of goods sold entries.

(b) Indicate the statement presentation of service charges.

Ex. 257

Compute the missing amount for each of the following notes:

Principal Annual Interest Rate Time Total Interest

(a) $50,000 5% 2.5 years ?

(b) $120,000 ? 9 months $7,200

(c) ? 9% 90 days $1,350

(d) $60,000 6% ? $1,200

Ex. 258

Record the following transactions in general journal form for the Acme Company.

July 1 Received a $9,000, 8%, 3-month note, dated July 1, from Kim Kardashian in payment of her open account.

Oct. 1 Received notification from Kim Kardashian that she was unable to honor her note at this time. It is expected that Kardashian will pay at a later date.

Nov. 15 Received full payment from Kim Kardashian for a note receivable previously dishonored.

Ex. 259

A1 Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for A1 Boat Company. Omit cost of goods sold entries.

Feb. 12 Accepted a $35,000, 6%, 60-day note from Bill Wiggins for the sale of a 19-foot motorboat built to his specifications.

April 14 Received notification from Bill Wiggins that he was unable to honor his promissory note but that he expects to pay the amount owed in May.

May 26 Received a check from Bill Wiggins for the total amount owed.

June 10 Received notification by the bank that Bill Wiggins’ check was being returned “NSF” and that Mr. Wiggins had declared personal bankruptcy.

Ex. 260

Compute the maturity value as indicated for each of the following notes receivable.

1. An $8,000, 6%, 3-month note dated April 20.

Maturity value $____________.

2. A $20,000, 9%, 72-day note dated March 5.

Maturity value $____________.

3. A $12,000, 5%, 30-day note dated September 10.

Maturity value $____________.

4. A $9,000, 7%, 6-month note dated November 15.

Maturity value $____________.

Ex. 261

Ace Supply Co. has the following transactions related to Notes Receivable during the last 2 months of the year.

Nov. 1 Loaned $75,000 cash to K. Perry on a 1-year, 8% note.

Dec. 11 Sold goods to Acme, Inc., receiving a $9,000, 90-day, 7% note.

16 Received a $20,000, 6-month, 9% note to settle an open account from L. Richie.

31 Accrued interest revenue on all notes receivable.

Instructions

Journalize the transactions for Ace Supply Co. Omit cost of goods sold entries.

Ex. 262

These transactions took place for Acme Garden Co. during the years 2024 and 2025.

2024

May 1 Received a $15,000, 1-year, 9% note in exchange for an outstanding account receivable from L. Bryan.

Dec. 31 Accrued interest revenue on the L. Bryan note.

2025

May 1 Received principal plus interest on the L. Bryan note. (No interest has been accrued since December 31, 2024.)

Instructions

Record the transactions in the general journal.

Ex. 263

Presented here is basic financial information (in millions) from the annual reports of Nike and adidas.

Nike adidas

Net credit sales revenue $18,627 $10,299

Allowance for doubtful accounts, Jan. 1 71.5 112

Allowance for doubtful accounts, Dec. 31 78.4 111

Accounts receivable balance (gross), Jan 1 2,566.2 1,527

Accounts receivable balance (gross), Dec. 31 2,873.7 1,570

Instructions

Calculate the accounts receivable turnover and average collection period for both companies. Comment on the difference in their collection experiences.

Ex. 264

The following information is available from the annual reports of Company A and Company B.

(In millions)

A B

Net sales revenue $112,500 $32,000

Beginning accounts receivable, net 19,000 3,500

Ending accounts receivable, net 18,500 4,400

Instructions

(a) Based on the preceding information, compute the following for each company:

1. Accounts receivable turnover. (Assume all sales were credit sales.)

2. Average collection period.

(b) What conclusion concerning the management of accounts receivable can be drawn from these data?