ACCT Chapter 8

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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.

b. note receivable.

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.

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

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

a. Depreciating accounts receivable

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.

c. at cash realizable value.

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.

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

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

a. liability.
b. contra account of Bad Debt Expense.
c. expense.
d. contra account to Accounts Receivable.

d. contra account to Accounts Receivable.

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.

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

If a company fails to record estimated bad debts expense:
a. cash realizable value is understated.
b. expenses are understated.
c. revenues are understated.
d. receivables are understated.

b. expenses are understated.

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 uncollectibles.
d. a customer’s account becomes past due.

c. management estimates the amount of uncollectibles.

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.

b. Accounts Receivable should be credited.

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.

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

A debit balance in the Allowance for Doubtful Accounts

a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of receivables method of estimating bad debts is used.

b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.

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.

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

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.

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

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.

c. an operating expense.

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.

b. in the same year as the credit sale.

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

a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. debit to Loss on Credit Sales and a credit to Accounts Receivable.

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

Under the allowance method of accounting for uncollectible accounts,

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.

c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.

When using the balance sheet approach, 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. Net realizable method
b. Direct write-off method
c. Accrual method
d. Allowance method

d. Allowance method

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.

d. is deducted from accounts receivable.

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.

c. decreases and the allowance account decreases.

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.

a. total assets will be unchanged.

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.

a. cash realizable value.

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.

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

A promissory note

a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.

b. may be used to settle an accounts receivable.

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.

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

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.

c. customers are making payments very quickly.

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

Company / Accounts Receivable turnover / Average collection period

Martin / 13.9 / 26.3
Lewis / 13.3 / 27.4
Danforth / 10.4 / 35.1
Garner / 14.5 / 25.2
Industry Average / 13.0 / 28.1

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

a. Martin
b. Lewis
c. Danforth
d. Garner

d. Garner

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 generally used by businesses that are insolvent.
d. are mainly used in the textile and furniture industries.

a. are ways to accelerate receivable collections.

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

a. selling expense.
b. interest expense.
c. other expense.
d. contra asset.

a. selling expense.

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 from the credit card company.

b. is not involved in the collection process.

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