Ch.8 Wiley Plus MC

What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?

A note receivable.

On June 15, Kersee Company sold merchandise on account to Eng Co. for $1,000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received on June 24?

$686 (The amount received on June 24 is $686. Because payment is made within the discount period of 10 days, the amount received is $700 ($1,000 – return of $300) minus the discount of $14 ($700 × 2%), for a cash amount of $686.)

Which of the following should be classified as an "other" receivable?

Interest receivable.

What type of receivables result from sales transactions?

Trade receivables.

Which of the following should be classified as an "other" receivable?

Interest receivable.

When is a receivable recorded by a service organization?

When service is provided on account.

At what value are accounts receivable reported on the balance sheet?

Net cash realizable value.

Notes receivable are reported in the current assets section of the balance sheet at

Cash (net) realizable value.

At what amount are receivables reported on the balance sheet?

Cash (net) realizable value.

Which one of the following is not one of the three basic issues in accounting for notes receivable?

Realizing notes receivable.

Which of the following is one effect of recording thewrite off of an account under the allowance method?

Allowance for Doubtful Accounts is debited.

RyTronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $100,000 at year-end and the total credit sales were $800,000. Management estimates that 4% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment?

Bad Debts Expense 3,200 Allowance for Doubtful Accounts 3,200

When an uncollectible account is recovered after it has been written off, which of the following accounts will be credited in the process?

Accounts Receivable and Allowance for Doubtful Accounts.

Which one of the following statements is true?

Bad Debts Expense is a nominal account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period.

Obama Company has identified that Bill Clinton’s receivable account of $100 is uncollectible. What is the journal entry needed to write off the account under the allowance method?

Allowance for Doubtful Accounts 100 Accounts Receivable 100

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

$12,000 (Because the estimate is based on a percentage of receivables, the $800 balance in the Allowance accounts must be considered. The amount by which the allowance account will be increased is 7.5% times $160,000, which is $12,000. Since there is already a balance of $5,000 in the allowance account, the difference of $7,000 should be added, giving a balance of $12,000.)

During 2012, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2012, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2012, $30,000 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 $200,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2012?

$32,000 (After the write-offs are recorded, Allowance for Doubtful Accounts will have a debit balance of $12,000 ($18,000 credit beginning balance combined with a $30,000 debit for the write-offs). The desired balance, using the percentage of receivables basis, is a credit balance of $20,000 ($200,000 × 10%). In order to have an ending balance of $20,000, a credit entry of $32,000 must be made to Allowance for Doubtful Accounts. Thus, the amount of the adjusting entry must be $32,000.)

If a company uses the allowance method for uncollectible accounts, then the entry to record $800 of estimated uncollectibles is

Bad Debts Expense 800 Allowance for Doubtful Accounts 800

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method?

Allowance for Doubtful Accounts is debited.

Ryan Leaf Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end and the total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a credit balance of $200 before adjustment?

Bad Debts Expense 1,600 Allowance for Doubtful Accounts 1,600

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal these data:
Accounts receivable $800,000
Allowance for doubtful accounts per books before adjustment (credit) 12,000
Amounts expected to become uncollectible 65,000
How much is the cash realizable value of the accounts receivable at December 31, after adjustment?

$735,000 (The cash realizable value of the accounts receivable is accounts receivable less the ending balance in the Allowance for Doubtful Accounts. In this case, accounts receivable is $800,000 and the ending balance in Allowance for Doubtful Accounts is $65,000. This results in cash realizable value of $800,000 less $65,000, or $735,000.)

A 90-day promissory note is issued on September 15. What is the note’s maturity date?

December 14.

Which one of these statements about promissory notes is incorrect?

A promissory note is not a negotiable instrument.

Michael Co. accepts a $4,000, 3-month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is:

Notes Receivable 4,000 Accounts Receivable 4,000

At what amount is a short-term notes receivable recorded on the issue date?

Face value.

How much accrued interest should be reported on the payee’s December 31 balance sheet ona $5,000, 8%, 9-month note receivable issued on June 1?

$233 (Interest earned is calculated by multiplying the principal ($5,000) times the interest rate times the portion of the year that has passed since the note was issued. $5,000 × 8% × 7/12 = $233)

On May 2,Wainwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What entry will Wainwright Company make when it receives the note on May 2?

Notes Receivable 3,000 Accounts Receivable 3,000

Butte Co. loaned $25,000 to Beavis Co. on June 1, at 12% interest for 3 months. What adjusting entry will Butte Co. have to make on June 30 before preparing the financial statements on June 30?

Interest Receivable 250 Interest Revenue 250

Danta Company has a March 31 fiscal year end. How much is thematurity value of a $25,000, 12%, 3-month note receivable dated March 1?

$25,750 (The maturity value is the face value plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. Interest = $25,000 × 12% × 3/12 = $750. Maturity value = $25,000 + $750 = $25,750)

How much is the maturity value of a $25,000, 9%, 4-month note receivable issued on December 1 if the company has a fiscal year end on December 31?

$25,750 (The maturity value is the face value plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length of the note. Interest = $25,000 × 9% × 4/12 = $750. Maturity value = $25,000 + $750 = $25,750)

On the date a 90-day note is honored, how much cash will the payee receive?

Face value plus 90 days of interest.

Which of the following is the debit effect of the journal entry torecord the dishonor of a note receivable?

Accounts Receivable.

When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain?

Two credits and one debit.

Schleis Co. holds Murphy Inc.’s $10,000, 120-day, 9% note. What is the entry to be made by Schleis Co. when the note is collected, assuming no interest has previously been accrued?

Cash 10,300 Notes Receivable 10,000 Interest Revenue 300

A company holds a 120-day, 10%, $21,000 note which was not paid in full on the maturity date. Which of the following will the journal entry on the maturity date include?

Debit to Accounts Receivable for $21,700 (The journal entry will decrease Notes Receivable for the value of the note, recognize interest revenue for the term of the note, and increase the Accounts Receivable account for the total owed by the maker. The journal entry is: Accounts Receivable 21,700 (debit) Notes Receivable 21,000 (credit) Interest Revenue 700 (credit) ($21,000 × 10% × 120/360 = $700))

Which of the following is the correct sequence to report receivables on the balance sheet?

Accounts receivable, a 6-month note receivable, other receivables.

Which statement is true about reporting receivables on the balance sheet?

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.

Which one of the following is the correct presentation of Accounts Receivable and its contra account on the balance sheet?

Accounts Receivable $642,000 Less: Allowance for Doutful Accounts (2,000) $640,000.

If a company is concerned about lending money to a risky customer, which one of the following would it not want to do?

Provide the customer a lengthy payment period to increase the chance of paying.

What is often the most critical part of managing receivables?

Determining who gets credit and who doesn’t.

Which of the following is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company?

A concentration of credit risk.

Which one of the following is not one of the principles of managing accounts receivable?

Determining which vendor from which credit should be requested.

Eddy Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. How much is the receivables turnover ratio?

6.4.

Prall Corporation sells its goods on terms of 2/10, n/30. It has a receivables turnover ratio of 7.00. What is its average collection period (days)?

52 days.

Net credit sales are $800,000, average net receivables total $150,000, average inventory totals $200,000, and the allowance for doubtful accounts totals $8,000. How much is the average collection period?

68.5 days.

What is the receivables turnover ratio?

Net credit sales divided by average net receivables.

Which of these statements about Visa credit card sales is incorrect?

The retailer must wait to receive payment from the issuer.

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. Which of the following is/are the debit entry(ies) required to record this transaction by Good Stuff Retailers?

Cash $48,000 and Service Charge Expense $2,000.

Which one of the following is not a method used by companies to accelerate its cash receipts?

Writing off receivables.

Which of the following accounts is debited when a company factors its accounts receivable?

Service Charge Expense.

Laurel Company factors $300,000 of receivables to Hardy Factors. Hardy assesses a 3% fee on the amount of receivables sold. Laurel Co. factors its receivables to Hardy regularly. What journal entry does Laurel make when the factoring occurs?

Cash 291,000 Service Charge Expense 9,000 Accounts Receivable 300,000

Kerrison Company sold $6,000 of merchandise to customers who charged their purchases with a bank credit card. Kerrison’s bank charges it a 4% fee. Which one of the following is part of the journal entry to record the credit card sales?

Debit to Cash for $5,760.

Factoring is the process of

Selling accounts receivable at a discount to another party.