The Revenue/Receivables/Cash Cycle: Hapter

 CHAPTER 6 
The Revenue/Receivables/Cash Cycle

MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions
1 Definition of the operating cycle

2 Composition of cash on the balance sheet
3 Separation of duties in controls over cash
4 Understanding the bank reconciliation
5 Understanding the bank reconciliation
6 SFAS No. 125 criteria for recognizing transfers as sales.
7 Principles of internal control
8 Operating cycle defined
9 Trade discounts
10 Using direct write-off method
11 Allowance method of accounting for bad debts
12 Allowance method--recording write-off
13 Allowance method write-off--effect on net income and accounts receivable
14 Allowance method--recording collection of account written off
15 Balance sheet method of estimating bad debts--aging of accounts
receivable
16 An uncollectible receivable is paid off
17 Matching principle and the recognition of an estimated liability for
warranties
18 Accounts receivable turnover
19 Number of days’ sales in accounts receivable
20 Cash classifications
21 Characteristics of cash control system
22 Journal entry to replenish petty cash
23 Purpose of petty cash system
24 Purpose of petty cash reimbursement prior to year end
25 Replenishing petty cash fund
26 Bank statement information
27 Bank statement reconciliation
28 Bank statement reconciliation
29 Bank reconciliation--items added to bank balance
183
184 Chapter 6  The Revenue/Receivables/Cash Cycle
30 Bank reconciliation--adjustments on depositor's books

31 General assignment of accounts receivable does not reduce accounts
receivable balance
32 Definition of factoring accounts receivable
33 Reporting transfer of receivables with recourse as a sale
34 APB No. 21--valuation of notes receivable exchanged for property
35 Recording notes receivable without interest
36 Definition of discounting notes receivable
Computational Questions
37 Computing proceeds of discounting notes receivable
38 Computing proceeds of discounting notes receivable
39 Computation of sales discounts
40 Computation of sales discounts
41 Computation of gross sales given write-off amounts under direct write-off
42 Computation of net realizable value of accounts receivable
43 Computation of net realizable value of accounts receivable
44 Computation of allowance for doubtful accounts balance
45 Computation of doubtful accounts expense
48 Computation of doubtful accounts expense--aging method
49 Computation of net realizable value of accounts receivable using
percentage of credit sales for bad debts
51 Computation of warranty expenses
52 Computation of warranty expenses
53 Computation of accounts receivable turnover
54 Computation of number of days sales in average inventories
55 Computation of year-end cash balance
56 Computation of cash amount for balance sheet
57 Computation of petty cash fund reimbursement
58 Computation of reconciled cash balance
59 Computation of reconciled cash balance
60 Computation of cash balance per books
61 Computation of cash amount for balance sheet
62 Computation of corrected cash balance
63 Computation of cash disbursements per books
64 Computation of proceeds from assignment of accounts receivable
65 Assignment of accounts receivable--computation of amount owed to
assignee
66 Computation of proceeds received on note
Test Bank, Intermediate Accounting, 14th ed. 185

71 Computation of proceeds of discounting notes receivable
72 Computation of proceeds of discounting notes receivable
73 Computation of effective interest rate on notes receivable
74 Effect of uncollectible accounts on statement of cash flows
77 Proper statement presentation of receivables
PROBLEMS
1 Provide entries to establish, replenish, and decrease petty cash
2 Computation of cash balance per books before reconciliation adjustments
3 Prepare bank reconciliation statement
4 Prepare bank reconciliation statement
5 Prepare 4-column bank reconciliation
6 Give adjusting entries for bad debts expense
7 Give adjusting entries for bad debts expense
8 Prepare schedule of allowance for bad debts and adjusting entries
9 Record assignment, loan and remittance of accounts receivable (and show
balance sheet)
10 Record factoring/sale of accounts receivable and final settlement
11 Computation of proceeds from discounting three separate notes
12 Given scenario, compute discount on notes receivable, gain/loss on
equipment sale, record sale and amortization of discount
13 Record entries for sale, interest, and settlement of building sale
14 Record transactions for sale of equipment and factor of note
15 Record note receipt and discount to bank
16 Record factoring of accounts receivable
17 Computation of net cash from operations given appropriate balances
MULTIPLE CHOICE QUESTIONS

c 1. An operating cycle
LO1 a. is twelve months or less in length.
b. is the average time required for a company to collect its receivables.
c. is used to determine current assets when the operating cycle is longer
than one year.
d. begins with inventory and ends with cash.
a 2. The amount reported as "Cash" on a company's balance sheet normally

should
LO4 exclude
a. postdated checks that are payable to the company.
b. cash in a payroll account.
c. undelivered checks written and signed by the company.
d. petty cash.
c 3. Which one of the following statements is incorrect?

LO4 a. The accounting function should be separated from the custodianship of
a company's assets.
b. Certain clerical personnel in a company should be rotated among
various jobs.
c. The responsibility for receiving merchandise and paying for it should
usually be given to one person.
d. A company's personnel should be given well-defined responsibilities.
d 4. If the balance shown on a company's bank statement is less than the

correct
LO4 cash balance, and neither the company nor the bank has made any errors,
there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
a 5. If the cash balance shown in a company's accounting records is less than

the
LO4 correct cash balance, and neither the company nor the bank has made any
errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. deposits in transit.
c. outstanding checks.
d. bank charges not yet recorded by the company.
b 6. The FASB specified in Statement No. 125 three conditions that must be met
LO6 if a transfer of receivables is to accounted for as a sale. Which of the
following is not one of the three conditions specified?
a. The transferred assets have been isolated from the transferor.
b. The transferor’s obligation under the recourse provisions can be
reasonably estimated.
c. The transferee has the right to pledge or exchange the transferred
assets.
d. The transferor does not maintain effective control over the assets
through an agreement to repurchase the assets before their maturity.
c 7. Which one of the following statements is incorrect?

LO4 a. The accounting function should be separated from the custodianship of
a company’s assets.
b. Certain clerical personnel in a company should be rotated among
various jobs.
c. The responsibility of receiving merchandise and paying for it usually
should be given to one person.
d. A company’s personnel should given well-defined responsibilities.
a 8. Which of the following is incorrect?

LO1 a. The operating cycle always is one year in duration.
b. The operating cycle sometimes is longer than one year in duration.
c. The operating cycle sometimes is shorter than one year in duration.
d. The operating cycle is a concept applicable both to manufacturing and
retailing enterprises.
c 9. A discount given to a customer for purchasing a large volume of

merchandise
LO2 is typically referred to as a
a. quantity discount.
b. cash discount.
c. trade discount.
d. size discount.
d 10. When the direct write-off method of recognizing bad debt expense is used,
the
LO2 entry to write off a specific customer account would
a. increase net income.
b. have no effect on net income.
c. increase the accounts receivable balance and increase net income.
d. decrease the accounts receivable balance and decrease net income.
b 11. When comparing the allowance method of accounting for bad debts with
the
LO2 direct write-off method, which of the following is true?
a. The direct write-off method is exact and also better illustrates the
matching principle.
b. The allowance method is less exact but it better illustrates the matching
principle.
c. The direct write-off method is theoretically superior.
d. The direct write-off method requires two separate entries to write off an
uncollectible account.
a 12. When the allowance method of recognizing bad debt expense is used, the
LO2 entry to record the write-off of a specific uncollectible account would
decrease
a. allowance for doubtful accounts.
b. net income.
c. net realizable value of accounts receivable.
d. working capital.
a 13. When a specific customer’s account is written off by a company using the
LO2 allowance method, the effect on net income and the net realizable value of
the accounts receivable is
Net Realizable Value
Net Income of Accounts Receivable
a. None None
b. Decrease Decrease
c. Increase Increase
d. Decrease None
b 14. When the allowance method of recognizing bad debt expense is used, the
LO2 entries at the time of collection of a small account previously written off
would
a. increase net income.
b. increase the allowance for doubtful accounts.
c. decrease net income.
d. decrease the allowance for doubtful accounts.
b 15. A method of estimating bad debts that focuses on the balance sheet rather
LO2 than the income statement is the allowance method based on
a. direct write-off.
b. aging the trade receivable accounts.
c. credit sales.
d. specific accounts determined to be uncollectible.
c 16. The entry

LO2
Accounts Receivable....................................... xxx
Allowance for Uncollectible Accounts........ xxx
would be made when

a. a customer pays its account balance.
b. a customer defaults on its account.
c. a previously defaulted customer pays its outstanding balance.

d. estimated uncollectible receivables are too low.
a 17. What is the accounting principle underlying the recognition of an estimated

LO2 liability for warranties in the period of product sale?
a. Matching
b. Materiality
c. Full Disclosure
d. Conservatism
c 18. In calculating a company’s accounts receivable turnover, which of the

following
LO3 sets of factors would be used?
a. Net income and average accounts receivable
b. Average accounts receivable and average total assets
c. Average accounts receivable and net credit sales
d. Net credit sales and average stockholders’ equity
c 19. Which of the following factors are used to compute the number of days’
sales
LO3 in accounts receivable?
a. Inventory turnover and 365 days
b. Net sales and average inventory
c. Accounts receivable turnover and 365 days
d. Average accounts receivable and cost of goods sold
d 20. Which of the following would not be classified as cash?

LO4 a. Personal checks
b. Travelers’ checks
c. Cashiers’ checks
d. Postdated checks
b 21. Which of the following is not a basic characteristic of a system of cash

control?
LO4 a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
c 22. On January 1, 2002, Kyle Corporation established a petty cash fund of

$400.
LO9 On December 31, 2002, the petty cash fund was examined and found to
have receipts and documents for miscellaneous expenses amounting to
$364. In addition, there was cash amounting to $44. What entry would be
required to record replenishment of the petty cash fund on December 31,
2002?
a. Petty Cash............................................................. 364
Cash Short and Over....................................... 8
Cash................................................................. 356
b. Miscellaneous Expense........................................ 364
Petty Cash....................................................... 356
c. Miscellaneous Expense........................................ 364
Cash................................................................. 356
d. Miscellaneous Expense........................................ 356
Cash Short and Over............................................ 8
Cash................................................................. 364
d 23. A petty cash system is designed to

LO9 a. cash checks for employees.
b. handle cash sales.
c. account for all cash receipts and disbursements.
d. pay small miscellaneous expenses.
a 24. In most situations, the petty cash fund is reimbursed just prior to the year
end
LO9 and an adjusting entry is made to avoid
a. the overstatement of cash and the understatement of expenses.
b. the understatement of cash and the overstatement of expenses.
c. the misstatement of revenues.
d. the understatement of cash with the appropriate statement of expenses.
b 25. In replenishing a petty cash fund, which one of the following entries is
LO9 required?
a. Debit Petty Cash, credit Cash
b. Debit individual expense accounts, credit Cash
c. Debit Petty Cash, credit individual expense accounts
d. Debit Cash, credit Petty Cash
d 26. Bank statements provide information about all of the following except
LO4 a. checks cleared during the period.
b. NSF checks.
c. bank charges for the period.
d. errors made by the company.
c 27. Which of the following items would be added to the book balance on a bank
LO4 reconciliation?
a. Outstanding checks
b. A check written for $63 entered as $36 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
c 28. In preparing a bank reconciliation, interest paid by the bank on the account
is
LO4 a. added to the bank balance.
b. subtracted from the bank balance.
c. added to the book balance.
d. subtracted from the book balance.
c 29. In preparing a monthly bank reconciliation, which of the following items

would
LO4 be added to the balance reported on the bank statement to arrive at the
correct cash balance?
a. Outstanding checks
b. Bank service charge
c. Deposits in transit
d. A customer’s note collected by the bank on behalf of the depositor
b 30. Bank reconciliations are normally prepared on a monthly basis to identify

LO4 adjustments needed in the depositor’s records and to identify bank errors.
Adjustments should be recorded for
a. bank errors, outstanding checks, and deposits in transit.
b. all items except bank errors, outstanding checks, and deposits in transit.
c. book errors, bank errors, deposits in transit, and outstanding checks.
d. outstanding checks and deposits in transit.
b 31. The balance in Accounts Receivable is not reduced in recording which of

the
LO6 following types of financing arrangements?
a. Assignment of specific accounts receivable
b. General assignment (pledge) of accounts receivable

c. Factoring of accounts receivable
d. Transfer of accounts receivable without recourse
b 32. When the accounts receivable of a company are sold outright to a company
LO6 that normally buys accounts receivable of other companies without
recourse, the accounts receivable have been
a. transferred with recourse.
b. factored.
c. assigned.
d. pledged.
a 33. Which of the following is a requirement for reporting the transfer of

receivables
LO6 with recourse as a sale?
a. The transferor has the right to pledge or exchange the transferred
receivables.
b. The transferor surrenders control of the future economic benefit
embodied in the receivables.
c. The transferor’s obligation under the recourse provisions can be
reasonably estimated.
d. The transferee cannot require the transferor to repurchase the
receivables except pursuant to the recourse provisions.
a 34. According to APB Opinion No. 21, if a note receivable is exchanged for
LO7 property and no interest rate is stated, the note is to be recorded at the
a. fair market value of the property or note.
b. maturity value of the note.
c. face value of the note.
d. carrying (book) value of the property.
c 35. Scott Company received a one-year non-interest-bearing note receivable.

LO7 When the note receivable was recorded, which of the following were
debited or credited?
Interest Discount on
Receivable Note Receivable
a. Yes Yes
b. Yes No
c. No Yes
d. No No
b 36. A 180-day, 12 percent interest-bearing note receivable is sold to a bank
after
LO7 being held for 45 days. The proceeds are calculated using a 15 percent
interest rate. The note receivable has been
Discounted Pledged
a. Yes Yes
b. Yes No
c. No Yes
d. No No
b 37. A 90-day, 15 percent interest-bearing note receivable was immediately

LO7 discounted at a bank at 12 percent. The proceeds received from the bank
upon discounting would be the
a. maturity value less the discount at 15 percent.
b. maturity value less the discount at 12 percent.
c. face value less the discount at 15 percent.
d. face value less the discount at 12 percent.
a 38. On December 1, 2002, Bain Company received a $10,000, 60-day, 6

percent
LO7 note from a customer. On December 31, 2002, the company discounted
the note at the bank. The bank’s discount rate was 9 percent. How much
were the proceeds received by Bain from the bank?
a. $10,024.25.
b. $9,700.00.
c. $9,924.25.
d. $10,050.00.
b 39. First Company sold merchandise on credit to Second Company for $1,000
on
LO2 July 1, with terms of 2/10, net /30. On July 6, Second returned $200 worth
of merchandise claiming the materials were defective. On July 8, First
received a payment from Second and credited Accounts Receivable for
$450. On July 24, Second Company paid the remaining balance on its
account. How much was the total Sales Discounts given to Second during
July?
a. $0
b. $9
c. $441
d. $2,441
c 40. First Company sold merchandise on credit to Second Company for $1,000
on
LO2 July 1, with terms of 2/10, net /30. On July 6, Second returned $200 worth
of merchandise claiming the materials were defective. On July 8, First
received a payment from Second and credited Accounts Receivable for
$450. On July 24, Second Company paid the remaining balance on its
account. What was the total cash received from Second during July?
a. $441
b. $450
c. $791
d. $800
b 41. For the month of December, the records of Balin Corporation show the
LO2 following information:
Cash received on accounts receivable................................. $ 70,000

Cash sales............................................................................. 60,000
Accounts Receivable, December 1....................................... 160,000
Accounts Receivable, December 31..................................... 148,000
Accounts Receivable written off as uncollectible.................. 2,000
The corporation uses the direct write-off method in accounting for

uncollectible accounts receivable. What are the gross sales for the month
of December?
a. $118,000
b. $120,000
c. $130,000
d. $144,000
c 42. An analysis and aging of accounts receivable of the Lucille Company at

LO2 December 31, 2002, showed the following:
Accounts Receivable....................................................... $840,000

Allowance for Doubtful Accounts (before adjustment)........... 36,000
(cr)
Accounts estimated to be uncollectible........................... 76,800
Compute the net realizable value of the accounts receivable of Lucille

Company at December 31, 2002.
a. $804,000
b. $799,200
c. $763,200
d. $727,200
d 43. An analysis and aging of the accounts receivable of Shriner Company at
LO2 December 31 revealed the following data:
Accounts Receivable....................................................... $450,000

Allowance for Doubtful Accounts (before adjustment)........... 25,000
(cr)
Accounts estimated to be uncollectible........................... 32,000
The net realizable value of the accounts receivable at December 31 should

be
a. $450,000.
b. $443,000.
c. $425,000.
d. $418,000.
d 44. Maple Company provides for doubtful accounts expense at the rate of 3
LO2 percent of credit sales. The following data are available for last year:
Allowance for Doubtful Accounts, January 1................... $ 54,000

(cr)
Accounts written off as uncollectible during the year...... 60,000
Collection of accounts written off in prior years
(customer credit was re-established)...................................... 15,000
Credit sales, year-ended December 31........................... 3,000,000
The allowance for doubtful accounts balance at December 31, after
adjusting entries, should be
a. $45,000.
b. $84,000.
c. $90,000.
d. $99,000.
c 45. The following information is from the records of Prosser, Inc. for the year
LO2 ended December 31, 2002.
Allowance for Doubtful Accounts, January 1, 2002......... $ 6,000

(cr)
Sales, 2002...................................................................... 2,920,000
Sales Returns and Allowances, 2002.............................. 32,000
If the basis for estimating bad debts is 1 percent of net sales, the correct
amount of doubtful accounts expense for 2002 is
a. $22,800.
b. $23,200.
c. $28,880.
d. $34,880.
a 46. Based on the aging of its accounts receivable at December 31, Pribob
LO2 Company determined that the net realizable value of the receivables at that
date is $760,000. Additional information is as follows:
Accounts Receivable at December 31............................ $880,000

Allowance for Doubtful Accounts at January 1................ 128,000
(cr)
Accounts written off as uncollectible during the year...... 88,000
Pribob’s doubtful accounts expense for the year ended December 31 is

a. $80,000.
b. $96,000.
c. $120,000.
d. $160,000.
b 47. Based on its past collection experience, Ace Company provides for bad
debts
LO2 at the rate of 2 percent of net credit sales. On January 1, 2002, the
allowance for doubtful accounts credit balance was $10,000. During 2002,
Ace wrote off $18,000 of uncollectible receivables and recovered $5,000 on
accounts written off in prior years. If net credit sales for 1999 totaled
$1,000,000, the doubtful accounts expense for 2002 should be
a. $17,000.
b. $20,000.
c. $23,000.
d. $35,000.
d 48. Richards Company uses the allowance method of accounting for bad debts.
LO2 The following summary schedule was prepared from an aging of accounts
receivable outstanding on December 31 of the current year.
No. of Days Probability

Outstanding Amount of Collection
0-30 days $500,000 .98
31-60 days 200,000 .90
Over 60 days 100,000 .80
The following additional information is available for the current year:
Net credit sales for the year....................................... $4,000,000

Allowance for Doubtful Accounts:
Balance, January 1............................................... 45,000
(cr)
Balance before adjustment, December 31........... 2,000
(dr)
If Richards bases its estimate of bad debts on the aging of accounts
receivable, doubtful accounts expense for the current year ending
December 31 is
a. $47,000.
b. $48,000.
c. $50,000.
d. $52,000.
c 49. Richards Company uses the allowance method of accounting for bad debts.
LO2 The following summary schedule was prepared from an aging of accounts
receivable outstanding on December 31 of the current year.
No. of Days Probability

Outstanding Amount of Collection
0-30 days $500,000 .98
31-60 days 200,000 .90
Over 60 days 100,000 .80
The following additional information is available for the current year:
Net credit sales for the year............................................. $4,000,000

Allowance for Doubtful Accounts:
Balance, January 1..................................................... 45,000
(cr)
Balance before adjustment, December 31................. 2,000
(dr)
If Richards determines bad debt expense using 1.5 percent of net credit
sales, the net realizable value of accounts receivable on the December 31
balance sheet will be
a. $738,000.
b. $740,000.
c. $742,000.
d. $750,000.
d 50. Gekko, Inc. reported the following balances (after adjustment) at the end of
LO2 2002 and 2001.
12/31/2002 12/31/2001
Total accounts receivable..................... $105,000 $96,000
Net accounts receivable....................... 102,000 94,500
During 2002, Gekko wrote off customer accounts totaling $3,200 and
collected $800 on accounts written off in previous years. Gekko’s doubtful
accounts expense for the year ending December 31, 2002 is
a. $1,500.
b. $2,400.
c. $3,000.
d. $3,900.
c 51. A new product introduced by Wilkenson Promotions carries a two-year

LO2 warranty against defects. The estimated warranty costs related to dollar
sales are as follows:
Year of sale................................................................. 3 percent
Year after sale............................................................ 5 percent
Sales and actual warranty expenditures for the years ended December 31,
2001 and 2002, are as follows:
Actual Warranty
Sales Expenditures
2001 $ 800,000 $20,000
2002 1,000,000 70,000
What amount should Wilkenson report as its estimated liability as of

December 31, 2002?
a. $4,000
b. $24,000
c. $54,000
d. $74,000
d 52. National Appliance Center sells washing machines that carry a three-year
LO2 warranty against manufacturer’s defects. Based on company experience,
warranty costs are estimated at $60 per machine. During the year, National
sold 48,000 washing machines and paid warranty costs of $340,000. In its
income statement for the year ended December 31, National should report
warranty expense of
a. $680,000.
b. $960,000.
c. $2,200,000.
d. $2,880,000.
c 53. Millward Corporation's books disclosed the following information for the
year
LO3 ended December 31, 2002:
Net credit sales................................................................ $1,500,000

Net cash sales.................................................................. 240,000
Accounts Receivable at beginning of year...................... 200,000
Accounts Receivable at end of year................................ 400,000
Millward's accounts receivable turnover is

a. 3.75 times.
b. 4.35 times.
c. 5.00 times.
d. 5.80 times.
b 54. Selected information from the accounting records of Ellison Manufacturing

LO3 Company follows:
Net sales.......................................................................... $3,600,000

Cost of goods sold........................................................... 2,400,000
Inventories at January 1.................................................. 672,000
Inventories at December 31............................................. 576,000
What is the number of days' sales in average inventories for the year?
a. 102.2
b. 94.9
c. 87.6
d. 68.1
c 55. Berman Corporation had the following transactions in its first year of
LO4 operations:
Sales (90 percent collected in the first year)................... $750,000

Disbursements for costs and expenses........................... 600,000
Purchases of equipment for cash.................................... 200,000
Proceeds from issuance of common stock...................... 250,000
Payments on short-term borrowings................................ 25,000
Proceeds from short-term borrowings............................. 50,000
Depreciation on equipment.............................................. 40,000
Disbursements for income taxes..................................... 45,000
Bad debt write-offs........................................................... 30,000
What is the cash balance at December 31 of the first year?

a. $75,000
b. $85,000
c. $105,000
d. $140,000
d 56. Jackson Company had the following cash balances at December 31, 2002:
LO4
Cash in banks.................................................................. $375,000
Petty cash funds (all funds were reimbursed on
December 31, 2002)......................................................... 5,000
Cash in banks includes $125,000 of compensating balances against short-

term borrowing arrangements at December 31, 2002. The compensating
balances are legally restricted as to withdrawal by Jackson. In the current
asset section of Jackson’s December 31, 2002, balance sheet, what total
amount should be reported as Cash?
a. $380,000
b. $375,000
c. $255,000
d. $250,000
d 57. A company has a petty cash fund of $25. At the end of the month, petty
cash
LO9 includes the following:
Currency and coins.......................................................... $ 1.50

Receipted vouchers for:
Postage....................................................................... 6.00
Travel.......................................................................... 7.50
Donation to charity...................................................... 10.00
$25.00
Which of the following is the correct entry to simultaneously reimburse the
fund and increase it to $100?
a. Petty Cash............................................................. 100.00
Cash................................................................. 100.00
b. Petty Cash............................................................. 98.50
Cash................................................................. 98.50
c. Postage................................................................. 6.00
Travel .................................................................... 7.50
Donations.............................................................. 10.00
Cash................................................................. 23.50
d. Petty Cash............................................................. 75.00
Postage................................................................. 6.00
Travel .................................................................... 7.50
Donations.............................................................. 10.00
Cash................................................................. 98.50
d 58. Assume the following facts for Kurt Company: The month-end bank
statement
LO4 shows a balance of $40,000; outstanding checks total $2,000; a deposit of
$8,000 is in transit at month-end; and a check for $400 was erroneously
charged against the account by the bank. What is the correct cash balance
at the end of the month?
a. $33,600
b. $34,400
c. $45,600
d. $46,400
c 59. In preparing the bank reconciliation of Crews Company for the month of
July,
LO4 the following information is available:
Balance per bank statement, 7/31........................................ $54,075

Deposits in transit, 7/31......................................................... 9,375
Outstanding checks, 7/31...................................................... 8,625
Deposit erroneously recorded by bank to
Crews account, 7/18........................................................ 375
Bank service charges for July............................................... 75
What is the correct cash balance at July 31?

a. $52,875
b. $54,375
c. $54,450
d. $54,825
a 60. The August 31 bank statement of Kelvin Inc. showed a balance of

$113,000.
LO4 Deducted in arriving at this amount was a customer’s NSF check for
$2,400 that had been returned. Kelvin had received no prior notice
concerning this check. In addition to the bank statement, other records
showed there were deposits in transit totaling $17,200 and that outstanding
checks totaled $10,800. What is the cash balance per books at August 31
(prior to adjustments)?
a. $121,800
b. $119,400
c. $117,000
d. $115,400
c 61. Trask Corporation’s checkbook balance on December 31, 2001, was

$8,000.
LO4 In addition, Trask held the following items in its safe on December 31:
Check payable to Trask Corporation, dated January 2,
2002, not included in December 31 checkbook
balance............................................................................. $2,000
Check payable to Trask Corporation, deposited
December 20, and included in December 31
checkbook balance, but returned by bank on
December 30, stamped “NSF.” The check was
redeposited January 2, 2002, and cleared
January 7......................................................................... 400
Post-dated checks................................................................. 150
Check drawn on Trask Corporation’s account, payable
to a vendor, dated and recorded December 31, but
not mailed until January 15, 2002.................................... 1,000
The proper amount to be shown as cash on Trask’s balance sheet at

December 31, 2001, is
a. $7,600.
b. $8,000.
c. $8,600.
d. $9,750.
d 62. In preparing its bank reconciliation for the month of February, James
Company
LO4 has available the following information:
Balance per bank statement, February 28............................ $18,025
Deposit in transit, February 28.............................................. 3,125
Outstanding checks, February 28......................................... 2,875
Check erroneously deducted by bank from James’
account, February 10....................................................... 125
Bank service charges for February....................................... 25
What is the corrected cash balance at February 28?

a. $18,125
b. $18,150
c. $18,275
d. $18,400
a 63. Ramos Company had the following bank reconciliation at March 31:
LO4
Balance per bank statement, 3/31........................................$ 93,000
Add: Deposit in transit.......................................................... 20,600
$113,600
Less: Outstanding checks................................................... (25,200)
Balance per books, 3/31........................................................$ 88,400
Data per bank statement for the month of April follow:

Deposits...........................................................................$116,800
Disbursements................................................................. 99,400
All reconciliation items at March 31 cleared through the bank in April.

Outstanding checks at April 30 totaled $15,000. What is the amount of
cash disbursements per books in April?
a. $89,200
b. $99,400
c. $109,600
d. $114,400
a 64. On September 1, Riva Co. assigns specific receivables totaling $750,000 to
LO6 Pacific Bank as collateral on a $625,000, 12 percent note. Riva Co. will
continue to collect the assigned accounts receivable. Pacific also assesses
a 2 percent service charge on the total accounts receivable assigned. Riva
Co. is to make monthly payments to Pacific with cash collected on assigned
accounts receivable. Collections of assigned accounts during September
totaled $260,000 less cash discounts of $3,500. What were the proceeds
from the assignment of Riva’s accounts receivable on September 1?
a. $610,000
b. $612,500
c. $625,000
d. $735,000
b 65. On September 1, Riva Co. assigns specific receivables totaling $750,000 to

LO6 Pacific Bank as collateral on a $625,000, 12 percent note. Riva Co. will
continue to collect the assigned accounts receivable. Pacific also assesses
a 2 percent service charge on the total accounts receivable assigned. Riva
Co. is to make monthly payments to Pacific with cash collected on assigned
accounts receivable. Collections of assigned accounts during September
totaled $260,000 less cash discounts of $3,500. What amount is owed to
Pacific by Riva Co. for September collections plus accrued interest on the
note to September 30?
a. $260,000
b. $262,750
c. $264,000
d. $266,250
a 66. Simpson Company held a $6,000, 3-month, 15 percent note. One month
LO6 before maturity, it discounted the note at 10 percent at a local bank.
Approximately how much interest did Simpson earn on the note?
a. $173
b. $52
c. $225
d. $60
d 67. If a 3-month non-interest-bearing note receivable of $10,000 is discounted

at
LO6 a bank at 10 percent, how much cash is received?
a. $10
b. $1,010
c. $999
d. $9,750
c 68. On January 1, Parent Company gave Kids, Inc. a $5,000, 2-month, 6

percent
LO6 note in payment of its account. One month later, Kids discounted the note
at the bank at 8 percent. The cash that Kids received from the bank was
(rounded to the nearest dollar)
a. $4,960.
b. $5,010.
c. $5,016.
d. $5,022.
c 69. On June 1, Clinton Corporation accepted a customer’s $10,000, 9 percent,

3
LO6 month note. On July 1, the note was discounted at a bank at a rate of 12
percent. How much cash did Clinton receive from the bank on the
discounted note?
a. $9,800.00
b. $9,942.50
c. $10,020.50
d. $10,250.00
b 70. A 10 percent, $3,000, 3-month note receivable discounted at 12 percent for

LO6 2 months will result in net proceeds of
a. $3,075.00.
b. $3,013.50.
c. $3,000.00.
d. $3,005.25.
c 71. Grant Company accepted a $400,000 face value, 6-month, 10 percent note
LO6 dated May 15 from a customer. On that same date Grant discounted the
note at Eagle National Bank at a 12 percent discount rate. How much cash
should Grant receive from the bank on May 15?
a. $400,000
b. $396,000
c. $394,800
d. $387,200
c 72. On June 30, 2002, Simon Company discounted a customer’s $180,000, 6

LO6 month, 10 percent note receivable dated April 30, 2002. A discount rate of
12 percent was charged by the bank. Simon’s proceeds from this
discounted note would be
a. $169,200.
b. $172,800.
c. $181,440.
d. $185,220.
c 73. On July 1, 2002, Cornell Corp. received a one-year note with a face value
of
LO7 $900,000 and a stated interest rate of 15 percent in exchange for a
machine with a fair value of $1,000,000. Compute the effective interest rate
for Cornell Corp.
a. 16.67 percent
b. 15.0 percent
c. 3.5 percent
d. 11.11 percent
b 74. Gray Company had an accounts receivable balance of $50,000 on

December
LO8 31, 2001, and $75,000 on December 31, 2002. The company wrote off
$20,000 of accounts receivable during 2002, and collected $3,000 on an
account written off in 2000. Sales for the year 2002 totaled $620,000. All
sales were on account. The amount collected from customers on accounts
receivable during 2002 was
a. $575,000.
b. $578,000.
c. $600,000.
d. $595,000.
a 75. JG Company had an accounts receivable balance of $40,000 on December

a. $487,000.
b. $485,000.
c. $510,000.
d. $495,000.
d 76. RGI Company had an accounts receivable balance of $45,000 on

December
a. $535,000.
b. $523,000.
c. $538,000.
d. $525,500.
d 77. Which of the following would be considered part of the category "trade
LO5 receivables"?
a. Advances to employees
b. Income tax refunds receivable
c. Dividends receivable
d. Amounts due from customers
PROBLEMS
Problem 1
The accountant for Baccah Inc. established a petty cash fund of $1,400. During
September, the fund was depleted by the following disbursements:
Shipping expense............................................................................. $740

Travel expense................................................................................. 240
Postage expense.............................................................................. 230
Miscellaneous supplies.................................................................... 170
In addition to receipts for the above items, the petty cash box contained $8 in coins
and an IOU of $8 from the secretary handling the fund. The company uses a cash
over and short expense account, as needed. The company decided to decrease
the petty cash fund to $1,000.
(1) Provide the entry to establish the petty cash fund.

(2) Provide the entry to replenish the petty cash fund.
(3) Provide the entry to record the decrease in the petty cash fund.
Solution 1
LO9
(1) Petty Cash........................................................................ 1,400

Cash............................................................................ 1,400
(2) Shipping Expense............................................................ 740

Travel Expense................................................................ 240
Postage Expense............................................................. 230
Miscellaneous Supplies................................................... 170
Employee Receivables.................................................... 8
Cash Over and Short....................................................... 4
Cash............................................................................ 1,392
(3) Cash ............................................................................... 400

Petty Cash.................................................................. 400
Problem 2
The information below is from the books of the Seminole Corporation on June 30:
Balance per bank statement............................................................ $11,164
Receipts recorded but not yet deposited in the bank...................... 1,340
Bank charges not recorded.............................................................. 16
Note collected by bank and not recorded on books........................ 1,120
Outstanding checks.......................................................................... 1,100
NSF checks--not recorded on books nor redeposited..................... 160
Assuming no errors were made, compute the cash balance per books on June 30
before any reconciliation adjustments.
Solution 2
LO4
Balance per bank statement, June 30............................................. $11,164

Add: Receipts not yet deposited......................................... 1,340
Bank charges.............................................................. 16
NSF checks................................................................ 160
$12,680
Deduct: Note collected by bank............................................... 1,120
Outstanding checks.................................................... 1,100
Balance per books before reconciliation adjustments..................... $10,460
Problem 3
The books of Steve’s Service, Inc. disclosed a cash balance of $68,757 on June
30. The bank statement as of June 30 showed a balance of $54,780. Additional
information that might be useful in reconciling the two balances follows:
(a) Check number 748 for $3,000 was originally recorded on the books as
$4,500.
(b) A customer’s note dated March 25 was discounted on April 12. The note
was dishonored on June 29 (maturity date). The bank charged Steve’s
account for $14,265, including a protest fee of $42.
(c) The deposit of June 24 was recorded on the books as $2,895, but it was
actually a deposit of $2,700.
(d) Outstanding checks totaled $9,885 as of June 30.
(e) There were bank service charges for June of $210 not yet recorded on the
books.
(f) Steve’s account had been charged on June 26 for a customer’s NSF check
for $1,296.
(g) Steve properly deposited $600 on June 3 that was not recorded by the
bank.
(h) Receipts of June 30 for $13,425 were recorded by the bank on July 2.
(i) A bank memo stated that a customer’s note for $4,500 and interest of $165
had been collected on June 27, and the bank charged a $36 collection fee.
Prepare a bank reconciliation statement, using the form reconciling bank and book
balances to the correct cash balance.
Solution 3
LO4
Balance per bank statement, June 30............................. $54,780
Add: Deposits in transit............................................ $13,425
Bank error--deposit not recorded.................... 600 14,025
$68,805
Deduct: Outstanding checks......................................... 9,885
Corrected bank balance................................................... $58,920
Balance per books, June 30............................................ $68,757

Add: Book error--Check No. 748............................. $ 1,500
Customer note collected by bank.................... 4,629 6,129
$74,886
Deduct: Dishonored note.............................................. $14,265
Book error--improperly recorded deposit........ 195
NSF check....................................................... 1,296
Bank service charges...................................... 210 15,966
Corrected book balance................................................... $58,920
Problem 4
The Eric Manufacturing Company received its bank statement for the month ending
May 31. The bank statement indicates a balance of $32,400. The cash account as
of the close of business on May 31 has a balance of $8,350. In reconciling the
balances, the following items are discovered.
(a) Collection by bank of note for $1,500 less collection fees of $250.
(b) Deposits in transit, $51,000.
(c) The bank charged the depositor $800 for overdrafts.
(d) Checks outstanding on May 31, $79,100.
(e) A canceled check issued to Scott Corp. for $4,500 was not recorded on Eric
Company’s books.
Prepare a bank reconciliation statement. (Use the format of reconciling bank and
depositor figures to corrected cash balance.)
Solution 4
LO4
Balance per bank statement............................................ $ 32,400
Add deposits in transit...................................................... 51,000
$ 83,400
Deduct outstanding checks.............................................. 79,100
Corrected balance............................................................ $ 4,300
Balance per depositor’s records...................................... $ 8,350

Add note receivable collected by bank............................ 1,250
$ 9,600
Deduct:
Overdrafts................................................................ $ 800
Book error--unrecorded check................................. 4,500 5,300
Corrected balance............................................................ $ 4,300
Problem 5
The accountant for the Goshen Company assembled the following data:
June 30 July 31
Cash account balance................................................... $ 15,822 $ 39,745
Bank statement balance................................................ 107,082 137,817
Deposits in transit.......................................................... 8,201 12,880
Outstanding checks....................................................... 27,718 30,112
Bank service charge*.................................................... 72 60
Customer’s check deposited July 10, returned by
bank on July 16 marked NSF, and redeposited
immediately; no entry made on books for return
or redeposit.............................................................. 8,250
Collection by bank of company’s notes receivable....... 71,815 80,900
* (Recorded on books in month following charge or collection)
The bank statements and the company’s cash records show these totals:
Disbursements in July per bank statement................... $218,373
Cash receipts in July per Goshen’s books.................... 236,452
Checks written in July per Goshen’s books.................. 212,529
Receipts in July per bank statement............................. 249,108
Prepare a 4-column bank reconciliation as of July 31, using the form that reconciles
both the book and bank balances to a correct cash amount.
Solution 5
LO4
Goshen Company
Reconciliation of Receipts, Disbursements, and Bank Balance
July 31
Beginning Ending
Reconciliation Reconciliation
June 30 Receipts Disbursements July 31
Balance per bank

statement..................$107,082 $249,108 $218,373 $137,817
Deposits in transit:
June 30.............. 8,201 (8,201)
July 31............... 12,880 12,880
Outstanding checks:
June 30.............. (27,718) (27,718)
July 31............... 30,112 (30,112)
NSF check
redeposited.............. (8,250) (8,250)
Corrected bank
balance..................... $ 87,565 $245,537 $212,517 $120,585
Balance per books. . . $ 15,822 $236,452 $212,529 $ 39,745

Bank service charge:
June................... (72) (72)
July.................... 60 (60)
Collection of notes
receivable:
June................... 71,815 (71,815)
July.................... 80,900 80,900
Corrected book
balance..................... $ 87,565 $245,537 $212,517 $120,585
Problem 6
The following information was abstracted from the records of the Hooper
Corporation:
Accounts Receivable, December 31, 2002............................. $ 590,000

Allowance for Doubtful Accounts before adjustment,
December 31, 2002............................................................ 18,000
(dr)
Sales--2002.............................................................................. 2,180,000
Sales Discounts--2002............................................................. 18,000
Sales Returns--2002................................................................ 27,000
Prepare the adjusting entry for doubtful accounts expense under each of the
following assumptions:
(1) 3 percent of outstanding accounts receivable are uncollectible.
(2) 1.5 percent of 1996 net sales are uncollectible.
(3) An aging schedule of the accounts shows that $21,400 of the accounts are
uncollectible.
Solution 6
LO2
(1) Doubtful Accounts Expense.......................................... 35,700
Allowance for Doubtful Accounts ............................ 35,700
[(3% x $590,000) + $18,000]

Allowance for Doubtful Accounts ............................ 32,025
[1.5% x ($2,180,000 - $18,000 - $27,000)]

Allowance for Doubtful Accounts............................. 39,400
($21,400 + $18,000)
Problem 7
The following information was abstracted from the 2002 financial statements of
Jennings Company:
Sales.............................................................................................. $747,000 *
Accounts Receivable, December 31, 2002................................... 128,000
Allowance for Doubtful Accounts................................................... 1,220
(cr)
Sales discounts.............................................................................. 18,000 *
Sales returns.................................................................................. 12,400 *
*30% related to credit sales
Prepare the adjusting entry for doubtful accounts expense under each of the
following assumptions:
(1) 3 percent of current accounts receivable are uncollectible.
(2) 2.5 percent of net credit sales are uncollectible.
Solution 7
LO2
(1) Doubtful Accounts Expense (3% x 128,000) - $1,220 ......... 2,620

30% ($747,000 - $18,000 - $12,400) = $214,980
(2.5% x $214,980) = $5,375
Problem 8
From inception of operations to December 31, 2001, Harris Corporation provided
for uncollectible accounts receivable under the allowance method: Provisions were
made monthly at 2 percent of credit sales; bad debts written off were charged to
the allowance account; recoveries of bad debts previously written off were credited
to the allowance account; and no year-end adjustments to the allowance account
were made. Harris’s usual credit terms are net 30 days.
The credit balance in the allowance for doubtful accounts was $260,000 at January
1, 2002. During 2002, credit sales totaled $18,000,000, interim provisions for
doubtful accounts were made at 2 percent of credit sales, $180,000 of bad debts
were written off, and recoveries of accounts previously written off amounted to
$30,000. Harris installed a computer system in November 2002 and an aging of
accounts receivable was prepared for the first time as of December 31, 2002. A
summary of the aging is as follows:
Classifications by Balance in Estimated %

Month of Sale Each Category Uncollectible
November-December 2002 $2,280,000 2%
July-October 2002 1,200,000 15%
January-June 2002 800,000 25%
Prior to January 1, 2002 260,000 80%
Based on the review of collectibility of the account balances in the “prior to January
1, 2002” aging category, additional receivables totaling $120,000 were written off
as of December 31, 2002. Effective with the year ended December 31, 2002,
Harris adopted a new accounting method for estimating the allowance for doubtful
accounts at the amount indicated by the year-end aging analysis of accounts
receivable.
(1) Prepare a schedule analyzing the changes in the allowance for doubtful
accounts for the year ended December 31, 2002. Show supporting
computations in good form.
(2) Prepare the journal entry for the year-end adjustment to the allowance for
doubtful accounts balance as of December 31, 2002.
Solution 8
LO2
(1) Harris Corporation
Analysis of Changes in the Allowance for Doubtful Accounts
For the Year Ended December 31, 2002
Balance at January 1, 2002............................................................. $260,000

Provision for doubtful accounts ($18,000,000 x 2%).............................. 360,000
Recovery in 2002 of bad debts written off previously...................... 30,000
$650,000
Deduct write-offs for 2002 ($180,000 + $120,000).................................. 300,000
Balance at December 31, 2002, before change in accounting
estimate....................................................................................... $350,000
Increase due to change in accounting estimate during 2002
($537,600 - $350,000)........................................................................ 187,600
Balance at December 31, 2002, adjusted (Schedule 1).................. $537,600
Schedule 1
Computation of Allowance for Doubtful Accounts
at December 31, 2002
Aging Category Balance Percent Doubtful Accounts

November-December 2002 $2,280,000 2% $ 45,600
July-October 2002 1,200,000 15% 180,000
January-June 2002 800,000 25% 200,000
Prior to January 1, 2002 140,000 * 80% 112,000
$4,420,000 $537,600
* $260,000 - $120,000
(2) Doubtful Accounts Expense............................................. 187,600

Allowance for Doubtful Accounts................................ 187,600
To increase the allowance for doubtful accounts
at December 31, 2002, resulting from a change in accounting estimate.
Problem 9
Specific customer accounts receivable totaling $1,850,000 were assigned to
Georgetown Finance Company by Thompson Inc. as collateral for a $1,470,000
loan. The finance company charged a 3 percent finance charge on the total
accounts receivable assigned. The note bears interest at 12 percent per year.
During the first month, Thompson collected $680,000 on the assigned accounts.
This amount plus one month’s interest was remitted to the finance company.
(1) Make all necessary entries concerning the assignment, the loan, and the
remittance on the books of Thompson Inc.
(2) Prepare the appropriate section(s) of Thompson’s balance sheet to reflect the
assignment at the end of the first month.
Solution 9
LO6
(1) Cash............................................................................1,414,500
Finance Charge (3% x $1,850,000)................................. 55,500
Accounts Receivable Assigned..................................1,850,000
Notes Payable....................................................... 1,470,000
Accounts Receivable............................................. 1,850,000
Cash............................................................................ 680,000
Accounts Receivable Assigned............................. 680,000
Notes Payable............................................................ 680,000

Interest Expense ($1,470,000 x 12% x 1/12)...................... 14,700
Cash ($680,000 + $14,700).......................................... 694,700
(2) Current Assets

Accounts Receivable Assigned.................................................. $1,170,000 *
*Thompson Inc. should disclose parenthetically, or in a footnote, that the

equity in its assigned receivables is $380,000 ($1,170,000 - $790,000).
Problem 10
On June 1, 2002, Howard Corporation needed cash to meet current operating
needs. Howard decided to factor some of its receivables. Howard factored
$490,000 of receivables to Third National Bank for $416,500. An allowance for
doubtful accounts of 3 percent of the receivables balance is maintained by Howard.
The bank withheld 7 percent of the purchase price as protection against sales
returns and allowances. Sales returns against the factored receivables totaled
$1,480.
(1) Record the entry to reflect the factoring (sale) of the accounts receivable.
(2) Record the final settlement of the accounts receivable factoring.
Solution 10
LO6
(1) Cash................................................................................. 387,345
Receivable from Factor (7% x $416,500).............................. 29,155
Allowance for Doubtful Accounts (3% x $490,000)............... 14,700
Loss from Factoring ($490,000 - $14,700) - $416,500............... 58,800
Accounts Receivable.................................................. 490,000
(2) Sales Returns and Allowances........................................ 1,480

Cash ($29,155 - $1,480)........................................................ 27,675
Receivable from Factor.............................................. 29,155
Problem 11
On December 31, Central Savings & Loan discounted the following notes at 12
percent:
(1) 3-month, $70,000, non-interest-bearing note dated October 31.
(2) 2-month, $48,000, 13 percent note dated November 30.
(3) 4-month, $30,000, 10 percent note dated October 31.
Determine the proceeds from each note, rounded to the nearest dollar.
Solution 11
LO6
(1) Maturity Value................................................................................... $70,000
Discount ($70,000 x 12% x 1/12)............................................................. 700
Proceeds.......................................................................................... $69,300
(2) Face.................................................................................................. $48,000

Interest Income ($48,000 x 13% x 2/12).................................................. 1,040
Maturity Value................................................................................... $49,040
Discount ($49,040 x 12% x 1/12)............................................................. 490
Proceeds.......................................................................................... $48,550
(3) Face.................................................................................................. $30,000
Interest Income ($30,000 x 10% x 4/12).................................................. 1,000
Maturity Value................................................................................... $31,000
Discount ($31,000 x 12% x 2/12)............................................................. 620
Proceeds.......................................................................................... $30,380
Problem 12
Denver Equipment sold a machine with a book value of $66,000 to Minnesota
Corp., receiving a $60,000 non-interest-bearing note due in three years. The fair
value of the machine cannot be determined. The interest on similar obligations is
estimated to be 10 percent.
(1) Compute the discount on notes receivable.

(2) Compute the gain or loss on sale of machinery, if any.
(3) Prepare the journal entry to record the sale.
(4) Prepare a schedule of discount amortization for the note with amounts rounded
to the nearest dollar.
(5) Give the entry to record the amortization at the end of year one.
Solution 12
LO7
(1) Present Value of note: PV = A(PVF (n/i)) n = 3 i = 10%
PV = $60,000 x .7513
PV = $45,078
Face Value of Note........................................................................... $ 60,000
Present Value................................................................................... 45,078
Discount............................................................................................ $ 14,922
(2) Net Book Value................................................................................. $ 66,000

Present Value of Note...................................................................... 45,078
Loss on Sale..................................................................................... $ 20,922
(3) Notes Receivable............................................................. 60,000

Loss on Sale of Machinery.............................................. 20,922
Machinery (net)........................................................ 66,000
Discount on Notes Receivable................................ 14,922
(4) Unamortized
Effective Discount Discount Present Value
Interest 10% Amortized Balance of Note
Initial $14,922 $45,078
End of Year 1 $4,508 $4,508 10,414 49,586
End of Year 2 4,959 4,959 5,455 54,545
End of Year 3 5,455 5,455 0 60,000
(5) Discount on Notes Receivable......................................... 4,508

Interest Revenue..................................................... 4,508
Problem 13
On January 2, 2002, Clark Products, Inc. sold an apartment building that cost
$1,800,000 and had a book value of $810,000. Clark received a two-year, non-
interest-bearing note with a face value of $1,935,000 and a due date of December
31, 2003. The fair value of the apartment building at the date of sale could not be
determined. The current rate of interest for comparable notes was 14 percent.
Prepare the journal entries for Clark Products, Inc. to record:

(1) The apartment building sale.
(2) The adjusting entries at December 31, 2002 and 2003 for interest earned.
(3) Settlement of note at maturity.
Solution 13
LO7
(1) Notes Receivable........................................................1,935,000
Accumulated Depreciation......................................... 990,000
Gain on Sale of Apartment Building...................... 678,983 *
Apartment Building................................................ 1,800,000
Discount on Notes Receivable.............................. 446,017
* $1,935,000 x .7695 = $1,488,983
810,000
$ 678,983 Gain
(2) December 31, 2002

Discount on Notes Receivable ($1,488,983 x 14%)......... 208,458
Interest Revenue................................................... 208,458
December 31, 2003

Discount on Notes Receivable ($446,017 - $208,458) *. . . 237,559
Interest Revenue................................................... 237,559
* Note: The use of tables causes rounding in the computation of discount amount.
(3) Cash............................................................................1,935,000
Notes Receivable.................................................. 1,935,000
Problem 14
Pogo Company accepted a $120,000, 180-day, 10 percent interest-bearing note
dated August 1, 2002, from a customer for the sale of a piece of equipment. The
machinery cost $160,000 and was 40 percent depreciated. On September 15,
2002, Pogo discounted the note, with recourse, at Third National Bank at a 12
percent discount rate. The customer paid the note at maturity.
(1) Make the entries necessary to record the above transactions on Pogo
Company’s books. Round amounts to the nearest dollar. (Assume the
transfer does not meet the FASB criteria for recording as a sale.)
(2) What entry would be required on Pogo’s books at maturity if the customer
defaults?
Solution 14
LO6, LO7
(1) August 1, 2002

Notes Receivable............................................................. 120,000
Accumulated Depreciation............................................... 64,000
Gain on Sale of Equipment........................................ 24,000
Equipment................................................................... 160,000
September 15, 2002

Cash................................................................................. 120,329
Interest Revenue........................................................ 329
Obligation on Discounted Notes Receivable.............. 120,000
Face Value of Note..................................................................... $120,000

Interest Revenue ($120,000 x 10% x 180/365)................................... 5,918
Maturity Value............................................................................. $125,918
Discount ($125,918 x 12% x 135/365)................................................. 5,589
Proceeds..................................................................................... $120,329
January 27, 2003

Obligation on Discounted Notes Receivable................... 120,000
Notes Receivable....................................................... 120,000
(2) January 27, 2003
Notes Receivable--Past Due........................................... 125,918
Cash............................................................................ 125,918
Obligation on Discounted Notes Receivable................... 120,000
Problem 15
Dunn Company accepted a $400,000, 90-day, 12 percent interest-bearing note
dated September 1, 2002, from a customer for an accounts receivable balance.
On October 1, 2002, Dunn discounted the note, without recourse, to City National
Bank at a 10 percent discount rate. The customer paid the note at maturity.
(1) Make the necessary entries to record the above transactions on Dunn
Company’s books. Round amounts to the nearest dollar.
(2) What entry would be required on Dunn Company’s books at maturity if the
customer defaults?
Solution 15
LO7
(1) September 1, 2002

Notes Receivable............................................................. 400,000
October 1, 2002
Cash................................................................................. 405,066
Gain on Sale of Notes Receivable............................. 5,066
Face Value.................................................................................. $400,000

Interest ($400,000 x 12% x 90/365)..................................................... 11,836
Maturity Value............................................................................. $411,836
Discount ($411,836 x 10% x 60/365)................................................... 6,770
Proceeds..................................................................................... $405,066
(2) No entry because the note was transferred without recourse.
Problem 16
On July 23, Plitt Company factored $300,000 in accounts receivable for cash of
$280,000. The factor withheld 7 percent of the cash proceeds to allow for possible
customer returns. An allowance for doubtful accounts of $13,000 had previously
been established by Plitt in relation to these accounts.
Make the journal entry necessary on Plitt’s books to record the factoring of the
accounts.
Test Bank Intermediate Accounting, 14th ed. 223
Solution 16
LO6
Cash................................................................................. 260,400
Receivable from Factor.................................................... 19,600
Allowance for Doubtful Accounts..................................... 13,000
Loss from Factoring Receivables.................................... 7,000
Problem 17
The following information is for Loranne Company:
Accounts Receivable, January 1, 2002...................................... $ 200,000
Accounts Receivable, December 31, 2002................................ 215,000
Allowance for Bad Debts, January 1, 2002................................ 30,000
Allowance for Bad Debts, December 31, 2002.......................... 28,000
Write-offs of uncollectible accounts--2002................................. 35,500
Bad Debt Expense--2002........................................................... 33,500
Depreciation Expense--2002...................................................... 100,000
Net Income--2002....................................................................... 257,000
Compute net cash flow from operations for 2002. Assume that all expenses not
mentioned were paid in cash and that the levels of all current assets and liabilities,
except for accounts receivable, were unchanged during the year.
Solution 17
LO8
Net income.................................................................................. $ 257,000
Plus: Depreciation expense....................................................... 100,000
Less: Increase in net accounts receivable................................ (17,000)
Net cash flow from operations.................................................... $ 340,000
Problem 18
You are the auditor of Plastico, Inc., a manufacturer of plastic products. In
reviewing balance sheet of the company, you notice several receivables from the
officers of the company. You report your findings to the president of the company
and inform him that these receivables will be considered related party transaction
for purposes of financial accounting and reporting. The president seems
somewhat annoyed by your comments and asks you to explain what you mean by
“related party” transactions and how the financial statements will be affected by
these transactions. Prepare a brief response to the president’s question.
Solution 18
LO5
Related party transactions occur when an enterprise engages in transactions in
which
one of the parties to the transaction has the ability to influence significantly the
policies of the other, or in which one party to the transaction has the ability to
influence the policies of the two transacting parties. The following are examples of
related party transactions:
a. Transactions between a parent company and its subsidiaries.

b. Transactions between subsidiaries of a common parent.
c. Transactions between an enterprise and trusts for the benefit of employees
(such trusts being controlled or managed by the enterprise).
d. Transactions between an enterprise and its principal owners, management, or
members of immediate families and affiliates.
Transactions between related parties may be controlled entirely by one of the

parties
so that the transactions may be affected significantly by considerations other than
those in arm’s-length transactions with unrelated parties. Related party
transactions frequently involve such things as borrowing or lending money at
abnormally high or low interest rates, real estate sales at amounts that differ
significantly from appraised values, exchanges of nonmonetary assets, and
transactions with “shell” companies
(enterprises having no economic substance).
Transactions with related parties are not conducted at arm’s-length and thus their
form may differ from their economic substance. In cases where the form of the
transaction differs from the substance, auditors will require that the financial
statements properly reflect the substance of the transaction. Auditors also will
require that the financial statements include the following disclosures regarding
related party transactions:
a. The nature of the relationship(s) involved.

b. A description of the transactions, including transactions to which no
amounts or nominal amounts were ascribed for each period for which an
income statement is presented.
c. The dollar amounts of transactions for each of the periods for which income
statements are presented.
d. Amounts due from or to related parties as of the date of each balance sheet
presented.
The president may be reluctant to disclose the nature or amounts of related party
transactions and may resist changes in accounting for related party transaction if
the
transactions have not been accounted for in accordance with applicable generally
accepted accounting principles or do not reflect the substance of the transactions.
CHAPTER 6 -- QUIZ A
Name _________________________
Section ________________________
T F 1. Certificates of deposit and money market savings certificates are examples of

time deposits.
T F 2. Demand deposits would include amounts in checking, savings, and money

market deposit accounts.
T F 3. Deposits in foreign banks are always reported as receivables.
T F 4. A cash overdraft should be reported as a current liability.
T F 5. Compensating balance requirements as a result of short-term financing

arrangements are reported separately in the investment section of the balance
sheet.
T F 6. When an imprest petty cash fund fails to balance, an adjustment is made to a

miscellaneous expense or revenue account, often called “Cash Over and
Short.”
T F 7. A bank reconciliation should be prepared by the individual responsible for

cash receipts and disbursements.
T F 8. In a bank reconciliation statement, the amount of a not-sufficient-funds check

must be added to the depositor’s cash balance in determining the correct cash
balance.
T F 9. In a bank reconciliation statement, an outstanding check must be subtracted

from the bank statement balance in determining the correct cash balance.
T F 10. The term “internal control” includes only accounting controls.
225
CHAPTER 6 -- QUIZ B
Name _________________________
Section ________________________
T F 1. Accounts receivable are to be reported at their net realizable value.
T F 2. The direct write-off method for uncollectible accounts does not provide for the
matching of current revenues with related expenses.
T F 3. The use of the direct write-off method is acceptable under generally accepted
accounting principles.
T F 4. Doubtful accounts expense is normally reported as a deduction from sales in

the income statement.
T F 5. The entry to write off an uncollectible account under the allowance method is
a debit to Doubtful Accounts Expense and a credit to Accounts Receivable.
T F 6. The method of estimating uncollectible accounts expense based on the

accounts receivable balance emphasizes the determination of the net
realizable value of the receivables.
T F 7. When estimating collectibility based on an analysis of the accounts receivable

balance, any existing balance in the allowance for doubtful accounts is
ignored.
T F 8. When there has been a failure to estimate uncollectible accounts accurately,

resulting in an allowance balance that is clearly excessive or inadequate, an
adjustment is in order. This adjustment would be considered a change in
accounting estimate under APB Opinion No. 20.
T F 9. The “list” sales price less any trade discount is the amount at which the
receivable and the corresponding revenue should be recorded.
T F 10. Sales discounts are normally reported as selling expenses.
226
CHAPTER 6 -- QUIZ C
Name _________________________
Section ________________________
T F 1. For balance sheet classification purposes, accounts receivable are always

considered current.
T F 2. Nontrade receivables should be included with trade accounts receivable on

the balance sheet.
T F 3. With a general assignment of receivables, the loan (note payable) should be

reported on the balance sheet and the amount and nature of the receivables
pledged to secure the loan should be disclosed.
T F 4. The assignment of specific receivables to a lender does not require customer

notification if the borrower continues to collect the receivables.
T F 5. The disclosure requirements for the assignment of specific receivables include

reporting them separately as a current asset, if material, and presenting the
equity in assigned accounts parenthetically or in a note.
T F 6. When factoring accounts receivable without recourse, the buyer (factor)

normally assumes the burden of billing and collecting accounts.
T F 7. Transferring receivables without recourse means that the bank or finance

company advances cash in return for accounts receivable, but it retains the
right to collect from the transferor if debtors fail to make payments when due.
T F 8. The transfer of accounts receivable with recourse should never be accounted

for as a sale.
T F 9. Notes arising from loans to customers, officers, employees, and affiliated

companies should be reported with trade notes receivable.
T F 10. An interest-bearing note is written as a promise to pay a face amount plus

interest at a specified rate.
227
CHAPTER 6 -- QUIZ D
Name _________________________
Section ________________________
A. Notes receivable I. Trade discount

B. Nontrade receivables J. Present value
C. Net realizable value K. Allowance method
D. Direct write-off method L. Sales discount
E. Interest-bearing note M. Negotiable note
F. Maturity date N. Non-interest-bearing note
G. Promissory note O. Assignment of receivables
H. Factoring receivables P. Valuation date
Select the term that best fits each of the following definitions and descriptions.
____ 1. A method of recognizing the actual losses from uncollectible accounts as

expenses during the period in which the receivables are determined to be
uncollectible.
____ 2. The amount of cash expected to be received from the conversion of assets in
the normal course of business.
____ 3. The sale of receivables without recourse for cash to a third party, usually a
bank or other financial institution.
____ 4. Receivables that are evidenced by a formal written promise to pay a certain
sum of money at a specified date.
____ 5. The date the principal amount of a note is due to be paid.
____ 6. A reduction in the “list” sales price of an item to the “net” sales price actually
charged to the customer; generally the amount of reduction depends on the
volume of business or size of the order from the customer.
____ 7. The sum of future receipts or payments discounted to the present date at an
appropriate rate of interest.
____ 8. A reduction in the selling price that is allowed if payment is received within a
specified period.
____ 9. A method of recognizing the estimated losses from uncollectible accounts as
expenses during the period in which the sales occur.
____10. A note that is legally transferable by endorsement and delivery.
____11. Any receivable arising from transactions that are not directly associated with
the normal operating activities of a business.
____12. A note written in the form where the face amount includes the interest
charges.
____13. The borrowing of money with receivables pledged as security on the loan.
____14. A note written in the form where the maker promises to pay the face amount
plus interest at a specified rate.
____15. An unconditional written promise to pay a certain sum of money at a specified
time.
228
CHAPTER 6 -- QUIZ SOLUTIONS
Quiz A Quiz B Quiz C Quiz D
1. T 1. T 1. T 1. D
2. T 2. T 2. F 2. C
3. F 3. F 3. T 3. H
4. T 4. F 4. T 4. A
5. F 5. F 5. T 5. F
6. T 6. T 6. T 6. I
7. F 7. F 7. F 7. J
8. F 8. T 8. F 8. L
9. T 9. T 9. F 9. K
10. F 10. F 10. T 10. M
11. B
12. N
13. O
14. E
15. G
(This page is left blank intentionally.)

The Revenue/Receivables/Cash Cycle: Hapter

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 CHAPTER 6 

The Revenue/Receivables/Cash Cycle

1 Definition of the operating cycle

30 Bank reconciliation--adjustments on depositor's books

69 Computation of proceeds received on note

MULTIPLE CHOICE QUESTIONS

a 2. The amount reported as "Cash" on a company's balance sheet normally

c 3. Which one of the following statements is incorrect?

d 4. If the balance shown on a company's bank statement is less than the

a 5. If the cash balance shown in a company's accounting records is less than

c 7. Which one of the following statements is incorrect?

a 8. Which of the following is incorrect?

c 9. A discount given to a customer for purchasing a large volume of

c 16. The entry

would be made when

c. a previously defaulted customer pays its outstanding balance.

a 17. What is the accounting principle underlying the recognition of an estimated

c 18. In calculating a company’s accounts receivable turnover, which of the

d 20. Which of the following would not be classified as cash?

b 21. Which of the following is not a basic characteristic of a system of cash

c 22. On January 1, 2002, Kyle Corporation established a petty cash fund of

d 23. A petty cash system is designed to

c 29. In preparing a monthly bank reconciliation, which of the following items

b 30. Bank reconciliations are normally prepared on a monthly basis to identify

b 31. The balance in Accounts Receivable is not reduced in recording which of

b. General assignment (pledge) of accounts receivable

a 33. Which of the following is a requirement for reporting the transfer of

c 35. Scott Company received a one-year non-interest-bearing note receivable.

b 37. A 90-day, 15 percent interest-bearing note receivable was immediately

a 38. On December 1, 2002, Bain Company received a $10,000, 60-day, 6

Cash received on accounts receivable................................. $ 70,000

The corporation uses the direct write-off method in accounting for

c 42. An analysis and aging of accounts receivable of the Lucille Company at

Accounts Receivable....................................................... $840,000

Compute the net realizable value of the accounts receivable of Lucille

Accounts Receivable....................................................... $450,000

The net realizable value of the accounts receivable at December 31 should

Allowance for Doubtful Accounts, January 1................... $ 54,000

Allowance for Doubtful Accounts, January 1, 2002......... $ 6,000

Accounts Receivable at December 31............................ $880,000

Pribob’s doubtful accounts expense for the year ended December 31 is

No. of Days Probability

The following additional information is available for the current year:

Net credit sales for the year....................................... $4,000,000

No. of Days Probability

The following additional information is available for the current year:

Net credit sales for the year............................................. $4,000,000

c 51. A new product introduced by Wilkenson Promotions carries a two-year

What amount should Wilkenson report as its estimated liability as of

Net credit sales................................................................ $1,500,000

Millward's accounts receivable turnover is

b 54. Selected information from the accounting records of Ellison Manufacturing

Net sales.......................................................................... $3,600,000

Sales (90 percent collected in the first year)................... $750,000

What is the cash balance at December 31 of the first year?

Cash in banks includes $125,000 of compensating balances against short-

Currency and coins.......................................................... $ 1.50

Balance per bank statement, 7/31........................................ $54,075

What is the correct cash balance at July 31?

a 60. The August 31 bank statement of Kelvin Inc. showed a balance of

c 61. Trask Corporation’s checkbook balance on December 31, 2001, was

The proper amount to be shown as cash on Trask’s balance sheet at

What is the corrected cash balance at February 28?