ACCOUNTS RECEIVABLE

TEST I. MULTIPLE CHOICE THEORIES

Instruction: Encircle the letter of the correct answer. (1 point each)

1. Trade receivables are classified as current assets if these are reasonably expected
to be collected
1 point

a. Within one year.

b. Within the normal operating cycle.
c. Within one year or within the operating cycle, whichever is shorter.
d. Within one year or within the operating cycle, whichever is longer.

2. Nontrade receivables are classified as current assets only if these are reasonably
expected to be realized in cash
1 point

a. Within one year or within the operating cycle, whichever is shorter.

b. Within one year or within the operating cycle, whichever is longer.
c. Within the normal operating cycle.
d. Within one year, the length of the operating cycle not with standing .

3. If the ideal measure of short-term receivables in the statement of financial position

is the discounted amount of the cash to be received in the future, failure to follow this
practice usually does not make the statement of financial position misleading because
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a. Most short-term receivables are noninterest-bearing.

b. The allowance for doubtful accounts includes a discount element.
c. The amount of the discount is not material.
d. Most receivables can be sold to a bank or factor.

4. Credit balances in accounts receivable are classified as

1 point

a. Current liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts payable

5. Where the operating cycle extends beyond one year because of normal credit terms
as in the case of installments sales of household appliances
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a. It is proper to classify the entire receivables as current assets with disclosure of the amount not
realizable within one year, if material.
b. The entire receivables are shown as noncurrent assets.
c. The portion due in one year are shown as noncurrent and the balance as noncurrent.
d. The receivables are not recognized

6. Which method of recording bad debt loss is consistent with accrual accounting?
1 point

a. Allowance method
b. Direct writeoff method
c. Percent of sales method
d. Percent of accounts receivable method

7. A method of estimating bad debts that focuses on the income statement rather than
the statement of financial position is the allowance method based on
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a. Direct writeoff
b. Aging the trade accounts receivable
c. Credit sales
d. The balance in the trade accounts receivable

8. A method of estimating uncollectible accounts that emphasizes asset valuation

rather than income measurement is the allowance method based on
1 point

a. Aging of accounts receivable

b. Direct writeoff
c. Gross sales
d. Credit sales less returns and allowances

9. The advantages of relating the bad debt experience to accounts receivable is that
this approach
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a. Gives a reasonably accurate measurement of receivables in the statement of financial position .

b. Relates bad debt expense to the period of sale.
c. Is the only generally accepted method for measuring accounts receivable.
d. Makes estimates of uncollectible accounts unnecessary.

10. When a specific customer account receivable is written off as uncollectible, what
will be the effect on net income under the allowance and direct writeoff method?
1 point

a. No effect under both allowance method and direct writeoff method

b. Decrease under both allowance method and direct writeoff method
c. No effect under allowance method and decrease under direct writeoff method
d. Decrease under allowance method and no effect under direct writeoff method

11. When the allowance method of recognizing uncollectible accounts used, the entry
to record the writeoff of a specific account would
1 point

a. Decrease both accounts receivable and the allowance for uncollectible accounts.
b. Decrease accounts receivable and increase the allowance for uncollectible accounts.
c. Increase the allowance for uncollectible accounts and decrease net income.
d. Decrease both accounts receivable and net income.

12. When an entity uses the allowance method for recognizing uncollectible accounts,
the entry to record the writeoff of a specific uncollectible account
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a. Affects neither net income nor working capital

b. Affects neither net income nor accounts receivable
c. Decrease both net income and accounts receivable
d. Decrease both net income and working capital

13. When the allowance method of recognizing bad debt expense is used, the entries
at the time of collection of an account previously written off would
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a. Decrease the allowance for doubtful accounts

b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income

14. An entity uses the allowance method to recognize doubtful accounts expense.
What is the effect of a collection of an account previously written off?
1 point

a. No effect on both allowance for doubtful accounts and doubtful accounts expense
b. No effect on allowance for doubtful accounts and decrease in doubtful accounts expense
c. Increase in allowance for doubtful accounts and no effect on doubtful accounts expense
d. Increase in allowance for doubtful accounts and decrease in doubtful accounts expense

15. When an accounts receivable aging schedule is prepared, a series of

computations is made to determine the estimated uncollectible accounts. The resulting
amount from this aging schedule
1 point

a. When added to the total accounts written off during the year is the desired credit balance of the
allowance for doubtful accounts at year-end
b. Is the amount of doubtful accounts expense for the year
c. Is the amount that should be added to the beginning allowance for doubtful accounts expense
for the year
d. Is the amount of desired credit balance of the allowance for doubtful accounts to be reported at
year-end
16. On October 1 of the current year, an entity received a one-year note receivable
bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due on September 30 of the next year. The interest
receivable on December 31 of the current year would consist of an amount
representing
1 point

a. Three months of accrued interest income

b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the note receivable over its face amount

17. On July 1 of the current year, an entity obtained a two-year 8% note receivable for
services rendered. At the time, the market rate of interest was 10%. The face amount
of the note and the entire amount of the interest are due on the date of maturity.
Interest receivable on December 31 of the current year is
1 point

a. 5% of the face amount of the note

b. 4% of the amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note

18. An entity uses the installment method to recognize revenue from installment sales.
Customers pay the installment notes in 24 equal monthly amounts which include 12%
interest. What is the installment note receivable balance six months after the sale?
1 point

a. 75% of the original sales price.

b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.

19. What is imputed interest?

1 point

a. Interest based on the stated interest rate

b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the bank prime interest rate

20. Accounting for the interest in a noninterest bearing note receivable is an example
of what aspect of accounting theory?
1 point

a. Matching
b. Verifiability
c. Substance over form
d. From over substance

21. On July 1 of the current year, an entity received a one-year note receivable
bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due in one year. The interest receivable account
would show a balance on
1 point

a. July 1 but not December 31

b. December 31 but not July 1
c. July 1 and December 31
d. Neither July 1 nor December 31

22. On July 1 of the current year, an entity received a one-year note receivable
bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due in one year. When the note receivable was
recorded on July 1, which of the following was debited?
1 point

a. Interest receivable
b. Unearned discount on note receivable
c. Interest receivable and unearned discount on note receivable
d. Neither interest receivable nor unearned discount on note receivable

23. On August 15, an entity sold goods for which it received a note bearing the market
rate of interest on that date. The four-month note was dated July 15. Note principal,
together with all interest, is due November 15. When the note was recorded on August
15, which of the following accounts increased?
1 point

a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest revenue

24. On July 1 of the current year, an entity received a one-year note receivable
bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due on June 3 of the next year. On December 31 of
the current year, the entity should report in the statement of financial position
1 point

a. A deferred credit for interest applicable to next year

b. No interest receivable
c. Interest receivable for the entire amount of the interest due on June 30 of the next year
d. Interest receivable for the interest accruing in the current year

25. An entity received a seven-year zero interest-bearing note on February 1, 2017 in

exchange for property sold. There was no established exchange price for the property
and the note has no ready market. The prevailing rate of interest for a note of this type
was 7% on February 1, 2017, 6% on December 31, 2017, 8% on February 1, 2017,
and 9% on December 31, 2018. What interest rate should be used to calculate the
interest revenue from the transaction for the years ended December 31, 2017 and
2018, respectively?
1 point

a. 0% and 0%
b. 7% and 7%
c. 7% and 9%
d. 6% and 9%