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Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
Chapter 08
Receivables, Bad Debt Expense, and Interest Revenue
2. There is a cost of extending credit to customers even when the company is able to collect
its accounts receivable in full.
TRUE
8-1
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
5. When bad debts exceed the amount estimated and written off in the previous accounting
period, the company is required to issue amended financial statements.
FALSE
6. Under the aging of accounts receivable method, bad debt expense is calculated and then
added to the beginning balance in the allowance for doubtful accounts.
FALSE
8-2
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
8. The aging of accounts receivable method is based upon the principle that the longer an
account is overdue, the higher the risk of non-payment.
TRUE
9. When the allowance method is used, the journal entry to write-off an uncollectible account
does not change the amount reported as net accounts receivable on the balance sheet.
TRUE
10. The two methods of accounting for bad debts that are acceptable under GAAP are the
allowance method and the direct write-off method.
FALSE
11. Interest on notes receivable is recorded as revenue when the cash is received.
FALSE
8-3
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
12. The allowance for doubtful accounts is not used in the direct write off method.
TRUE
13. The amount of the principal of a notes receivable depends on the maturity date.
FALSE
14. When a company receives an interest payment on a note, the entire payment must then be
recorded as revenue.
FALSE
15. The receivables turnover ratio is calculated using the average net accounts receivable.
TRUE
8-4
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
16. The receivables turnover ratio indicates how many times, on average, the process of
selling to and collecting the sales proceeds from customers occurs during the accounting
period.
TRUE
17. Companies of similar size operating in the same country tend to have similar receivables
turnover ratios.
FALSE
18. Analysts often interpret a sudden decline in the receivables turnover ratio as a signal of a
developing problem.
TRUE
19. The smaller the receivables turnover ratio the larger the days to collect measure will be.
TRUE
8-5
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
20. A higher receivables turnover ratio is a warning sign indicating that the company is
allowing a longer time period for customers to pay.
FALSE
21. In normal circumstances, the allowance for doubtful accounts for a company should be a
fairly consistent percentage of gross accounts receivable.
TRUE
22. Companies do not need to explain to financial statement users how uncollectable
receivables are accounted for because they do not need this information.
FALSE
23. If the receivables turnover ratio rises significantly, the increase may be a signal that the
company is extending credit to high-risk borrowers or allowing an overly generous repayment
schedule.
FALSE
8-6
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
8-7
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
28. The balance in the Allowance for Doubtful Accounts will always differ from the balance
in Bad Debt Expense.
FALSE
30. Both the percentage of credit sales and aging of accounts receivable methods are
acceptable under ASPE and IFRS.
TRUE
31. The direct write-off method is acceptable under IFRS, but not under ASPE.
FALSE
8-8
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
32. All else being equal, net sales revenue and days to collect have an inverse relationship.
FALSE
33. All else being equal, an increase in the average net receivables necessarily implies an
increase in days to collect.
TRUE
34. The collection of a note receivable is accounted for like the collection of an account
receivable.
TRUE
8-9
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
37. Extending credit to customers will result in which of the following additional costs?
A. Increased employer costs will be incurred to evaluate customer credit worthiness, track
what each customer owes, and follow up to ensure correction.
B. Bad debt expense will result when amounts cannot be collected from customers.
C. Delayed receipt of cash may result requiring the company to take out short-term loans and
incur interest costs.
D. All of the answers are acceptable.
8-10
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
38. Which of the following methods is required by Canada Revenue Agency for accounting
for bad debt for tax purposes:
A. Direct write-off method
B. Allowance method
C. Percentage of sales method
D. Aging of accounts method
39. Companies are concerned about the cost of extending credit for all the following reasons
EXCEPT:
A. the time delay in receiving payment.
B. the expense of the extra goods that must be produced or bought.
C. the risk of non-payment.
D. the administrative costs associated with extending credit.
8-11
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
40. Assume the Mirtha Company had the following balances at year-end.
Assume the company recorded no write-offs or recoveries during 2018. What was the amount
of bad debt expense reported in 2018?
A. $79,000.
B. $64,600.
C. $28,800.
D. $14,400.
If there were no write-offs or recoveries during 2018, then the change in the allowance
account was solely due to debt expense in 2018, which would be the difference between the
balance in allowance for doubtful accounts: 79,000 - 64,600 = 14,400.
41. Purrfect Pets sells a $1,500 aquarium to a customer on account. This would be recorded
under:
A. non-trade receivables.
B. cash.
C. trade accounts receivable.
D. notes receivable.
8-12
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
42. The Grass is Greener Corporation provides $6,000 worth of lawn care on account during
the month. Experience suggests that about 2% of net credit sales will not be paid. According
to the revenue recognition principle and the expense recognition principle, the company
should:
A. record an estimate of bad debt expense in the same period as the lawn care is provided.
B. not report the sales revenue until it collects payment.
C. increase the value of its liabilities with an adjustment.
D. all of the answers are acceptable.
8-13
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
44. The Grass is Greener Corporation provides $6,000 worth of lawn care on account during
the month. Experience suggests that about 2% of net credit sales will not be paid. To record
the potential bad debts, The Grass is Greener Corporation would:
A. debit Accounts Receivable and credit Allowance for Doubtful Accounts for $120.
B. debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $120.
C. debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $120.
D. debit Bad Debt Expense and credit Accounts Receivable for $120.
Using the allowance method, Bad Debt Expense is debited and the contra-asset account,
Allowance for Doubtful Accounts, is credited for $120 ($6,000 * .02).
45. At the end of the accounting period, The Grass is Greener Corporation learns that a
customer who owes $350 has gone bankrupt and payment will not be made. The Grass is
Greener Corporation should:
A. debit Bad Debt Expense and credit Accounts Receivable for $350.
B. debit the Allowance for Doubtful Accounts and credit Accounts Receivable for $350.
C. debit Bad Debt Expense and credit Cash for $350.
D. debit Accounts Receivable and credit Bad Debt Expense for $350.
8-14
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
46. When an adjusting entry is made in anticipation of some receivables being uncollectible
the adjustment reduces:
A. both net income and net accounts receivable.
B. net income and increases liabilities.
C. net accounts receivable and increases liabilities.
D. net income and selling expenses.
47. Over the past five years, a company had average annual credit sales of $320,000 and an
average annual net write-offs of $2,000. Credit sales in the current year are $300,000. Using
the percentage of credit sales method, what should the company record as an estimate of bad
debt expense?
A. $2,000
B. $1,875
C. $20,000
D. $6,000
8-15
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
48. When a company that uses the allowance method writes off an actual bad debt:
A. total assets decrease.
B. total liabilities increase.
C. total expenses increase and total revenues increase.
D. total assets, revenue, and expenses remain the same.
49.
Johnstone Supplies, Inc. Accounts Receivable Aging Report, July 31, 2018
Accounts receivable by due date Account Total Estimated % uncollectible
Not yet due $126,500 2%
1-30 days past due $89,200 12%
31-60 days past due $53,600 18%
Over 60 days past due $31,800 35%
The unadjusted balance of the allowance for doubtful accounts of Johnstone Supplies, Inc., is
$28,947 on July 31, 2018. Based on the accounts receivable aging report, bad debt expense
will be:
A. $34,012.
B. $5,065.
C. $62,959.
D. $50,434.
8-16
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
50.
Johnstone Supplies, Inc. Accounts Receivable Aging Report, July 31, 2018
Accounts receivable by due date Account Total Estimated % uncollectible
Not yet due $126,500 2%
1-30 days past due $89,200 12%
31-60 days past due $53,600 18%
Over 60 days past due $31,800 35%
If Johnstone Supplies, Inc., writes off $3,081 of un-collectible accounts during August, 2018,
the unadjusted balance in the allowance for doubtful accounts account on August 31, 2018
will be:
A. $30,931.
B. $5,065.
C. $34,012.
D. $1,984.
The July 31 adjusted balance in the allowance account minus the write-off in August equals
the unadjusted balance at the end of August.
$34,012 - $3,081 = $30,931 unadjusted balance.
8-17
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
51. Your company wrote off $350 in accounts receivable two months ago when a customer
went bankrupt. That customer reorganizes and now pays the $350. Your company should:
A. debit Bad Debt Expense and credit Cash.
B. debit Accounts Receivable and credit Bad Debt Expense and then debit Allowance for
Doubtful Accounts and credit Cash.
C. debit Cash and credit Bad Debt Expense.
D. debit Accounts Receivable and credit Allowance for Doubtful Accounts and then debit
Cash and credit Accounts Receivable.
53. Your company previously averaged about 20% of its total accounts receivable in the "over
90 days past due" category and now has 35% in this category. All else equal, using the aging
of accounts receivable method, the amount of the bad debt adjustment will:
A. fall, increasing the ending balance of the allowance account.
B. rise, increasing the ending balance of the allowance account.
C. fall, decreasing the ending balance of the allowance account.
D. rise, decreasing the ending balance of the allowance account.
8-18
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
54. On average, 5% of credit sales has been uncollectible in the past. At the end of the year,
the balance of accounts receivable is $100,000 and the allowance for doubtful accounts has a
credit balance of $500. Net credit sales during the year were $150,000. Using the percentage
of credit sales method, the estimated bad debt expense would be:
A. $5,000.
B. $7,000.
C. $7,500.
D. Cannot be determined; the percent of credit sales method cannot be used, as the
information provided can only be used for calculating the aging of accounts receivable
method.
55. On average, 5% of total accounts receivable has been uncollectible in the past. At the end
of the year, the balance of accounts receivable is $100,000 and the allowance for doubtful
accounts has a credit balance of $500. Credit sales during the year were $150,000. Using the
aging of accounts receivable method, the estimated bad debt expense would be:
A. $4,500.
B. $5,000.
C. $5,500.
D. Cannot be determined; the aging of accounts receivable method cannot be used as the
information provided can only be used for calculating the percentage of credit sales method.
8-19
Chapter 08 - Receivables, Bad Debt Expense, and Interest Revenue
56. Before adjustment, the allowance for doubtful accounts has a credit balance of $2,700.
The company had $140,000 of net credit sales during the period and historically fails to
collect 4% of credit sales. The company uses the percentage of credit sales method of
estimating doubtful accounts. After adjusting for estimated bad debts, the new balance in the
allowance for doubtful accounts account will be:
A. $8,300.
B. $5,400.
C. $2,900.
D. Cannot be determined from the information given.
The balance in the allowance account will be increased by the amount of the bad debt expense
recorded at the end of the year.
$140,000 * .04 = $5,600
$5600 + 2,700 = $8,300.
57. During the year, a company concludes that $6,844 of specific customer accounts will not
be collected. These are written off by:
A. debiting Accounts Receivable and crediting Allowance for Doubtful Accounts for $6,844.
B. debiting Accounts Receivable and crediting Bad Debt Expense for $6,844.
C. debiting Bad Debt Expense and crediting Accounts Receivable for $6,844.
D. debiting Allowance for Doubtful Accounts and crediting Accounts Receivable for $6,844.
8-20
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Language: Finnish
Kirj.
Punanen lippu.
Testamentti.
Onnen saari.
Punanen lippu.
— Nyt se on kuollut.
— Kuka? Kuka on kuollut?
Kun poika oli varttunut ja alkoi olla viidentoista ijässä, pantiin hänet
kultasepän oppiin Pietariin. Kulta- enemmän kuin muutakaan seppää
ei hänestä tullut, vaan renttu, pahantekijä, josta isällä oli alituista
huolta, tuskaa ja katkerata surua. Hän kävi tuon tuostakin isänsä
luona rahaa pyytämässä ja tiukkaamassa. Isä antoikin alussa, kun
poika lupasi parantaa tapansa ja ruveta työtä tekemään. Siitä ei ollut
apua, vaan pahennusta. Työstä ei tullut mitään, parannuksesta vielä
vähemmän. Hän vaan juopotteli ja hävitti, mitä sai. Kun poika oli
joutunut niin pitkälle, että häh kerran kotona käydessään oli omin
lupinsa vienyt äitivainajansa kellon ja sen hävittänyt, oli isä ankarasti
kieltänyt hänet luokseen tulemasta ja silmäinsä eteen ilmestymästä.
Sen perästä oli hän ollut pitkän aikaa kotonansa käymättä, ruvennut
näpistelemään, varastanut, joutunut kiinni, vankeuteen.
Lippu putosi hänen kädestään, juna oli samassa ohitse. Hän seisoi
hetken liikkumatta kuin kivettynyt. Sitten lähti juosta potkaltamaan
junan perässä huutaen, täyttä kurkkua karjuen: punanen lippu,
punanen lippu!
Töin tuskin sai toinen vartija hänet kiinni ja kykeni pitelemään siksi
kun apua joutui…
Juna vihelsi.
Testamentti.
— Nyt se on ukki kuollut.
— Niinpä tuntuu.
Panivat tupakan.
— Se on tehnyt testamentin.
Ja riittihän se.
Ja kun sitten isä poikansa puolesta esitti asian, niin oli tämän
varsin helppo vastata.
Nuorempi tytär oli kokonaan toista maata kuin vanhempi. Hän oli
iloinen ja hilpeä, laulava ja naurava, avomielinen ja suora.
Rippikoulussa, jota pidettiin neljä viikkoa, oli hän saanut tutustua
kirkonkylän tyttöihin ja herrasneitosiin. Varsinkin rovastin tyttärien
kanssa tuli hän hyväksi ystäväksi. Kun ne olivat soitannollista väkeä,
oppi hänkin siellä laulamaan lauluja monenlaisia ja lukemaan
muutakin kuin hengellisiä kirjoja. Kirjallisuutta sitä, mitä kielellämme
oli, sai hän lainakirjastosta, jonka hoitajana oli rovastin vanhin tytär.
Kotia täytyi tosin kirjat salaisesti kuljettaa ja vielä salaisemmasti niitä
viljellä, sillä isä ei ollenkaan suvainnut tuonlaista »joutavuutta» ja
»ajan hukkaa», vaan kävihän se sitenkin. Ainahan sitä on lomaa
lukemiseen, kun vaan on halua ja harrastusta.
Senlaista oli helpompi ajatella kuin toimeen saada, sen sai isäntä
kokea, hänkin, joka oli tottunut vastuksia voittamaan.