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Chapter 7: Receivables and Investments
Student: ___________________________________________________________________________
1. Which one of the following is not an accurate description of Allowance for Doubtful Accounts?
A. Contra account
B. Balance sheet account
C. Income statement account
D. Current asset account
What amount will Tallon show on its year-end balance sheet for the net realizable value of its accounts receivable?
A. $295,000
B. $267,000
C. $250,000
D. $ 28,000
What is the effect on liquidity when Tallon records its estimate for bad debt expense using the allowance method?
A. Liquidity decreases
B. Liquidity increases
C. Liquidity stays the same
D. Liquidity both increases and decreases
4. The following information was presented in the balance sheet of Gloria Company as of December 31, 2014:
5. On January 15, 2014, the accounts receivable balance was $7,000 and the balance in the allowance for
doubtful accounts was $700. That morning a $200 uncollectible account was written-off. The net realizable
value of accounts receivable immediately after the write-off is:
A. $6,300
B. $6,800
C. $7,200
D. $7,900
6. Which one of the following is an accurate description of Allowance for Doubtful Accounts?
A. Contra account
B. Liability account
C. Revenue account
D. Expense account
8. If a company uses the direct write-off method of accounting for bad debts,
A. It is applying the matching principle
B. It will record bad debt expense only when an account is determined to be uncollectible
C. It will reduce the accounts receivable account at the end of the accounting period for estimated uncollectible
accounts
D. It will report accounts receivable in the balance sheet at their net realizable value
9. Fenchurch Corp. uses the direct write-off method to account for bad debts. What are the effects on the
accounting equation when recording the write-off of a customer's account balance?
A. Assets and liabilities decrease
B. Assets and owners’ equity decrease
C. Owners’ equity decrease and liabilities increase
D. No effect; assets increase and decrease by the same amount
10. If a company uses the allowance method of accounting for bad debts, which one of the following statements
is true?
A. It violates the matching principle
B. It will record bad debts only when an account is determined to be uncollectible
C. It will reduce the accounts receivable at the end of the accounting period for estimated uncollectible accounts
D. It will report accounts receivable in the balance sheet at their net realizable value
11. Which one of the following statements is true if a company's collection period for accounts receivable is
unacceptably long?
A. The company may need to borrow to acquire operating cash
B. The company may offer trade discounts to lengthen the collection period
C. Cash flows from operations may be higher than expected for the company's sales
D. The company should expand operations with its excess cash
12. If a company uses the allowance method to account for bad debts, when will the company's owners' equity
decrease?
A. At the date a customer's account is written off
B. At the end of the accounting period when an adjusting entry for bad debts is recorded
C. At the date a customer's account is determined to be uncollectible
D. When the accounts receivable amount becomes past due
13. Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching
bad debts expense with revenue on the income statement?
A. The percentage of accounts receivable approach
B. The percentage of net credit sales approach
C. The direct write-off method
D. The uncollectible approach
14. Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net
realizable value of accounts receivable on the balance sheet?
A. The percentage of accounts receivable approach
B. The percentage of net credit sales approach
C. The direct write-off method
D. The uncollectible approach
The data presented below for Agee Corp. is for the year ended December 31, 2014
Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decembe
r 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated 14,000
amount of
uncollecti
ble
accounts
based on
aging
analysis
The data presented below for Agee Corp. is for the year ended December 31, 2014
Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decembe
r 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated 14,000
amount of
uncollecti
ble
accounts
based on
aging
analysis
The data presented below for Agee Corp. is for the year ended December 31, 2014
Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decembe
r 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated 14,000
amount of
uncollecti
ble
accounts
based on
aging
analysis
The data presented below for Agee Corp. is for the year ended December 31, 2014
Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decembe
r 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated 14,000
amount of
uncollecti
ble
accounts
based on
aging
analysis
20. Which of the following statements is true regarding the two allowance methods used to account for bad
debts?
A. The percentage of net credit sales approach takes into account the existing balance in the Allowance for
Doubtful Accounts account.
B. The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts
account.
C. The percentage of accounts receivable approach takes into account the existing balance in the Allowance for
Doubtful Accounts account.
D. The direct write-off method does a better job of matching revenues and expenses.
What amount will Cubano show on its year-end balance sheet for the net realizable value of its accounts receivable?
A. $253,000
B. $235,000
C. $224,000
D. $217,000
22. What are the effects on the accounting equation when a company makes the adjustment to record bad debt
expense using the allowance method?
A. Assets and owners' equity increase
B. Assets and owners' equity decrease
C. Assets increase and owners' equity decreases
D. Assets decrease and owners' equity increases
23. What are the effects on the accounting equation when a company writes off a bad debt?
A. Assets and stockholders' equity increase
B. Assets and stockholders' equity decrease
C. Assets increase and stockholders' equity decreases
D. No effect on overall assets or equity
24. Americana Corporation
If the aging approach is used to estimate bad debts, what is the balance in the Allowance for Doubtful Accounts after the bad debt expense
adjustment.
A. $8,000
B. $8,100
C. $8,900
D. $9,600
If Satin estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt expense for 2014?
A. $25,800
B. $27,000
C. $28,800
D. $30,000
If Satin uses 2% of net credit sales to estimate its bad debts, what will be the balance in the Allowance for Doubtful Accounts account after the
adjustment for bad debts?
A. $33,000
B. $31,800
C. $27,000
D. $25,800
If Satin uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for 2014?
A. $28,000
B. $31,000
C. $34,000
D. $50,000
If Satin uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable value of its accounts receivable after
the adjustment for bad debt expense?
A. $216,000
B. $219,000
C. $222,000
D. $250,000
34. On January 1, 2014, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius
Company carried balances of $20,000 and $550 respectively. During the year, the company reported $70,000 of
credit sales. There were $400 of receivables written off as uncollectible in 2014. Cash collections of receivables
amounted to $74,700. The company estimates that it will be unable to collect 5% of the year-end accounts
receivable balance.
The amount of bad debts expense recognized in the 2014 income statement will be:
A. $545
B. $595
C. $745
D. $795
35. Assuming a company uses the allowance method, the entry to recognize the write-off of the specific
uncollectible accounts will act to:
A. Increase total assets and total equity
B. Increase total assets and decrease total equity
C. Decrease total assets and total equity
D. Not affect total assets or total equity
36. The entry required to recognize the bad debts expense for 2014 will act to:
A. Increase total assets and retained earnings
B. Decrease total assets and retained earnings
C. Decrease total assets and increase net income
D. Increase total assets and decrease net income
37. On January 1, 2014, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius
Company carried balances of $20,000 and $550 respectively. During the year, the company reported $70,000 of
credit sales. There were $400 of receivables written off as uncollectible in 2014. Cash collections of receivables
amounted to $74,700. The company estimates that it will be unable to collect 5% of the year-end accounts
receivable balance.
The net realizable value of receivables appearing on the 2014 balance sheet will amount to:
A. $14,105
B. $14,155
C. $14,900
D. $15,450
38. On November 2, 2014, Quaint General Store concluded that a customer’s $400 account receivable was
uncollectible and that the account should be written off. What effect will this write-off have on Quaint’s 2014
net income and balance sheet totals assuming the allowance method is used to account for bad debts?
A. Decrease in net income; decrease in total assets
B. Increase in net income; no effect on total assets
C. No effect on net income; decrease in total assets
D. No effect on net income; no effect on total assets
39. What is the distinguishing characteristic between accounts receivable and notes receivable?
A. Accounts receivable are usually current assets while notes receivable are usually long-term assets
B. Accounts receivable require payment of interest if not paid within the usual credit terms
C. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable
result from credit sale transactions for service companies
D. Notes receivable result from a written promise to pay within a specified amount of time
40. Where can the amounts needed to compute the accounts receivable turnover ratio be found?
A. The income statement
B. The balance sheet
C. The statement of cash flows
D. Both (a) and (b).
41. What should a company do to improve its accounts receivable turnover rate?
A. Lower its selling prices.
B. Increase its sales force.
C. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
D. Reduce the number of employees working in the credit department.
42. Spirit Corp. reported net sales (all on credit) of $1,600,000 and cost of goods sold of $1,100,000 for 2014.
Its beginning balance of Accounts Receivable was $150,000. The accounts receivable balance decreased by
$10,000 during 2014. Rounded to two decimal places, what is Spirit’s accounts receivable turnover rate for
2014?
A. 7.59
B. 10.32
C. 10.67
D. 11.03
43. During 2014, the accounts receivable turnover rate for Cordner Company increased from 10 to 14 times per
year. Which one of the following statements is the most likely explanation for the change?
A. The company's credit department has followed up with customers whose account balances are past due in
order to generate quicker collections.
B. The company has decreased sales to its most credit worthy customers.
C. The company has increased the amount of time customers have to pay their accounts before they are past
due.
D. The company has extended credit to more risky customers in order to increase sales.
44. Lasiter Corp. reported net credit sales of $2,000,000 and cost of goods sold of $1,400,000 for 2014. On
January 1, 2014, accounts receivable was $250,000. Amounts owed by customers increased by $20,000 during
2014. Rounding to two decimal places, what is Lasiter’s accounts receivable turnover rate for 2014?
A. 8.33
B. 8.00
C. 7.69
D. 7.41
45. The party to a promissory note that agrees to repay money on the maturity date of the note is called the
A. Lender
B. Maker of the note
C. Payee of the note
D. Recipient of the note
46. How will the payee of the promissory note record the note on its books?
A. The promissory note will be recorded as an asset
B. The promissory note will be recorded as a liability
C. The promissory note will be recorded as revenue
D. The promissory note will be recorded as an expense
47. The total amount of interest calculated annually on a $7,000 promissory note payable for 3 years at 12% that
is not compounded is
A. $ 280
B. $ 840
C. $ 2,520
D. $ 8,260
48. On July 1, 2014, Falcon Company received a $20,000 promissory note from Jordyn Company. The annual
interest rate is 5%. Principal and interest are paid in cash at the maturity date of June 30, 2015.
If Falcon’s fiscal year ends September 30, 2014, an adjusting entry is needed to:
A. Increase interest revenue by $1,000
B. Increase notes receivable by $250
C. Increase interest receivable by $250
D. Increase notes receivable by $1,000
49. On July 1, 2014, Falcon Company received a $20,000 promissory note for services from Jordyn Company.
The annual interest rate is 5%. Principal and interest are paid in cash at the maturity date of June 30, 2013.
50. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a promissory
note for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah’s
accounting period ends on December 31.
What is the actual maturity date of the note?
A. December 31, 2014
B. January 29, 2015
C. February 28, 2015
D. March 1, 2015
51. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a promissory
note for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah’s
accounting period ends on December 31.
What amount should Utah recognize as interest revenue on December 31, 2014 (if a 360 day year is assumed)?
A. $ -0-
B. $ 60
C. $120
D. $180
52. Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a promissory
note for payment in the same amount. The note has a term of 90 days and a stated interest rate of 8%. Utah’s
accounting period ends on December 31.
What amount should Utah recognize as interest revenue on the maturity date of the note?
A. $ -0-
B. $ 60
C. $120
D. $180
53. Megan Farms received a promissory note from a customer on March 1, 2014. The face amount of the note is
$8,000; the terms are 90 days and 9% interest.
What is the total amount of interest that Megan Farms will receive when the note is paid?
A. $ 60
B. $ 90
C. $180
D. $720
54. Megan Farms received a promissory note from a customer on March 1, 2014. The face amount of the note is
$8,000; the terms are 90 days and 9% interest. At the maturity date, the customer pays the amount due for the
note and interest.
What entry is required on the books of Megan Farms on the maturity date, assuming none of the interest had
already been recognized?
A. One that increases Cash, $8,000, and decreases Notes Receivable $8,000.
B. One that increases Cash, $8,180, increases Interest Revenue, $180, and decreases Notes Receivable, $8,000.
C. One that increases Cash $8,720, decreases Notes Receivable $8,000, and increases Interest Revenue, $720.
D. No entry is required; the customer pays the amount due to the bank.
55. Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted a
promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest rate of 7%.
Verilux’s accounting period ends on December 31, 2014.
What amount should Verilux recognize as interest revenue on December 31, 2014?
A. $ -0-
B. $ 116.67
C. $ 291.67
D. $ 280.00
56. Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted a
promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest rate of 7%.
Verilux’s accounting period ends on December 31, 2014.
What amount should Verilux recognize as interest revenue on the maturity date of the note?
A. $ -0-
B. $ 175.00
C. $ 291.67
D. $ 420.00
57. Comfort Shoes received a promissory note from a customer on April 1, 2014. The face amount of the note is
$2,000; the terms are 12 months and 8% annual interest.
How much total interest revenue will Comfort Shoes recognize for the year ended December 31, 2014?
A. $ 40
B. $ 107
C. $ 120
D. $ 160
58. Comfort Shoes received a promissory note from a customer on April 1, 2014. The face amount of the note is
$2,000; the terms are 12 months and 8% annual interest.
At the maturity date, the customer pays for the note and interest. Comfort Shoes made the proper adjustment at
the end of December for interest. The effect of recognizing the transaction on the maturity date is
A. A decrease to Cash
B. An increase to Notes Receivable
C. An increase to Discount on Notes Receivable
D. A decrease to Notes Receivable
59. Router Inc. lends $70,000 on a 120-day, 9% promissory note. The total interest that Router will receive at
maturity is
A. $6,300
B. $2,100
C. $525
D. $1,890
60. Idaho.com accepts VISA for payments of purchases made by students. The credit card drafts are deposited
directly in a bank account. VISA charges a 2% collection fee. Credit card drafts totaling $12,000 are deposited
during September. The effect on the accounting equation to record the sales and deposits will include
A. An increase in Cash for $12,000
B. An increase to Sales for $11,760
C. An increase to Accounts Receivable for $11,760
D. An increase in Collection Fee Expense for $240
64. If Cable Inc. receives $23,825 from credit card collections and has an average rate of 4.7% charged by the
credit card company, its credit card sales during the period were:
A. $111,978
B. $50,691
C. $25,000
D. $22,705
65. Cushion Sports accepted a credit card account receivable in exchange for $5,000 of services provided to a
customer. The credit card company charges a 5% service charge. Recording the transaction in the company’s
accounting records will have what effect on the accounting equation?
A. Increase assets and equity by $4,750
B. Decrease assets and equity by $250
C. Increase assets by $5,000
D. Increase equity by $5,000
66. When one company purchases less than 50% of equity securities in a second company, which of the
following statements is true?
A. The purchaser is referred to as the parent.
B. The purchaser is referred to as the subsidiary.
C. The company whose securities are purchased is the subsidiary.
D. The company whose securities are purchased is the investee.
68. For what reason would a company buy 10% of the common stock of a second company?
A. The company has idle cash and wishes to have a higher return than that available from temporary money
market investments.
B. The company wishes to insure a steady source of goods from the second company.
C. The company wishes to prepare consolidated financial statements.
D. More than one of the above is correct.
70. The equity method of accounting for an investment is used when a company purchases
A. More than 20% of the debt securities of a second company.
B. 100% of the debt securities of a second company.
C. 15% of the equity securities of a second company.
D. More than 20% of the equity securities of a second company.
71. Hedron Corp. invested cash in a 6-month certificate of deposit (CD) on November 1, 2014. If Hedron Corp.
has an accounting period that ends on December 31, 2014, when should Hedron recognize interest revenue from
the CD?
A. On December 31, 2014 only
B. On May 1, 2013 only
C. Both December 31, 2014 and May 31, 2013
D. On the date when its income tax return is filed
72. Tippi Corp. invested cash in a 9-month certificate of deposit (CD) on October 1, 2014. If Tippi has an
accounting period which ends on December 31, 2014, when would it most likely recognize interest revenue
from the CD?
A. On December 31, 2014 only
B. On July 1, 2013 only
C. Both Dec. 31, 2014 and July 1, 2013
D. On October 1, 2014
73. Wagner’s Bookstore acquires a 6% $12,000 certificate of deposit on September 1. The term of the CD is six
months. At that time, all principal and accrued interest will be paid in cash. Indicate the effect on the financial
statements at December 31.
A. Interest Receivable increases $240, Interest Revenue increases $240
B. Interest Receivable increases $360, Interest Revenue increases $360
C. Interest Receivable increases $480, Interest Revenue increases $480
D. Interest Receivable increases $720, Interest Revenue increases $720
74. What are the effects on the accounting equation from the purchase of a short-term investment?
A. Assets and stockholders’ equity decrease
B. No effects--assets increase and decrease by the same amount
C. Assets and liabilities decrease
D. Stockholders' equity decreases and liabilities increase
75. Meta Inc. pays $18,000 to buy stock in another company and an additional $350 in commissions. Three
months later, Meta sells the stock for $19,000. At the time of sale, Meta will recognize a:
A. A $650 loss
B. A $1,000 gain
C. A $350 loss
D. A $650 gain
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