Ch08 Receivables

Chapter 8 Receivables OBJECTIVES

Obj 1 Obj 2 Obj 3 Obj 4 Obj 5 Obj 6 Obj 7

Describe the common classifications of receivables. Describe the nature of and the accounting of uncollectible receivables. Describe the direct write-off method of the accounting for uncollectible receivables. Describe the allowance method of accounting for uncollectible receivables. Compare the direct write-off and allowance methods of accounting for uncollectible accounts. Describe the nature, characteristics, and accounting of notes receivable. Describe the reporting of receivables on the balance sheet.

QUESTION GRID

True/False No Objective . 1 08-01 2 08-01 3 08-01 4 08-01 5 08-01 6 08-01 7 08-02 8 08-02 9 08-03 10 08-03 11 08-03 12 08-03 13 08-04 14 08-04 15 08-04 16 08-04

Difficulty

No.

Objective

Difficulty

No.

Objective

Difficulty

Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy

17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-06 08-06 08-06 08-06 08-06 08-06 08-06

Easy Moderate Moderate Easy Moderate Moderate Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy

33 34 35 36 37 38 39 40 41 42 43 44 45 46

08-06 08-06 08-06 08-06 08-06 08-07 08-07 08-APP 08-APP 08-APP 08-APP 08-APP 08-APP 08-APP

Easy Easy Easy Easy Easy Easy Easy Moderate Moderate Moderate Easy Easy Easy Easy

401

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Multiple Choice No Objective . 1 08-01 2 08-01 3 08-01 4 08-01 5 08-01 6 08-02 7 08-02 8 08-02 9 08-02 10 08-02 11 08-02 12 08-02 13 08-03 14 08-03 15 08-03 16 08-03 17 08-04 18 08-04 19 08-04 20 08-04 21 08-04 22 08-04 23 08-04 24 08-04 25 08-04 26 08-04

Difficulty

No.

Objective

Difficulty

No.

Objective

Difficulty

Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Moderate Moderate Easy Moderate Easy Moderate Moderate Easy Easy Easy Easy

27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52

08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-04 08-06 08-06

Moderate Moderate Easy Moderate Moderate Moderate Easy Easy Easy Moderate Moderate Moderate Moderate Easy Easy Moderate Moderate Moderate Moderate Easy Easy Easy Moderate Moderate Easy Easy

53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78

08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-06 08-07 08-07 08-07 08-07 08-APP 08-APP 08-APP 08-APP 08-APP 08-APP 08-APP 08-APP

Easy Moderate Easy Moderate Easy Easy Moderate Moderate Easy Easy Easy Easy Easy Moderate Easy Easy Easy Easy Easy Easy Moderate Moderate Moderate Moderate Difficult Moderate

Exercise/Other No Objectiv Difficulty . e 1 08-01 Easy 2 08-02 Easy 3 08-03 Easy

No . 8 9 10

08-04 08-04 08-04

4

08-03

Easy

11

08-04

5

08-03

Easy

12

08-04

6

08-03/04

Easy

13

08-04

7

08-04

Moderate

14

08-04

Objective

Difficult y Difficult Easy Moderat e Moderat e Moderat e Moderat e Moderat e

No . 15 16 17

Objectiv e 08-04 08-04 08-06

Difficult y Moderate Easy Moderate

18

08-07

Easy

19

08-07

Easy

20

08-07

Moderate

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Problem No Objective . 1 08-03/04/07 2 08-04 3 08-04

Difficult y Moderate Difficult Moderate

5 6 7

08-07 08-07 08-04/07

4

Moderate

8

08-07

08-06

No.

Objective

Difficult y Easy Easy Moderat e Moderat e

No . 9 10 11

Objectiv e 08-07 08-APP 08-APP

Difficult y Moderate Difficult Moderate

Chapter 8—Receivables TRUE/FALSE 1. Notes receivable and accounts receivables can also be called trade receivables. ANS: T DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 2. Receivables from company owners and officers should be disclosed separately on the balance sheet. ANS: T DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement

3.

Receivables not currently collectible are reported in the investments section of the balance sheet. ANS: T DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 4. Trade receivables occur when two companies trade or exchange notes receivables. ANS: F DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 5. Other receivables include non trade receivables such as loans to company officers. ANS: T DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 6.

Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. ANS: T DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 7. When companies sell their receivables to other companies, the transaction is called factoring ANS: T DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement

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8.

Of the two methods of accounting for uncollectible receivables, the allowance method provides in advance for uncollectible receivables. ANS: T DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 9.

Generally accepted accounting principles do not normally allow the use direct write-off method of accounting for uncollectible accounts. ANS: T DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 10. The direct write-off method records uncollectible accounts expense in the year the specific account receivable is determined to be uncollectible. ANS: T DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 11. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible. ANS: F DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 12. Under the direct write-off method, no attempt is made to match Bad Debt Expense to sales revenues in the same accounting period. ANS: T DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 13. The difference between Accounts Receivable and its contra asset account is called net realizable value. ANS: T DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 14. The estimate based on sales method violates the matching principle. ANS: F DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 15. When the estimate based on analysis of receivables is used, income is reduced when a specific receivable is written off. ANS: F DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 16. When an account receivable that has been written off is subsequently collected, the account receivable is reinstated. ANS: T DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

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17. Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a debit or a credit balance before adjusting entries are recorded at the end of the accounting period. ANS: T DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 18. At the end of a period, before the accounts are adjusted, Allowance for Doubtful Accounts has a credit balance of $250, and net sales on account for the period total $500,000. If uncollectible accounts expense is estimated at 1% of net sales on account, the current provision to be made for uncollectible accounts expense is $4,750. ANS: F DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 19. At the end of a period, before the accounts are adjusted, Allowance for Doubtful Accounts has a debit balance of $500, and net sales on account for the period total $800,000. If uncollectible accounts expense is estimated at 1% of net sales on account, the current provision to be made for uncollectible accounts expense is $8,500. ANS: F DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 20. Allowance for Doubtful Accounts is a liability account. ANS: F DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 21. At the end of a period, before the accounts are adjusted, Allowance for Doubtful Accounts has a debit balance of $2,000. If the estimate of uncollectible accounts determined by aging the receivables is $30,000, the current provision to be made for uncollectible accounts expense is $30,000. ANS: F DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 22. At the end of a period, before the accounts are adjusted, Allowance for Doubtful Accounts has a credit balance of $5,000. If the estimate of uncollectible accounts determined by aging the receivables is $50,000, the current provision to be made for uncollectible accounts expense is $45,000. ANS: T DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 23. When using the estimate-based-on-sales method, the entry to record uncollectible accounts expense includes a credit to the Accounts Receivable account. ANS: F DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

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24. When using the estimate based on analysis of receivables, the amount computed in the analysis is always the required amount that would be recorded in the adjusting entry. ANS: F DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 25. The allowance for doubtful accounts is similar to accumulated depreciation in that the account represents the total of all accounts written-off since the beginning year. ANS: F DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 26. The equation for computing interest on an interest-bearing note is as follows: interest equals maturity value times interest rate times time. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 27. The due date of a 60-day note dated July 10 is September 10. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 28. The maturity value of a 12%, 60-day note for $5,000 is $5,600. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 29. The maturity value of a note receivable is always the same as its face value. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 30. The interest on a 6%, 60-day note for $5,000 is $300. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 31. The party promising to pay a note at maturity is the payee. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 32. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored. ANS: T DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 33. When a note is received from a customer on account, it is recorded by debiting Accounts Receivable and crediting Notes Receivable. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement

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34. In computing the maturity date of a note, the date the note is issued is included but the due date is omitted. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 35. When a note is written to settle an open account no entry is necessary. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 36. If a promissory note is dishonored, the payee should not record interest income. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 37. The receivables turnover ratio is computed by dividing total gross sales by the average net receivables during the year. ANS: F DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 38. The balance of the allowance for doubtful accounts is added to accounts receivable on the balance sheet. ANS: F DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 39. The accounts receivable turnover measures the length of time in days it takes to collect a receivable. ANS: F DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 40. A 60-day, 12% note receivable for $20,000, dated May 20, is discounted at the bank on June 9 at 15%. The number of days in the discount period is 20. ANS: F DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 41. A 60-day, 12% note receivable for $20,000, dated May 20, is discounted at the bank on June 9 at 15%. The proceeds are $20,340. ANS: F DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 42. If the proceeds from discounting a note receivable are less than the face value of the note, Interest Expense will be debited for the excess of the proceeds over the face value. ANS: T DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement

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43. The discounting of a note receivable creates a contingent liability that continues in effect until the due date of the note. ANS: T DIF: Easy OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 44. A note receivable can be sold to a financial institution to secure cash before the maturity date. This type of transaction is called discounting the note receivable. ANS: T DIF: Easy OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 45. The amount of cash received for a discounted noted is called maturity value. ANS: F DIF: Easy OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 46. The proceeds received from discounting a note receivable at a bank are equal to the face value of the note less the discount charged by the bank. ANS: F DIF: Easy OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement MULTIPLE CHOICE 1.

A note receivable due in 18 months is listed on the balance sheet under the caption a. long-term liabilities b. fixed assets c. current assets d. investments ANS: D DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 2.

The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable. ANS: B DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 3.

Which of the following receivables would not be classified as an "other receivable”? a. Advance to an employee b. Interest receivable c. Refundable income tax d. Notes receivable ANS: D DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement

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4.

Notes or accounts receivables that result from sales transactions are often called a. non-trade receivables. b. trade receivables. c. merchandise receivables. d. sales receivables. ANS: B DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 5.

The term "receivables" includes all a. money claims against other entities. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors. ANS: A DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 6.

When does an account become uncollectible? a. when the debtor fails to pay an account according to a sales contract b. when the debtor fails to pay a note on the due date c. there is no general rule for when an account becomes uncollectible d. at the end of the fiscal year e. upon receipt of a certified letter from the debtor ANS: C DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 7.

The type of account and normal balance of Allowance for Doubtful Accounts is a. contra asset, credit b. asset, debit c. liability, credit d. expense, debit e. expense, credit ANS: A DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 8.

The two methods of accounting for uncollectible receivables are the allowance method and the a. equity method b. direct write-off method c. interest method d. cost method ANS: B DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement

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9.

The direct write-off method of accounting for uncollectible accounts a. emphasizes balance sheet relationships. b. is not generally accepted as a basis for estimating bad debts. c. emphasizes cash realizable value. d. emphasizes the matching of expenses with revenues. ANS: B DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 10. Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expense is debited a. at the end of each accounting period. b. when a credit sale is past due. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be worthless. ANS: D DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 11. An alternative name for Bad Debts Expense is a. Collection Expense. b. Credit Loss Expense. c. Uncollectible Accounts Expense. d. Deadbeat Expense. ANS: C DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 12. Two methods of accounting for uncollectible accounts are the a. direct write-off method and the allowance method. b. allowance method and the accrual method. c. allowance method and the net realizable method. d. direct write-off method and the accrual method. ANS: A DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 13. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Payable b. Accounts Receivable c. Allowance for Doubtful Accounts d. Bad Debt Expense ANS: D DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement

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14. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense ANS: B DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 15. One of the weaknesses of the direct write-off method is that it a. understates accounts receivable on the balance sheet b. violates the matching principle c. is too difficult to use for many companies d. is based on estimates ANS: B DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 16. The LMN Co. uses the direct write-off method of accounting for uncollectible accounts receivable. The entry to write off an account that has been determined to be uncollectible would be as follows: a. debit Allowance for Doubtful Accounts; credit Accounts Receivable b. debit Sales Returns and Allowance, credit Accounts Receivable c. debit Uncollectible Accounts Expense; credit Allowance for Doubtful Accounts d. debit Accounts Receivable, credit Uncollectible Accounts Expense e. debit Uncollectible Accounts Expense; credit Accounts Receivable ANS: E DIF: Moderate OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 17. Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and uncollectible accounts expense is estimated at 3% of net sales. If net sales are $600,000, the amount of the adjusting entry to record the provision for doubtful accounts is a. $18,500 b. $17,500 c. $18,000 d. none of the above ANS: C DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

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18. Under the allowance method, writing off an uncollectible account a. affects only income statement accounts. b. is not acceptable practice. c. affects only balance sheet accounts. d. affects both balance sheet and income statement accounts. ANS: C DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 19. An estimate based on an analysis of receivables shows that $780 of accounts receivables are uncollectible. The Allowance for Doubtful Accounts has a debit balance of $110. After preparing the adjusting entry at the end of the year, the balance in the Allowance for Doubtful Accounts is a. $110 b. $780 c. $670 d. $890 ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 20. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Allowance for Doubtful Accounts c. Accounts Receivable d. Interest Expense ANS: B DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 21. Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year (before adjustment), and an analysis of accounts in the customers ledger indicates doubtful accounts of $15,000. Which of the following entries records the proper provision for doubtful accounts? a. debit Uncollectible Accounts Expense, $800; credit Allowance for Doubtful Accounts, $800 b. debit Uncollectible Accounts Expense, $14,200; credit Allowance for Doubtful Accounts, $14,200 c. debit Allowance for Doubtful Accounts, $800; credit Uncollectible Accounts Expense, $800 d. debit Allowance for Doubtful Accounts, $15,800; credit Uncollectible Accounts Expense, $15,800 ANS: B DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

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22. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year (before adjustment), and uncollectible accounts expense is estimated at 3% of net sales. If net sales are $600,000, the amount of the adjusting entry to record the provision for doubtful accounts is a. $18,500 b. $17,500 c. $18,000 d. none of the above ANS: C DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 23. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $450,000 and Allowance for Doubtful Accounts has a balance of $25,000. What is the net realizable value of the accounts receivable? a. $25,000 b. $425,000 c. $450,000 d. $455,000 ANS: B DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 24. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense ANS: B DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 25. Allowance for Doubtful Accounts is listed on the balance sheet under the caption a. stockholders’ equity b. investments c. fixed assets d. current assets ANS: D DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

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26. On the balance sheet, the amount shown for the Allowance for Doubtful Accounts is equal to the a. Uncollectible accounts expense for the year b. total of the accounts receivables written-off during the year c. total estimated uncollectible accounts as of the end of the year d. sum of all accounts that are past due. ANS: C DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 27. Allowance for Doubtful Accounts has a credit balance of $1,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates doubtful accounts of $12,900. Which of the following entries records the proper provision for doubtful accounts? a. debit Uncollectible Accounts Expense, $14,000; credit Allowance for Doubtful Accounts, $14,000 b. debit Allowance for Doubtful Accounts, $14,000; credit Uncollectible Accounts Expense, $14,000 c. debit Allowance for Doubtful Accounts, $11,800; credit Uncollectible Accounts Expense, $11,800 d. debit Uncollectible Accounts Expense, $11,800; credit Allowance for Doubtful Accounts, $11,800 ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 28. Allowance for Doubtful Accounts has a credit balance of $1,500 at the end of the year (before adjustment), and an analysis of customers' accounts indicates doubtful accounts of $17,900. Which of the following entries records the proper provision for doubtful accounts? a. debit Allowance for Doubtful Accounts, $16,400; credit Uncollectible Accounts Expense, $16,400 b. debit Allowance for Doubtful Accounts, $19,400; credit Uncollectible Accounts Expense, $19,400 c. debit Uncollectible Accounts Expense, $19,400; credit Allowance for Doubtful Accounts, $19,400 d. debit Uncollectible Accounts Expense, $16,400; credit Allowance for Doubtful Accounts, $16,400 ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 29. What is the type of account and normal balance of Allowance for Doubtful Accounts? a. Contra asset, credit b. Asset, debit c. Asset, credit d. Contra asset, debit ANS: A DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

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30. A company uses the estimate of sales method to account for uncollectible accounts. When the firm writes off a specific customer's account receivable a. total current assets are reduced b. total expenses for the period are increased c. total current assets are reduced and total expenses are increased d. there is no effect on total current assets or total expenses ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 31. An estimate based on an analysis of receivables shows that $780 of accounts receivables are uncollectible. The Allowance for Doubtful Accounts has a debit balance of $110. After preparing the adjusting entry at the end of the year, the balance in the Uncollectible Accounts Expense is a. $110 b. $780 c. $670 d. $890 ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 32. ABC company uses the estimate of sales method of accounting for uncollectible accounts. ABC estimates that 3% of all credit sales will be uncollectible. On January 1, 2005, the Allowance for Doubtful Accounts had a credit balance of $2,400. During 2005, ABC wroteoff accounts receivable totaling $1,800 and made credit sales of $100,000. After the adjusting entry, the December 31, 2005, balance in the Uncollectible Accounts Expense would be a. $1,200 b. $3,000 c. $3,600 d. $7,200 ANS: B DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 33. The balance in Allowance for Doubtful Accounts must be carefully considered prior to the end of the year adjustment when applying which method? a. direct write-off method b. estimate based on sales c. estimate based on an analysis of receivables d. both (b) and (c) ANS: C DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

416  Chapter 8/Receivables

34. Donovan Company uses the estimate based on analysis of receivables to account for uncollectible accounts. The company has determined that the Irish Company account is uncollectible. To write-off this account, Donovan should debit a. Uncollectible Accounts Expense and credit Accounts Receivable b. Uncollectible Accounts Expense and credit Allowance for Doubtful Accounts c. Allowance for Doubtful Accounts and credit Accounts Receivable d. Accounts receivable and credit Allowance for Doubtful Accounts ANS: C DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 35. Using the estimate based on sales method of accounting for uncollectible accounts, the entry to reinstate a specific receivable previously written off would include a a. credit to Bad Debt Expense b. credit to Accounts Receivable c. debit to Allowance for Doubtful Accounts d. debit to Accounts Receivable ANS: D DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 36. At the beginning of the year, the balance in the Allowance for Doubtful Accounts is a credit of $540. During the year, $350 of previously written-off accounts were reinstated and accounts totaling $410 are written-off as uncollectible. The end of the year balance in the Allowance for Doubtful Accounts should be a. $350 b. $410 c. $480 d. $600 ANS: C DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 37. Allowance for Doubtful Accounts has a debit balance of $800 at the end of the year (before adjustment), and an analysis of accounts in the customers ledger indicates doubtful accounts of $15,000. Which of the following entries records the proper provision for doubtful accounts? a. debit Uncollectible Accounts Expense, $800; credit Allowance for Doubtful Accounts, $800 b. debit Uncollectible Accounts Expense, $14,200; credit Allowance for Doubtful Accounts, $14,200 c. debit Allowance for Doubtful Accounts, $800; credit Uncollectible Accounts Expense, $800 d. debit Uncollectible Accounts Expense, $15,800; credit Allowance for Doubtful Accounts, $15,800 ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 8/Receivables  417

38. Allowance for Doubtful Accounts has a debit balance of $1,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates doubtful accounts of $12,900. Which of the following entries records the proper provision for doubtful accounts? a. debit Uncollectible Accounts Expense, $14,000; credit Allowance for Doubtful Accounts, $14,000 b. debit Allowance for Doubtful Accounts, $14,000; credit Uncollectible Accounts Expense, $14,000 c. debit Allowance for Doubtful Accounts, $11,800; credit Uncollectible Accounts Expense, $11,800 d. debit Uncollectible Accounts Expense, $11,800; credit Allowance for Doubtful Accounts, $11,800 ANS: A DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 39. Allowance for Doubtful Accounts has a credit balance of $1,500 at the end of the year (before adjustment), and an analysis of customers' accounts indicates doubtful accounts of $17,900. Which of the following entries records the proper provision for doubtful accounts? a. debit Allowance for Doubtful Accounts, $16,400; credit Uncollectible Accounts Expense, $16,400 b. debit Allowance for Doubtful Accounts, $19,400; credit Uncollectible Accounts Expense, $19,400 c. debit Uncollectible Accounts Expense, $19,400; credit Allowance for Doubtful Accounts, $19,400 d. debit Uncollectible Accounts Expense, $16,400; credit Allowance for Doubtful Accounts, $16,400 ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 40. When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when a. a customer's account becomes past due. b. an account becomes bad and is written off. c. a sale is made. d. management estimates the amount of uncollectibles. ANS: D DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 41. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase income in the period it is collected. b. will decrease income in the period it is collected. c. does not affect income in the period it is collected. d. requires a correcting entry for the period in which the account was written off. ANS: C DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

418  Chapter 8/Receivables

42. An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a a. debit to Allowance for Doubtful Accounts for $2,800. b. debit to Bad Debts Expense for $2,800. c. debit to Allowance for Doubtful Accounts for $4,000. d. credit to Allowance for Doubtful for $4,000. ANS: B DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 43. An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $4,200. b. debit to Bad Debts Expense for $3,000. c. debit to Bad Debts Expense for $1,800. d. credit to Allowance for Doubtful Accounts for $4,000. ANS: A DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 44. An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $4,200. b. debit to Bad Debts Expense for $3,000. c. debit to Bad Debts Expense for $1,800. d. credit to Allowance for Doubtful Accounts for $4,000. ANS: C DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 45. A debit balance in the Allowance for Doubtful Accounts a. is the normal balance for that account. b. indicates that actual bad debt write-offs have been less than what was estimated. c. cannot occur if the percentage of receivables method of estimating bad debts is used. d. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 8/Receivables  419

46. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a a. debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts. b. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales and a credit to Accounts Receivable. ANS: A DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 47. The balance in Allowance for Doubtful Accounts must be considered prior to end of period adjustment when using which of the following methods? a. Analysis of receivables allowance method b. Direct write-off method c. Accrual method d. Net realizable method ANS: A DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 48. You have just received notice that a customer of yours with an Account Receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Bad Debt Expense and credit Allowance for Doubtful Accounts. b. debit Bad Debt Expense and credit Accounts Receivable. c. debit Allowance for Doubtful Accounts and credit Accounts Receivable. d. debit Allowance for Doubtful Accounts and credit Bad Debt Expense. ANS: C DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 49. Tanning Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. An aging of accounts receivable shows that 5% will be uncollectible. What adjusting entry will Manning Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment? a. Bad Debts Expense 8,000 Allowance for Doubtful Accounts 8,000 b. Bad Debts Expense 10,000 Allowance for Doubtful Accounts 10,000 c. Bad Debts Expense 8,000 Accounts Receivable 8,000 d. Bad Debts Expense 10,000 Accounts Receivable 10,000 ANS: A DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

420  Chapter 8/Receivables

50. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. Liabilities decrease. b. Net Income is unchanged. c. Total Assets are unchanged. d. Total Assets decrease. ANS: D DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 51. The amount of a promissory note is called the a. realizable value b. maturity value c. face value d. proceeds ANS: C DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 52. The amount of the promissory note plus the interest earned on the due date is called the a. realizable value b. maturity value c. face value d. net realizable value ANS: B DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 53. A 60-day, 10% note for $8,000, dated April 15, is received from a customer on account. The face value of the note is a. $8,600 b. $7,200 c. $8,800 d. $8,000 ANS: D DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 54. A 90-day, 12% note for $10,000, dated May 1, is received from a customer on account. The maturity value of the note is a. $10,000 b. $10,300 c. $450 d. $9,550 ANS: B DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 8/Receivables  421

55. Interest on a note can be calculated without knowledge of the a. note's maturity date b. rate of interest c. notes duration d. principal amount ANS: A DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 56. On November 1, Blazer Company receives a 6% interest bearing note from Ram Company to settle a $20,000 account receivable. The note is due in six months. At December 31, Blazer should record interest revenue of a. $0 b. $100 c. $200 d. $600 ANS: C DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 57. If the maker of a promissory note fails to pay the note on the due date, the note is said to be a. displaced b. disallowed c. dishonored d. discounted ANS: C DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 58. The journal entry to record a note received from a customer to apply on account is a. debit Notes Receivable; credit Accounts Receivable b. debit Accounts Receivable; credit Notes Receivable c. debit Cash; credit Notes Receivable d. debit Notes Receivable; credit Notes Payable ANS: A DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 59. A $6,000, 30-day, 12% note recorded on November 21 is not paid by the maker at maturity. The journal entry to recognize this event is a. debit Cash, $6,060; credit Notes Receivable, $6,060 b. debit Accounts Receivable, $6,060; credit Notes Receivable, $6,000; Credit Interest Receivable, $60 c. debit Notes Receivable, $6,060; credit Accounts Receivable, $6,060 d. debit Accounts Receivable, $6,060; credit Notes Receivable, $6,000; Credit Interest Revenue, $60 ANS: D DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement

422  Chapter 8/Receivables

60. On November 1, Kim Company accepted a 3-month note receivable as payment for services provided to Chu Company. The terms of the note were $8,000 face value and 6% interest. Kim Company closes its books at December 31 and does not use reversing entries. On February 1, the journal entry to record the collection of the note should include a credit to a. Notes Receivable for $8,120 b. Interest Receivable for $120 c. Interest Revenue for $120 d. Interest Revenue for $40 ANS: D DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 61. A note receivable or promissory note a. has the party to whom the money is due as the maker. b. is not a formal credit instrument. c. cannot be factored to another party. d. may be used to settle an accounts receivable. ANS: D DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 62. When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note. b. debit Notes Receivable for the face value of the note. c. credit Notes Receivable for the maturity value of the note. d. credit Notes Receivable for the face value of the note. ANS: B DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 63. Pane Company receives a $3,000, 3-month, 6% promissory note from Dag Company in settlement of an open accounts receivable. What entry will Pane Company make upon receiving the note? a. Notes Receivable 3,000 Accounts Receivable—Dag Company 3,000 b. Notes Receivable 3,045 Accounts Receivable—Dag Company 3,045 c. Notes Receivable 3,045 Accounts Receivable—Dag Company 3,000 Interest Revenue 45 d. Notes Receivable 3,000 Interest Receivable 45 Accounts Receivable—Dag Company 3,000 Interest Revenue 45 ANS: A DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 8/Receivables  423

64. The maturity value of a $20,000, 9%, 40-day note receivable dated July 3 is a. $20,000. b. $20,200. c. $21,800. d. $22,000. ANS: B DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 65. Harper Company lends Hewell Company $20,000 on March 1, accepting a four-month, 6% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared? a. Cash 100 Interest Revenue 100 b. Interest Receivable 300 Interest Revenue 300 c. Interest Receivable 100 Interest Revenue 100 d. Note Receivable 20,000 Cash 20,000 ANS: C DIF: Easy OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 66. Bright Co. holds Park Co.’s $20,000, 120 day, 9% note. The entry made by Bright Co. when the note is collected, assuming no interest has previously been accrued is: a. Cash 20,000 Notes Receivable 20,000 b. Accounts Receivable 20,600 Notes Receivable 20,000 Interest Revenue 600 c. Cash 20,600 Notes Receivable 20,000 Interest Revenue 600 d. Accounts Receivable 20,600 Notes Revenue 20,000 Interest Revenue 600 ANS: C DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 67. Receivables are usually listed on the balance sheet after Cash in what order? a. Accounts Receivable, Notes Receivable, Interest Receivable b. Interest Receivable, Notes Receivable, Accounts Receivable c. Notes Receivable, Interest Receivable, Accounts Receivable d. Notes Receivable, Accounts Receivable, Interest Receivable ANS: D DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement

424  Chapter 8/Receivables

68. Receivables are usually listed in order a. of the due date b. of the size c. alphabetically d. of liquidity ANS: D DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 69. Accounts Receivable Turnover measures a. how frequently during the year the accounts receivable are converted to cash b. the number of days outstanding c. the fair market value of accounts receivable d. the efficiency of the accounts payable function ANS: A DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 70. The number of days' sales in receivables a. is an estimate of the length of time the receivables have been outstanding b. measures the number of times the receivables turn over each year c. is Net Credit Sales divided by Average Receivables d. is not meaningful and therefore is not used ANS: A DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 71. In reference to a promissory note, another word for "discount" is a. maturity b. sale c. purchase d. interest ANS: D DIF: Easy OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 72. The amount received by the endorser after discounting a note receivable at the bank is called the a. proceeds b. maturity value c. face value d. realizable value ANS: A DIF: Easy OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 8/Receivables  425

73. A 60-day, 12% note for $10,000, dated May 1, is received from a customer on account. If the note is discounted on May 21 at 15%, the proceeds are a. $170 b. $9,830 c. $10,000 d. $10,030 ANS: D DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 74. A 60-day, 12% note for $10,000, dated May 1, is received from a customer on account. If the note is discounted on June 10 at 15%, the proceeds are a. $10,115 b. $10,200 c. $10,000 d. $10,030 ANS: A DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 75. A 60-day, 12% note for $10,000, dated May 1, is received from a customer on account. If the note is discounted on May 21 at 15%, the amount of interest revenue or expense to be recorded by the payee of the note on May 21 is a. $30 interest expense b. $30 interest revenue c. $170 interest revenue d. $170 interest expense ANS: B DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 76. A 60-day, 12% note received from a customer for $50,000, dated May 15, is endorsed to the bank on May 25, and the bank discounts the note at 15%. If the note is dishonored by the maker and the bank charges a $20 protest fee, what is the amount payable to the bank on July 14? a. $51,000 b. $51,020 c. $56,020 d. $50,000 ANS: B DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement

426  Chapter 8/Receivables

77. A 90-day, 12% note for $20,000, dated April 10, is received from a customer on account. If the note is discounted at 15% on May 10, the due date is a. July 9 b. July 10 c. July 11 d. July 8 ANS: A DIF: Difficult OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 78. A 90-day, 12% note for $20,000, dated April 10, is received from a customer on account. If the note is discounted at 15% on May 10, the days in the discount period are a. 60 b. 90 c. 120 d. 30 ANS: A DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement EXERCISE/OTHER 1.

Other than accounts receivable and notes receivable, name other receivables that might be included in the general ledger. ANS: Interest Receivable, Receivables from Officers or Employees, Taxes Receivable. DIF: Easy OBJ: 08-01 NAT: AACSB Analytic | AICPA FN-Measurement 2.

If sales personnel are allowed to approve customer credit, how might the cost of approving poor credit risk be controlled? ANS: Allow sales personnel to approve customer credit for only sales of small amounts. DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement 3.

On March 31st the company determines that it needs to recognize $1,950.00 in uncollectible accounts expense based on an evaluation of accounts receivable. Journalize this recognition. ANS: Mar 31st Uncollectible Accounts Expense 1,950.00 Allowance for Doubtful Accounts 1,950.00 DIF: Easy OBJ: 08-02 NAT: AACSB Analytic | AICPA FN-Measurement

Chapter 8/Receivables  427

4.

Journalize the following transaction using the direct write-off method of accounting for uncollectible receivables. June 10 Received $1,300 from Jan Downs and wrote off the remainder owed of $4,200.

Oct. 11 Reinstated the account of Jan Downs and received $4,200 cash in full payment. ANS: June 10 Cash 1,300 Bad Debt Expense 4,200 Accounts Receivable-Jan Downs 5,500 Oct 11

11

Accounts Receivable-Jan Downs Bad Debt Expense

4,200

Cash Accounts Receivable-Jan Downs

4,200

4,200

4,200

DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-1 5.

Mega Stampers utilizes the direct write-off method for accounts receivable. On September 15th it is notified by the attorneys for Hub Cap Ben that Hub Cap Ben is bankrupt and no cash is expected in the liquidation of Hub Cap Ben’s. Journalize the $655.00 shown as accounts receivable from Hub Cap Ben’s as a write-off. ANS: Sept 15th Uncollectible Accounts Expense 655.00 Accounts Receivable - Hub Cap Ben 655.00 DIF: Easy OBJ: 08-03 NAT: AACSB Analytic | AICPA FN-Measurement 6.

The following journal entries illustrate the two methods of accounting for uncollectible receivables. Identify each. (a) Uncollectible Accounts Expense Accounts Receivable-Billings

450

(b) Allowance for Doubtful Accounts Accounts Receivable-Helena

450

ANS: (a) Direct Write-Off Method (b) Allowance Method

450

450

428  Chapter 8/Receivables

DIF: Easy OBJ: 08-03 | 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 7.

Determine the amount to be added to Allowance for Doubtful Accounts in each of the following cases. Indicate the ending balance in each case. (a) (b)

Credit balance of $400 in the allowance account just prior to adjustment. Analysis of accounts receivable indicates doubtful accounts of $8,500. Credit balance of $400 in the allowance account just prior to adjustment. Uncollectible accounts are estimated at 2% of sales, which totaled $1,000,000 for the year.

ANS: (a) $8,100 and $8,500 (b) $20,000 and $20,400 DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 8.

Mega Sales has Gross sales of $1,525,000.00. Of these sales, $1,175,000.00 were on accounts receivable. During the year of 2007 there were sales returns and allowances and sales discounts on sales made on account of $55,000.00. Mega Sales calculates that 6 1/2% of the period sales less sales returns and allowances and sales discounts will be uncollectible.

Calculate the net realizable value of sales and write the journal entry to recognize the period expense of uncollectible accounts. ANS: Period credit sales $1,175,000 Less sales returns, allowances, and discounts 55,000 Net sales on account $1,120,000 Percentage estimate for uncollectibles 6 1/2% Amount calculated to be uncollectible $72,800.00 Dec 31, 2007 Uncollectible Accounts Expense 72,800.00 Allowance for Doubtful Accounts DIF: Difficult OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

72,800.00

Chapter 8/Receivables  429

9.

Journalize the following transactions using the allowance method of accounting for uncollectible receivables. June 10 Received $1,300 from Jan Downs and wrote off the remainder owed of $4,200.

Oct. 11 Reinstated the account of Jan Downs and received $4,200 cash in full payment. ANS: June 10 Cash 1,300 Allowance for Doubtful Accounts 4,200 Accounts Receivable-Jan Downs 5,500 Oct 11

11

Accounts Receivable-Jan Downs Bad Debt Expense

4,200

Cash Accounts Receivable-Jan Downs

4,200

4,200

4,200

DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-2 10. At the end of the current year, Accounts Receivable has a balance of $700,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and net sales for the year total $2,500,000. Bad Debt Expense is estimated at 1/2 of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANS: (a) $12,500 ($2,500,000  .005) Adjusted Balance (b) Accounts Receivable $700,000 Allowance for Doubtful Accounts ($5,500 + $12,500) 18,000 Bad Debt Expense 12,500 (c)

Net realizable value ( $700,000 - $18,000)

$682,000

DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-3

430  Chapter 8/Receivables

11. At the end of the current year, Accounts Receivable has a balance of $900,000; Allowance for Doubtful Accounts has a credit balance of $3,500; and net sales for the year total $3,000,000. Bad Debt Expense is estimated at 1/2 of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANS: (a) $15,000 ($3,000,000  .005) Adjusted Balance (b) Accounts Receivable $900,000 Allowance for Doubtful Accounts ($3,500 + $15,000) 18,500 Bad Debt Expense 15,000 (c)

Net realizable value ( $900,000 - $18,500)

$881,500

DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-3 12. At the end of the current year, Accounts Receivable has a balance of $700,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and net sales for the year total $2,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $25,000. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANS: (a) $19,500 ($25,000 -$5,500) Adjusted Balance (b) Accounts Receivable $700,000 Allowance for Doubtful Accounts ($5,500 + $19,500) 25,000 Bad Debt Expense 19,500 (c)

Net realizable value ( $700,000 - $25,000)

$675,000

DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-4

Chapter 8/Receivables  431

13. At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $3,500; and net sales for the year total $3,000,000. Bad Debt Expense is estimated at 1/2 of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANS: (a) $15,000 ($3,000,000  .005) Adjusted Balance (b) Accounts Receivable $800,000 Allowance for Doubtful Accounts ($3,500 + 15,000) 18,500 Bad Debt Expense 15,000 (c)

Net realizable value ( $800,000 - $18,500)

$781,500

DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-3 14. At the end of the current year, Accounts Receivable has a balance of $900,000; Allowance for Doubtful Accounts has a credit balance of $3,500; and net sales for the year total $3,000,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated to be $35,000. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance of Doubtful Accounts; and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANS: (a) $31,500 ($35,000 -$3,500) Adjusted Balance (b) Accounts Receivable $900,000 Allowance for Doubtful Accounts ($3,500 + $31,500) 35,000 Bad Debt Expense 31,500 (c)

Net realizable value ( $900,000 - $35,000)

$865,000

DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-4

432  Chapter 8/Receivables

15. Mega Stampers utilizes the allowance for doubtful accounts method for accounts receivable that are deemed uncollectible. On December 12th it is notified by Fancy Wheels and Tires that it is submitting $275.00 in settlement of its $550.00 outstanding accounts receivable. Due to the owner’s failing health the company is closing and it expects to make no further payments. Journalize this declaration. ANS: Dec 12th Cash 275.00 Allowance for Doubtful Accounts 275.00 Accounts Receivable - Fancy Wheels and Tires 550.00 DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 16. On June 30th the company has a credit balance of $27,275.00 in its allowance for doubtful accounts. An evaluation of accounts receivable indicates that the proper balance should be $31,025.00. Journalize this recognition. ANS: Jun 30th Uncollectible Accounts Expense 3,750.00 Allowance for Doubtful Accounts 3,750.00 DIF: Easy OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 17. Good Day Service Center received a 120-day, 6% note for $50,000, dated April 12 from a customer on account. (a) (b) (c)

Determine the due date of the note. Determine the maturity value of the note. Journalize the entry to record the receipt of the payment of the note at maturity.

ANS: (a) August 10 determined as follows: April May June July August Total (b)

18 days (30-12) 31 days 30 days 31 days 10 days 120 days

$51,000 [$50,000 + ($50,000 x 6% x (120/360)]

(c) Aug. 10

Cash Note Receivable Interest Revenue

51,000 50,000 1,000

Chapter 8/Receivables  433

DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 8-5 18. Calculate the following: (a) (b)

If the interest on a note is $500, the interest rate is 6% and the time is 60 days, what is the principal? If the principal of a note is $30,000, the interest is $500 and the time is 60 days, what is the interest rate?

ANS: (a) $50,000 ($500 ´ 360/60) ÷ .06 (b) 10% ($500 ÷ $30,000) ´ (360/60) = 10% DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 19. Determine the due date and amount of interest due at maturity on the following notes:

(a) (b)

Origination Date Mar 1 May 15

Face Amount $4,000 $9,000

Term of Note 60 days 90 days

Interest Rate 9% 8%

Maturity Date __________ __________

Interest Amount __________ __________

ANS: (a) April 30; $60 = ($4,000  .09) (60/360) (b) August 13; $180 = ($9,000  DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 20. Based on the following data and using a 365-day year, compute (a) the accounts receivable turnover and (b) the number of days’ sales in receivables. The industry average is a collection period of once every 20 days, and the number of days’ sales in receivables average 10. (c) Comment on this situation. 12/31/07 Accounts Receivable, net 12/31/08 Accounts Receivable, net For the year ended 12/31/07, net credit sales For the year ended 12/31/08, net credit sales ANS: (a) $1,600,000 ÷ [($90,000 + $70,000) ÷ 2] = 20 (b) $70,000 ÷ ($1,600,000 ÷ 365 days) = 15.97 days (c) This situation is better than the industry average.

$90,000 $70,000 $1,250,000 $1,600,000

434  Chapter 8/Receivables

DIF: Moderate OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement PROBLEM 1.

For a business that makes advance provision for uncollectible receivables (a)

(b) (c)

Journalize the entries to record the following: (1) Record the adjusting entry at December 31, the end of the fiscal year, to provide for doubtful accounts. The accounts receivable account has a balance of $800,000, and the contra asset account before adjustment has a debit balance of $600. Analysis of the receivables indicates doubtful accounts of $20,000. (2) In March of the following fiscal year, the $550 owed by Flake Co. on account is written off as uncollectible. (3) Eight months later, $200 of the Flake Co. account is reinstated and payment of that amount is received. (4) In October, $400 is received on the $600 owed by Doe Co. and the remainder is written off as uncollectible. Based on the data in (a) (1) above, what is the net realizable value of the accounts receivable as reported on the balance sheet as of December 31? Assuming that the business had been following the direct write-off procedure in accounting for uncollectible receivables, journalize the entries to record the following: (1) Recorded the write-off of account of Flake Co. [(a) (2) above]. (2) Reinstated account of Flake Co. for $200 and recorded payment of that amount received [(a) (3) above]. (3) Recorded the receipt of $400 from Doe Co. in (a) (4) above and wrote off the remainder owed as uncollectible.

Chapter 8/Receivables  435

ANS: (a) (1) (2) (3)

(4)

(b)

Uncollectible Accounts Expense Allowance for Doubtful Accounts

20,600 20,600

Allowance for Doubtful Accounts Accounts Receivable-Flake Co

550

Accounts Receivable-Flake Co Allowance for Doubtful Accounts

200

550 200

Cash Accounts Receivable-Flake Co

200

Cash Allowance for Doubtful Accounts Accounts Receivable-Doe Co

400 200

200

600

$780,000 ($800,000 - $20,000)

(c) (1) (2)

(3)

Uncollectible Accounts Expense Accounts Receivable-Flake Co

550

Accounts Receivable-Flake Co Uncollectible Accounts Expense

200

Cash Accounts Receivable-Flake Co

200

Cash Uncollectible Accounts Expense Accounts Receivable-Doe Co

400 200

DIF: Moderate OBJ: 08-03 | 08-04 | 08-07 NAT: AACSB Analytic | AICPA FN-Measurement

550 200 200

600

436  Chapter 8/Receivables

2.

The aging of Freedom Sales is shown below. Calculate the amount of each periodicity range that is deemed to be uncollectible. The Allowance for Doubtful Accounts carries a credit balance of $1,135.00. Write the adjusting entry for the end of the current year. Age Interval: Not past due 1~30 days past due: 31~60 days past due: 61~90 days past due: 91~180 days past due: 181~365 days past due: Over 365 days past due: Total:

Balance: 750,000 47,500 21,750 11,250 5,065 2,500 1,145 839,210

Est Uncollectible Accts Percentage: Amount: 2.50% 5.00% 10.00% 20.00% 30.00% 50.00% 95.00%

ANS: Age Interval: Not past due 1~30 days past due: 31~60 days past due: 61~90 days past due: 91~180 days past due: 181~365 days past due: Over 365 days past due: Total: Dec 31

Balance: 750,000 47,500 21,750 11,250 5,065 2,500 1,145 839,210

Est Uncollectible Accts Percentage: Amount: 2.50% 18,750.00 5.00% 2,375.00 10.00% 2,175.00 20.00% 2,250.00 30.00% 1,519.50 50.00% 1,250.00 95.00% 1,087.75 29,407.25

Uncollectible Accounts Expense 28,272.25 Allowance for Doubtful Accounts

Calculation of expense: Amount of calculated uncollectible accounts Less credit balance of account Additional credit amount to establish calc’d value DIF: Difficult OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement

28,272.25 $29,407.25 1,135.00 $28,272.25

Chapter 8/Receivables  437

3.

Mr. P issued a 90-day, 7% note for $200,000, dated February 3rd to VWX Co. on account. (a) Determine the due date of the note. (b) Determine the interest. (b) Determine the maturity value of the note. (c) Journalize the entry to record the receipt of the note by VWX Co. (d) Journalize the entry to record the receipt of payment of the note at maturity by VWX Co. ANS: (a) May 4 Feb 4 - Feb 28 March April May

25 days 31 days 30 days 4 days 90 days

(b)

Interest = Face Amount (or principal) ´ Rate ´ Time Interest = $200,000  Interest = $3,500

(c)

Maturity Value = Face Amount + Interest Maturity Value = $200,000 + 3,500 Maturity Value = $203,500

(d)

Cash

 Notes Receivable Interest Revenue

 

DIF: Moderate OBJ: 08-04 NAT: AACSB Analytic | AICPA FN-Measurement 4.

Last Day Service Center received a 90-day, 6% note for $50,000, dated March 12 from a customer on account. (a) (b) (c)

Determine the due date of the note. Determine the maturity value of the note. Journalize the entry to record the receipt of the payment of the note at maturity.

438  Chapter 8/Receivables

ANS: (a) June 10 determined as follows: March April May June Total (b)

19 days (31-12) 30 days 31 days 10 days 90 days

$50,750 [$50,000 + ($50,000  6%  (90/360)]

(c) June 10

Cash Note Receivable Interest Revenue

  

DIF: Moderate OBJ: 08-06 NAT: AACSB Analytic | AICPA FN-Measurement 5.

Wolfe Company issued a 60-day, 8% note for $15,000, dated April 5, to Lamb Company on account. (a) (b) (c)

Determine the due date of the note. Determine the maturity value of the note. Journalize the entries to record the following: (1) receipt of the note by the payee, and (2) receipt by the payee of the amount due on the note at maturity. Round answers to the nearest $1.

ANS: (a) June 4 (b)

$15,200

(c)

Note Receivable-Wolfe Co Account Receivable-Wolfe Co

15,000

Cash Note Receivable-Wolfe Co Interest Revenue

15,200

DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement

15,000 15,000 200

Chapter 8/Receivables  439

6.

On the basis of the following data related to assets due within one year for Wally Co., prepare a partial balance sheet in good form at December 31, 2005. Show total current assets. Cash Notes receivable Accounts receivable Allowance for doubtful accounts Interest receivable

$125,000 50,000 275,000 25,000 1,000

ANS: Wally Co. Balance Sheet December 31, 2005 Assets Current assets: Cash Notes receivable Accounts receivable Less allowance for doubtful accounts Interest receivable Total current assets

$125,000 50,000 $275,000 25,000

250,000 1,000 $426,000

DIF: Easy OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 7.

Journalize the following transactions: Mar. 1 May 30 Dec. 11

Received a 90-day, 10% note for $36,000, dated March 1, from Burke Co. on account. The note of March 1 was dishonored. Accepted $33,000 in full settlement of the amount owed on the note dishonored on May 30. The allowance method of accounting for uncollectible receivables is used.

440  Chapter 8/Receivables

ANS: Mar. 1

Notes Receivable Accounts Receivable-Burke Co.

36,000.00 36,000.00

May. 30 Accounts Receivable-Burke Co. Notes Receivable Interest Revenue

36,900.00

Dec. 11

33,000.00 3,900.00

36,000.00 900.00

Cash Allowance for Doubtful Accounts Accounts Receivable-Burke Co.

36,900.00

DIF: Moderate OBJ: 08-04 | 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 8.

The following are the current assets from Happy Co. as of December 31, 2007: Accounts Receivable Allowance for Doubtful Accounts Cash Interest Receivable Merchandise Inventories Notes Receivable

42,000 3,000 74,000 3,500 104,000 100,000

Prepare the current asset section of the balance sheet. ANS: Happy Co. Balance Sheet December 31, 2007 Assets Current Assets: Cash Notes Receivable Accounts Receivable Less allowance for doubtful accounts Interest Receivable Merchandise Inventory Total Current Assets DIF: Moderate OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement

$ 74,000 100,000 42,000 3,000

39,000 3,500 104,000 320,500

Chapter 8/Receivables  441

9.

For the fiscal years 2007 and 2008, ABC Co. reported the following:

Net Sales Accounts Receivable

Year Ended December 31, 2007 2008 $44,123,486 $36,124,961 749,321 719,365

(a) Compute the accounts receivable turnover for 2008. (b) Compute the number of days’ sales in receivable at the end of 2008. ANS: (a) Accounts receivable turnover = Net Sales / Average accounts receivable Accounts receivable turnover = 36,124,961 / ((749,321+719,365)/2) Accounts receivable turnover = 49.19 (b)

Number of days’ sales in receivables = Accounts receivable, end of year/Ave. daily sales Number of days’ sales in receivables = 719,365/(36,124,961/365 days) Number of days’ sales in receivables = 7.3

DIF: Moderate OBJ: 08-07 NAT: AACSB Analytic | AICPA FN-Measurement 10. Journalize the following transactions: Mar. 1 Apr. 30 Apr. 30 May 10

Received a 60-day, 10% note for $24,000, dated today, from Toy Co. on account. Received amount due on note above. Received a 90-day, 10% note for $4,800, dated April 30, from Bear Co. on account. Discounted the note dated April 30 at Third National Bank at a discount rate of 10%.

442  Chapter 8/Receivables

ANS: Mar. 1 Apr. 30

Apr. 30 May 10

Notes Receivable Accounts Receivable-Toy Co

24,000

Cash Notes Receivable Interest Revenue

24,400

Notes Receivable Accounts Receivable-Bear Cash Interest Revenue Notes Receivable

24,000 24,000 400 4,800 4,800 4,813.33 10.33 4,800.00

DIF: Difficult OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement 11. Small Co. received a $10,000, 12%, 90-day note, dated October 1, from Wade Co. on account. On October 31, Ashley Co. discounted the note at the bank at 9%. Determine the items below and insert answers in the spaces provided. (a) (b) (c) (d) (e) (f)

Due date of note Maturity value of note Discount period Discount amount Proceeds from discounting note Interest ________________________ (insert Revenue or Expense)

ANS: (a) December 30 (b) $10,300 (c) 60 days (d) $150.00 (e) $10,150.00 (f) Revenue $150.00 DIF: Moderate OBJ: 08-App NAT: AACSB Analytic | AICPA FN-Measurement

__________ __________ __________ days __________ __________ __________