Import Settings: Base Settings: Brownstone Default Information Field: Difficulty Information Field: LO Highest Answer Letter: E ultiple !eywords in Same "aragraph: #o
$hapter: $hapter %&: 'ecei(a)les
*rue+False
%, Accounts recei(a)le arise from credit sales sales to customers )y )oth retailers and wholesalers, Ans: *rue Difficulty: Easy LO: %
-, $redit sales are recorded )y crediting an account recei(a)le for a specific specific customer, Ans: False Difficulty: Easy LO: %
., As long as a company accurately records credit sales information/ information/ it is not necessary to ha(e accounts for specific customers, Ans: False Difficulty: oderate LO: %
0, If a customer owes interest on a )ill/ Accounts 'ecei(a)le is de)ited and Interest 'e(enue is credited, Ans: *rue Difficulty: oderate LO: %
1, *ech$om *ech$om customer/ 'DA Electronics paid off an 23/.&& )alance on its account recei(a)le, *ech$om *ech$om should record the transaction as a de)it to Accounts 'ecei(a)le4'DA Electronics and a credit to $ash, Ans: False Difficulty: Easy LO: %
5, 6uality of recei(a)les refers to the li7elihood of collection collection without loss, Ans: *rue Difficulty: Easy LO: 8
8, *he use of an allowance for for )ad de)ts is re9uired under the materiality principle, principle, Ans: False Difficulty: oderate LO: -
3, *he ad(antage of the allowance method of accounting for )ad de)ts is that that it identifies the the customers who wont pay their )ills, Ans: False Difficulty: Hard LO: -
;, *he
%&, *he aging of accounts recei(a)le e=amines each account recei(a)le to estimate the amount amount that is uncollecti)le, Ans: *rue Difficulty: Easy LO: .
%%, Installment accounts recei(a)le is another name for aging accounts recei(a)le, Ans: False Difficulty: Easy LO: .
%-, *he percentage of sales approach for estimating )ad de)ts is is )ased on the idea that a percent percent of a companys credit sales for the period are uncollecti)le, Ans: *rue Difficulty: oderate LO: .
%., *he accounts recei(a)le approach uses income statement statement relationships to estimate )ad de)ts,
Ans: False Difficulty: oderate LO: .
%0, *ech$om *ech$om has 20&/&&& in outstanding accounts recei(a)le, "ast e=perience suggests that 1> of outstanding recei(a)les are uncollecti)le, uncollecti)le, *he current )alance in the allowance allowance for dou)tful accounts is 2-/1&&, *he re9uired ad
%1, *ech$om *ech$om has sales of 2.1&/&&& and estimates estimates that ,1> of its sales sales are uncollecti)le, *he amount of )ad de)t e=pense is 2%/81&, Ans: *rue Difficulty: Easy LO: .
%5, *he direct write4off write4off method of accounting for )ad de)ts records the loss loss from an uncollecti)le account recei(a)le at the time it is determined to )e uncollecti)le, Ans: *rue Difficulty: Easy LO: 0
%8, *he matching principle re9uires use of the direct write4off write4off method, Ans: False Difficulty: Easy LO: 0
%3, $ompanies must follow )oth the matching principle and the materiality materiality principle when considering the use of the direct write4off method, Ans: *rue Difficulty: oderate LO: 0
%;, *he direct write4off write4off method is allowed allowed under generally accepted accounting principles, Ans: False Difficulty: Easy LO: 0
-&, *he direct write4off write4off method does not use an allowance for dou)tful accounts account, Ans: *rue Difficulty: Easy LO: 0
-%, *he conser(atism and materiality principles are the
--, *he allowance method complies with with the ?AA" of conser(atism and matching, Ans: *rue Difficulty: oderate LO: 0
-., *he direct write4off write4off method is used )ecause it is simpler simpler than the allowance method, Ans: *rue Difficulty: oderate LO: 0
-0, #otes recei(a)le do not re9uire a su)sidiary ledger, ledger, Ans: *rue Difficulty: Easy LO: 1
-1, #otes recei(a)le are classified as current lia)ilities, lia)ilities, Ans: False Difficulty: Easy LO: 1
-5, *he maturity date of a note is the day the note note is signed, Ans: False Difficulty: Easy LO: 1
-8, A promissory note is a written promise promise to pay a specified amount of money either on demand or at a definite future date, da te, Ans: *rue Difficulty: Easy LO: 1
-3, *he formula for computing computing interest on a note recei(a)le is is principal multiplied )y interest rate multiplied )y time, Ans: *rue Difficulty: oderate LO: 1
-;, *he person that )orrows money and signs a promissory note is called the payee, Ans: False Difficulty: oderate LO: 1
.&, Augusto Dia@ )orrowed 2%/&&& and signed signed a 54month promissory promissory note at %%> interest, interest, *he total amount of interest is 211,&&, Ans: *rue Difficulty: oderate LO: 1
.%, "huong o o )orrowed 21/&&& and signed a .4month promissory promissory note at %&>, *he total interest on the note is 2%-1, Ans: *rue Difficulty: oderate LO: 1
.-, *ech$om *ech$om recei(ed a 2%/&&&/ ;&4day/ ;&4day/ %&> note recei(a)le from Danny Outlaw, *he
Difficulty: oderate LO: 1
.., It is a )ad )usiness )usiness practice to accept a note recei(a)le recei(a)le in e=change for an o(erdue account recei(a)le, Ans: False Difficulty: oderate LO: 1
.0, A payee of a note usually honours a note and pays it in full, Ans: False Difficulty: Easy LO: 1
.1, A ma7er who dishonours a note does not pay it at maturity, Ans: *rue Difficulty: Easy LO: 1
.5, A dishonoured note recei(a)le is reclassified reclassified as an account recei(a)le, Ans: *rue Difficulty: oderate LO: 1
.8, *he practice of placing dishonoured dishonoured notes recei(a)le into Accounts Accounts 'ecei(a)le 7eeps only current notes recei(a)le in the #otes 'ecei(a)le account,
Ans: *rue Difficulty: Hard LO: 1
.3, *he matching principle re9uires that accrued interest on outstanding outstanding accounts recei(a)le )e recorded at the end of an accounting period, Ans: *rue Difficulty: Hard LO: 1
.;, 'ecei(a)les can )e con(erted to cash )y either selling them or using them as security for a loan, Ans: *rue Difficulty: Easy LO: 5
0&, A company can raise cash )y )orrowing money/ and then factoring its accounts recei(a)le recei(a)le as security for the loan, Ans: False Difficulty: Easy LO: 5
0%, Because pledged recei(a)les only ser(e as collateral collateral for a loan and are not sold/ it is not necessary to disclose the pledging, Ans: False Difficulty: oderate LO: 5
0-, A contingent lia)ility is an o)ligation to ma7e a future payment if an uncertain future e(ent occurs, Ans: *rue Difficulty: oderate LO: 5
0., hen a note is discounted discounted to a )an7 without recourse/ the the )an7 assumes the ris7 of a )ad de)t loss and the original payee doesnt ha(e a contingent lia)ility, Ans: *rue Difficulty: Hard LO: 5
00, *ech$om *ech$om factored 2.1/&&& of its accounts recei(a)le recei(a)le and was charged a -> factoring fee, *he
01, Accounts recei(a)le turno(er shows shows how often a company con(erts its its a(erage accounts recei(a)le )alance into cash during the period, Ans: *rue Difficulty: Easy LO: 8
05, A high accounts recei(a)le turno(er rate in comparison with that of competitors suggests that the firm should tighten its credit policy, Ans: False
Difficulty: oderate LO: 8
08, Accounts recei(a)le turno(er is is calculated )y di(iding net sales sales )y a(erage accounts recei(a)le, Ans: *rue Difficulty: oderate LO: 8
03, *ech$om *ech$om had net sales of 203&/&&& and a(erage accounts recei(a)le of 250/&&&, Its accounts recei(a)le turno(er was 8,1, Ans: *rue Difficulty: Hard LO: 8
0;, $ompa9 had net sales of 2%&/1&& million, Its a(erage account recei(a)les were 2%/81& million, Its accounts recei(a)le turno(er was 5, Ans: *rue Difficulty: Hard LO: 8
1&, *he days sales uncollected ratio ratio measures a companys a)ility to manage its de)t, Ans: False Difficulty: Easy LO: 8
1%, *he days sales uncollected ratio ratio measures the li9uidity li9uidity of recei(a)les,
Ans: *rue Difficulty: Easy LO: 8
1-, *he days sales uncollected ratio ratio is calculated )y di(iding accounts recei(a)le )y net sales and multiplying the answer )y .51, Ans: *rue Difficulty: oderate LO: 8
1., A company must ha(e less than .& days sales uncollected in order to )e ade9uately li9uid, Ans: False Difficulty: oderate LO: 8
10, 4art had 2%-/&&& in accounts recei(a)le and 2.-&/&&& in net sales for the period, Its days sales uncollected was %.,8 days, Ans: *rue Difficulty: Hard LO: 8
11, Has)ro had 281& million in accounts recei(a)le and 2-/;&& million in net sales for the period, Its days sales uncollected was -;,3, Ans: False Difficulty: Hard LO: 8
ultiple $hoice
15, Accounts recei(a)le accounts for specific customers are important important )ecause they show: A How much each customer purchases, B How much each customer has paid, $ How much each customer still still owes, D *he )asis for sending )ills )ills to customers, customers, E All of these answers are are correct, Ans: E Difficulty: Easy LO: %
18, hich accounting principle re9uires reporting credit card e=pense in the the same period as the credit card sale A ateriality, B atching, $ ?oing concern, D $ost, E Business entity, Ans: B Difficulty: Easy LO: %
13, A credit sale of 2-/1&& to a customer would result in: in: A A de)it to the Accounts 'ecei(a)le account in the general ledger and a de)it to the customers account in the Accounts 'ecei(a)le Ledger, B A credit to the Accounts Accounts 'ecei(a)le account in the general ledger and a credit to the customers account in the Accounts 'ecei(a)le Ledger, $ A de)it to the Accounts Accounts 'ecei(a)le account in the general ledger and a credit to the customers account in the Accounts 'ecei(a)le Ledger, D A credit to the Accounts 'ecei(a)le account in the general ledger and a de)it to the customers account in the Accounts 'ecei(a)le Ledger, E A credit to Sales and a credit to the customers account in the Accounts Accounts 'ecei(a)le Ledger,
Ans: A Difficulty: oderate LO: %
1;, Firms allow customers to use credit cards: cards: A *o a(oid e(aluating a customers credit standing, B *o a(oid the ris7 of e=tending credit to customers who cant pay, $ In order to speed up receipt of cash from the sale, D *o increase sales (olume, E All of these answers are are correct, Ans: E Difficulty: oderate LO: %
5&, *he matching matching principle principle re9uires: A *hat )ad de)t e=penses )e reported in in the same accounting period as the the sales they helped generate, B *he use of the direct direct write4off method method for )ad de)ts, $ *he use of the allowance method of accounting for )ad de)ts, D *hat )ad de)t e=penses )e reported in in the same accounting period as the the sales they helped generate and re9uires the use of the direct write4off method for )ad de)ts, E *hat )ad de)t e=penses )e reported in in the same accounting period as the sales they helped generate and re9uires the use of the allowance method of accounting for )ad de)ts, Ans: E Difficulty: oderate LO: -/ 0
5%, *he materiality principle: A States that an amount can )e ignored if its effect on financial statements statements is unimportant to the user, B "ermits use of the direct write4off write4off method, method, $ "rohi)its use of the direct write4off write4off method, method, D States that an amount can )e ignored if its effect on financial statements statements is unimportant to the user and permits use of the direct write4off method, E Both permits and prohi)its prohi)its use of the direct write4off method, method,
Ans: D Difficulty: oderate LO: 0
5-, *he accounting principle that re9uires financial statements including notes to report all rele(ant information a)out the operations and financial position of a company is called: A 'ele(ance, B Full disclosure, $ E(aluation, D ateriality, E atching, Ans: B Difficulty: Easy LO: .
5., If the )alance of the Allowance Allowance for Dou)tful Accounts Accounts account e=ceeds the amount of a )ad de)t )eing written off/ the entry to record the write4off against the allowance account results in: A An increase in the e=penses of the current period, period, B A reduction in current assets, assets, $ A reduction in owners e9uity, e9uity, D #o effect on the e=penses of the current period, E A reduction in current lia)ilities, lia)ilities, Ans: D Difficulty: Hard LO: .
50, During the current year/ year/ *ech$om *ech$om concluded that a customers customers 20/0&& account recei(a)le was uncollecti)le and that the account should )e written off, hat effect will this write4off ha(e on *ech$oms *ech$oms current year net income and )alance sheet totals assuming the allowance method is used to account for )ad de)ts A Decrease in net incomeC no effect effect on total assets, assets, B #o effect on net income or on total assets, assets, $ Decrease in net incomeC incomeC decrease in total total assets, D Increase in net incomeC no effect on total assets, assets,
E #o effect on net incomeC decrease in total assets, assets, Ans: B Difficulty: Hard LO: .
51, *he amount of )ad de)t e=pense can )e estimated )y: A *he percent of sales approach, B *he percent of accounts recei(a)le approach, $ *he aging of accounts recei(a)le approach, D Both the percent of sales approach and the percent of accounts recei(a)le approach, E All of these answers are are correct, Ans: E Difficulty: Easy LO: .
55, A method of estimating )ad de)ts e=pense that in(ol(es a detailed e=amination of outstanding accounts that is usually the most relia)le is the: A Direct write4off method, B Aging accounts recei(a)le method, $ Income statement statement method, D Simplified )alance sheet method, E Accounts recei(a)le method, method, Ans: B Difficulty: Easy LO: .
58, An accounting procedure that G% G% estimates and reports )ad de)t e=pense from credit sales sales during the period of the sales and G- reports accounts recei(a)le at the amount of cash inflow that is e=pected from their collection is the: A Allowance method of accounting for )ad de)ts, B Aging of accounts recei(a)le, $ Ad
Ans: A Difficulty: oderate LO: .
53, On Decem)er .% of the current year/ *ech$oms *ech$oms unad of outstanding accounts recei(a)le as of Decem)er .% of the current cu rrent year/ are estimated to )e uncollecti)le A 21/3.1, B 20/811, $ 2./;;-, D 25/1;3, E 28/583, Ans: $ Difficulty: Hard LO: .
5;, *ech$om *ech$om ages its accounts recei(a)les to determine the end of the period ad
%1/181
$ Bad De)ts E=pense %1/;-1 Allowance for Dou)tful Accounts
%1/;-1
D Accounts 'ecei(a)le Bad De)ts E=pense Sales
%1/;-1
% 1 /81 & %81
E Accounts 'ecei(a)le %1/;-1 Allowance for Dou)tful Accounts
%1/;-1
Ans: $ Difficulty: Hard LO: .
8&, A promissory note from a customer: A Is a cash e9ui(alent, B Is an account recei(a)le, $ Is a note recei(a)le, recei(a)le, D Is a short4term in(estment, E Is a note paya)le, Ans: $ Difficulty: Easy LO: 1
8%, *he person who signs a note recei(a)le and promises to pay is the: A a7er, B "ayee, $ Holder, D 'ecei(er, E Owner, Ans: A Difficulty: Easy LO: 1
8-, A promissory note: A Is an account recei(a)le, B Is a written promise promise to pay a specified amount of money at a certain date, $ Is a lia)ility to the payee, D Is a written promise to pay a specified amount of money at a certain date and is a lia)ility to the payee, E All of these answers are are correct, Ans: B
Difficulty: oderate LO: 1
8., *he maturity date of a note recei(a)le: recei(a)le: A Is the day of the credit credit sale, B Is the day the note was signed, $ Is the day the note is due to )e paid, D Is the date of the first first payment, E Is the last last day of the month, Ans: $ Difficulty: oderate LO: 1
80, A ;&4day note issued on uly %& matures on: A Octo)er 8, B Octo)er 3, $ Octo)er ;, D Octo)er %&, E Octo)er %%, Ans: B Difficulty: Hard LO: 1
81, *ech$om *ech$om recei(es a %&>/ ;&4day note for 2%/1&&, *he interest on the note is: is: A 2 .5,;3, B 2%1&,&&, $ 2 81,&&, D 2 1&,&&, E 2 38,1&, Ans: A Difficulty: oderate LO: 1
85, hen a ma7er of a note honours a note: A *he note is signed, signed, B *he note is paid off, $ *he note is written, written, D *he note is notari@ed, notari@ed, E *he note note is cosigned, Ans: B Difficulty: Easy LO: 1
88, Interest on 2./5&& at 8> for 5& days is: A 2 .5, B 20%,0$ 2-1-, D 2%3&, E 20-&, Ans: B Difficulty: oderate LO: 1
83, *he maturity (alue of a 25/&&&/ 3>/ 5&4day note recei(a)le is: A 25/&&&, B 25/03&, $ 21/1-&, D 25&83,;&, E 21/;-&, Ans: D Difficulty: oderate LO: 1
8;, Electron )orrowed 281/&&& from *ech$om *ech$om )y signing signing a promissory note and pledging 231/&&& in accounts recei(a)le as security, *ech$oms *ech$oms entry to record the transaction should
include a: A De)it to #otes 'ecei(a)le for 281/&&&, B De)it to Accounts 'ecei(a)le for 281/&&&, $ $redit to #otes 'ecei(a)le for 281/&&&, D De)it #otes #otes "aya)le for 281/&&&, E $redit to to Sales for 281/&&&, Ans: A Difficulty: Easy LO: 1
3&, *he Liccorish "i@@a )ought 21/&&& worth of merchandise from *ech$om *ech$om and signed a ;&4 day/ %&> promissory promissory note for the 21/&&&, *ech$oms *ech$oms
1/&&&
$ Ac Accou counts nts 'ecei(a) (a)le Sales
1/%-1
D #o #otes 'ecei(a)le Sales
1/%-1
E #o #otes 'ecei(a)le Interest 'ecei(a)le Sales
1/&&& %- 1
1/&&&
1/%-1
1/%-1
1/%-1
Ans: B Difficulty: Hard LO: 1
3%, i='ecording Studios purchased 28/3&& in electronic electronic components from *ech$om, *ech$om, i='ecording Studios signed a 5&4day/ %&> promissory note for 28/3&&, *ech$oms *ech$oms
B Ac Accou counts nts 'ecei(a) (a)le Sales
8/;.&
$ #otes 'ecei(a)le Sales
8/3&&
D #otes 'ecei(a)le Sales
8/;.&
E #o #otes 'ecei(a)le Interest 'ecei(a)le Sales
8/3&& %. &
8/;.&
8/3&&
8/;.&
8/;.&
Ans: $ Difficulty: Hard LO: 1
3-, Failure )y a promissory notes ma7er to pay the amount due at maturity is 7nown as: A "rotesting a note, B $losing a note, $ Dishonouring a note, D Discounting a note, E Depreciating a note, Ans: $ Difficulty: Easy LO: 1
3., 'otel purchased merchandise from *ech$om *ech$om on Octo)er %8/ -&&&, *ech$om *ech$om accepted 'otels 20/3&&/ ;&4day/ %&> note as payment, hat entry should *ech$om *ech$om ma7e on anuary %1/ -&&% when the note is paid A $ash 0 ; % 3 ,. 5 Interest Earned %%3,.5 #otes 'ecei(a)le 0/3&& B $ash #otes 'ecei(a)le
0;% 3 ,.5
$ $ash
0;% 3 ,.5
0;%3,.5
Interest Earned Interest 'ecei(a)le #otes 'ecei(a)le D $ash 0;%3,.5 Interest Earned Interest 'ecei(a)le #otes 'ecei(a)le E $ash 0; %3 ,. 5 Interest Earned Accounts 'ecei(a)le
;3,5. %;,8. 0/3&&
%;,8. ;3,5. 0/3&&
%%3,.5 0/3&&
Ans: D Difficulty: Hard LO: 1
30, *he )uyer who pays pays cash for accounts recei(a)le is called: A "ayor, B "ledgor, $ Factor, D "ayee, E "ledgee, Ans: $ Difficulty: Easy LO: 5
31, "ledging recei(a)les: A Allow firms to raise cash, B Allow firms firms to retain ownership ownership of recei(a)les, $ *ransfer ris7 of )ad de)t to the the lender, D Allow firms firms to raise cash and retain ownership of recei(a)les, E All of these answers are are correct, Ans: D Difficulty: oderate LO: 5
35, A contingent lia)ility: lia)ility: A Is another name for a long term lia)ility, lia)ility, B Only arise when accounts recei(a)le recei(a)le are factored, factored, $ Arise when a note recei(a)le is discounted without without recourse, D Is an o)ligation to ma7e a future payment if a certain future e(ent occurs, E Is an o)ligation to ma7e a future payment if an uncertain uncertain future e(ent occurs, Ans: E Difficulty: oderate LO: 5
38, A note recei(a)le discounted with recourse is: is: A A contingent lia)ility, lia)ility, B An outright sale sale of a note recei(a)le to a )an7, $ Sold to a )an7 and the )an7 assumes lia)ility, lia)ility, D A contingent lia)ility and an outright sale of a note recei(a)le to the )an7, E An outright sale sale of a note recei(a)le to a )an7 and sold to a )an7 and the )an7 assumes assumes lia)ility, Ans: A Difficulty: Hard LO: 5
33, 6uality of recei(a)les refers to: A *he creditworthiness creditworthiness of the customers, B *he speed speed of collection, $ *he li7elihood li7elihood of collection, D Sales turno(er, E *he speed and li7elihood of collection, Ans: $ Difficulty: Easy LO: 8
3;, Accounts recei(a)le turno(er measures: A How long it ta7es to sell sell in(entory on credit, credit, B How often a company con(erts its a(erage accounts recei(a)le )alance into cash during the the period, $ easures the relationship of cash sales to credit sales, D How long it ta7es to to sell in(entory on credit and how often a company con(erts its a(erage accounts recei(a)le )alance into cash during the period, E How often a company con(erts its its a(erage accounts recei(a)le )alance into cash during the the period and measures the relationship of cash sales to credit sales, Ans: B Difficulty: Easy LO: 8
;&, Accounts recei(a)le turno(er is calculated calculated )y: A Di(iding net sales )y a(erage accounts recei(a)le, B Di(iding net sales )y a(erage accounts recei(a)le and multiplying )y .51, $ Di(iding a(erage accounts recei(a)le )y net sales, D Di(iding a(erage accounts recei(a)le )y net sales sales and multiplying multiplying )y .51, E Di(iding net income )y a(erage accounts recei(a)le, Ans: A Difficulty: oderate LO: 8
;%, *ech$om *ech$om has net sales of 20.1/&&& and a(erage accounts recei(a)le of 238/&&&, hat is the accounts recei(a)le turno(er for the period A -&, B 8., $ %/3-1, D 1, E -1, Ans: D Difficulty: oderate LO: 8
;-, Dell had net sales of 23/8.; million and a(erage accounts recei(a)le of 2350 million, Its accounts recei(a)le turno(er was: A %&,%, B ;,;, $ .5,%, D ;,%, E %-,3, Ans: A Difficulty: oderate LO: 8
;., $ompa9s accounts recei(a)le turno(er rate was 1,8 for this year and 1,0 for last year, year, Dells turno(er rate was 5,3 for this year and 8 for last year, year, *his means that: A Dell has the )etter turno(er rate for )oth )oth years, B $ompa9 has the )etter )etter turno(er rate for )oth years, years, $ Dells turno(er rate is impro(ing, D $ompa9s turno(er rate is impro(ing, E Dell has the )etter turno(er rate for )oth years years and $ompa9s turno(er rate is is impro(ing, Ans: E Difficulty: Hard LO: 8
;0, *he num)er of days sales uncollected: A Is used to to e(aluate the li9uidity li9uidity of recei(a)les, B Is calculated )y di(iding accounts recei(a)le )y sales, $ easures a companys a)ility to to pay its )ills on time, D easures a companys de)t to to income, E Is calculated )y di(iding sales )y accounts recei(a)le, Ans: A Difficulty: Easy LO: 8
;1, *he days sales sales uncollected ratio is used to: to: A easure how many days of sales remain until the the end of the year,
B Determine the num)er of days that that ha(e passed without collecting on accounts recei(a)le, $ Identify the li7elihood li7elihood of collecting sales on account, D Estimate how much time is li7ely to pass )efore )efore cash receipts from credit sales e9ual the current amount of accounts recei(a)le, E easure the amount amount of layaway sales sales for a period, Ans: D Difficulty: oderate LO: 8
;5, *he num)er of days sales uncollected is calculated )y: A Di(iding accounts recei(a)le )y net sales, B Di(iding accounts recei(a)le )y net sales and multiplying the result )y .51, $ Di(iding net sales )y accounts recei(a)le, D Di(iding net sales )y accounts recei(a)le and multiplying the result result )y .51, E ultiplying net sales )y accounts recei(a)le and di(iding the result result )y .51, Ans: B Difficulty: oderate LO: 8
;8, *he num)er of days sales uncollected: A easures how much time time is li7ely to pass )efore a company recei(es cash receipts from from credit sales e9ual to the current amount of accounts recei(a)le, B Is used to compare a company to to other companies in the same industry, industry, $ Is used to compare )etween current and prior periods, D Is used to compare a company to other companies in the same same industry and is used to compare )etween current and prior periods, E All of these answers are are correct, Ans: E Difficulty: oderate LO: 8
;3, 4art had net sales of 2.%/1&& and accounts recei(a)le of 2-/8&&, Its days sales uncollected was: A %%,8,
B $ D E
-.,., .%,., 0-,1, 05,5,
Ans: $ Difficulty: Hard LO: 8
;;, attel had net sales of 20/-.1 million and accounts recei(a)le of 2881 million, million, Its days sales uncollected was: A -;3, B 55,3, $ %;,0, D 3%,3, E 51,-, Ans: B Difficulty: Hard LO: 8
Short Answer
%&&, atch each of the following terms terms with the appropriate appropriate definition, Ga Bad de)ts G) Aging accounts recei(a)le Gc "romissory note Gd "ayee of a note Ge Accounts recei(a)le Gf Allowance Allowance for dou)tful accounts Gg 'eali@a)le (alue Gh atching principle G% Amounts due from customers arising from from credit sales, G- A process of classifying accounts recei(a)le in terms of how long they ha(e )een outstanding for the purpose of estimating the amount of
G. G0 G1 G5 G8 G3
uncollecti)le accounts, A written written promise to pay a specified amount of money either on demand or at a definite future date, *he e=pected proceeds from con(erting assets into cash, *he accounts of customers who do not pay what they ha(e promised to pay a company, *he accounting principle which re9uires that e=penses )e reported in the same accounting period as the sales they helped to produce, A contra contra asset account with a )alance e9ual to the estimated amount of accounts recei(a)le that will )e uncollecti)le, *he one to whom the promissory note is made paya)le,
Ans: G% e G- ) G. c G0 g G1 a G5 h G8 f G3 d Difficulty: oderate LO: %41
%&%, atch each of the following terms terms with the appropriate appropriate definition, Ga "rincipal of a note G) Full disclosure principle Gc ateriality principle Gd Dishonouring a note Ge Accounts recei(a)le turno(er Gf $ontingent lia)ility Gg a7er of a note G% A measure measure of )oth the 9uality and li9uidity of accounts recei(a)le, It indicates how often/ on a(erage/ recei(a)les are recogni@ed and collected during the period, G- *he accounting principle that states that an amount may )e ignored if its effect on the financial statements is unimportant to their users, G. Occurs when a notes ma7er is una)le/ or refuses/ to pay at maturity, maturity, G0 An o)ligation to ma7e a future payment if/ and only if/ an uncertain future e(ent actually occurs, G1 *he accounting principle that re9uires that financial statements Gincluding the footnotes report all rele(ant information a)out the operations and financial position of the entity, G5 One who signs a note and promises to pay it at maturity, maturity, G8 *he amount that the signer of a promissory note agrees to pay )ac7 when the note matures/ not including interest, Ans: G% e G- c G. d G0 f G1 ) G5 g G8 a
Difficulty: oderate LO: %48
%&-, Descri)e accounts recei(a)le and how they are recorded into the accounting system, Ans: Accounts recei(a)le recei(a)le arise from sales to customers customers on credit, *hey may )e from from either direct credit sales or credit card sales, Accounts recei(a)le are recorded into a su)sidiary ledger which separately lists amounts owed )y indi(idual customers, Difficulty: oderate LO: %
%&., *ech$om *ech$om allows customers customers to use )an7 credit cards to charge purchases, hen customers use the )an7 card/ *ech$om recei(es an immediate credit upon depositing sales receipts in the company che9uing account, *ech$om *ech$om is charged charged a .> ser(ice ser(ice charge for credit card sales, sales, On April %./ *ech$om *ech$om sold 2%3/1&& worth of merchandise to customers using )an7 cards, "repare the
Difficulty: oderate LO: %
%&0, Annies Attic allows allows customers to use )an7 credit cards to charge purchases, Annies Attics )an7 will process all )an7 credit cards in e=change for a 1> processing fee, All credit card receipts deposited are credited to to the company account on the day of deposit, On anuary %3/ Annies Attic Attic deposited 2.0/&&& worth of credit credit card receipts, "repare the general
Difficulty: oderate LO: %
%&1, *ech$om accepts the #OA credit card for credit card sales, *ech$om sends #OA #OA credit card receipts receip ts to #OA #OA on a wee7ly )asis, #OA charges *ech$om a .,1> ser(ice charge, cha rge, *ech$om *ech$om usually recei(es payment from #OA within a wee7, "repare entries in general
Sold Sold mercha merchandis ndisee for 20/18 20/181 1 to custo customer merss using using the the #OA #OA credit credit card card,, Sent Sent 2%;/3;& 2%;/3;& wort worth h of credit credit card card receip receipts ts to #O #OA, 'ecei(ed 'ecei(ed cash cash proceeds proceeds less less the the ser(ice ser(ice charge charge for the the arch arch %0 )ill )ill to to #OA #OA,
Ans:
Difficulty: oderate LO: %
%&5, Outdoors Jnlimited Jnlimited accepts the the E=plorer credit card from its its customers, E=plorer charges a .,1> ser(ice fee and pays Outdoors Jnlimited the net amount of E=plorer charges once a month, During Fe)ruary/ Outdoors Jnlimited sold sold 2-8/&&& worth of merchandise to customers customers using the E=plorer charge card, On arch 0/ Outdoors Jnlimited Jnlimited recei(ed cash proceeds from E=plorer for the Fe)ruary credit sales, "repare the general
Difficulty: oderate LO: %
%&8, On ay .%/ Outdoors Jnlimited Jnlimited had a )alance in its accounts recei(a)le of 2%&./3;1, "repare the following transactions for une, une une une 3
Sold Sold merc mercha handi ndise se on on acco account unt// 2%0/ 2%0/&&& &&&,, Sold 2%1/&&& worth of accounts accounts recei(a recei(a)le )le to First First Ban7, Ban7, First Ban7 charges charges a %,1> discounting fee, une -& Borrowed Borrowed 2.&/&&& 2.&/&&& from First Ban7/ pledging pledging 2.%/1&& 2.%/1&& worth worth of accounts recei(a)le as collateral for the loan, Ans:
Difficulty: oderate LO: %/ 5
%&3, *he following series of transactions occurred during K' % and K' - when Linwood $orp, sold merchandise to ohn oore, Linwoods annual accounting period ends on Decem)er .%, Assume -3 days in the month of Fe)ruary, %&+&% %&+&% K' K' % %%+%1 %%+%1 K' K' %
%-+.% %-+.% K' % &.+%1 &.+%1 K' K' &.+-&.+-- K' K' %-+.% %-+.% K' K' -
Sold Sold 2%-/&&& 2%-/&&& of merc merchan handis disee to ohn ohn oor oore/ e/ term termss .+%1/ .+%1/ n+01 n+01,, r, r, oore oore indi indicat cates es he won wontt )e a)le a)le to pay the the account account until until early early ne=t ne=t year, He agrees to change the account to a %-&4da %-&4day/ y/ %-> note recei(a)le, "repar "repared ed ad
"repare Linwood $orp,s
Difficulty: oderate LO: %/ 1
%&;, "repare general
% Sold Sold 2-/ 2-/1& 1&& & of merc mercha hand ndis isee to ALA $o,/ $o,/ rec recei ei(i (ing ng a %&> %&>// ;&4d ;&4day ay not note, e, %1 rote rote off 2%/1&& owed )y #I $o, as worthless, G*he allowance method of accounting for )ad de)ts is used, .& 'ecei( 'ecei(ed ed a 25/3&&/ 25/3&&/ %->/ %->/ .&4day .&4day note note recei(a recei(a)le )le from from $B$ $B$ $o, as an e=tension of credit, ay % Disc Discou ount nted ed the the note note rece recei( i(ed ed on on Apr April il % fro from m ALA ALA $o, $o, aatt %->, %->, .& #ote #ote recei recei(ed (ed on on Apri Aprill .& was collect collected, ed, une une -; 'ece 'ecei( i(ed ed a mem memo o from from the the )an )an7 7 indi indica cati ting ng tha thatt the the not notee discounted on ay % was dishonoured, *he )an7 charged Laurier a 2%& ser(ice charge, "aid the )an7 the maturity (alue of the note plus the ser(ice charge, uly uly %1 #I #I $o, $o, paid paid 2%/& 2%/&&& && of the the amou amount nt writ writte ten n off off on April pril %1 %1 a)o(e a)o(e,, Laur Laurie ierr does not e=pect to recei(e any further payments, Ans:
Difficulty: Hard LO: %41
%%&, *he !ader $orp, had the following following )alances on anuary %/ -&1: Allowance for dou)tful accounts 2 -/5&& #otes recei(a)le 15/&&& "repare general
-1
ay %& une une -0 -; Oct, Oct,
-&
Disc Discoun ounte ted d a 2%& 2%&/& /&&&/ &&/ ;>/ ;>/ %-&4 %-&4day day note note dated dated arc arch h %/ %/ rece recei( i(ed ed from Stoller $orp,/ at the )an7 at %->, % ->, Sold Sold 20/1 20/1&& && of merc mercha hand ndis isee to to $B$ $B$ $or $orp, p,// rec recei ei(i (ing ng a %&>/ %&>/ 5&4day note recei(a)le, rote ote off off 2%/ 2%/3& 3&& & acco accoun untt owe owed d )y Soln Solnic ic7 7 as as wor worth thle less ss,, #ote #ote sign signed ed )y $B$ $B$ $or $orp, p, on April pril -1 was was dis disho hono nour ured ed,, 'ecei( 'ecei(ed ed a memo memo from from the the )an7 )an7 that that the the note note discou discounte nted d on arch -% was collected, $B$ $B$ $or $orp, p, paid paid what what was was owe owed d on on the the dish dishon onou oure red d not note/ e/
Dec, Dec, .%
including interest at %&> from maturity date to Octo)er -&, Jncol Jncolle lect cti) i)le le accou account ntss rec recei ei(a) (a)le le were were esti estima mate ted d to to )e )e 2./ 2./-& -&&, &,
Ans:
Difficulty: Hard LO: %45
%%%, How are the direct write4off and allowance methods applied to accounting for uncollecti)le %%%, recei(a)les Ans: *he direct write4off write4off method charges Bad De)t E=pense when indi(idual accounts recei(a)le are determined to )e uncollecti)le, uncollecti)le, Jnder the allowance method/ estimated )ad de)t e=pense is recorded at the end of each accounting period )y de)iting Bad De)t E=pense and crediting an Allowance Allowance for Dou)tful Accounts, Accounts, Indi(idual uncollecti)le accounts are later written off with a de)it to Allowance for Dou)tful Accounts, Difficulty: Hard
LO: -40
%%-, E=plain why the allowance method satisfies satisfies the generally accepted principles principles of conser(atism and matching, Ans: *he allowance method ensures that the assets Gi,e, accounts recei(a)le recei(a)le and the reported net income are not o(erstated, In this way it accomplishes the re9uirements of the conser(atism principle, *he allowance method recogni@es the )ad de)ts e=pense in the same period in which the related credit sales were recogni@ed, In this way it accomplishes the re9uired matching of e=penses with the re(enue in the period in which the re(enue was recogni@ed, Difficulty: Hard LO: -40
%%., Identify the accounting principles in(ol(ed in deciding )etween the allowance method and the direct write4off write4off method, Indicate which principles are associated associated with each method, Ans: *he conser(atism and matching principles principles are used to
%%0, E=plain the difference )etween )etween estimating the amount of uncollecti)le accounts using approaches )ased on percent of sales and accounts recei(a)le, Ans: *he percent of sales approach emphasi@es the income statement relationship )etween )ad de)ts and sales, It is )ased on the matching principle and assumes that )ad de)ts are incurred at the time of sale, *he accounts recei(a)le approaches emphasi@e the )alance sheet sheet relationship )etween accounts recei(a)le and the Allowance for Dou)tful Accounts, *he accounts recei(a)le method uses a percentage relationship with accounts recei(a)le, *he aging of accounts recei(a)le method estimates the actual amount of uncollecti)le u ncollecti)le accounts recei(a)le, Difficulty: Hard LO: .
%%1, *immons $ompany $ompany had a anuary %/ current year/ )alance in Allowance Allowance for Dou)tful Accounts of 28/&&&, *he following e(ents re9uired
Hannah Sungs account recei(a)le recei(a)le of 21/8&& 21/8&& was deemed uncollecti)l uncollecti)le, e, att att el ells ls paid paid the full full amount amount of his his pre( pre(iou iously sly writte written4o n4off ff account account recei(a)le, *he recei(a)le recei(a)le of 2-/.&& had )een written off in in -&0, Bad de)ts de)ts e=pense was estimated estimated to to )e -,&> of of credit credit sales/ sales/ which which had amounted to 2.81/&&&,
hat amount of allowance for dou)tful accounts accoun ts should appear in the Decem)er .%/current year/ )alance sheet Ans: 28/&&& 4 21/8&& M 2-/.&& M G2.81/&&& × &,&- N 2%%/%&& Difficulty: Hard LO: .
%%5, On Decem)er .% of the current year/ Heidi $orporation had the following: *otal *otal sales for the the current year of: 283&/&&&/ including 2%5&/&&& in cash sales, Accounts recei(a)le )alance at Dec, .% of the current year: Bad de)ts written off during the current year: Balance of Allowance for Dou)tful Accounts at anuary % of the current year:
2%;&/&&&, 25/3&&, 23/.&&,
"repare any ad of credit sales, G) A)out 1> of accounts recei(a)le, Ans:
Difficulty: oderate LO: .
%%8, Fife/ Inc, has the following account )alances at Decem)er .% of the current year: Accounts 'ecei(a)le 2%31/5&& and Allowance Allowance for Dou)tful Accounts Accounts 2%/5&& Gcredit )alance, Fife uses the aging of accounts recei(a)le to estimate estimate )ad de)ts, *he following aging schedule reflects reflects the situation at year4end:
G% $alculate the amount of the Allowance for Dou)tful Accounts that should appear on the Decem)er .%/ current year/ )alance sheet, G- "repare the
Difficulty: oderate LO: .
%%3, asson/ asson/ Inc, had the following items in its unad
"repare the ad of credit sales, G- An analysis shows that 3> of outstanding accounts recei(a)le will not )e collected, Ans:
Difficulty: oderate LO: .
'eference: 'ef %&4% On Decem)er .%/ *oppenish/ Inc,s )oo7s showed accounts recei(a)le of 2%31/5&&C sales re(enue of 2%/-3&/&&& G3&> were on creditC and Allowance for Dou)tful Accounts of 2%/5&& Gcredit )alance,
%%;, $alculate and prepare of credit sales, Ans:
'efer *o: *o: 'ef %&4% Difficulty: oderate LO: .
%-&, Assume )ad de)ts are estimated and recorded as -> of credit sales, G% Show how Accounts 'ecei(a)le and Allowance for Dou)tful Accounts Accounts would appear on the )alance sheet, G- "resent the entry to write off a 2%/1&& account, ac count, G. Show how Accounts 'ecei(a)le and Allowance for Dou)tful Accounts Accounts would appear on a )alance sheet immediately after writing off the the account in G- a)o(e, Ans:
'efer *o: *o: 'ef %&4% Difficulty: oderate LO: .
%-%, S ' $orp, uses the aging of accounts recei(a)le approach to estimate estimate )ad de)ts e=pense, On Decem)er .% of the current year/ an analysis of accounts recei(a)le re(ealed the following:
'e9uired: Ga $alculate the amount of allowance for dou)tful d ou)tful accounts that should )e reported on the )alance sheet, G) $alculate the amount of )ad de)ts e=pense that should )e reported on the income statement/ assuming that the )alance of Allowance for Dou)tful Accounts on anuary % of the current year was 200/&&& and accounts accoun ts recei(a)le written off during the year totalled 20;/-&&, Gc a7e the appropriate general
Difficulty: oderate LO: .
%--, Each Decem)er .%/ $ompany ages its accounts recei(a)le to determine the amount of its ad
Difficulty: Hard LO: .
%-., A company that uses the allowance method to account for )ad de)ts sold 280&/&&& of merchandise on credit in K' %/ including a 28-& sale sale to !aren Long, On Decem)er .%/ K' %/ it pro(ided an addition to its allowance for dou)tful accounts e9ual to %,1> of its credit sales, On une %/ K' -/ it wrote off as uncollecti)le the 28-& account ac count of !aren LongC and on Decem)er -1/ K' - !aren Long une=pectedly paid her account in full, ?i(e without e=planations the re9uired re9uired entries Ga on Decem)er .%/ K' %/ to increase the allowance for dou)tful accountsC G) on une %/ K' -/ to write off the )ad de)tC and Gc on Decem)er -1/K' -/ to record the une=pected collection, Ans:
Difficulty: oderate LO: .
%-0, E=plain how the materiality principle principle can )e used to
%-1, $apilano $orporation has a year4end of uly .%, Kou Kou ha(e )een pro(ided with the following information for the year of total sales, 4 *he accounts recei(a)le )alance at the )eginning of the year was 2%&-/&&&, 4 *he accounts recei(a)le )alance at the end of the year was 2%5-/&&&, 4 A re(iew of the outstanding accounts recei(a)le at the end of the year indicates that 23/%&& should )e written off, 4 *he industry uses the allowance approach )ased on 0> of accounts ac counts recei(a)le or %> of credit sales, a7e the necessary ad
$orporation uses the direct write4off approach, Ans: Ba Bad de)ts e=pense 3/%&& Accounts 'ecei(a)le 3/%&&
Difficulty: oderate LO: 0
%-5, Define a note recei(a)le and descri)e how to calculate the interest due on a note recei(a)le, Ans: A note recei(a)le is a promissory promissory note, It is a written written promise to pay a specified amount of money either on demand or at a definite definite future date, Interest on a note recei(a)le that that matures in less than one year is calculated )y ) y multiplying the amount )orrowed Gprincipal times the interest rate times the period of the note di(ided )y .51 days, Difficulty: Hard LO: 1
%-8, $alculate the amount of interest interest that would )e owed on a 2;/&&&/ 5&4day/ 5&4day/ ;> note recei(a)le, Ans: 2%..,%1 Difficulty: oderate LO: 1
%-3, If a ;&4day note recei(a)le is dated une %-/ what is the due date date of the note Ans: Septem)er %& Difficulty: oderate LO: 1
%-;, If a 5&4day note recei(a)le is dated Septem)er --/ what is the due date of the note Ans: #o(em)er -% Difficulty: oderate
LO: 1
%.&, $airo $orp, accepted a 21/&&&/ %->/ ;&4day note dated ay %5/ from Ale=andria Ale=andria $orp, as an e=tension on its past4due past4due account, a7e the necessary general
Difficulty: Hard LO: 1
%.%, E=plain how to record the receipt of a note recei(a)le, Ans: A note is recorded )y entering the total amount )orrowed Gprincipal as a de)it to #otes 'ecei(a)le and as a credit to the account representing the asset or ser(ice e=changed for the note, Difficulty: Easy LO: 1
%.-, E=plain the difference difference )etween honouring and dishonouring a note recei(a)le, Ans: hen a note is honoured/ the ma7er ma7er of the note pays off the note, hen a note is dishonoured/ the ma7er defaults/ and does do es not pay off the note, Difficulty: Easy LO: 1
%.., How can a company con(ert its recei(a)les recei(a)les to cash Ans: A companys recei(a)les are normally con(erted to cash as the customers pay off their accounts, Howe(er/ there there are three options a(aila)le to a company that wishes to con(ert its recei(a)les )efore they are due, First a company can sell the the recei(a)les to a factor, Second/ a company can use its recei(a)les as collateral for a loan, *hird/ a company can discount the recei(a)les to a )an7, Difficulty: oderate LO: 5
%.0, Annies Attic sold 23&/&&& in accounts recei(a)le to First Ban7 and incurred a -> factor fee, "repare the
Difficulty: oderate LO: 5
%.1, Discuss the purpose of the accounts recei(a)le turno(er ratio and e=plain how it is calculated, Ans: *he accounts recei(a)le turno(er ratio is used to measure how often/ on a(erage/ recei(a)les are recogni@ed and collected during an accounting period, period, Analysts use the ratio to measure )oth the 9uality and li9uidity li9uidity of accounts recei(a)le, 6uality refers to to the li7elihood of collection without loss, Li9uidity refers refers to the speed of collections, *he accounts recei(a)le
turno(er ratio is calculated )y di(iding net sales )y a(erage accounts recei(a)le for an accounting period, Difficulty: oderate LO: 8
%.5, hat is the purpose of the days sales uncollected uncollected ratio Ans: *he days sales uncollected ratio is a li9uidity measure, measure, It is used to estimate estimate how much time is li7ely to pass )efore a firm recei(es cash from net n et credit sales e9ual to the current amount of accounts recei(a)le, *he measure is also (alua)le for analysis in comparing ratios from other companies in the same industry and as a means to compare current with prior years performance, pe rformance, Difficulty: oderate LO: 8
%.8, Has)ro had net sales of 28/381 and a(erage accounts recei(a)le recei(a)le of 2%/.1&, Its accounts recei(a)le turno(er rate was: Ans: 1,3 Difficulty: Easy LO: 8
%.3, *ech$om *ech$om had net sales of 2.%1/&&& and a(erage accounts recei(a)le of 281/5&&, Its competitor/ $om had net sales of 2-;;/&&& and a(erage accounts recei(a)le of 23%/.1&, $alculate the accounts recei(a)le turno(er rate rate for )oth companies, hich company is doing a )etter
%.;, *he following information information is from the financial financial statements of E=9uisite E=9uisite Ensem)les:
$alculate E=9uisite Ensem)les accounts recei(a)le turno(er rate for K' - and K' %, $ompare the two results and gi(e a possi)le e=planation e=p lanation for any significant change, Ans: K' - accounts recei(a)le turno(er: turno(er:
K' . accounts recei(a)le turno(er:
E=9uisite Ensem)les has turned o(er its accounts recei(a)le - more times in K' . than in K' -, *his may indicate that the company has tightened its credit policy or has impro(ed its collection efforts, Difficulty: Hard LO: 8
%0&, In Octo)er/ 4art had 2081/&&& in net credit sales and 281/&&& in accounts recei(a)le, $alculate the days sales uncollected for Octo)er, Ans: 18,5 days Difficulty: Easy LO: 8
%0%, In April/ April/ Has)ro had 2./381 million in sales and 2;;& million in accounts recei(a)le, For the same period/ attel had 20/1;1 million in sales and 23.0 million in accounts accou nts recei(a)le, $alculate the days sales uncollected uncollected for )oth companies, hich company appears to )e doing a )etter
%0-, Outdoors Jnlimited had net sales for K' K' % of 2-31/&&& and 2181/&&& for K' -, *he year4
end )alances of accounts recei(a)le were 20;/&&& for K' % and 231/&&& for K' -, $alculate the days sales uncollected at the end of each year and descri)e any changes in the apparent li9uidity of the companys recei(a)les, Ans: K' % N 5. daysC daysC K' - N 10 days, *he decrease of ; days means means that Outdoors Jnlimited Jnlimited appears to ha(e impro(ed its management of recei(a)les and has increased its li9uidity, Difficulty: oderate LO: 8
Fill4In4*he4Blan7
%0., *he principle re9uires reporting credit card card e=pense in the same period as the sale, Ans: atching Difficulty: oderate LO: %
%00, *he method of accounting for )ad de)ts records the the loss from an uncollecti)le account recei(a)le at the time it is determined to )e uncollecti)le, Ans: Direct write4off Difficulty: oderate LO: 0
%01, *he of a note is the time time from the notes date to to its maturity date, Ans: "eriod Difficulty: oderate LO: 1
%05, yre= $orporation purchased 20/&&& in parts from *ech$om, *ech$om, yre= signed a 5&4day/ %&> promissory note, *ech$om *ech$om should record the sale with a
%08, A dishonoured note recei(a)le recei(a)le should )e , , Ans: $redited to notes recei(a)le and de)ited to the account recei(a)le of the ma7er Difficulty: Hard LO: 1
%03, *he accounts recei(a)le turno(er rate is calculated )y di(iding )y , Ans: #et sales/ sales/ a(erage accounts recei(a)le Difficulty: oderate LO: 8
%0;, *he ratio measures the li9uidity of recei(a)les, Ans: accounts recei(a)le turno(er Difficulty: Easy LO: 8
