Describe Accounts Receivable and how they occur and are recorded
A finance company or bank that acquires ownership of another company's accounts receivable is called a:
a. Payer.
b. Pledger.
c. Factor.
d. Payee.
e. Pledgee.
c. Factor.
Learning Objective: 07-C3 Explain how receivables can be converted to cash before maturity.
The materiality constraint, as applied to bad debts:
a. Permits the use of the direct write-off method when its results approximate those of the allowance method.
b. Requires use of the pledge method for bad debts.
c. Requires use of the direct write-off method.
d. Requires that bad debts not be written off.
e. Requires that expenses be reported when paid in cash.
a. Permits the use of the direct write-off method when its results approximate those of the allowance method.
Learning Objective: 07-P1 Apply the direct write-off method to accounts receivable.
The allowance method that assumes a percent of a company’s credit sales for the period is uncollectible is:
a. The percent of accounts receivable method.
b. The aging of accounts receivable method.
c. The percent of sales method.
d. The direct write-off method.
e. The factoring method.
c. The percent of sales method.
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
A method of estimating bad debts expense that involves classifying receivables by how long they are past due is called the:
a. Direct write-off method.
b. Aging of accounts receivable method.
c. Percent of sales method.
d. Aging of investments method.
e. Percent of accounts payable method.
b. Aging of accounts receivable method.
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
The interest accrued on $7,500 at 6% for 90 days is:
Note: Use 360 days a year.
a. $450.00.
b. $37.50.
c. $112.50.
d. $11.25.
e. $1,800.00.
c. $112.50.
$7,500 × 0.06 × 90/360 = $112.50
Learning Objective: 07-C2 Describe a note receivable, the computation of its maturity date, and the recording of its existence.
Mullis Company sold merchandise on account to a customer for $625, terms n/30. The journal entry to record this sale transaction would be:
a. Debit Cash of $625 and credit Sales $625.
b. Debit Cash of $625 and credit Accounts Receivable $625.
c. Debit Accounts Receivable $625 and credit Sales $625.
d. Debit Accounts Receivable $625 and credit Cash $625.
e. Debit Sales $625 and credit Accounts Receivable $625.
c. Debit Accounts Receivable $625 and credit Sales $625.
Learning Objective: 07-C1 Describe accounts receivable and how they occur and are recorded.
Gideon Company uses the direct write-off method of accounting for uncollectible accounts. On May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer, A. Hopkins. The entry or entries Gideon makes to record the write-off of the account on May 3 is:
a. Accounts Receivable—A. Hopkins 2,000
Bad Debts Expense 2,000
b. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkins 2,000
c. Accounts Receivable—A. Hopkins 2,000
Cash 2,000
d. Bad Debts Expense 2,000
Accounts Receivable—A. Hopkins 2,000
e. Cash 2,000
Accounts Receivable—A. Hopkins 2,000
d. Bad Debts Expense 2,000
Accounts Receivable—A. Hopkins 2,000
Learning Objective: 07-P1 Apply the direct write-off method to accounts receivable.
Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer, A. Hopkins. The entry or entries Gideon makes to record the write off of the account on May 3 is:
a. Accounts Receivable—A. Hopkins 2,000
Allowance for Doubtful Accounts 2,000
b. Allowance for Doubtful Accounts 2,000
Bad Debts Expense 2,000
c. Accounts Receivable—A. Hopkins 2,000
Bad Debts Expense 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
d. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkins 2,000
e. Cash 2,000
Accounts Receivable—A. Hopkins 2,000
d. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkins 2,000
Learning Objective: 07-P2 Apply the allowance method to accounts receivable.
The unadjusted trial balance at year-end for a company that uses the percent of receivables method to determine its bad debts expense reports the following selected amounts:
Accounts Receivable $ 432,000 Debit
Allowance for Doubtful Accounts $ 1,380 Debit
Net Sales $ 2,230,000 Credit
All sales are made on credit. Based on past experience, the company estimates 3.0% of ending accounts receivable to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?
a. Debit Bad Debts Expense $16,690; credit Allowance for Doubtful Accounts $16,690.
b. Debit Bad Debts Expense $11,580; credit Allowance for Doubtful Accounts $11,580.
c. Debit Bad Debts Expense $14,340; credit Allowance for Doubtful Accounts $14,340.
d. Debit Bad Debts Expense $6,690; credit Allowance for Doubtful Accounts $6,690.
e. Debit Bad Debts Expense $12,960; credit Allowance for Doubtful Accounts $12,960.
c. Debit Bad Debts Expense $14,340; credit Allowance for Doubtful Accounts $14,340.
$432,000 × 0.030 = $12,960 + $1,380 = $14,340
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
A company has net sales of $2,200,000 and average accounts receivable, net of $440,000. What is its accounts receivable turnover for the period?
a. 0.40
b. 9.00
c. 26.00
d. 81.00
e. 5.00
e. 5.00
Accounts Receivable Turnover = Net Sales/Average Accounts Receivable, Net
Accounts Receivable Turnover = $2,200,000/$440,000 = 5.00
Learning Objective: 07-A1 Compute accounts receivable turnover and use it to help assess financial condition.
Mullis Company sold merchandise on account to a customer for $625, terms n/30. The journal entry to record the collection on account would be:
a. Debit Cash of $625 and credit Sales $625.
b. Debit Cash of $625 and credit Accounts Receivable $625.
c. Debit Accounts Receivable $625 and credit Sales $625.
d. Debit Accounts Receivable $625 and credit Cash $625.
e. Debit Sales $625 and credit Accounts Receivable $625.
b. Debit Cash of $625 and credit Accounts Receivable $625.
Learning Objective: 07-C1 Describe accounts receivable and how they occur and are recorded.
Gideon Company uses the direct write-off method of accounting for uncollectible accounts. On May 3, Gideon Company wrote off the $2,000 uncollectible account of its customer, A. Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins. The entry or entries Gideon makes to record the recovery of the bad debt is:
a. Accounts Receivable—A. Hopkins 2,000
Allowance for Doubtful Accounts 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
b. Cash 2,000
Bad Debts Expense 2,000
c. Accounts Receivable—A. Hopkins 2,000
Bad Debts Expense 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
d. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkinse 2,000
Accounts Receivable—A. Hopkins 2,000
Cash 2,000
e. Cash 2,000
Accounts Receivable—A. Hopkins 2,000
c. Accounts Receivable—A. Hopkins 2,000
Bad Debts Expense 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
Learning Objective: 07-P1 Apply the direct write-off method to accounts receivable.
Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, Gideon Company wrote off the $2,000 uncollectible account of its customer, A. Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins. The entry or entries Gideon makes to record the recovery of the bad debt is:
a. Accounts Receivable—A. Hopkins 2,000
Allowance for Doubtful Accounts 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
b. Cash 2,000
Bad debts expense 2,000
c. Accounts Receivable—A. Hopkins 2,000
Bad debts expense 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
d. Allowance for Doubtful Accounts 2,000
Accounts Receivable—A. Hopkinse 2,000
Accounts Receivable—A. Hopkins 2,000
Cash 2,000
e. Cash 2,000
Accounts Receivable—A. Hopkins 2,000
a. Accounts Receivable—A. Hopkins 2,000
Allowance for Doubtful Accounts 2,000
Cash 2,000
Accounts Receivable—A. Hopkins 2,000
Learning Objective: 07-P2 Apply the allowance method to accounts receivable.
Craigmont uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial balance shows Accounts Receivable of $104,500, allowance for doubtful accounts of $665 (credit) and sales of $925,000. If uncollectible accounts are estimated to be 4% of accounts receivable, what is the amount of the bad debts expense adjusting entry?
a. $4,845
b. $4,180
c. $3,515
d. $3,700
e. $3,850
c. $3,515
$104,500 × 0.04 = $4,180 − $665 = $3,515
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts:
Accounts Receivable $ 375,000 debit
Net Sales 800,000 credit
All sales are made on credit. Based on past experience, the company estimates that 0.6% of net sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
a. $1,275
b. $1,775
c. $4,500
d. $4,800
e. $5,500
d. $4,800
$800,000 × 0.006 = $4,800
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
On July 9, Mifflin Company receives a $8,500, 90-day, 8% note from customer Payton Summers as payment on account. Compute the maturity date for the note.
a. October 8
b. October 7
c. November 8
d. November 7
e. November 6
b. October 7
July 31 − 9 = 22; August = 31; September = 30; 90 − 22 − 31 − 30 = October 7
Learning Objective: 07-C2 Describe a note receivable, the computation of its maturity date, and the recording of its existence.
The quality of receivables refers to:
a. The creditworthiness of sellers.
b. The method of collection.
c. The likelihood of collection without loss.
d. Sales turnover.
e. The interest rate charged.
c. The likelihood of collection without loss.
On October 12 of the current year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Assuming the allowance method is used to account for bad debts, what effect will this write-off have on the company's net income and total assets?
a. Decrease in net income; no effect on total assets.
b. No effect on net income; no effect on total assets.
c. Decrease in net income; decrease in total assets.
d. Increase in net income; no effect on total assets.
e. No effect on net income; decrease in total assets.
b. No effect on net income; no effect on total assets.
Learning Objective: 07-P2 Apply the allowance method to accounts receivable.
On December 31 of the current year, the unadjusted trial balance of a company using the percent of receivables method to estimate bad debt included the following: Accounts Receivable, debit balance of $97,400; Allowance for Doubtful Accounts, credit balance of $981. What amount should be debited to Bad Debts Expense, assuming 3% of outstanding accounts receivable at the end of the current year are estimated to be uncollectible?
a. $3,903.
b. $2,922.
c. $981.
d. $1,049.
e. $1,941.
e. $1,941.
Desired balance in allowance account: $2,922 credit
$97,400 × 0.03 = $2,922
Current balance in allowance account: −981 credit
Required: amount of Bad Debts Expense: $ 1,941 credit
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
Jasper makes a $25,000, 90-day, 7% cash loan to Clayborn Company. The amount of interest that Jasper will collect on the loan is:
Note: Use 360 days a year.
a. $1,750.
b. $145.83.
c. $437.50.
d. $19.44.
e. $875.00.
c. $437.50.
$25,000 × 0.07 × 90/360 = $437.50
Learning Objective: 07-C2 Describe a note receivable, the computation of its maturity date, and the recording of its existence.
Jervis accepts all major bank credit cards, including those issued by Northern Bank (NB), which assesses a 3% charge on sales for using its card. On June 28, Jervis had $3,500 in NB Card credit sales. What entry should Jervis make on June 28 to record the deposit?
a. Debit Cash $3,500; credit Sales $3,500
b. Debit Accounts Receivable $3,500; credit Sales $3,500
c. Debit Cash $3,605; credit Credit Card Expense $105; credit Sales $3,500
d. Debit Cash $3,395; debit Credit Card Expense $105; credit Sales $3,500
e. Debit Accounts Receivable $3,395; debit Credit Card Expense $105; credit Sales $3,500
d. Debit Cash $3,395; debit Credit Card Expense $105; credit Sales $3,500
Credit card fee expense: $3,500 × 0.03 = $105
Cash received: $3,500 − $105 = $3,395
Learning Objective: 07-C1 Describe accounts receivable and how they occur and are recorded.
On October 12 of the current year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Assuming the direct write-off method is used to account for bad debts, what effect will this write-off have on the company's net income and total assets?
a. Decrease in net income; no effect on total assets.
b. No effect on net income; no effect on total assets.
c. Decrease in net income; decrease in total assets.
d. Increase in net income; no effect on total assets.
e. No effect on net income; decrease in total assets.
c. Decrease in net income; decrease in total assets.
Learning Objective: 07-P1 Apply the direct write-off method to accounts receivable.
A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts:
Accounts Receivable $ 348,000 debit
Net Sales 793,000 credit
All sales are made on credit. Based on past experience, the company estimates that 0.5% of net sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
a. $4,635
b. $2,410
c. $3,965
d. $3,295
e. $1,070
c. $3,965
$793,000 × 0.005 = $3,965
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
At the end of the current year, using the aging of accounts receivable method, management estimated that $27,750 of the accounts receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a debit balance of $775. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?
a. Bad Debts Expense 27,750
Allowance for Doubtful Accounts 27,750
b. Bad Debts Expense 26,975
Allowance for Doubtful Accounts 26,975
c. Bad Debts Expense 28,525
Allowance for Doubtful Accounts 28,525
d. Accounts Receivable 27,750
Bad Debts Expense 775
Sales 28,525
e. Accounts Receivable 28,525
Allowance for Doubtful Accounts 28,525
c. Bad Debts Expense 28,525
Allowance for Doubtful Accounts 28,525
Desired balance in allowance account: $ 27,750 credit
Current balance: +775 debit
Required: adjustment to allowance $ 28,525 credit
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.
A company has $93,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 3% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is an $830 debit. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for:
a. $2,790
b. $2,765
c. $2,815
d. $1,960
e. $3,620
e. $3,620
Desired balance in allowance account: $ 2,790 credit
$ 93,000 × 0.03 = $ 2,790
Current balance in allowance account: +830 debit
Adjustment to allowance: $ 3,620 credit
Learning Objective: 07-P3 Estimate uncollectibles based on sales and accounts receivable.