Multiple Choice: Chapter Seven
1. Trade accounts receivable:
a. arise from the sale of a company's products or services.
b. are reported in the noncurrent asset section of the balance sheet.
c. include deposits with utilities.
d. generally comprise the minority of the total receivables balance.
Answera. Trade receivables arise from the sale of products or services to customers. They typically comprise the majority of total receivables and are reported as current assets. Trade receivables contrast with nontrade receivables which arise from advances to employees, deposits with utilities, and so forth.
2. Lundstrom Company began making sales on credit during 20X1. The company used the direct write-off method for uncollectible accounts. A material amount of uncollectible accounts resulting from sales made during 20X1 were written off during 20X2. What was the effect of this write-off on net income for 20X1 and 20X2?
20X1 20X2 a. Overstate Overstate b. Overstate Understate c. Understate Overstate d. Understate Understate
Answerb. Generally accepted accounting principles require the use of an allowance method if uncollectibles are material in amount. Lundstrom's use of the direct write-off approach resulted in recording no uncollectible accounts expense in 20X1, even though the credit sales which triggered the uncollectibles were recorded in that year. 20X1 income was thereby overstated. 20X2's income was reduced for the write-offs attributable to 20X1 sales, and accordingly was understated.
3. Taylor Company uses the direct write-off method of recording uncollectible accounts receivable. Recently, a customer informed Taylor that he would be unable to pay $300 owed to Taylor. Taylor's proper journal entry to reflect this event would be:
a. Uncollectible Accounts Expense 300 Allow. for Uncollectible Accounts 300 b. Allow. for Uncollectible Accounts 300 Accounts Receivable 300 c. Uncollectible Accounts Expense 300 Accounts Receivable 300 d. Sales 300 Accounts Receivable 300
Answer c. Answers "a" and "b" both relate to the allowance methods -- establishing the allowance and writing off an account against the allowance. Under the direct write-off method, expense is recorded at the same time the receivable is written off, as demonstrated by answer "c." Answer "d" is not a typical journal entry.
4. Malcom's financial statements revealed uncollectible accounts expense of $8,000, accounts receivable of $140,000, and allowance for uncollectible accounts of $12,000. The net realizable value of Malcom's accounts receivable is:
5. Branz Company had credit sales during the current year which amounted to $700,000. Historically, 3% of credit sales are uncollectible. If Branz uses the allowance method of recording uncollectible accounts, a proper journal entry for the year would be:
a. Accounts Receivable 21,000 Allow. for Uncollectible Accounts 21,000 b. Uncollectible Accounts Expense 21,000 Accounts Receivable 21,000 c. Uncollectible Accounts Expense 21,000 Allow. for Uncollectible Accounts 21,000 d. Allow. for Uncollectible Accounts 21,000 Accounts Receivable 21,000
Answerc. The journal entry reflects the recording of expense and the establishment of an allowance for $21,000 ($700,000 X 3%). The allowance is increased for the calculated amount because the percentage of sales (i.e., income statement approach) technique is in use.
6. Lindy Company uses an allowance method to account for bad debts. Lindy estimates that 5% of the outstanding accounts receivable will be uncollectible. At the end of the year, Lindy has outstanding accounts receivable of $750,000, and a debit balance in the Allowance for Uncollectible Accounts of $9,000. Lindy should record uncollectible accounts expense of:
Answerc. $46,500. The desired balance in the Allowance account is $37,500 ($750,000 X 5%). The Allowance account should be a credit balance; therefore, an adjustment of $46,500 is needed to convert from a $9,000 debit balance to a $37,500 credit balance. This adjustment would occur by debiting Uncollectible Accounts Expense and crediting the Allowance for Uncollectible Accounts for $46,500.
7. Flynn Company uses an allowance method for recording uncollectibles. Flynn determined that $4,000 due from Mitchell will not be collected. The entry Flynn should record to write off the Mitchell account is:
a. Uncollectible Accounts Expense 4,000 Accounts Receivable 4,000 b. Sales 4,000 Accounts Receivable 4,000 c. Uncollectible Accounts Expense 4,000 Allow. for Uncollectible Accounts 4,000 d. Allow. for Uncollectible Accounts 4,000 Accounts Receivable 4,000
8. John Company uses an allowance method for recording uncollectible receivables. John was notified by Paul that payment on a $1,000 receivable would be forthcoming. John had previously written off the receivable from Paul. The proper journal entry for John to record to reinstate the receivable into the accounts is:
a. Accounts Receivable 1,000 Allow. for Uncollectible Accounts 1,000 b. Allow. for Uncollectible Accounts 1,000 Sales 1,000 c. Accounts Receivable 1,000 Sales 1,000 d. Accounts Receivable 1,000 Uncollectible Accounts Expense 1,000
9. Interest on a loan may be computed by which of the following formulas?
a. (principal x rate)/time
b. (principal x rate x time)
c. (principal x time)/rate
d. (principal x time)/time
10. Vivian Howell is the payee of $10,000, 180-day, 8% note. At maturity, the maker failed to pay. How much interest income should Vivian recognize on the dishonored note?
Answerb. $400. The interest of $400 is calculated as $10,000 X 8% X 180/360. Even though the note was dishonored, Vivian will still try to collect the full amount due, including the interest. Therefore, the interest income is recognized and recorded as a receivable along with the principal amount of the note.