introduction chapters
chapter 7
Accounts Receivable
goals discussion
goals
achievement
fill
in the blanks multiple
choice
problems
check list and key terms
Select the appropriate response.
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.
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
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
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:
a.
$128,000
b. $132,000
c. $136,000
d. $152,000
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
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:
a. $28,500
b. $37,500
c. $46,500
d. $55,500
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
Allowance for Uncollectible
Accounts 4,000
d.
Allowance 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?
a. $0
b. $400
c. $800
d. $10,800
1. a. 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. b. 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. 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. a. $128,000. The net realizable value of accounts receivable is $140,000 (the gross accounts receivable) less $12,000 (the allowance amount), or $128,000.
5. c. 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. c. $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. d. Under the allowance method, uncollectible accounts are recorded by writing off the specific account receivable against the Allowance account.
8. a. To reinstate a previously written-off account requires a reversal of the entry which was made at the time of write off.
9. b. The formula is the amount of the loan
(principal) times the interest rate per period (rate) times the number of
periods (time).
10. b. $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.