Horngrens Financial and Managerial Accounting 6th Edition Nobles Test Bank

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Horngrens Financial and Managerial

Accounting 6th Edition Nobles Test


Bank
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managerial-accounting-6th-edition-nobles-test-bank/
Horngren's Financial and Managerial Accounting, 6e (Miller-Nobles)
Chapter 8 Receivables

8.1 Learning Objective 8-1

1) A receivable occurs when a business sells goods or services to another party on account.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

2) Each receivable transaction involves two parties - the one who takes on the obligation and the one who
will collect the cash.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

3) A receivable is a monetary claim against a business or an individual.


Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

4) A receivable is a liability because it represents a right to receive cash in the future.


Answer: FALSE
Explanation: A receivable is an asset because it represents a right to receive cash in the future.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

1
Copyright © 2018 Pearson Education, Inc.
5) A debtor is a party to a credit transaction who will receive the cash for the transaction at a later date.
Answer: FALSE
Explanation: A debtor is a party to a credit transaction who takes on an obligation/payable.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

6) A receivable occurs when a business ________.


A) loans money to another party
B) sells goods or services to another party on account
C) has a monetary claim against a business or individual
D) All of the statements are correct.
Answer: D
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

7) Which of the following statements regarding receivables is correct?


A) Each receivable transaction involves three parties.
B) Receivables occur when a business loans money to another party.
C) A receivable occurs when a business makes a cash sale of goods or services to another party.
D) A receivable is the right to pay cash in the future from a current receivable transaction.
Answer: B
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: What Are Common Types of Receivables and How Are Credit Sales Recorded? (H1)

8) The two major types of receivables are interest receivable and taxes receivable.
Answer: FALSE
Explanation: The two major types of receivables are accounts receivable and notes receivable.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

2
Copyright © 2018 Pearson Education, Inc.
9) The three major types of receivables are accounts receivable, notes receivable, and other receivables.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

10) Accounts receivable are also called trade receivables.


Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

11) The collection period of accounts receivable is usually long, and therefore, it is classified as a long-
term asset on the balance sheet.
Answer: FALSE
Explanation: Accounts receivable are usually collected within a short period of time and are therefore
reported as a current asset on the balance sheet.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

12) Accounts receivable are usually collected within a short period of time and are therefore reported as a
current liability on the balance sheet.
Answer: FALSE
Explanation: Accounts receivable are usually collected within a short period of time and are therefore
reported as a current asset on the balance sheet.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

13) Notes receivable represent a written promise that a party will pay a fixed amount of principal plus
interest on a stated maturity date.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

3
Copyright © 2018 Pearson Education, Inc.
14) The payment terms for a note receivable are generally longer than that of an account receivable.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

15) Dividends receivable, interest receivable, and taxes receivable are generally categorized as other
receivables.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

16) Notes receivable due within 12 months or within the normal operating cycle if the cycle is longer than
a year are considered long-term assets.
Answer: FALSE
Explanation: These are considered current assets.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

17) Which of the following is included in the category of other receivables?


A) interest receivable
B) accounts receivable
C) notes receivable
D) investments
Answer: A
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

4
Copyright © 2018 Pearson Education, Inc.
18) Which of the following statements is true?
A) Accounts receivable are more liquid than cash.
B) Notes receivable are always classified as current assets.
C) Notes receivable usually have longer collection terms than accounts receivable.
D) Accounts receivable are liabilities.
Answer: C
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

19) Which of the following statements, regarding notes receivable, is incorrect?


A) Notes receivable usually have longer terms than accounts receivable.
B) A notes receivable is a written promise that a customer will pay a fixed amount of principal plus
interest by a certain date in the future.
C) All notes receivable are considered long-term assets.
D) Notes receivable are sometimes called promissory notes.
Answer: C
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Receivables

20) Notes receivable ________.


A) represent an oral promise to pay a fixed amount of principal plus interest on the maturity date
B) are included in a miscellaneous category called other receivables
C) are due within 12 months or within the normal operating cycle if the cycle is longer than a year are
considered long-term assets
D) are supported by a promissory note
Answer: D
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Types of Receivables

5
Copyright © 2018 Pearson Education, Inc.
21) Which of the following should be classified as a long-term asset?
A) Interest Receivable
B) Accounts Receivable
C) Notes Receivable, due in 5 years
D) Cash Equivalents
Answer: C
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Types of Receivables

22) Credit department employees must have access to cash in order to exercise effective internal control
over receivables.
Answer: FALSE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Exercising Internal Control Over Receivables

23) Separation of cash-handling and cash-accounting duties is a critical element of internal control over
receivables.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Exercising Internal Control Over Receivables

24) The employees who handle cash know how customers pay and thus are in the best position to grant
credit to customers.
Answer: FALSE
Explanation: The employees who handle cash should not be in a position to grant credit to customers.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Exercising Internal Control Over Receivables

6
Copyright © 2018 Pearson Education, Inc.
25) Which of the following is an example of exercising internal control over receivables?
A) separating cash collection and credit approval duties
B) extending credit to all customers who apply for credit
C) combining the duties of the credit and accounting departments
D) allowing credit department employees to collect cash from customers
Answer: A
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Exercising Internal Control Over Receivables

26) Which of the following is a weak internal control over cash collections from receivables?
A) The credit department should have no access to cash.
B) A credit department should evaluate customers' credit applications to determine whether they meet
the company's approval standards.
C) A company should have written approval standards for processing customers' credit applications.
D) In order to avoid losing sales, all customers' credit applications should be approved.
Answer: D
Diff: 2
LO: 8-1
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Exercising Internal Control Over Receivables

27) The role of the credit department includes ________.


A) approving all credit applications in order to avoid losing sales
B) evaluating customers' credit applications to determine whether they meet the company's approval
standards
C) following unwritten approval standards for processing customers' credit applications
D) collecting cash from customers
Answer: B
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Exercising Internal Control Over Receivables

28) Businesses must maintain a single Accounts Receivable control account regardless of the number of
customers.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Sales on Credit

7
Copyright © 2018 Pearson Education, Inc.
29) Separate customer accounts receivable are called subsidiary accounts.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Sales on Credit

30) A business maintains a separate Accounts Receivable account for each customer in order to account
for payments received from the customer and amounts still owed by the customer.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Sales on Credit

31) Because customers make payments on account throughout the period, the sum of all balances in
subsidiary accounts receivable will not equal the control account balance.
Answer: FALSE
Explanation: The sum of all balances in subsidiary accounts receivable equals a control account balance.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Sales on Credit

32) Specialty Foods, Inc. maintains a separate accounts receivable account for each customer. Regarding
this accounting treatment, which of the following statements is incorrect?
A) The separate customer accounts receivable are called subsidiary accounts.
B) When a customer makes a payment on account, a debit is posted to the accounts receivable subsidiary
account as well as to the accounts receivable control account.
C) The sum of all balances in the subsidiary accounts receivable equals a control account balance.
D) The purpose of this accounting treatment is to account for payments received from the customer and
the amounts still owed.
Answer: B
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Sales on Credit

8
Copyright © 2018 Pearson Education, Inc.
33) Alltech Company maintains a separate accounts receivable account for each customer. On June 18,
Alltech provides $6,300 of services on account to customer Anthony and $1,200 of services on account to
customer Walker. How will these two transactions affect the control and subsidiary accounts?
A) The control account, Accounts Receivable, will be increased with a debit of $7,500.
B) The individual customer accounts in the subsidiary ledger will be increased with credits.
C) After posting these transactions, the sum of the balances in subsidiary accounts receivable will not
equal the control account balance.
D) The control account will have a debit balance and the subsidiary accounts will have a credit balance.
This keeps the accounting equation in balance.
Answer: A
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Sales on Credit

9
Copyright © 2018 Pearson Education, Inc.
34) A business maintains subsidiary accounts for each of its customers. On May 15, the business provides
services on account: $1,900 to customer J. Anthony ; $4,900 to customer A. Martin; and $1,300 to customer
S. Lee. Which journal entry is needed to record these transactions?

A)
May 15 Accounts Receivable 8,100
Service Revenue 8,100

B)
May 15 Accounts Receivable - J. Anthony 1,900
Accounts Receivable - A. Martin 4,900
Accounts Receivable - S. Lee 1,300
Service Revenue 8,100

C)
May 15 Service Revenue 8,100
Accounts Receivable 8,100

D)
May 15 Accounts Receivable Control 8,100
Sales Revenue 8,100

May 15 Accounts Receivable - J. Anthony 1,900


Accounts Receivable - A. Martin 4,900
Accounts Receivable -S. Lee 1,300
Accounts Receivable - Control 8,100

Answer: B
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Sales on Credit

10
Copyright © 2018 Pearson Education, Inc.
35) A business maintains subsidiary accounts for each of its customers. On April 7, the business provides
$2,500 in services to Anne Hill on account. The business sells $4,000 (sales price) of merchandise
inventory to Ron Wilson on account.

The full amount was collected from each customer on April 26.

Prepare the journal entries for April 7 and April 26. Ignore Cost of Goods Sold and omit explanations.

Date Debit Credit

Answer:
Date Debit Credit
4/7 Accounts Receivable - Hill 2,500
Service Revenue 2,500

4/7 Accounts Receivable - Wilson 4,000


Sales Revenue 4,000

4/26 Cash 6,500


Accounts Receivable - Hill 2,500
Accounts Receivable -Wilson 4,000

Diff: 3
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Sales on Credit

36) By accepting credit and debit cards, companies are able to attract more customers.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

11
Copyright © 2018 Pearson Education, Inc.
37) When businesses accept payment by credit and debit cards, there is almost always a fee to the
purchaser to cover the processing costs charged by the card issuer.
Answer: FALSE
Explanation: When businesses accept payment by credit and debit cards, there is almost always a fee to
the purchaser to cover the processing costs charged by the card issuer.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

38) Sales through credit or debit cards transfer the risk of collection of receivables from the seller to the
card issuer.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

39) When businesses accept payment by credit and debit cards, the costs of processing fees are greater
than the benefits of transferring the risk of not being able to collect from the customer and avoiding the
costs associated with credit customers.
Answer: FALSE
Explanation: When businesses accept payment by credit and debit cards, the benefits of transferring the
risk of not being able to collect from the customer and avoiding the costs associated with credit customers
are greater than the costs of processing fees.
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

40) Credit cards reduce the customer's bank account immediately but allow the customer to pay
electronically instead of with currency or writing a check.
Answer: FALSE
Explanation: Debit cards reduce the customer's bank account immediately but allow the customer to pay
electronically instead of with currency or writing a check.
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

12
Copyright © 2018 Pearson Education, Inc.
41) Factoring occurs when a business sells its receivables to a finance company or bank.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

42) When a business factors its receivables, it uses the receivables as security for a loan.
Answer: FALSE
Explanation: When a business pledges its receivables, it uses the receivables as security for a loan.
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

43) When a business factors its receivables, the factor collects cash on the receivables.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

44) Factoring is an option available to a business to reduce the risk of uncollectible accounts receivable.
Answer: TRUE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

45) When a business pledges its accounts receivable, it transfers the right to collect cash from customers to
the bank.
Answer: FALSE
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

13
Copyright © 2018 Pearson Education, Inc.
46) When a business factors its accounts receivables, the business ________.
A) uses the receivables as security for a loan
B) no longer has to deal with the collection of the receivables from the customers
C) receives the total amount of the receivables from the factor
D) receives cash, less an applicable fee, after the factor collects from the customers
Answer: B
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decreasing Collection Time and Credit Risk

47) Which of the following is a disadvantage when a business accepts credit cards or debit cards from
customers?
A) The business bears the responsibility of collecting cash from the customer.
B) The business bears the risk of nonpayment by the customer.
C) The business pays a processing fee.
D) The business checks customers' credit ratings.
Answer: C
Diff: 1
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decreasing Collection Time and Credit Risk

48) A business that accepts payments by credit and debit cards ________.
A) is usually unable to attract more customers
B) must check each customer's credit rating
C) generally receives proceeds from credit and debit card transactions 30-45 days after the sale
D) almost always pays a fee to the processor to cover the processing costs
Answer: D
Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decreasing Collection Time and Credit Risk

14
Copyright © 2018 Pearson Education, Inc.
49) Provide a brief definition of each of the following terms.

Term Brief Definition


Debtor

Pledging Receivables

Accounts Receivable

Answer:
Term Brief Definition
Debtor The party to a transaction who
takes on an obligation/payable.
Pledging Receivables Using receivables as security
(collateral) for a loan.
The right to receive cash in the
Accounts Receivable future from customers for
goods sold or for services
provided.

Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decreasing Collection Time and Credit Risk

15
Copyright © 2018 Pearson Education, Inc.
50) Provide a brief definition of each of the following terms.

Term Brief Definition


Factoring Receivables

Receivable

Maturity Date

Answer:
Term Brief Definition
Factoring Receivables Selling receivables to finance
company or bank.
Receivable A monetary claim against a
business or an individual.
Maturity Date The date when a note is due.

Diff: 2
LO: 8-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decreasing Collection Time and Credit Risk

8.2 Learning Objective 8-2

1) The expense associated with the cost of uncollectible accounts receivable is called bad debts expense.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

16
Copyright © 2018 Pearson Education, Inc.
2) Accounts receivable that are uncollectible must remain on the books because the customer may
eventually pay.
Answer: FALSE
Explanation: Accounts receivable that are uncollectible must be written off because the company does
not expect to receive cash in the future.
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

3) Bad debt expense is a cost to the seller of extending credit.


Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

4) The two methods of accounting for uncollectible accounts receivable are ________.
A) the direct write-off method and the liability method
B) the asset method and the sales method
C) the allowance method and the liability method
D) the allowance method and the direct write-off method
Answer: D
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Direct Write-Off Method? (H1)

5) The direct write-off method of accounting for uncollectible receivables is primarily used by small,
nonpublic companies.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

17
Copyright © 2018 Pearson Education, Inc.
6) The following information is from the records of Mountainview Camera Shop:

Accounts receivable, December 31, 2018 $80,000 (debit)


Net credit sales for 2018 160,000
Accounts written off as uncollectible during 2018 16,000
Cash sales during 2018 42,000

The company uses the direct write-off method for bad debts. What is the amount of bad debts expense?
A) $80,000
B) $42,000
C) $64,000
D) $16,000
Answer: D
Diff: 2
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

7) Under the direct write-off method, the entry to write off an uncollectible account will include ________.
A) a debit to Bad Debts Expense account
B) a debit to the customer's Account Receivable
C) a credit to the Allowance for Bad Debts
D) No entry is made to write off uncollectible accounts.
Answer: A
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

8) Under the direct write-off method, which of the following is included in the entry to write off an
uncollectible account?
A) a credit to the Allowance for Bad Debts
B) a credit to the customer's Account Receivable
C) a debit to Allowance for Uncollectible Accounts
D) No entry is made to write off uncollectible accounts.
Answer: B
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

18
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9) When a company is using the direct write-off method, and an account is written off, the journal entry
consists of a ________.
A) debit to Accounts Receivable and a credit to Cash
B) credit to Accounts Receivable and a debit to Bad Debts Expense
C) debit to the Allowance for Bad Debts and a credit to Accounts Receivable
D) credit to Accounts Receivable and a debit to Interest Expense
Answer: B
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

10) Uptown, Inc. has determined that an account receivable of $125 is uncollectible. The company uses
the direct write-off method. Which of the following entries is required to record the write-off?

A)
Bad Debts Expense 125
Accounts Receivable 125

B)
Cash 125
Accounts Receivable 125

C)
Allowance for Bad Debts 125
Accounts Receivable 125

D)
Accounts Receivable 125
Bad Debts Expense 125

Answer: A
Diff: 2
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

19
Copyright © 2018 Pearson Education, Inc.
11) On January 1, Five Star Services has the following balances:

Accounts Receivable $24,000 (debit)


Bad Debts Expense $0

Five Star Services has the following transactions during January: Credit sales of $120,000, collections of
credit sales of $86,000, and write-offs of $20,000. Five Star Services uses the direct write-off method. At the
end of January, the balance of Accounts Receivable is ________.
A) $14,333
B) $38,000
C) $27,907
D) $58,000
Answer: B
Explanation: B) Beginning balance $24,000 + Credit Sales $120,000 - Collections $86,000 - Write-offs
$20,000 = $38,000
Diff: 2
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

12) On January 1, All City Services has the following balances:

Accounts Receivable $25,000


Bad Debts Expense $0

All City has the following transactions during January: Credit sales of $120,000, collections of credit sales
of $81,000, and write-offs of $18,000. All City uses the direct write-off method. The amount of Bad Debts
Expense for January is ________.
A) $25,000
B) $26,667
C) $12,150
D) $18,000
Answer: D
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

20
Copyright © 2018 Pearson Education, Inc.
13) A company with significant amounts of accounts receivable experiences uncollectible accounts from
time to time. If the company uses the direct write-off method, the effect of writing off an uncollectible
receivable will be ________.
A) a reduction in net income
B) negligible on net income
C) an increase in total assets
D) a generation of positive cash flow
Answer: A
Diff: 2
LO: 8-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

14) Once an accounts receivable is written off ________.


A) the account must be turned over to a collection agency
B) the company continues to pursue the collection
C) the company still expects to be paid
D) the customer's accounts receivable is removed from the books
Answer: D
Diff: 2
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

15) Prepare the journal entry to record an uncollectible accounts receivable of $10,000, using the direct
write-off method. Omit explanation.
Answer:
Bad Debts Expense 10,000
Accounts Receivable 10,000

Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording and Writing Off Uncollectible Accounts - Direct Write-Off Method

16) In order to keep accurate records about the collection of cash for a previously written off account, a
business should re-establish the Accounts Receivable by crediting the receivable account.
Answer: FALSE
Explanation: The receivable account is debited.
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method
21
Copyright © 2018 Pearson Education, Inc.
17) In order to keep accurate records about the collection of cash for a previously written off account, a
business should re-establish the Accounts Receivable by debiting the receivable account.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method

18) Customer G. Smith owed Stonehollow Electronics $425. On April 27, 2018, Stonehollow determined
this account receivable to be uncollectible and wrote off the account. The company uses the direct write-
off method. On July 15, 2018, Stonehollow received a check for $425 from the customer. How should the
July 15, 2018 transaction be recorded?
A)
July 15 Cash 425
Accounts Receivable - G. Smith 425

B)
July 15 Accounts Receivable - G. Smith 425
Bad Debt Revenue 425

July 15 Cash 425


Accounts Receivable - G. Smith 425

C)
July 15 Cash 425
Bad Debt Expense 425

D)
July 15 Accounts Receivable - G. Smith 425
Bad Debt Expense 425

July 15 Cash 425


Accounts Receivable - G. Smith 425

Answer: D
Diff: 2
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method

22
Copyright © 2018 Pearson Education, Inc.
19) Moonlight, Inc. wrote off the account of one of its customers, X, in 2018 for $500. On January 21, 2019,
X unexpectedly repaid his account in full. The company uses the direct write-off method to account for
uncollectible receivables. Journalize the entries required for Moonlight, Inc. on January 21, 2019. Omit
explanations.
Answer:
Accounts Receivable—X 500
Bad Debts Expense 500

Cash 500
Accounts Receivable— X 500

Diff: 2
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recovery of Accounts Previously Written Off - Direct Write-Off Method

20) Companies that follow GAAP are required to use the direct write-off method for uncollectible
accounts receivable.
Answer: FALSE
Explanation: The allowance method is required by GAAP.
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Limitations of the Direct Write-Off Method

21) The direct write-off method is only acceptable for companies that have very few uncollectible
receivables.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Limitations of the Direct Write-Off Method

22) The direct write-off method for uncollectible accounts violates the matching principle.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Limitations of the Direct Write-Off Method

23
Copyright © 2018 Pearson Education, Inc.
23) For a company with significant uncollectible receivables, the direct write-off method is unsuitable
because ________.
A) it overstates liabilities on the balance sheet
B) it violates the matching principle
C) it uses estimates for determining the bad debt expense
D) companies are not able to track customer payment histories
Answer: B
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Limitations of the Direct Write-Off Method

24) Which of the following statements is true of the direct write-off method?
A) GAAP requires public companies to follow the direct write-off method.
B) It provides better matching of revenues with expenses.
C) It results in more accurate net income than any other method.
D) It is only suitable for small companies that have very few uncollectible receivables.
Answer: D
Diff: 1
LO: 8-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Limitations of the Direct Write-Off Method

8.3 Learning Objective 8-3

1) The use of the allowance method to record bad debts expense violates the matching principle.
Answer: FALSE
Explanation: The use of the allowance method to record bad debts expense is based on the matching
principle.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

2) A method of accounting for uncollectible receivables in which the company estimates bad debts
expense instead of waiting to see from which customers the company will not be able to collect is known
as the allowance method.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

24
Copyright © 2018 Pearson Education, Inc.
3) Under both the allowance method and the direct-write off method of accounting for uncollectible
accounts, the amount of bad debts expense is estimated at the end of each accounting period.
Answer: FALSE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

4) The Allowance for Bad Debts is a contra account to Accounts Receivable.


Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

5) The allowance method of accounting for uncollectible receivables ________.


A) is used to measure bad debts
B) violates the matching principle
C) records bad debt expense in the period the accounts receivable is written off
D) requires the use of a contra liability account.
Answer: A
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

6) Which of the following statements regarding the allowance method of accounting for uncollectible
receivables is incorrect?
A) Bad debt expense is not estimated.
B) The Allowance for Bad Debts is used to hold the pool of "unknown" uncollectible accounts.
C) The business does not wait to see which customers will not pay when estimating the allowance for bad
debts.
D) The allowance method is based on the matching principle.
Answer: A
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

25
Copyright © 2018 Pearson Education, Inc.
7) The Allowance for Bad Debts account ________.
A) is a liability account
B) holds the pool of "unknown" uncollectible accounts
C) increases with a debit
D) is added to accounts receivable
Answer: B
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Uncollectibles Accounted for When Using the Allowance Method? (H1)

8) The net realizable value of Accounts Receivable is calculated by subtracting Bad Debts Expense from
Accounts Receivable.
Answer: FALSE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Bad Debt Expense - Allowance Method

9) When accounting for uncollectible accounts under IFRS, the allowance method is used to accomplish
the matching of bad debt expense to the sales of the period but not to report receivables at net realizable
value.
Answer: FALSE
Explanation: When accounting for uncollectible accounts under IFRS, the allowance method is used to
accomplish the matching of bad debt expense to the sales of the period and to report receivables at net
realizable value.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Bad Debt Expense - Allowance Method

10) To report accounts receivable at the appropriate amount on the balance sheet, a company determines
an accurate estimate of uncollectible accounts and recognizes the associated bad debt expense.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Bad Debt Expense - Allowance Method

26
Copyright © 2018 Pearson Education, Inc.
11) When using the allowance method to account for uncollectible accounts receivable, companies
estimate bad debt expense at the end of the period and then record an adjusting entry.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Bad Debt Expense - Allowance Method

12) When a company uses the allowance method to measure bad debts, ________.
A) the Bad Debts Expense account is debited when an account is written off
B) the amount of bad debts expense is estimated at the end of the accounting period
C) the normal balance in the Allowance for Bad Debts account is a debit
D) the amount of bad debts expense is not estimated at the end of the accounting period
Answer: B
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

13) Which of the following is true of the balance sheet presentation of the Allowance for Bad Debts?
A) It is reported as a current liability.
B) It is reported as an operating expense.
C) It is reported as a separate, independent line item under current assets.
D) It is shown as a contra account related to accounts receivable.
Answer: D
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

27
Copyright © 2018 Pearson Education, Inc.
14) Accounts Receivable has a balance of $32,000, and the Allowance for Bad Debts has a credit balance of
$3,000. The allowance method is used. What is the net realizable value of Accounts Receivable before and
after a $2,100 account receivable is written off?
A) $29,000; $29,000
B) $26,900; $26,900
C) $29,000; $26,900
D) $26,900; $31,100
Answer: A
Explanation: A)

Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

15) Accounts Receivable has a balance of $8,000, and the Allowance for Bad Debts has a credit balance of
$450. The allowance method is used. What is the net realizable value of Accounts Receivable after a $160
account receivable is written off?
A) $7,390
B) $7,710
C) $7,550
D) $8,000
Answer: C
Explanation: C)
After
write-off
Accounts Receivable $7,840
Less: Allowance for Bad Debts (290)
Net Realizable Value $7,550
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

28
Copyright © 2018 Pearson Education, Inc.
16) A company reports net accounts receivable of $152,000 on its December 31, 2019 balance sheet. The
Allowance for Bad Debts has a credit balance of $19,000. What is the balance of Accounts Receivable?
A) $157,000
B) $152,000
C) $171,000
D) $133,000
Answer: C
Explanation: C) $152,000 + $19,000 = $171,000
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

17) After the December 31, 2019 adjusting journal entries have been posted, Sinclair Enterprises has the
following account balances (all accounts have normal balances) are:

Account Title Account Balance


Accounts Receivable $159,000
Allowance for Bad Debts $4,600
Bad Debts Expense $8,200

What is the net realizable value as of December 21, 2019?


A) $163,600
B) $150,800
C) $146,200
D) $154,400
Answer: D
Explanation: D) Accounts Receivable - Allowance for Bad Debts = Net Realizable Value
$159,000 - $4,600 = $154,400
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

29
Copyright © 2018 Pearson Education, Inc.
18) After the December 31, 2019 adjusting journal entries have been posted, Tri-State Distributors has the
following account balances (all accounts have normal balances) are:
Account Title Account Balance
Accounts Receivable $240,000
Allowance for Bad Debts $12,500
Bad Debts Expense $14,500

Use this information to prepare, in good form, the Balance Sheet (partial) on December, 31, 2019. Include
a proper heading.
Answer:
Tri-State Distributors
Balance Sheet (partial)
December 31, 2019

Assets
Current Assets:
Account Receivable $240,000
Less: Allowance for Bad Debts 2,500 $227,500
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Bad Debt Expense - Allowance Method

19) Bad Debt Expense is not debited when a company writes off an account receivable when using the
allowance method because the company has already recorded the Bad Debt Expense as an adjusting
entry.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

20) The entry to write off an account under the allowance method affects net income at the time of entry.
Answer: FALSE
Explanation: The entry to write off an account under the allowance method has no effect on net income
at the time of entry.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

30
Copyright © 2018 Pearson Education, Inc.
21) When using the allowance method, Allowance for Bad Debts is debited when an account receivable is
written off.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

22) Under the allowance method, the entry to write off a receivable increases the amount of the
Allowance for Bad Debts account.
Answer: FALSE
Explanation: The entry to write off a receivable decreases the amount of the Allowance for Bad Debts
account.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

23) The entry to write off an account receivable under the allowance method will ________.
A) reduce net income
B) have no effect on net income
C) increase total assets
D) increase net income
Answer: B
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

24) Jayson Enterprises uses the allowance method to account for uncollectible receivables. When an
uncollectible account is written off, ________.
A) the Bad Debt Expense account is debited
B) no entry is required because bad debt expense is estimated at the end of the accounting period
C) the write off has no effect on net income
D) the Allowance for Bad Debts account is credited
Answer: C
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

31
Copyright © 2018 Pearson Education, Inc.
25) When using the allowance method, the write-off of a receivable ________.
A) involves a contra-revenue account
B) reduces the amount of the Allowance for Bad Debts account
C) decreases net income
D) affects the net realizable value of accounts receivable
Answer: B
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Writing Off Uncollectible Accounts - Allowance Method

26) On January 16, Half Circle, Inc. sold $5,000 of merchandise to Arnold, on account. Half Circle could
not collect cash from Arnold and wrote off the account. Prepare a journal entry to record the write-off,
assuming Half Circle uses the allowance method. Omit explanation.
Answer:
Allowance for Bad Debts 5,000
Accounts Receivable—Arnold 5,000

Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Writing Off Uncollectible Accounts - Allowance Method

27) Define net realizable value. How is net realizable value affected when a receivable is written off
under the allowance method?
Answer: Net realizable value is the net value a company expects to collect from its accounts receivable.
Accounts Receivable less Allowance for Bad Debts equals net realizable value. The entry to write off a
receivable reduces the amounts of the Allowance for Bad Debts and Accounts Receivable accounts, but
does not affect the net realizable value shown on the balance sheet. This is because both accounts are
reduced by the amount of the write-off.
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Writing Off Uncollectible Accounts - Allowance Method

32
Copyright © 2018 Pearson Education, Inc.
28) After a company has written off an account, the company continues to attempt to collect on the
receivable.
Answer: FALSE
Explanation: After a company has written off an account, the company stops attempting to collect on the
receivable.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Allowance Method

29) Under the allowance method, if a customer makes payment on a receivable that has already been
written off, the company needs to reverse the write-off to the Allowance for Bad Debts account.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Allowance Method

30) If a customer makes payment on a receivable that has already been written off, the receivable account
is reestablished.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Allowance Method

31) When using the allowance method, the receipt of a payment on receivables that have been written-off
requires an entry to reverse the write-off to the Allowance for Bad Debts account and an entry to record
the receipt of cash.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Allowance Method

33
Copyright © 2018 Pearson Education, Inc.
32) When using the allowance method, after a company has previously written off an account, ________.
A) the company continues to send monthly statements to the customers whose accounts have been
written off
B) the company cannot collect from these customers because their accounts have been written off
C) when a customer pays on an account that has been written off, the company needs to reverse the
write-off to the Allowance for Bad Debts account and then record the receipt of cash
D) the company does not need to re-establish the receivable account
Answer: C
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recovery of Accounts Previously Written Off - Allowance Method

33) On June 16, 2018, Evergreen Inc. wrote off the $200 receivable from customer M. Simmons. On
October 14, 2018, Evergreen unexpectedly receives $200 cash from M.Simmons. How should Evergreen
record the $200 payment from M. Simmons? Evergreen uses the allowance method.
A) debit Cash and credit Bad Debts Expense
B) debit Accounts Receivable - M. Simmons and credit Allowance for Bad Debts; debit Cash and credit
Accounts Receivable - M. Simmons
C) debit Accounts Receivable - M. Simmons and credit Bad Debts Expense; debit Cash and credit
Accounts Receivable - M. Simmons
D) debit Cash and credit Allowance for Bad Debts
Answer: B
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recovery of Accounts Previously Written Off - Allowance Method

34
Copyright © 2018 Pearson Education, Inc.
34) During July 2019, Midtown Catering recorded the following:

Catering services of $86,400 were provided ($64,500 on account, $21,900 for cash)
Collections on account, $58,950
Write-offs of uncollectible receivables, $2,560
Recovery of receivable previously written off, $1,000

Journalize Midtown's transactions during July, assuming Midtown uses the allowance method. Omit
explanations.
Answer:
Date Accounts and Explanation Debit Credit
2019
July Accounts Receivable 64,500
Cash 21,900
Service Revenue 86,400

Cash 58,950
Accounts Receivable 58,950

Allowance for Bad Debts 2,560


Accounts Receivable 2,560

Accounts Receivable 1,000


Allowance for Bad Debts 1,000

Cash 1,000
Accounts Receivable 1,000

Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recovery of Accounts Previously Written Off - Allowance Method

35
Copyright © 2018 Pearson Education, Inc.
35) On July 15, 2018, Ellison Brothers Oil, Inc. sold $5,000 of merchandise to S & G Company, on account.
Ignore cost of goods sold. Ellison could not collect cash from S & G and wrote off the account on
December 31, 2018. On November 4, 2019, S & G unexpectedly paid $5,000. Journalize the transactions on
December 31, 2018 and November 4, 2019. (Ellison uses the allowance method.) Omit explanations.

Answer:
Dec. 31 Allowance for Bad Debts 5,000
2018 Accounts Receivable — S & G 5,000

Nov. 4 Accounts Receivable — S & G 5,000


2019 Allowance for Bad Debts 5,000

Nov. 4 Cash 5,000


2019 Accounts Receivable — S & G 5,000

Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recovery of Accounts Previously Written Off - Allowance Method

36) The percent-of-sales method calculates bad debts expense based on a percentage of net cash sales.
Answer: FALSE
Explanation: The percent-of-sales method calculates bad debts expense based on a percentage of net
credit sales.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Estimating and Recording Bad Debt Expense - Allowance Method

36
Copyright © 2018 Pearson Education, Inc.
37) The percent-of-sales method, used to compute bad debt expense, is also known as the balance sheet
approach.
Answer: FALSE
Explanation: The percent-of-sales method, used to compute bad debt expense, is also known as the
income-statement approach.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Estimating and Recording Bad Debt Expense - Allowance Method

38) The percent-of-sales method calculates bad debts expense as a percentage of net credit sales.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Estimating and Recording Bad Debt Expense - Allowance Method

39) The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Estimating and Recording Bad Debt Expense - Allowance Method

40) Two methods of estimating uncollectible receivables are ________.


A) the allowance method and the amortization method
B) the aging-of-accounts-receivable method and the percent-of-sales method
C) the gross-up method and the direct write-off method
D) the direct write-off method and the percent-of-completion method
Answer: B
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Estimating and Recording Bad Debt Expense - Allowance Method

37
Copyright © 2018 Pearson Education, Inc.
41) The following information is from the records of Chicago Photography:

Accounts Receivable, December 31, 2019 $22,000 (debit)


Allowance for Bad Debts, December 31, 2019
prior to adjustment 800 (debit)
Net credit sales for 2019 95,000
Accounts written off as uncollectible during
2019 450

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $2,850 of
accounts receivable will be uncollectible. Calculate the amount of net accounts receivable after the
adjustment for bad debts.
A) $19,950
B) $19,150
C) $18,350
D) $17,900
Answer: B
Explanation: B) $22,000 - $2,850 = $19,150
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

42) The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad
debts expense. The company's management estimates that 4% of net credit sales will be uncollectible for
the year 2019. Net credit sales for the year amounted to $250,000. What is the amount of Bad Debts
Expense reported on the income statement for 2019?
A) $10,000
B) $12,000
C) $5,000
D) $8,000
Answer: A
Explanation: A) $250,000 × 0.04 = $10,000
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

38
Copyright © 2018 Pearson Education, Inc.
43) The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad
debts expense. The company's management estimates that 2% of net credit sales will be uncollectible for
the year 2019. Net credit sales for the year amounted to $270,000. What will be the balance of Allowance
for Bad Debts on the December 31, 2019 balance sheet?
A) $5,400
B) $2,000
C) $7,400
D) $5,360
Answer: C
Explanation: C) Beginning balance of the Allowance for Bad Debts (Credit) + Adjusting entry = $2,000 +
$5,400
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

44) The Allowance for Bad Debts has a credit balance of $8,000 before the adjusting entry for bad debts
expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging-of-
receivables method, the company's management estimates that uncollectible accounts will be $17,000.
What will be the amount of Bad Debts Expense reported on the income statement?
A) $25,000
B) $9,000
C) $17,000
D) $8,000
Answer: B
Explanation: B) Estimate of uncollectible accounts - Credit balance of the Allowance for Bad Debts =
$17,000 - $8,000 = $9,000
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

39
Copyright © 2018 Pearson Education, Inc.
45) The Allowance for Bad Debts account has a credit balance of $8,300 before the adjusting entry for bad
debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging-
of-receivables method, the company's management estimates that uncollectible accounts will be $14,700.
What will be the balance of the Allowance for Bad Debts reported on the balance sheet?
A) $14,700
B) $6,400
C) $23,000
D) $13,230
Answer: A
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

46) The Allowance for Bad Debts account has a debit balance of $9,000 before the adjusting entry for bad
debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging-
of-receivables method, the company's management estimates that uncollectible accounts will be $11,000.
What amount of bad debts expense will be reported on the income statement?
A) $8,000
B) $20,000
C) $2,000
D) $11,000
Answer: B
Explanation: B) $11,000 + $9,000 = $20,000
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

47) The Allowance for Bad Debts account has a debit balance of $8,000 before the adjusting entry for bad
debts expense. After analyzing the accounts in the accounts receivable subsidiary ledger, the company's
management estimates that uncollectible accounts will be $12,000. What will be the amount of the
adjustment in the Allowance for Bad Debts account?
A) $19,250
B) $12,000
C) $18,900
D) $20,000
Answer: D
Explanation: D) Beginning balance of the Allowance for Bad Debts (Credit) + Estimate for uncollectible
accounts = $8,000 + $12,000 = $20,000
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

40
Copyright © 2018 Pearson Education, Inc.
48) The following information is from the 2020 records of R & S Commercial Plumbing Company:

Accounts receivable, December 31, 2020 $45,000 (debit)


Allowance for Bad Debts, December 31, 2020
prior to adjustment 1,300 (debit)
Net credit sales for 2020 180,000
Accounts written off as uncollectible during
2017 14,000
Cash sales during 2020 26,000

Bad debts expense is estimated by the percent-of-sales method. Management estimates that 3% of net
credit sales will be uncollectible. Calculate the amount of bad debts expense for 2020.
A) $5,400
B) $4,050
C) $6,180
D) $4,100
Answer: A
Explanation: A) Calculations: $180,000 × 0.03 = $5,400
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

41
Copyright © 2018 Pearson Education, Inc.
49) The following information is from the 2019 records of Albert Book Shop:

Accounts receivable, December 31, 2019 $48,000 (debit)


Allowance for Bad Debts, December 31, 2019
prior to adjustment 2,000 (debit)
Net credit sales for 2019 179,000
Accounts written off as uncollectible during
2017 17,000
Cash sales during 2019 29,000

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $5,100 of
accounts receivable will be uncollectible. Calculate the amount of bad debts expense for 2019.
A) $6,900
B) $7,100
C) $3,100
D) $5,350
Answer: B
Explanation: B)
Adjustment = Estimate based on aging + Allowance balance (debit) = $5,100 + $2,000 = $7,100
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

42
Copyright © 2018 Pearson Education, Inc.
50) The following information is from the 2019 records of Uptown Antique Shop:

Accounts receivable, December 31, 2019 $43,000 (debit)


Allowance for Bad Debts, December 31, 2019
prior to adjustment 1,500 (debit)
Net credit sales for 2019 180,000
Accounts written off as uncollectible during
2019 11,000
Cash sales during 2019 28,000

Bad debts expense is estimated by the percent-of-sales method. Management estimates that 3% of net
credit sales will be uncollectible. The ending balance of the Allowance for Bad Debts account after
adjustment will be ________.
A) $6,900
B) $4,740
C) $7,740
D) $3,900
Answer: D
Explanation: D) Estimated Bad Debt Expense - Allowance account balance (Debit) = $5,400 - $1,500 =
$3,900
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

43
Copyright © 2018 Pearson Education, Inc.
51) The following information is from the 2019 records of Fast Lane Racing Gear:

Accounts receivable, December 31, 2019 $40,000 (debit)


Allowance for Bad Debts, December 31, 2019
prior to adjustment 1,700 (debit)
Net credit sales for 2019 178,000
Accounts written off as uncollectible during
2019 17,000
Cash sales during 2019 32,000

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $7,000 of
accounts receivable will be uncollectible. Calculate the ending balance of Allowance for Bad Debts, after
the adjustment for bad debts expense, at December 31, 2019.
A) $5,340
B) $10,400
C) $8,000
D) $7,000
Answer: D
Explanation: D) Under the aging-of-receivables method, the Allowance for Bad Debts account is adjusted
to the total amount estimated to be uncollectible.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

52) A & B Commercial Cleaning is a new business. During its first year of operations, credit sales were
$40,000 and collections from credit sales were $35,000. One account for $650 was written off. Management
uses the percent-of-sales method to account for bad debts expense and estimates 2% of credit sales to be
uncollectible. What is the balance of Accounts Receivable at the end of the first year?
A) $5,000
B) $3,550
C) $4,350
D) $4,200
Answer: C
Explanation: C) Accounts Receivable = $40,000 - $35,000 - $650 = $4,350
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

44
Copyright © 2018 Pearson Education, Inc.
53) Historical Art is a new business. During its first year of operations, credit sales were $50,000 and
collections on credit sales were $34,000. One account of $500 was written off. Management uses the
percent-of-sales method to account for bad debts expense and estimates 3% of credit sales to be
uncollectible. The ending balance of Allowance for Bad Debts account is ________.
A) $1,000
B) $1,500
C) $465
D) $2,505
Answer: A
Explanation: A) 3% of credit sales ($50,000) = the adjustment (Credit) of $1,500 to the Allowance for Bad
Debts account. Because the write-off of $500 is a debit to the Allowance account, the ending balance is
$1,000.
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

54) Modern Designs is a new business. During its first year of operations, credit sales were $45,000 and
collections of credit sales were $34,000. One account, $700, was written off. Management uses the percent-
of-sales method to account for bad debts expense and estimates 3% of credit sales to be uncollectible. Bad
debts expense for the first year of operations is ________.
A) $650
B) $1,350
C) $700
D) $2,370
Answer: B
Explanation: B) Bad debts expense = ($45,000 × 0.03) = $1,350
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

45
Copyright © 2018 Pearson Education, Inc.
55) Industrial Equipment Supply is a new business. During its first year of operations, credit sales were
$44,000 and collections of credit sales were $37,000. One account, $650, was written off. Management uses
the aging-of-receivables method to account for bad debts expense and estimated $575 as uncollectible at
year end. The ending balance of the Allowance for Bad Debts is ________.
A) $230
B) $880
C) $1,225
D) $575
Answer: D
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

56) A newly created design business, Teri's Art, is finishing its first year of operations. During the year,
credit sales were $43,000 and collections of credit sales were $34,000. One account for $675 was written
off. Teri's Art uses the aging-of-receivables method to account for bad debts expense. It has estimated
$200 as uncollectible at year-end. What is the amount of the Bad Debts Expense for the first year of
operations?
A) $8,125
B) $675
C) $200
D) $875
Answer: D
Explanation: D) Bad Debts Expense = $200 + $675 = $875
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

46
Copyright © 2018 Pearson Education, Inc.
57) At the beginning of 2019, Statewide Delivery, Inc. has the following account balances:

Accounts Receivable $42,000 (debit balance)


Allowance for Bad Debts $9,000 (credit balance)
Bad Debts Expense $0

During the year, credit sales amounted to $800,000. Cash collected on credit sales amounted to $790,000,
and $18,000 has been written off. At the end of the year, the company adjusted for bad debts expense
using the percent-of-sales method and applied a rate, based on past history, of 3.5%. The ending balance
of Accounts Receivable is ________.
A) $42,000
B) $34,000
C) $57,120
D) $18,000
Answer: B
Explanation: B) Accounts Receivable beginning balance + Credit Sales - Collections - Write offs = $42,000
+ $800,000 - $790,000 - $18,000 = $34,000
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

58) At the beginning of 2019, Elliott, Inc. has the following account balances:

Accounts Receivable $41,000 (debit balance)


Allowance for Bad Debts $6,000 (credit balance)
Bad Debts Expense $0

During the year, credit sales amounted to $820,000. Cash collected on credit sales amounted to $780,000,
and $15,000 has been written off. At the end of the year, the company adjusted for bad debts expense
using the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance
in the Allowance for Bad Debts is ________.
A) $6,000
B) $5,500
C) $10,500
D) $11,500
Answer: D
Explanation: D) Ending balance in the Allowance account = Beginning balance of Allowance for Bad
Debts - Write offs + Bad Debt Expense for the year = $6,000 - $15,000 + $20,500 = $11,500
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

47
Copyright © 2018 Pearson Education, Inc.
59) At the beginning of 2019, Patriots, Inc. has the following account balances:

Accounts Receivable $45,000 (Debit)


Allowance for Bad Debts $8,000 (Credit)
Bad Debts Expense $0

During the year, credit sales amounted to $810,000. Cash collected on credit sales amounted to $770,000,
and $18,000 has been written off. At the end of the year, the company adjusted for bad debts expense
using the percent-of-sales method and applied a rate, based on past history, of 3.5%. The amount of bad
debts expense for 2019 is ________.
A) $28,350
B) $56,875
C) $18,000
D) $18,350
Answer: A
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

60) At the beginning of 2019, Gourmet Cupcakes, Inc. has the following ledger balances:

Accounts Receivable $42,000 (Debit)


Allowance for Bad Debts $6,000 (Credit)

During the year, credit sales amounted to $840,000. Cash collected on credit sales amounted to $750,000,
and $17,000 has been written off. Gourmet Cupcakes uses the aging-of-receivables method to record bad
debts expense. The estimate of uncollectible accounts was $28,000. The ending balance in the Allowance
for Bad Debts is ________.
A) $39,000
B) $17,000
C) $28,000
D) $22,000
Answer: C
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

48
Copyright © 2018 Pearson Education, Inc.
61) At the beginning of 2018, Uptown Travel, Inc. has the following account balances:

Accounts receivable $45,000 (Debit)


Allowance for Bad Debts $5,000 (Credit)

During the year, credit sales were $810,000. Cash collected on credit sales was $760,000, and $18,000 was
written off. Uptown uses the aging-of-receivables method to record bad debts expense. The amount
estimated as uncollectible was $30,000. The amount of Bad Debts Expense for 2018 is ________.
A) $43,000
B) $30,000
C) $13,000
D) $12,000
Answer: A
Explanation: A) Calculations: $30,000 + $18,000 - $5,000 = $43,000.
Diff: 3
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

49
Copyright © 2018 Pearson Education, Inc.
62) On January 1, 2019, Triangle Corp. has the following account balances:

Accounts Receivable
19,000

Allowance for Bad Debts


1,600

Bad Debts Expense

During the year, Triangle has $155,000 of credit sales, collections of credit sales of $142,000, and write-offs
of $3,400. It records bad debts expense at the end of the year using the aging-of-receivables method. At
the end of the year, the aging analysis shows that $2,000 is the estimate of uncollectible accounts. Before
the year-end entry to adjust the bad debts expense is made, the balance in the Allowance for Bad Debts is
________.
A) a debit of $1,800
B) a credit of $5,000
C) a zero balance
D) a debit of $3,400
Answer: A
Explanation: A) $3,400 - $1,600 = $1,800
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

63) Fleet Transportation is a new business. During its first year of operations, credit sales were $40,000
and collections of credit sales were $36,000. One account, $650, was written off. Management uses the
percent-of-sales method to account for bad debts expense and estimates 2% of credit sales to be
uncollectible. Prepare the entry to record bad debts expense. Omit explanation.
Answer:
Bad Debts Expense 800
Allowance for Bad Debts 800

Bad Debts Expense = $40,000 × .02


Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

50
Copyright © 2018 Pearson Education, Inc.
64) Trendy Calendars is a new business. During its first year of operations, credit sales were $40,000, and
collections of credit sales were $36,000. One account, $650, was written off. Using the aging-of-receivables
method, management calculates $200 as its estimate of uncollectible amounts at year end. Prepare the
journal entry to record bad debts expense. Omit explanation.
Answer:
Bad Debts Expense 850
Allowance for Bad Debts 850

Explanation:
Calculations: $200 + $650 = $850
Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

65) The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad
debts expense. The company's management estimates that 2% of net credit sales will be uncollectible for
the year 2019. Net credit sales for the year were $250,000. Prepare the journal entry to record the bad
debts expense on December 31, 2019. Omit explanation.
Answer:
Bad Debts Expense 5,000
Allowance for Bad Debts 5,000

Bad Debts Expense: $250,000 × .02


Diff: 2
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

51
Copyright © 2018 Pearson Education, Inc.
66) During June 2019, Andy Company had the following transactions:
1. Sales of $185,000 ($142,000 on account, $43,000 for cash).
2. Collections on account, $128,000
3. Write-offs of uncollectible receivables, $1,900
4. Recovery of receivable previously written off, $600.

Additional information:
Ignore Cost of Goods Sold
Andy uses the allowance method for uncollectibles.
Andy estimates that 4.50% of its accounts receivable will be uncollectible.
On June 1, 2019, the Accounts Receivable balance was $25,000 and the Allowance for
Bad Debts had a normal account balance of $1,125.

Requirements:
a. Prepare the journal entries for the June 2019 transactions. Because the transactions represent a
summary of events, use June 30 for all dates. Omit explanations.
b. Prepare the June 30, 2019 adjusting journal entry. Omit explanation.
c. What is the net realizable value of Accounts Receivable on June 30, 2019 (after the adjusting journal
entry has been posted)? Show computations and label your work.

Answer:
Date Accounts and Explanation Debit Credit
June
a 30 Cash 43,000
Accounts Receivable 142,000
Sales Revenue 185,000

30 Cash 128,000
Accounts Receivable 128,000

30 Allowance for Bad Debts 1,900


Accounts Receivable 1,900

30 Accounts Receivable 600


Allowance for Bad Debts 600

30 Cash 600
Accounts Receivable 600

b 30 Bad Debts Expense 1,845


Allowance for Bad Debts 1,845

52
Copyright © 2018 Pearson Education, Inc.
c.
June 30, 2019
Accounts Receivable $37,100
Less: Allowance for Bad Debts 1,670
Net Realizable Value $35,430

Computations
Desired Allowance balance $1,670 Cr. bal
Balance before adjustment 175 Dr. bal
Bad Debt Expense $1,845

Accounts Receivable
Beginning balance $25,000
Add: sales on account 142,000
Less: write-offs (1,900)
Less: collections on account (128,000)
Ending balance $37,100

AR ending balance $37,100


× 4.50%
Desired balance of Allowance
for Bad Debts $1,670

Allowance for Bad Debts


Beginning balance $1,125 Cr. bal
Less: write-offs (1,900)
Add: recovery 600
Ending balance before
adjustment $175 Dr. bal

Diff: 3
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Estimating and Recording Bad Debt Expense - Allowance Method

53
Copyright © 2018 Pearson Education, Inc.
67) When using the direct method to account for uncollectibles, an allowance account is used.
Answer: FALSE
Explanation: When using the direct method to account for uncollectibles, the business does not use an
allowance account.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Comparison of Accounting for Uncollectibles

68) When using the allowance method to account for uncollectibles, the balance sheet approaches require
two steps in determining bad debts expense.
Answer: TRUE
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Comparison of Accounting for Uncollectibles

69) Businesses must estimate the amount of bad debts expense at the end of the accounting period only
when using the balance sheet approaches.
Answer: FALSE
Explanation: Businesses must estimate the amount of bad debts expense at the end of the accounting
period when using the income statement or balance sheet approaches.
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Comparison of Accounting for Uncollectibles

70) GAAP requires companies to ________ method to record bad debts expense.
A) use the direct write-off
B) use the allowance
C) select either the direct write-off or allowance
D) use the fair value
Answer: B
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Comparison of Accounting for Uncollectibles

54
Copyright © 2018 Pearson Education, Inc.
71) Under GAAP, which of the following is NOT an acceptable method of estimating the amount of bad
debt expense at the end of the accounting period?
A) percent-of-receivables
B) percent-of-sales
C) direct write-off
D) aging-of-receivables
Answer: C
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Accounting for Uncollectibles

72) Which method of estimating the amount of bad debts expense violates the matching principle?
A) percent-of-receivables
B) percent-of-sales
C) aging-of-receivables
D) All of these methods comply with the matching principle.
Answer: D
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Accounting for Uncollectibles

73) When comparing the direct write-off and allowance methods, the major difference is ________.
A) when to record bad debts expense
B) when to recognize revenue
C) determining the balance of the Allowance for Bad Debts account
D) developing adequate procedures for granting credit
Answer: A
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Accounting for Uncollectibles

55
Copyright © 2018 Pearson Education, Inc.
74) Which of the following methods does NOT require an adjusting entry to recognize bad debts?
A) percent-of receivables
B) aging-of-receivables
C) percent-of-sales
D) direct write-off
Answer: D
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Accounting for Uncollectibles

75) Which of the following methods requires two entries to record the recovery of accounts receivable
previously written off?
A) direct write-off
B) allowance
C) Two entries are never required.
D) Both direct write-off and allowance.
Answer: D
Diff: 1
LO: 8-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Accounting for Uncollectibles

8.4 Learning Objective 8-4

1) The interest period extends from the original date of the note to the maturity date.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Notes Receivable Accounted For? (H1)

2) The maturity value of a note is the sum of the principal minus interest due at maturity.
Answer: FALSE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Notes Receivable Accounted For? (H1)

56
Copyright © 2018 Pearson Education, Inc.
3) Interest is generally stated as a monthly rate on notes receivable.
Answer: FALSE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Notes Receivable Accounted For? (H1)

4) The entity that signs the promissory note and promises to pay the required amount is the ________.
A) maker of the note
B) banker of the note
C) holder of the note
D) payee of the note
Answer: A
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Notes Receivable Accounted For? (H1)

5) On October 1, 2019, ABC Company loaned A. Jenkins $9,000 at an annual interest rate of 5% with a
maturity date of April 1, 2020. On October 1, 2019, ABC Company will record ________.
A) no entry since the note is due on April 1, 2020
B) a debit to Notes Receivable - A. Jenkins of $9,450
C) a credit to Notes Payable - A. Jenkins of $9,000
D) a debit to Notes Receivable - A. Jenkins of $9,000
Answer: D
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Are Notes Receivable Accounted For? (H1)

6) For a promissory note, the entity to whom the promise of future payment is made is the ________.
A) maker of the note
B) endorser of the note
C) banker of the note
D) payee of the note
Answer: D
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Notes Receivable Accounted For? (H1)

57
Copyright © 2018 Pearson Education, Inc.
7) A company issues a 120-day, 14% note for $16,000. What is the principal amount of the note? (Round
your answer to the nearest dollar.)
A) $18,240
B) $16,000
C) $15,253
D) $16,747
Answer: B
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Are Notes Receivable Accounted For? (H1)

8) On November 30, 2019, Jenkins Company loaned M. Lee $4,000 for one year at an annual interest rate
of 4%. Prepare the entry that Jenkins Company will make on November 30, 2019. Omit explanations.

Answer:
Notes Receivable -M. Lee 4,000
Cash 4,000

Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Are Notes Receivable Accounted For? (H1)

9) In counting the number of days in a note term, omit the date the note was issued.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Identifying Maturity Date

10) A five-month note dated October 15, 2019 would mature on February 15, 2020.
Answer: FALSE
Explanation: A five-month note dated October 15, 2019 would mature on March 15, 2020.
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Identifying Maturity Date

58
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11) On July 7, A-1 Credit Union loaned $440,000 to Bridal Retail Shop on a 90 day, 8% note. What is the
maturity date of the note?
A) October 7
B) October 5
C) October 6
D) October 8
Answer: B
Explanation: B) There are 24 days remaining in July (31 - 7); 31 days in August; 30 days in September;
and 5 days in October (24 + 31 + 30 + 5 = 90 days).
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Identifying Maturity Date

12) On August 14, Second Street Bank lent $210,000 to City Restaurant on a 75 day, 4% note. What is the
maturity date of the note?
A) Oct. 27
B) Oct. 28
C) Oct. 29
D) Oct. 30
Answer: B
Explanation: B) There are 17 days in August (31 - 14); 30 days in September; and 28 days in October (17 +
30 + 28 = 75 days).
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Identifying Maturity Date

13) The maturity date for a six-month note issued on January 15 would be ________.
A) July 15
B) July 14
C) July 16
D) July 10
Answer: A
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Identifying Maturity Date

59
Copyright © 2018 Pearson Education, Inc.
14) In counting the number of days in a note term, ________.
A) do not count the maturity date
B) do not count the interest periods
C) count the date the note was issued
D) None of the statements are correct.
Answer: D
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Identifying Maturity Date

15) Interest on a $12,000 note at 6% for 4 months is $240.


Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

16) Interest on a $70,000 note at 6% for 45 days is $518. (Use a 360 day year. Round your answer to the
nearest dollar.)
Answer: FALSE
Explanation: $70,000 × 0.06 × 45 / 360 = $525
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

17) In the formula for computing the interest on a note, the time period represents the portion of a year
that interest has accrued on the note.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Computing Interest on a Note

60
Copyright © 2018 Pearson Education, Inc.
18) Interest rates are stated on an annual basis, therefore the time in the interest formula is always stated
as one year.
Answer: FALSE
Explanation: Interest rates are stated on an annual basis, therefore the time in the interest formula should
be expressed in terms of a fraction of one year.
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Computing Interest on a Note

19) On July 7, University Bank lent $560,000 to Jazz Music Shop on a 60 day, 7% note. What is the
maturity value of the note? (Use a 360-day year and round answers to the nearest dollar.)
A) $560,000
B) $599,200
C) $566,444
D) $566,533
Answer: D
Explanation: D) Maturity value = Principal + Interest
Maturity value = $560,000 + $6,533 ($560,000 × 0.07 × 60 / 360)
Maturity value = $566,533
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

20) On August 14, Park Avenue Bank lent $240,000 to City Coffee Shop on a 75 day, 2% note. What is the
maturity value of the note? (Use a 360-day year and round answers to the nearest dollar.)
A) $240,986
B) $241,000
C) $240,000
D) $244,800
Answer: B
Explanation: B) Maturity value = Principal + Interest
Maturity value = $240,000 + $1,000 ($240,000 × 0.02 × 75 / 360)
Maturity value = $241,000
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

61
Copyright © 2018 Pearson Education, Inc.
21) What is the maturity value of a 6-month, 11% note for $60,000? (Round any intermediate calculations
to two decimal places, and your final answer to the nearest dollar.)
A) $62,000
B) $66,600
C) $63,300
D) $60,000
Answer: C
Explanation: C) ($60,000 × 11%) × 6/12 = $3,300
$60,000 + $3,300 = $63,300
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

22) Calculate the interest on a 90-day, 9% note for $50,000. (Use a 360-day year to compute interest.
Round your answer to the nearest dollar.)
A) $2,250
B) $1,125
C) $4,500
D) $375
Answer: B
Explanation: B) ($50,000 × 9%) × 90 / 360 = $1,125
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

23) The maturity value of a note is the ________.


A) principal amount minus interest due at maturity
B) principal amount plus interest due at maturity
C) face amount of the note
D) principal amount times the interest rate
Answer: B
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Computing Interest on a Note

62
Copyright © 2018 Pearson Education, Inc.
24) On April 1, 2019, Barnes Services received a 9-month note for $12,000 at 12%. Calculate the amount of
interest due at maturity. (Round any intermediate calculations to two decimal places, and your final
answer to the nearest dollar.)
A) $972
B) $1,188
C) $1,440
D) $1,080
Answer: D
Explanation: D) ($12,000 × 12%) × 9/12 = $1,080
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

25) On October 1, 2020, Jewelry Specialists, Inc. made a loan to one of its customers. The customer signed
a 6-month note for $120,000 at 15%. Calculate the total interest earned on the note. (Round any
intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) $9,000
B) $4,500
C) $1,500
D) $18,000
Answer: A
Explanation: A) ($120,000 × 15%) × 6/12 = $9,000
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

26) On October 1, 2018, Parker, Inc. made a loan to one of its customers. The customer signed a 9-month
note for $110,000 at 14%. Calculate the maturity value of the note. (Round any intermediate calculations
to two decimal places, and your final answer to the nearest dollar.)
A) $121,550
B) $125,400
C) $94,600
D) $98,450
Answer: A
Explanation: A) $110,000 + [($110,000 × 14%) × 9/12] = $121,550
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

63
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27) On December 1, 2020, Eagle, Inc. sold machinery to a customer for $23,000. The customer could not
pay at the time of sale but agreed to pay 3 months later and signed a 3-month note at 11% interest. How
much interest revenue was earned for the entire term of the note? (Round any intermediate calculations
to two decimal places, and your final answer to the nearest dollar.)
A) $633
B) $422
C) $211
D) $2,530
Answer: A
Explanation: A) ($23,000 × 11%) × 3/12 = $633
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

28) On December 1, 2018, Restaurant Equipment, Inc. sold machinery to a customer for $23,000. The
customer could not pay at the time of sale but agreed to pay 9 months later and signed a 9-month note at
11% interest. What was the total amount of cash collected by Restaurant Equipment on the maturity of
the note? (Round any intermediate calculations to two decimal places, and your final answer to the
nearest dollar.)
A) $25,530
B) $24,898
C) $21,103
D) $1,898
Answer: B
Explanation: B) $23,000 + [(23,000 × 11%) × 9/12] = $24,898
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Computing Interest on a Note

29) On October 1, 2018, Mandy's Electronics sold merchandise in exchange for a 4-month, $20,000 note
receivable, with 9% interest. Interest revenue of $600 is earned in 2018.
Answer: FALSE
Explanation: 2018 Interest Revenue: $20,000 × 0.09 × 3/12 = $450
2019 Interest Revenue: $20,000 × 0.09 × 1/12 = $150
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

64
Copyright © 2018 Pearson Education, Inc.
30) If a note receivable is outstanding at the end of an accounting period, the interest earned up to year-
end is recorded as interest revenue when the cash is received.
Answer: FALSE
Explanation: If a note receivable is outstanding at the end of an accounting period, the interest earned up
to year-end is part of that year's earnings.
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

31) Because of the revenue recognition principle, interest on a note receivable is recorded in the year in
which it is earned.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

32) If a credit customer fails to pay an accounts receivable, the company may ask the customer to sign a
promissory note.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

33) Companies should not sell merchandise in exchange for notes receivable.
Answer: FALSE
Explanation: Some companies sell merchandise in exchange for notes receivable.
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

65
Copyright © 2018 Pearson Education, Inc.
34) When a company accepts a promissory note from a customer who cannot pay an accounts receivable,
the company will credit Notes Receivable.
Answer: FALSE
Explanation: When a company accepts a promissory note from a customer who cannot pay an accounts
receivable, the company will credit Accounts Receivable.
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

35) On October 1, 2019, Fashion Jewelers accepted a 5-month, 11% note for $7,500 in settlement of an
overdue account receivable. The accounting period ends on December 31. Calculate the accrued interest
on the note at December 31, 2019. (Round any intermediate calculations to two decimal places, and your
final answer to the nearest dollar.)
A) $206
B) $344
C) $825
D) $413
Answer: A
Explanation: A) ($7,500 × 11%) × 3/12 = $206
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

36) On October 1, 2018, Equipment Suppliers, Inc. made a loan to one of its customers. The customer
signed a 4-month note for $110,000 at 12%. How much interest revenue did the company record in the
year 2018? (Round any intermediate calculations to two decimal places, and your final answer to the
nearest dollar.)
A) $1,320
B) $1,100
C) $4,400
D) $3,300
Answer: D
Explanation: D) ($110,000 × 12%) × 3/12 = $3,300
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

66
Copyright © 2018 Pearson Education, Inc.
37) On October 1, 2019, Springfield, Inc. made a loan to one of its customers. The customer signed a 6-
month note for $140,000 at 15%. How much interest revenue did the company record in 2020 for this
note? (Round any intermediate calculations to two decimal places, and your final answer to the nearest
dollar.)
A) $7,000
B) $3,500
C) $5,250
D) $10,500
Answer: C
Explanation: C) ($140,000 × 15%) × 3/12 = $5,250
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

38) On October 1, 2019, Westfield, Inc. sold machinery to a customer for $25,000. The customer could not
pay at the time of sale, but agreed to pay 12 months later, and signed a 12-month note at 9% interest. How
much interest revenue was earned during 2019? Round any intermediate calculations to two decimal
places, and your final answer to the nearest dollar.
A) $593
B) $563
C) $5,067
D) $2,250
Answer: B
Explanation: B) ($25,000 × 9%) × 3/12 = $563
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

39) On December 1, 2018, Atlas, Inc. sold machinery to a customer for $24,000. The customer could not
pay at the time of sale but agreed to pay 10 months later and signed a 10-month note at 12% interest. How
much interest revenue was earned during 2019? (Round any intermediate calculations to two decimal
places, and your final answer to the nearest dollar.)
A) $1,440
B) $2,880
C) $2,640
D) $2,160
Answer: D
Explanation: D) ($24,000 × 12%) × 9/12 = $2,160
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

67
Copyright © 2018 Pearson Education, Inc.
40) A six-month note receivable for $8,000 at 13%, dated October 1, 2020, has accrued interest revenue of
________ as of December 31, 2020. (Round any intermediate calculations to two decimal places, and your
final answer to the nearest dollar.)
A) $1,040
B) $520
C) $260
D) $130
Answer: C
Explanation: C) ($8,000 × 13%) × 3/12 = $260
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

41) When a notes receivable is outstanding at the end of an accounting period, ________.
A) no adjusting entry is needed
B) the revenue recognition principle requires that earnings from the note be recorded in the year the cash
is received
C) the total interest on the note should be recorded in an adjusting entry
D) the interest revenue earned on the note up to year-end is part of that year's earnings
Answer: D
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

42) On November 1, 2018, Downtown Jewelers accepted a 3-month, 15% note for $6,000 in settlement of
an overdue account receivable. The accounting period ends on December 31. Prepare the journal entry to
record the accrued interest at the year end. Omit explanation.
Answer:
Interest Receivable 150
Interest Revenue 150

Explanation:
Calculations: ($6,000 × 15%) × 2/12 = $150
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

68
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43) On October 1, 2019, Island Jewelry Company accepted a 4-month, 10% note for $2,400 in settlement of
an overdue account receivable. Interest revenue was accrued through December 31, 2019. Island receives
the maturity value of the note at maturity. Prepare the journal entry to record the collection. Omit
explanation.
Answer:
Cash 2,480
Note Receivable 2,400
Interest Receivable 60
Interest Revenue 20

Explanation:
($2,400 × 10%) × 3/12 = $60
($2,400 × 10%) × 1/12 = $20
Diff: 3
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

44) On December 1, 2019, Pinewood, Inc. sold machinery to a customer for $2,000. Pinewood regularly
sells machinery. The customer could not pay at the time of sale but agreed to pay 9 months later and
signed a 9-month note at 12% interest. Prepare the journal entry to record the revenue at the time of sale.
Ignore the entry for cost of goods sold. Omit explanation.
Answer:
Notes Receivable 2,000
Sales Revenue 2,000

Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

45) On July 1, 2019, Landscape Equipment Sellers accepted a 3-month, 15% note for $6,000 in settlement
of an overdue account receivable. Prepare the journal entry to record the acceptance of the note. Omit
explanation.
Answer:
Notes Receivable 6,000
Accounts Receivable 6,000

Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

69
Copyright © 2018 Pearson Education, Inc.
46) The following selected transactions occurred during 2019 for Northwest Movers. The company ends
it accounting year on December 31.

Apr. 1 Performed services on account for Ellison Rentals, $12,000.


Received a $12,000, 3 month, 9% note from Ellison in
Aug. 1 satisfaction of its past-due account receivable.
Nov. 1 Collected the Ellison note at maturity

Prepare the journal entries to record these transactions. Omit explanations.


Answer:
Apr 1 Accounts Receivable - Ellison 12,000
Service Revenue 12,000

Aug 1 Notes Receivable - Ellison 12,000


Accounts Receivable - Ellison 12,000

Nov 1 Cash 12,270


Notes Receivable - Ellison 12,000
Interest Revenue* 270

* Interest Revenue: $12,000 × .09 × 3/12 = 270


Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accruing Interest Revenue and Recording Honored Notes Receivables

47) If the maker of the note fails to pay on the maturity date, the note is said to be dishonored.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Dishonored Notes Receivable

48) If the maker of the note does not pay at maturity, the note has expired and is no longer in force.
Answer: TRUE
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Dishonored Notes Receivable

70
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49) Which of the following is the result of the maker of a promissory note failing to pay the note on the
due date?
A) a discounted note
B) a depreciated note
C) an amortized note
D) a dishonored note
Answer: D
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Dishonored Notes Receivable

50) On January 1, Southwest Corp. accepted a one-year note for $70,000 at 5% from one of its customers.
When the note matured on December 31, the customer was unable to pay, and the company recorded the
dishonor. The amount of the debit recorded on December 31 is ________.
A) $66,500
B) $3,500
C) $70,000
D) $73,500
Answer: D
Explanation: D) $70,000 × 5% = $3,500
Total amount = $70,000 + $3,500 = $73,500
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Dishonored Notes Receivable

51) Which of the following would be included in the entry by the payee to record a dishonored note
receivable?
A) a debit to Accounts Receivable
B) a debit to Interest Revenue
C) a debit to Notes Receivable
D) a credit to Interest Expense
Answer: A
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Recording Dishonored Notes Receivable

71
Copyright © 2018 Pearson Education, Inc.
52) If the maker of a note does not pay at maturity, ________.
A) the debtor no longer owes the payee
B) interest revenue cannot be accrued on the note before the maturity date
C) the note is no longer in force because it has expired
D) the Accounts Receivable account increases for the amount of the note's principal only
Answer: C
Diff: 1
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Dishonored Notes Receivable

53) On January 1, Cooper Corp. accepted a one-year note for $5,000 at 4% from one of its customers.
When the note matured on December 31, the customer was unable to pay, and the company treated it as a
dishonored note. Prepare the journal entry that Cooper will make to record the dishonored note. Omit
explanation.
Answer:
Accounts Receivable 5,200
Notes Receivable 5,000
Interest Revenue 200

Explanation:
Calculations: $5,000 × 4% = $200
Diff: 2
LO: 8-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Recording Dishonored Notes Receivable

8.5 Learning Objective 8-5

1) A company's liquidity can be evaluated by analyzing the company's current assets.


Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Do We Use the Acid-Test Ratio, Accounts Receivable Turnover Ratio, and Days' Sales in Receivables to
Evaluate Business Performance? (H-1)

72
Copyright © 2018 Pearson Education, Inc.
2) Some companies promote and issue their own private label credit cards.
Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Do We Use the Acid-Test Ratio, Accounts Receivable Turnover Ratio, and Days' Sales in Receivables to
Evaluate Business Performance? (H-1)

3) A company's liquidity can be evaluated using all of the following ratios except ________.
A) Return on assets ratio
B) Acid-test ratio
C) Accounts receivable turnover
D) Days' sales in receivables
Answer: A
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Do We Use the Acid-Test Ratio, Accounts Receivable Turnover Ratio, and Days' Sales in Receivables to
Evaluate Business Performance? (H-1)

4) Which of the following accounts would NOT appear on the financial statements of a retailer that does
not issue its own private label credit card?
A) Merchandise Inventory
B) Cash and Cash Equivalents
C) Merchandise Sales
D) Credit Card Receivable
Answer: D
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Do We Use the Acid-Test Ratio, Accounts Receivable Turnover Ratio, and Days' Sales in Receivables to
Evaluate Business Performance? (H-1)

5) The acid-test ratio is also known as the quick ratio.


Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio

73
Copyright © 2018 Pearson Education, Inc.
6) The higher the acid-test ratio, the less able the business is to pay its current liabilities.
Answer: FALSE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio

7) The acid-test ratio is a more stringent measure of liquidity than the cash ratio.
Answer: FALSE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio

8) An acid-test ratio of 1.0 is considered safer than a ratio of 0.50.


Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio

9) Which of the following is included in the numerator of the acid-test ratio?


A) cash including cash equivalents, inventory, short-term investments, net current receivables
B) accounts receivable and inventory
C) cash including cash equivalents, short-term investments, net current receivables
D) total current assets
Answer: C
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio

10) Which of the following is included in the denominator of the acid-test ratio?
A) total current liabilities less accounts payable
B) total liabilities
C) total current liabilities
D) total current assets
Answer: C
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio
74
Copyright © 2018 Pearson Education, Inc.
11) Use the following to calculate the acid-test ratio. (Round your answer to two decimal places.)

Cash $130,000
Short-term investments 15,000
Net current receivables 280,000
Inventory 280,000
Total current liabilities 790,000

A) 0.73
B) 8.67
C) 0.89
D) 0.54
Answer: D
Explanation: D)
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Acid Test (or Quick) Ratio

12) What is the acid-test ratio for a merchant with the following account balances? (Round your answer to
two decimal places.)

Cash $25,000
Short-term investments 43,000
Net current receivables 54,000
Merchandise inventory 92,000
Total current liabilities 279,000

A) 0.77
B) 0.44
C) 0.61
D) 0.84
Answer: B
Explanation: B) Acid-test ratio = ($25,000 + $43,000 + $54,000) / $279,000 = 0.44
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Acid Test (or Quick) Ratio

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13) Which of the following is true of the acid-test ratio?
A) It measures a company's ability to pay its current liabilities.
B) It measures the ability of the company to earn net income.
C) It measures a company's ability to meet its short-term obligations with cash and cash equivalents.
D) It indicates how much cash could be realized by selling the inventory.
Answer: A
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Acid Test (or Quick) Ratio

14) Wentwood Clothing Store reported the following selected items at June 30, 2019 (previous year – 2018
– amounts are also given as needed):

Cash $ 80,000
Accounts Receivable, net:
June 30, 2019 45,000
June 30, 2018 53,000
Accounts Payable 55,000
Cost of Goods Sold 288,000
Merchandise Inventory
June 30, 2019 70,000
June 30, 2018 90,000
Net Credit Sales Revenue 480,000
Long-Term Assets 220,000
Long-Term Liabilities 140,000
Other Current Assets 150,000
Other Current Liabilities 130,000
Short-term Investments 40,000

Compute Wentwood's acid-test ratio on June 30, 2019. Show your computations. Round the answer to 2
decimal places.
Answer: Acid-Test Ratio: (Cash including cash equivalents + Short-term investments + Net current
receivables) / Total current liabilities
(80,000 + 40,000 + 45,000) / (55,000 + 130,000) = 165,000 / 185,000 = 0.89
Diff: 3
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Acid Test (or Quick) Ratio

76
Copyright © 2018 Pearson Education, Inc.
15) Accounts Receivable are generally reported at the gross amount on the balance sheet.
Answer: FALSE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounts Receivable Turnover Ratio

16) The accounts receivable turnover ratio indicates whether a company could pay all its current
liabilities if they were to become due immediately.
Answer: FALSE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounts Receivable Turnover Ratio

17) The accounts receivable turnover ratio is computed by dividing net credit sales by ending net
accounts receivable.
Answer: FALSE
Explanation: The accounts receivable turnover ratio is computed by dividing net credit sales by average
net accounts receivable.
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounts Receivable Turnover Ratio

18) The number of times a company collects the average accounts receivable balance in a year is known as
the accounts receivable turnover ratio.
Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounts Receivable Turnover Ratio

77
Copyright © 2018 Pearson Education, Inc.
19) The accounts receivable turnover ratio measures ________.
A) a company's ability to pay its current liabilities with its current assets
B) how many days it takes, on average, to collect receivables
C) how many days it takes, on average, to sell the inventory
D) the number of times a company collects the average accounts receivable balance in a year
Answer: D
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounts Receivable Turnover Ratio

20) Logan Sales provides the following information:

Net credit sales: $790,000


Beginning net accounts receivable: $43,000
Ending net accounts receivable: $20,000
Calculate the accounts receivable turnover ratio. (Round your answer to the nearest whole number.)
A) 18 times
B) 25 times
C) 40 times
D) 37 times
Answer: B
Explanation: B) Accounts receivable turnover ratio = [$790,000 / (($43,000 + $20,000) / 2))] = 25
times
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accounts Receivable Turnover Ratio

78
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21) Modern Clothing Store reported the following selected items at June 30, 2019 (previous year - 2018 -
amounts are also given as needed):

Cash $ 80,000
Accounts Receivable, net:
June 30, 2019 45,000
June 30, 2018 53,000
Accounts Payable 55,000
Cost of Goods Sold 288,000
Merchandise Inventory
June 30, 2019 70,000
June 30, 2018 90,000
Net Credit Sales Revenue 480,000
Long-Term Assets 220,000
Long-Term Liabilities 140,000
Other Current Assets 150,000
Other Current Liabilities 130,000
Short-term Investments 40,000

Compute Modern's accounts receivable turnover ratio for the year ending June 30, 2019. Show your
computations. (Round the answer to 2 decimal places.)
Answer: Accounts receivable turnover ratio:
Net credit sales / Average net accounts receivable
$480,000 / [($45,000 + $53,000)/ 2]
$480,000 / $49,000 = 9.80 times
Diff: 3
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Accounts Receivable Turnover Ratio

22) Days' sales in receivables is also called the collection period.


Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Days' Sales in Receivables

23) The days' sales in receivables indicates the number of days it takes to collect the average level of
accounts receivable.
Answer: TRUE
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Days' Sales in Receivables
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Copyright © 2018 Pearson Education, Inc.
24) The days' sales in receivables for Beckham Sales is 35. The days' sales in receivables for Xanadu
Company is 25. This suggests that Xanadu is having greater difficulty than Beckham in collecting its
accounts receivable.
Answer: FALSE
Diff: 2
LO: 8-5
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Days' Sales in Receivables

25) The accounts receivable turnover ratio for a merchandiser is 9.6 times. Calculate the days' sales in
receivables for the merchandiser. (Round your answer to the nearest day.)
A) 34 days
B) 38 days
C) 29 days
D) 41 days
Answer: B
Explanation: B) Days' sales in receivables = 365 / 9.6 = 38 days (rounded)
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables

26) A company has net credit sales of $91,000, beginning net accounts receivable of $22,000 and ending
net accounts receivable of $19,000. Calculate the days' sales in receivables. (Round any intermediate
calculations to two decimal places, and your final answer to the nearest whole day.)
A) 73 days
B) 52 days
C) 91 days
D) 82 days
Answer: D
Explanation: D)

Days' sales in receivables = 365 / 4.44= 82 days


Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables

80
Copyright © 2018 Pearson Education, Inc.
27) Days' sales in receivables measures ________.
A) how many days it takes to order and receive inventory
B) how many days it takes to collect the average level of accounts receivable
C) how many days it takes to sell inventory
D) the number of times a company collects the average accounts receivable balance in one year
Answer: B
Diff: 1
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Days' Sales in Receivables

28) A company has net credit sales of $1,200,000, beginning net accounts receivable of $290,000, and
ending net accounts receivable of $201,000. What is the days' sales in accounts receivable? (Round any
intermediate calculations to two decimal places, and your final answer to the nearest whole day.)
A) 75 days
B) 149 days
C) 61 days
D) 88 days
Answer: A
Explanation: A)
Days' sales in receivables = 365 / 4.89 = 75 days (rounded)
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables

29) Both Smith Enterprises and Jones Enterprises have credit terms of 2/10, net 30. The days' sales in
receivables are 40 for Smith Enterprises and 35 for Jones Enterprises. Analyze this information.
Answer:
Days' sales in receivables is a ratio that tells how many days it takes to collect the average level of
accounts receivable. Since both Smith and Jones have the same credit terms, the days' sales in receivables
should be close to 30 days. Jones has the better ratio and is receiving cash quicker than Smith.
Diff: 2
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables

81
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30) Edgewood Home Improvement Store reported the following selected items at June 30, 2019 (previous
year - 2018 - amounts are also given as needed):

Cash $ 80,000
Accounts Receivable, net:
June 30, 2019 125,000
June 30, 2018 153,000
Accounts Payable 45,000
Cost of Goods Sold 475,000
Merchandise Inventory
June 30, 2019 320,000
June 30, 2018 280,000
Net Credit Sales Revenue 1,200,000
Long-Term Assets 520,000
Long-Term Liabilities 140,000
Other Current Assets 150,000
Other Current Liabilities 130,000
Short-term Investments 200,000

Compute Edgewood's days' sales in receivables for the year ending June 30, 2019. Show your
computations.
Answer:

Accounts receivable turnover ratio = Net credit sales/average net accounts receivable

= $1,200,000/[($125,000 + $153,000)/2]

= 8.63

Days' sales in receivables:

365 days / Accounts receivable turnover ratio

365 / 8.63 = 42 days

Diff: 3
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables

82
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31) Mansfield Office Furniture Store reported the following selected items at December 31, 2019 (previous
year - 2018 - amounts are also given as needed):

Cash $ 50,000
Accounts Receivable, net:
Dec. 31, 2019 75,000
Dec. 31, 2018 63,000
Accounts Payable 55,000
Cost of Goods Sold 375,000
Merchandise Inventory
Dec. 31, 2019 240,000
Dec. 31, 2018 220,000
Net Credit Sales Revenue 820,000
Long-Term Assets 320,000
Long-Term Liabilities 240,000
Other Current Assets 135,000
Other Current Liabilities 125,000
Short-term Investments 80,000

Compute Mansfield's
(a) acid-test ratio;
(b) accounts receivable turnover ratio (round to 2 decimal places); and
(c) days' sales in receivables for 2019 (round to the nearest day). Show your computations.
Answer:
(a) Acid-test ratio:
(Cash including cash equivalents + Short-term investments + Net current receivables) / Total current
liabilities
(50,000 + 80,000 + 75,000) / (55,000 + 125,000) = 205,000 / 180,000 =1.14

(b) Accounts receivable turnover ratio:


Net credit sales / Average net accounts receivable
820,000 / [(75,000 +63,000) / 2]
820,000 / 69,000 =11.88 times

(c) Days' sales in receivables:


365 days / Accounts receivable turnover ratio
365 / 11.88 = 31 days
Diff: 3
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables, Accounts Receivable Turnover Ratio, Acid Test Ratio

83
Copyright © 2018 Pearson Education, Inc.
32) For each of the following ratios, provide the formula and state what the ratio tells the financial
statement user.
(a) acid-test ratio
(b) accounts receivable turnover ratio
(c) days' sales in receivables
Answer:
(a) acid-test ratio
(Cash including cash equivalents + Short-term investments + Net current receivables) / Total current
liabilities
This ratio tells the financial statement user whether the entity could pay all its current liabilities if they
came due immediately.

(b) accounts receivable turnover ratio


Net credit sales / Average net accounts receivable
This ratio tells the financial statement user the number of times the company collects the average
accounts receivable balance in a year.

(c) days' sales in receivables


365 days / Accounts receivable turnover ratio
This ratio tells the financial statement user how many days it takes to collect the average level of accounts
receivable.

Diff: 3
LO: 8-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Days' Sales in Receivables, Accounts Receivable Turnover Ratio, Acid Test Ratio

84
Copyright © 2018 Pearson Education, Inc.

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