Receivables QUIZ AND TEST HINTS

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1 C H A P T E R 9 Receivables QUIZ AND TEST HINTS The following hints may be helpful to you in preparing for a quiz or a test over the material covered in Chapter You should be able to prepare journal entries for writing off an uncollectible account receivable and reinstating the account if it is later collected. You should be able to prepare these entries for both the direct write-off method and the allowance method of accounting for uncollectible accounts. You should also be able to describe and explain the differences between these two methods of accounting for uncollectible accounts, including when it is acceptable to use the direct write-off method. 2. You should be able to determine the amount of the adjusting entry for uncollectible receivables (the allowance method) for both estimation methods presented in the chapter (percent of sales and analysis of receivables). Note that the percent of sales method is the easiest to use since the amount of the entry is the same as the estimate of the uncollectible sales. The analysis of receivables method requires the entry to be made for an amount that will result in the estimated balance of the allowance account. 3. You should be able to determine the due date, interest, and maturity value of a note receivable. You should also be able to prepare journal entries for the receipt and collection of a note receivable. 4. You may be tested on a problem requiring a series of general journal entries that encompass both uncollectible accounts receivable and notes receivable. The materials presented in this Study Guide and the Illustrative Problem in the text provide an excellent review. 5. Study the new terminology introduced in this chapter for possible multiplechoice, matching, or true/false questions. Review the Key Terms section at the end of the chapter and be sure you understand each term. Do the Matching and Fill-in-the-Blank exercises included in this Study Guide. 131

2 132 Chapter 9 6. Review the GPS graphic at the beginning of the chapter and the At A Glance section at the end of the chapter. Read and review each of the Key Points and related Learning Outcomes. For each Learning Outcome that has an Example Exercise, locate the Example Exercise in the chapter and be sure that you understand the solution and can work a similar item on a test. If you have any questions about an Example Exercise, read the section of the chapter immediately preceding the Example Exercise. 7. If your instructor covers the Financial Analysis and Interpretation item at the end of the chapter, you should know how to compute and interpret changes in the accounts receivable turnover and days sales in receivables ratios. 8. If your instructor covers Appendix 1, Discounting Notes Receivable, you should be able to compute the proceeds from discounting a notes receivable. You should also be able to prepare the journal entries for discounting a note and the journal entries if a discounted note is dishonored. Study and review the illustrations in Appendix 1 in preparation for such test questions.

3 Chapter MATCHING Instructions: Match each of the statements below with its proper term. Some terms may not be used. A. accounts receivable H. dishonored note receivable B. accounts receivable turnover I. maturity value C. aging the receivables J. notes receivable D. allowance method K. number of days sales in E. bad debt expense receivables F. contra asset L. promissory note G. direct write-off method M. receivables 1. All money claims against other entities, including people, business firms, and other organizations. 2. A receivable created by selling merchandise or services on credit. 3. Amounts customers owe, for which a formal, written instrument of credit has been issued. 4. The operating expense incurred because of the failure to collect receivables. 5. The method of accounting for uncollectible accounts that provides an expense for uncollectible receivables in advance of their write-off. 6. The method of accounting for uncollectible accounts that recognizes the expense only when accounts are judged to be worthless. 7. The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age. 8. The amount that is due at the maturity or due date of a note. 9. A note that the maker fails to pay on the due date. 10. An estimate of the length of time the accounts receivable have been outstanding. 11. Measures how frequently during the year the accounts receivable are being converted to cash. 12. A written promise to pay a sum of money on demand or at a definite time.

4 134 Chapter 9 FILL IN THE BLANK PART A Instructions: Answer the following questions or complete the statements by writing the appropriate words or amounts in the answer blanks. 1. All money claims against other entities, including people, business firms, and other organizations are called. 2. A(n) is a formal, written instrument of credit that has been received for the amount a customer owes. 3. The method of accounting for uncollectible accounts provides an expense for uncollectible receivables in advance of their write-off. 4. The is a process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age. 5. Allowance for Doubtful Accounts has a debit balance of $1,500 at the end of the year, before adjustments. Sales for the year amounted to $740,000, and sales returns and allowances amounted to $25,000. If uncollectible accounts expense is estimated at 1% of net sales, the amount of the appropriate adjusting entry will be. 6. Allowance for Doubtful Accounts has a debit balance of $2,500 at the end of the year, before adjustments. Sales for the year amounted to $950,000, and sales returns and allowances amounted to $20,000. If the analysis of the accounts in the customers ledger indicates doubtful accounts of $30,000, the amount of the appropriate adjusting entry will be. 7. The maturity value of a $300,000, 90-day, 12% note receivable is. 8. The due date of a 90-day note receivable dated July 12 is. 9. A note that the maker fails to pay on the due date is referred to as a(n) note. 10. measures how frequently during the year the accounts receivable are being converted to cash.

5 Chapter FILL IN THE BLANK PART B Instructions: Answer the following questions or complete the statements by writing the appropriate words or amounts in the answer blanks. 1. A(n) receivable is created by selling merchandise or services on credit. 2. The operating expense incurred because of the failure to collect receivables is recorded as expense. 3. The - method of accounting for uncollectible accounts recognizes an expense only when accounts are judged to be worthless. 4. At the end of the fiscal year, after the accounts are closed, Accounts Receivable has a balance of $350,000 and Allowance for Doubtful Accounts has a credit balance of $40,000. The expected realizable value of the receivables is. 5. Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year, before adjustments. If an analysis of receivables indicates doubtful accounts of $11,200, the amount of the appropriate adjusting entry is. 6. The amount that is due at the maturity or due date of a note is called the. 7. The maturity value of a $150,000, 60-day, 15% note receivable is. 8. The due date of a 120-day note receivable dated on August 18 is. 9. The is an estimate of the length of time the accounts receivable have been outstanding, expressed in days. 10. A written promise to pay a sum of money on demand or at a definite time is called a(n) note.

6 136 Chapter 9 MULTIPLE CHOICE Instructions: Circle the best answer for each of the following questions. 1. When the allowance method is used in accounting for uncollectible accounts, any uncollectible account is written off against the: a. allowance account b. sales account c. accounts receivable account d. bad debt expense account 2. When the direct write-off method is used in accounting for uncollectible accounts, any uncollectible account is written off against the: a. allowance account b. sales account c. accounts receivable account d. bad debt expense account 3. What is the type of account and normal balance of Allowance for Doubtful Accounts? a. asset, debit b. asset, credit c. contra asset, debit d. contra asset, credit 4. Assume that the allowance account has a credit balance of $170 at the end of the year, before adjustments. If the estimate of uncollectible accounts based on aging the receivables is $3,010, the amount of the adjusting entry for uncollectible accounts would be: a. $170 b. $2,840 c. $3,010 d. $3, Assume that the allowance account has a debit balance of $250 at the end of the year, before adjustments. If the estimate of uncollectible accounts based on sales for the period is $2,200, the amount of the adjusting entry for uncollectible accounts would be: a. $250 b. $1,950 c. $2,200 d. $2,450

7 Chapter After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $430,000 and Allowance for Doubtful Accounts has a balance of $25,000. What is the expected realizable value of the accounts receivable? a. $25,000 b. $405,000 c. $430,000 d. $455, On a promissory note, the one making the promise to pay is called the: a. payee b. creditor c. maker d. noter 8. The amount that is due on a note at the maturity or due date is called the: a. terminal value b. face value c. book value d. maturity value 9. The due date of a 90-day note dated July 1 is: a. September 28 b. September 29 c. September 30 d. October A 60-day, 12% note for $15,000, dated May 1, is received from a customer on account. The maturity value of the note is: a. $14,700 b. $15,000 c. $15,300 d. $16,200

8 138 Chapter 9 TRUE/FALSE Instructions: Indicate whether each of the following statements is true or false by placing a check mark in the appropriate column. True False 1. The method of accounting which provides in advance for receivables deemed uncollectible is called the allowance method The process of analyzing the receivable accounts in order to estimate the uncollectibles is sometimes called aging the receivables The direct write-off method of accounting for uncollectible receivables provides for uncollectible accounts in the year of sale Estimation of uncollectible accounts based on the analysis of receivables emphasizes the current net realizable value of the receivables The allowance method of accounting for uncollectible receivables emphasizes the matching of bad debt expense with the related sales The term notes includes all money claims against people, organizations, or other debtors Accounts and notes receivable originating from sales transactions are sometimes called trade receivables Companies with a large amount of receivables normally use the allowance method of accounting for uncollectible accounts When a note is received from a customer from a previous sale on account, it is recorded by debiting Notes Receivable and crediting Sales Jacob Co. issues a 90-day, 12% note on May 13; the due date of the note is August

9 Chapter EXERCISE 9-1 Coco Co. uses the direct write-off method of accounting for uncollectibles. On August 31, 20--, Coco deemed that an amount of $550 due from Don Shore was uncollectible and wrote it off. On October 8, 20--, Shore paid the $550. Instructions: (1) Prepare the entry to write off the account on August 31. (2) Prepare the entry to reinstate the account on October 8, and to record the cash received. JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT

10 140 Chapter 9 EXERCISE 9-2 Star Co. uses the allowance method of accounting for uncollectibles. On March 31, 20--, Star deemed that an amount of $3,150 due from Jane Eades was uncollectible and wrote it off. On May 8, 20--, Eades paid the $3,150. Instructions: (1) Prepare the entry to write off the account on March 31. (2) Prepare the entry to reinstate the account on May 8, and to record the cash received. JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT

11 Chapter EXERCISE 9-3 Instructions: Using the basic formula for interest and assuming a 360-day year, compute the interest on the following notes. 1. $8,000 at 12% for 30 days... $ 2. $3,500 at 6% for 60 days... $ 3. $2,000 at 12% for 90 days... $ 4. $8,000 at 9% for 30 days... $ 5. $7,500 at 6% for 60 days... $ 6. $12,000 for 90 days at 9%... $ 7. $5,250 for 120 days at 12%... $ EXERCISE 9-4 The following data regarding the current assets of Walton Company were selected from the accounting records after adjustment at the end of the current fiscal year: Accounts Receivable... $35,000 Allowance for Doubtful Accounts... 1,200 Cash... 37,500 Interest Receivable... 9,900 Notes Receivable... 20,000 Instructions: Prepare the Current Assets section of the balance sheet for Walton Company.

12 142 Chapter 9 PROBLEM 9-1 Instructions: Prepare the appropriate general journal entries for each of the following situations. (1) Net sales for the year are $800,000, bad debt expense is estimated at 3% of net sales, and the allowance account has a $425 credit balance before adjustment. Prepare the adjusting entry at year end for the uncollectibles. (2) Based on an analysis of accounts in the customers ledger, estimated uncollectible accounts total $6,280, and the allowance account has a $325 credit balance before adjustment. Prepare the adjusting entry at year end for the uncollectibles. (3) A $3,500 account receivable from Bentley Co. is written off as uncollectible. The allowance method is used. (4) A $1,235 account receivable from Apple Co., which was written off three months earlier, is collected in full. The allowance method is used. JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT

13 Chapter PROBLEM 9-2 Instructions: Prepare the general journal entries to record the following transactions. (Omit explanations.) (1) Pequot Co. received a 60-day, 12% note for $8,000 from a customer, Dave Davidson, in settlement of Davidson s account. (2) Davidson failed to pay the note in (1) at maturity. (3) Ten days after the maturity of the note in (1), Davidson paid Pequot in full, including interest at 11% for this 10-day period. (4) Pequot received a 90-day, 10% note for $3,000 from a customer, Sue Smith, in settlement of Smith s account. (5) The note in (4) was dishonored at maturity. JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT

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