Cash and Receivables Exam Questions
Consider an ethical, moral, or legal dilemma Encountered in Nursing
January 22, 2020Hip Hop Studies Reader
January 22, 2020Cash and Receivables Exam Questions
Cash and Receivables
True / False Questions
| 1. | Cash equivalents would include investments in marketable equity securities as long as management intends to sell the securities in the next three months.
True False |
| 2. | From a financial accounting perspective, the main purposes of a system of internal control are to improve the accuracy and reliability of accounting information and to safeguard assets.
True False |
| 3. | In a good system of internal control, the person who initiates a transaction should be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records.
True False |
| 4. | Depending on the circumstances, the classification of a compensating balance may be either current or noncurrent, and the arrangement should be disclosed in the notes.
True False |
| 5. | Under IFRS, an overdraft in a cash account at one bank can be offset against a positive balance in the account at another bank for purposes of reporting cash on the company’s balance sheet.
True False |
| 6. | The net method of accounting for cash discounts requires adjusting entries for discounts taken.
True False |
| 7. | Recognizing sales returns when they occur could result in an overstatement of income in the period of the related sale.
True False |
| 8. | The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value.
True False |
| 9. | Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so.
True False |
| 10. | Under IFRS, accounts receivable can be accounted for as “available for sale” if that approach is elected upon initial recognition of the receivable.
True False |
| 11. | Using the balance sheet approach, bad debt expense is an indirect result of estimating the net realizable value of accounts receivable.
True False |
| 12. | Discounts on notes receivable are recognized as interest earned over the term of the related note.
True False |
| 13. | Unless specific sales criteria are met, the factoring of accounts receivable with recourse is accounted for as a loan.
True False |
| 14. | Securitization of receivables is a type of secured borrowing.
True False |
| 15. | Under IFRS, transfer of risks and rewards of ownership, rather than transfer of control, is the primary factor determining whether a factored receivable can be treated as sold rather than as part of a secured borrowing.
True False |
| 16. | The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a company in managing its investment in receivables.
True False |
| 17. | In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges.
True False |
| 18. | In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors.
True False |
| 19. | The journal entry to record the replenishment of a petty cash fund includes a credit to the petty cash fund.
True False |
| 20. | When a creditor’s receivable becomes impaired due to a troubled debt restructuring, the receivable is revalued based on the discounted present value of currently expected cash flows at the loan’s original effective rate.
True False |
| 21. | Under IFRS, accounts receivable impairments due to troubled debt restructuring are not recognized.
True False |
Multiple Choice Questions
| 22. | Important elements of an internal control system for cash disbursements include each of the following except:
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| 23. | COSO defines internal control as a process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in:
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| 24. | Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/2013:
What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?
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| 25. | Cash equivalents do not include:
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| 26. | Cash may not include:
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| 27. | Compensating balances represent:
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| 28. | Cash that is restricted and not available for current operations is reported in the balance sheet as:
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| 29. | Logistics Company had the following items listed in its trial balance at 12/31/2013:
Included in the checking account balance is $50,000 of restricted cash that Bank of the East requires as a compensating balance for the $300,000 note. What amount will Logistics include in its year-end balance sheet as cash and cash equivalents?
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| 30. | Which of the following is true about reporting cash under IFRS?
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| Wilson Company had the following cash balance items listed in its trial balance at 12/31/2013:
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| 31. | If Wilson reports under IFRS, its 12/31/2013 balance sheet would show what cash balance?
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| 32. | If Wilson reports under U.S. GAAP, its 12/31/2013 balance sheet would show what cash balance?
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| On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. |
| 33. | What is the correct entry for Flores on November 10?
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| 34. | What is the correct entry for Flores on November 17, assuming the correct payment was received on that date?
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| 35. | What is the correct entry for Flores on December 5, assuming the correct payment was received on that date?
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| Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts. |
| 36. | What entry would Oswego make on April 12?
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| 37. | What entry would Oswego make on April 23, assuming the customer made the correct payment on that date?
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| 38. | What entry would Oswego make on June 10, assuming the customer made the correct payment on that date?
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| On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for cash discounts. |
| 39. | What entry would Cherokee make on November 10?
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| 40. | What entry would Cherokee make on November 17, assuming the correct payment was received on that date?
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| 41. | What entry would Cherokee make on December 10, assuming the correct payment was received on that date?
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| Harvey’s Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for cash discounts. |
| 42. | What entry would Harvey’s make on April 12?
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| 43. | What entry would Harvey’s make on April 23, assuming the customer made the correct payment on that date?
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| 44. | What entry would Harvey’s make on June 10, assuming the customer made the correct payment on that date?
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| 45. | Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting accounts receivable and debiting:
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| 46. | Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom’s would credit accounts receivable and debit:
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| 47. | Memorex Disks sells computer disk drives with right-of-return privileges. Returns are material and reasonably predictable. Memorex should:
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| False Value Hardware began 2013 with a credit balance of $32,000 in the allowance for sales returns account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2013, customers returned merchandise for credit of $28,000 to their accounts. |
| 48. | What is the balance in the allowance for sales returns account at the end of 2013?
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| 49. | False Value’s 2013 income statement would report net sales of:
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| 50. | Accounts receivable are normally reported at the:
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| 51. | The allowance for uncollectible accounts is a:
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| 52. | A company uses the allowance method to account for bad debts. What is the effect on each of the following accounts of the collection of an account previously written off?
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| 53. | Collection of accounts receivable that previously have been written off results in an increase in cash and an increase in:
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| 54. | Which of the following does not change the balance in accounts receivable?
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| 55. | Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending balance of accounts receivable. During 2013, Chez Fred’s credit sales and collections were $125,000 and $131,000, respectively. What was the balance of accounts receivable on January 1, 2013, if $180 in accounts receivable were written off during 2013 and if the allowance account had a balance of $750 on December 31, 2013?
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| 56. | The following information relates to Halloran Co.’s accounts receivable for 2013:
What amount should Halloran report for accounts receivable, before allowances, at December 31, 2013?
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| Calistoga Produce estimates bad debt expense at ½% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $471,000 and $1,650, respectively, at December 31, 2012. During 2013, Calistoga’s credit sales and collections were $315,000 and $319,000, respectively, and $1,720 in accounts receivable were written off. |
| 57. | Calistoga’s accounts receivable at December 31, 2013, are:
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| 58. | Calistoga’s 2013 bad debt expense is:
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| 59. | Calistoga’s adjusted allowance for uncollectible accounts at December 31, 2013, is:
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| 60. | The balance in accounts receivable at the beginning of 2013 was $300. During 2013, $1,600 of credit sales were recorded. If the ending balance in accounts receivable was $250 and $100 in accounts receivable were written off during the year, the amount of cash collected from customers during 2013 was:
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| In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,200,000, and cash collections from credit customers totaled $1,950,000. |
| 61. | What bad debt expense would Dinty report in its first-year income statement?
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| 62. | What accounts receivable balance would Dinty report in its first year-end balance sheet?
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| 63. | In Dinty’s adjusting entry for bad debts at year-end, which of these would be included?
|
| For 2013, Rahal’s Auto Parts estimates bad debt expense at 1% of credit sales. The company reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100, respectively, at December 31, 2012. During 2013, Rahal’s credit sales and collections were $404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off. |
| 64. | Rahal’s accounts receivable at December 31, 2013, are:
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| 65. | Rahal’s 2013 bad debt expense is:
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| 66. | Rahal’s adjusted allowance for uncollectible accounts at December 31, 2013, is:
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| 67. | The following information pertains to Jacobsen Co.’s accounts receivable at December 31, 2013:
During 2013, Jacobsen wrote off $18,000 in receivables and recovered $6,000 that had been written off in prior years. Jacobsen’s December 31, 2012, allowance for uncollectible accounts was $40,000. Under the aging method, what amount of allowance for uncollectible accounts should Jacobsen report at December 31, 2013?
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| 68. | When you use an aging schedule approach for estimating uncollectible accounts:
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| 69. | Which of the following is recorded by a credit to accounts receivable?
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| 70. | If a company uses the balance sheet approach to estimate bad debt expense, bad debt expense for a period can be determined by:
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| 71. | As of January 1, 2013, Farley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Farley’s credit sales have been uncollectible. During 2013, Farley wrote off $650,000 of accounts receivable. Credit sales for 2013 were $18,000,000. In its December 31, 2013, balance sheet, what amount should Farley report as allowance for uncollectible accounts?
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| 72. | San Mateo Company had the following account balances at December 31, 2013, before recording bad debt expense for the year:
San Mateo is considering the following approaches for estimating bad debts for 2013: • Based on 3% of credit sales What amount should San Mateo charge to bad debt expense at the end of 2013 under each method?
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| 73. | As of December 31, 2012, Gill Co. reported accounts receivable of $216,000 and an allowance for uncollectible accounts of $8,400. During 2013, accounts receivable increased by $22,000, and $7,800 of bad debts were written off. An analysis of Gill Co.’s December 31, 2013, accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. Bad debt expense for 2013 would be:
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| 74. | As of December 31, 2013, Amy Jo’s Appliances had unadjusted account balances in accounts receivable of $311,000 and $970 in the allowance for uncollectible accounts, following 2013 write-offs of $6,450 in bad debts. An analysis of Amy Jo’s December 31, 2013, accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for 2013 should be:
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| 75. | Nontrade receivables do not include:
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| 76. | Long-term notes receivable issued for noncash assets at an unrealistically low interest rate will be:
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| 77. | Priscilla’s Exotic Pets discounted a note receivable without recourse and the sales criteria were met. The discounting is recorded as:
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| 78. | Drebin Security Systems sold merchandise to a customer in exchange for a $50,000, five-year, noninterest-bearing note when an equivalent loan would carry 10% interest. Drebin would record sales revenue on the date of sale equal to:
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| 79. | A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity date. Mild Max would debit:
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| 80. | Baker Inc. acquired equipment from the manufacturer on 10/1/2013 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2014 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2013 year-end financial statements, what is its imputed annual interest rate?
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| 81. | Frasquita acquired equipment from the manufacturer on 6/30/2013 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2014 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2013 year-end financial statements, what amount would it record the equipment on its 6/30/2013 balance sheet?
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| 82. | Frasquita acquired equipment from the manufacturer on 6/30/2013 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2014 to satisfy the obligation in full. If Frasquita accrued interest of $15,000 on the note in its 2013 year-end financial statements, what would the manufacturer record in its 2013 income statement for this transaction?
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| 83. | Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2013. The notes included:
Note A: Dated 5/31/2013, principal of $120,000 and interest due 3/31/2014. Frankenstein had accrued interest receivable from these notes of $14,400 in its 12/31/2013 balance sheet. What is the annual interest rate on Note A?
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| 84. | Frankenstein Enterprises received two notes from customers for sales that Frankenstein made to them in 2013. The notes included:
Note A: Dated 5/31/2013, principal of $120,000 and interest due 3/31/2014. Frankenstein had accrued interest receivable from these notes of $14,400 on its 12/31/2013 balance sheet. What amount of interest revenue would Frankenstein earn on these notes during 2014?
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| Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2013. The note was accepted as payment of a delinquent receivable of $2,500. |
| 85. | What is the correct entry to record the note?
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| 86. | The cash collection on July 1, 2013, would be recorded as:
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| 87. | Which of the following is considered a sale of receivables?
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| 88. | The transferor is considered to have surrendered control over its receivables if:
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| 89. | Accounting for the pledging of accounts receivable as collateral for a loan requires:
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| 90. | In deciding whether financing with receivables is a secured borrowing or a sale under U.S. GAAP, the critical element is the extent to which:
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| 91. | In deciding whether financing with receivables is a secured borrowing or a sale under IFRS, the critical element is the extent to which:
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| 92. | The purpose of assigning accounts receivable is to:
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| 93. | Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2013. The note, along with interest at 6%, is due on June 30, 2014. On September 30, 2013, Ireland discounted the note at Cloverdale bank. The bank’s discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?
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| 94. | On April 1 of the current year, Troubled Company factored receivables with a carrying value of $85,000 for $60,000 in cash from Scrooge Lenders. The transfer was made without recourse. On April 1, Troubled would:
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| 95. | If a company adopts an accounts receivable factoring program, and accounts for the factoring as a sale of receivables, which of the following is true in the period the company starts the program (all else equal)?
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| 96. | Assume a company has been maintaining a receivables factoring program for the past five years and has been experiencing the same level of sales, factoring, and bad debts over that period. Customers typically pay their receivables within 60 days. Which of the following is true with respect to the current period (all else equal)?
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| 97. | Which of the following is not true regarding accounting for transfers of receivables under IFRS?
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| 98. | A company’s investment in receivables is influenced by several variables, including:
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| Excerpts from Huckabee Company’s December 31, 2013 and 2012, financial statements are presented below:
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| 99. | Huckabee’s 2013 receivables turnover (rounded) is:
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| 100. | Huckabee’s 2013 average collection period (rounded) is:
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| 101. | Alliance Software began 2013 with accounts receivable of $115,000. All sales are made on credit. Sales and cash collections from customers for the year were $780,000 and $700,000, respectively. Cost of goods sold for the year was $450,000. What was Alliance’s receivables turnover ratio (rounded) for 2013?
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| On July 1, 2013, Cromartie Furniture established a $150 petty cash fund. A check for $150 was made out to the petty cash custodian. During July, the petty cash custodian paid the following bills from the petty cash fund:
At the end of July the petty cash fund was replenished. |
| 102. | The journal entry to establish the petty cash fund includes:
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| 103. | The journal entry to replenish the petty cash fund includes:
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| 104. | Hazelton Manufacturing prepares a bank reconciliation at the end of every month. At the end of May, the general ledger checking account showed a balance of $1,360 and the bank statement showed a bank balance of $1,445. Outstanding checks totaled $350 and deposits in transit were $150. The bank statement listed service charges of $30 and NSF checks totaling $85. The corrected cash balance is:
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| 105. | Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the end of July, the balance in the general ledger checking account was $2,750 and the bank balance on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited were $400. The bank statement revealed that a check written for $120 was incorrectly recorded by Brockton as a $220 disbursement. The bank statement listed service charges and NSF check charges totaling $150. The corrected cash balance is:
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| 106. | Which of the following is true about accounting for a troubled debt restructuring?
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| 107. | Brewer Inc. is owed $200,000 by Carol Co. under a 10% note with two years remaining to maturity. Due to financial difficulties Carol Co. did not pay the prior year’s interest. Brewer agrees to settle the receivable (and accrued interest) in exchange for a cash payment of $150,000. The journal entry that Brewer would make to record this transaction would include a loss on troubled debt restructuring of:
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| 108. | The O’Hara Group is owed $1,000,000 by Hilton Enterprises under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. O’Hara agrees to restructure the note under terms that yield a present value of $880,000. The journal entry that O’Hara would make to record this transaction would include a loss on troubled debt restructuring of:
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| 109. | Rebound Inc. reports under IFRS. In 2013 Rebound recognized an impairment of $200,000 due to a troubled debt restructuring. In 2014 Rebound was pleased to determine that more cash flows would be received from the receivable than was previously thought, such that, if the total impairment were to be calculated in 2014, it would be estimated as $150,000 rather than $200,000. How should Rebound treat this in its 2014 income statement?
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Matching Questions
| 110. | Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.
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| 111. | Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.
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| 112. | Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.
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| 113. | Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term.
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| 114. | Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.
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| 115. | Listed below are five terms followed by a list of phrases that describe or characterize each of the terms with respect to accounting under IFRS. Match each phrase with the correct term.
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Short Answer Questions
| 116. | Costa Co. has the following cash balances at local banks as of 12/31/2013:
Required: 1. Prepare the Current Assets and Current Liabilities section of Costa’s 2013 balance sheet, assuming Parker reports under U.S. GAAP.
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| 117. | On May 12, 2013, Falwell Computing sold five computers to Computing Plus for $10,000, subject to terms 3/10, n30. Falwell uses the net method of accounting for sales discounts.
Required: 1. Prepare the journal entry to record the sale.
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| 118. | On July 18, 2013, Philly Furniture Factory sold 20 reclining rockers to Dave’s Discount Furniture for $8,000, subject to terms 2/10, n30. Philly uses the net method of accounting for sales discounts.
Required: 1. Prepare the journal entry to record the sale.
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| 119. | On March 12, 2013, Admiral Electronics sold 20 fax machines to Cool Stuff Co. for $10,000, subject to terms 2/10, n30. Admiral uses the gross method of accounting for sales discounts.
Required: 1. Prepare the journal entry to record the sale.
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| 120. | On October 18, 2013, Flying Chicken sold 2,000 pounds of chicken to Healthier Grocery for $3,400, subject to terms 2/10, n30. Flying Chicken uses the gross method of accounting for sales discounts.
Required: 1. Prepare the journal entry to record the sale.
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| 121. | On June 14, 2013, Rumsfeld Company sold 100 air-conditioning units to Powell Heating and Cooling. The units list for $600 each, but Powell was granted a 25% trade discount. All of Rumfeld’s sales are subject to terms 2/10, n30. Rumsfeld uses the gross method of accounting for sales discounts.
Required: 1. Prepare the journal entry to record the sale.
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| 122. | On February 14, 2013, Prime Company sold 50 air-conditioning units to L&P Heating and Cooling. The units list for $700 each, but L&P was granted a 30% trade discount. All of Prime’s sales are subject to terms 2/10, n30. Prime uses the net method of accounting for sales discounts.
Required: 1. Prepare the journal entry to record the sale.
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| 123. | Beethoven Music Company started business in March 2013. Sales for its first year were $400,000. Beethoven priced its merchandise to yield a 45% gross profit based on sales dollars. Industry statistics suggest that 10% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $30,000 in sales. Beethoven uses a perpetual inventory system.
Required: Prepare summary journal entries to record (1) sales, (2) sales returns, and (3) the year-end adjusting entry for estimated sales returns.
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| The following footnote disclosure is taken from the 2013 annual report to shareholders of Winchester International Corporation.
NOTE 5: ALLOWANCE FOR LOAN LOSSES The allowance for loan loss is maintained at a level to absorb probable losses inherent in the loan portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans. The following is a summary of the changes in the allowances for loan losses for three years: Winchester also reported (in thousands) in its comparative balance sheet that it held Loans receivable, net, of $6,869,911 and $6,819,209 at December 31, 2013, and December 31, 2012, respectively. |
| 124. | What kind of account is the Allowance for Loan Losses in Winchester’s financial statements?
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| 125. | Using a T-account for the Allowance for Loan Losses, identify the changes in the account during 2013.
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| 126. | How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?
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| 127. | Is there any evidence in Winchester’s disclosures above that are consistent with earnings management?
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| 128. | For each posted entry in the Allowance account during 2013, indicate the remaining entry(ies) in other accounts.
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| 129. | If Winchester is using the balance sheet approach to determining loan losses and the Allowance account balance, what percentage did it use in 2013?
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| The following information is taken from the 2010 annual report to shareholders of Hewlett-Packard (HP) Co.
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| 130. | What is the balance in HP’s allowance for doubtful accounts at the end of the fiscal years 2010 and 2009, respectively?
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| 131. | What kind of account is the provision for doubtful accounts in HP’s financial statements?
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| 132. | Using a T-account for the allowance for doubtful accounts, identify the changes in the account during fiscal year 2007.
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| 133. | How could a company with receivables like HP be able to manage earnings in applying generally accepted accounting principles?
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| 134. | Is there any evidence in HP’s disclosures above that are consistent with earnings management?
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| 135. | If HP is using the balance sheet approach to determining bad debt expense, what percentage of year-end receivables did it use in 2010 and 2009, respectively?
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| 136. | For each posted entry in the allowance account during 2010, prepare the journal entry.
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| 137. | During Burns Company’s first year of operations, credit sales totaled $140,000 and collections on credit sales totaled $105,000. Burns estimates that bad debt losses will be 1.5% of credit sales. By year-end, Burns had written off $300 of specific accounts as uncollectible.
Required: 1. Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense.
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| 138. | During Bricker Company’s first year of operations, credit sales totaled $200,000 and collections on credit sales totaled $145,000. Bricker estimates that $1,000 of its ending accounts receivable balance will not be collected. By year-end, Bricker had written off $330 of specific accounts as uncollectible.
Required: 1. Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense.
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| 139. | A summary of Klugman Company’s December 31, 2013, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:
The allowance for uncollectible accounts had a balance of $1,400 on January 1, 2013. During the year, bad debts of $750 were written off. Required: Prepare all journal entries for 2013 with respect to bad debts and the allowance for uncollectible accounts.
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| 140. | A summary of London Fashion’s December 31, 2013, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:
The allowance for uncollectible accounts had a balance of $1,600 at January 1, 2013. During the year bad debts of $1,150 were written off. Required: Prepare all 2013 journal entries with respect to bad debts and the allowance for uncollectible accounts.
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| 141. | On December 31, 2012, Central Freight reported an allowance for uncollectible accounts of $15,300. During 2013, Central wrote off $17,000 in accounts receivable. Included in the write-off was Roskoff Corp.’s account in the amount of $750. Roskoff subsequently paid this balance. At December 31, 2013, an analysis of the accounts receivable aging schedule indicated the need for an allowance for uncollectible accounts of $14,900.
Required: Prepare all implied journal entries relative to bad debt expense and the allowance for uncollectible accounts.
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| 142. | Cordova, Inc., reported the following receivables in its December 31, 2012, year-end balance sheet:
Current assets: Additional information: 1. The notes receivable account consists of two notes, a $100,000 note and a $300,000 note. The $100,000 note is dated October 31, 2012, with principal and interest payable on October 31, 2013. The $300,000 note is dated March 31, 2012, with principal and 8% interest payable on March 31, 2013. Required: 1. In addition to sales revenue, what revenue and expense amounts related to receivables will appear in Cordova’s 2013 income statement?
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| 143. | AT&T’s financial statements for the 2010 and 2009 fiscal years contained the following information:
In addition, the statement of cash flows disclosed bad debt expense of $1,334 million in 2010 and $1,762 million in 2009. Required: 1. Determine the amount of actual bad debt write-offs made during 2010.
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| 144. | Tokyo Imports sold merchandise to Tall-Mart, receiving a six-month, noninterest-bearing note for $100,000. The implied discount rate on the note is 10% per annum. Tokyo uses a periodic inventory system.
Required: 1. Prepare the journal entry to record the sale.
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| 145. | Montana Minerals sold coal to Beta Electric, receiving a six-month, noninterest-bearing note for $200,000. The implied discount rate on the note is 8% per annum. Montana uses a periodic inventory system.
Required: 1. Prepare the journal entry to record the sale.
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| 146. | On December 1, 2013, General Mole borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivable as collateral. Additionally, General Mole was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest.
Required: Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.
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| 147. | On October 1, 2013, Watergate Hotels borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivables as collateral. Additionally, Watergate was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest.
Required: Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.
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| 148. | On February 1, 2013, Stealth Trucks sold a diesel rig to Kansas Transports for $250,000, receiving a $50,000 down payment and a 12-month, 10% note for the balance. Principal and interest are due at maturity, and the 10% interest rate reflected the market rate of interest at the time of sale. On August 1, 2013, Kansas Transports discounted the note without recourse at the First South Bank at 12% interest.
Required: Prepare all required journal entries at August 1 to recognize interest revenue and the discounting of the note.
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| 149. | On June 30, 2013, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $400,000 in accounts receivable to Dogwood Finance Company without recourse for a 5% fee. Option Two calls for Blondie to transfer the $400,000 in receivables to Dogwood with recourse. Dogwood’s charges a 4% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $3,000 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 10% of the receivables is $25,000 (ignoring the factoring fee).
Required: 1. Prepare any necessary journal entry or entries if receivables are factored under Option One.
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| 150. | The Fitzgerald Company maintains a checking account at the Bank of the North. The bank provides a bank statement along with canceled checks on the last day of each month. The October 31, 2013, bank statement included the following information:
The company’s general ledger cash (checking) account had a balance of $42,544 at the end of October. Deposits outstanding totaled $4,224, and all checks written by the company were processed by the bank except for those totaling $5,620. In addition, a check for $500 for the purchase of office furniture was incorrectly recorded by the company as a $50 disbursement. The bank correctly processed the check during October. Required: 1. Prepare a bank reconciliation for the month of October.
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| 151. | The petty cash fund of Western Glass Company contained the following items on November 30, 2013:
The petty cash fund was established on November 1, 2013, with a transfer of $250 from cash to the petty cash account. Required: Prepare the journal entries to establish the petty cash account and to replenish the fund at the end of November.
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| 152. | Guido Properties owes First State Bank $60 million under a 7% note with two years remaining to maturity. Due to financial difficulties of Guido, the previous year’s interest ($4.2 million) was not received. The bank agrees to settle the note receivable and accrued interest receivable in exchange for land having a fair value of $44 million.
Required: Compute the loss on troubled debt restructuring that the bank would record.
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Essay Questions
| 153. | Define what it is meant by internal control.
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| 154. | Describe some key elements of an internal control system for cash.
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| 155. | Cash is the most liquid of all assets but is not always reported under current assets. Explain this statement.
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| 156. | Although the net method is theoretically more sound, most companies use the gross method of accounting for cash discounts related to sales on account. Explain this statement.
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| 157. | Briefly explain the accounting treatment for sales returns.
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| 158. | Briefly explain why the direct write-off of uncollectible accounts is not permitted by GAAP if bad debts are material.
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| 159. | Last year, Simpson Company had a receivables turnover ratio of 12. Homer, Simpson’s president, was delighted when the ratio went to 18 for this year. This year, Simpson’s long-standing credit terms of net 30 were changed to net 10. Should Homer be happy? Explain.
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| 160. | You have recently been hired as the assistant controller for Clayton, Inc., a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the chief financial officer. The controller has assigned the task of preparing the year-end adjusting entry for bad debts to you. The allowance for uncollectibles accounts has a credit balance of $86,000 before the year-end adjustment. Your analysis indicates that an appropriate balance for the allowance account is $210,000. After showing your analysis to the controller, she tells you to adjust the allowance account to $310,000. Tactfully, you ask the controller for an explanation for the amount and she tells you, “We are having a really good year. Let’s bump up the allowance.”
Required: Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.
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| 161. | Briefly compare and contrast the two approaches to estimating bad debt expense. In your answer, indicate which approach, if either, is superior.
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| 162. | Companies can have accounts receivable from ordinary trade customers and from related parties (e.g., directors, employees or large shareholders). How does U.S. GAAP differ from IFRS in its requirements regarding separate disclosure of trade receivables and related-party receivables? Why might separate disclosure of related party receivables be useful?
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| The following footnote disclosure appeared in a recent annual report of Halliburton:
Our receivables are generally not collateralized. Included in notes and accounts receivable are notes with varying interest rates totaling $12 million at December 31. At December 31, 39% of our consolidated receivables related to our United States government contracts, primarily for projects in the Middle East. |
| 163. | Explain the reason that Halliburton indicates that its receivables include notes with varying interest rates totaling $12 million at December 31. What significance does this have to the reader?
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| 164. | Explain the reason that Halliburton indicates that its receivables are generally not collateralized. What significance does this have to the reader?
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| 165. | Explain the transactions that typically would affect the discount on notes receivable account.
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| 166. | A company’s investment in receivables is affected by several related variables. Give an example of this interrelationship.
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| 167. | Explain how a company could manipulate cash flow from operations by changing the extent to which it factors accounts receivable and treats those factoring arrangements as sales of receivables.
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| 168. | Explain briefly how IFRS and U.S. GAAP differ in determining whether a transfer of an accounts receivable qualifies as a sale. |
