5.1 Learning Objective 5-1: Chapter 5 Short-Term Investments & Receivables

Financial Accounting, 9e (Harrison/Horngren/Thomas)
Chapter 5 Short-Term Investments & Receivables
5.1 Learning Objective 5-1
1) Another term for short-term investments is held-to-maturity securities.

Answer: FALSE
Diff: 1
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) Short-term investments may be divided into held-to-maturity securities, trading securities and
available-for-sale securities.
Answer: TRUE
Diff: 2
LO: 5-1
3) Short-term investments are the most liquid asset.

Answer: FALSE
Diff: 2
LO: 5-1
4) The purpose of a trading security is to hold it for a short term and then sell it for its cost.
Answer: FALSE
Diff: 2
LO: 5-1
5) An unrealized gain occurs when a company sells a trading security.

Answer: FALSE
Diff: 2
LO: 5-1
6) Fair value is the amount for which the securities can be sold.
Answer: TRUE
Diff: 1
LO: 5-1
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7) Trading securities may generate dividend revenue.
Answer: TRUE
Diff: 1
LO: 5-1
8) Trading securities are originally recorded at their cost.

Answer: TRUE
Diff: 1
LO: 5-1
9) A company will have an unrealized loss if the fair value of the investment is greater than its cost.
Answer: FALSE
Diff: 2
LO: 5-1
10) It takes good judgment, which includes ethics, to become a successful accountant.
Answer: TRUE
Diff: 2
LO: 5-1
AICPA Bus Persp: Strategic/Critical Thinking
11) Unrealized gains and losses on trading securities are reported as part of current income.
Answer: TRUE
Diff: 2
LO: 5-1
12) An unrealized loss occurs when the current market value is more than the original cost of the
investment.
Answer: FALSE
Diff: 2
LO: 5-1
2
13) Which of the following is an incorrect statement regarding short-term investments?
A) Short-term investments are also called marketable securities.
B) Short-term investments are easily convertible to cash.
C) Short-term investments must be held for less than three months.
D) Short-term investments allow a company to invest cash and earn a return.
Answer: C
Diff: 2
LO: 5-1
14) Another name for short-term investments is:

A) equity investments.
B) marketable securities.
C) market investments.
D) available-for-sale securities.
Answer: B
Diff: 2
LO: 5-1
15) Short-term investments:

A) are reported after accounts receivable on the balance sheet.
B) are more liquid than cash.
C) are reported at historical cost on the balance sheet.
D) include trading securities.
Answer: D
Diff: 2
LO: 5-1
16) Stock investments that are to be sold in the near future with the intent of generating profits on the sale
are:
A) investments.
B) trading securities.
C) available-for-sale securities.
D) debt securities.
Answer: B
Diff: 2
LO: 5-1
3
17) Investments in marketable securities fall into three categories, including:
A) available-for-exchange securities.
B) available for maturity securities.
C) accounts receivable securities.
D) trading securities.
Answer: D
Diff: 1
LO: 5-1
18) Which of the following statement is correct?

A) Trading securities can be current or long-term assets.
B) Available-for-sale securities are always current assets.
C) Held-to-maturity securities are always current assets.
D) Trading securities are always current assets.
Answer: D
Diff: 2
LO: 5-1
19) All investments in marketable securities NOT classified as trading securities or held-to-maturity
securities are classified as:
A) debt securities.
B) equity securities.
C) marketable securities.
D) available-for-sale securities.
Answer: D
Diff: 1
LO: 5-1
20) The purpose of owning trading securities is to:

A) increase cash reserves.
B) hold the investment for at least one year.
C) sell the investment for more than its cost.
D) sell the investment to decrease net income.
Answer: C
Diff: 2
LO: 5-1
4
21) Trading securities:
A) must be sold for more than their cost.
B) do not include debt securities of another company.
C) must increase in fair value.
D) can generate dividend revenue.
Answer: D
Diff: 2
LO: 5-1
22) ABC Company purchases a trading security for $12,000. The entry to record this transaction will
include a:
A) debit to the Investment account.
B) credit to the Investment account.
C) debit to the Unrealized Gain account.
D) credit to the Dividend Revenue account.
Answer: A
Diff: 2
LO: 5-1
AASCB: Analytical Skills
23) When a company receives a cash dividend from a trading security, the journal entry includes:
A) a debit to cash and credit to dividend revenue.
B) a debit to dividend revenue and credit to cash.
C) a debit to cash and credit to trading investment.
D) none of the above.
Answer: A
Diff: 2
LO: 5-1
24) An unrealized gain:

A) is recorded when a trading security is sold for more than its cost.
B) is recorded when a trading security is sold for less than its cost.
C) is recorded when the fair value of the trading security is more than its cost.
D) is recorded when the fair value of the trading security is less than its cost.
Answer: C
Diff: 2
LO: 5-1
5
25) When a company receives a cash dividend on a trading security:
A) revenue is increased.
B) revenue is decreased.
C) assets are decreased.
D) liabilities are decreased.
Answer: A
Diff: 2
LO: 5-1
26) Trading securities are:

A) reported on the income statement at fair value.
B) reported on the balance sheet at cost.
C) adjusted to their current fair value before the financial statements are prepared.
D) adjusted to their current fair value on a daily basis.
Answer: C
Diff: 2
LO: 5-1
27) A company's trading security has a fair value which exceeds its cost. When recording the journal
entry:
A) the Investment account will be credited.
B) the Unrealized Gain account will be credited.
C) the Unrealized Loss account will be debited.
D) no journal entry is needed for this transaction.
Answer: B
Diff: 2
LO: 5-1
28) Unrealized gains or losses on trading securities are reported on the:

A) income statement as Other Revenue, Gains, and Losses.
B) balance sheet.
C) income statement as Revenues or Expenses.
D) statement of cash flows.
Answer: A
Diff: 2
LO: 5-1
6
29) A realized gain occurs when the:
A) sales price is greater than the trading investment carrying amount.
B) sales price is less than the trading investment carrying amount.
C) fair value exceeds the cost of the trading investment.
D) cost of the investments exceeds the fair value of the trading investment.
Answer: A
Diff: 2
LO: 5-1
30) When a company sells a trading investment, the gain or loss on the sale is reported in the:
A) revenues section of the income statement.
B) short-term investments section of the balance sheet.
C) other revenue, gains, and losses section of the balance sheet.
D) other revenue, gains, and losses section of the income statement.
Answer: D
Diff: 2
LO: 5-1
31) When dealing with gains and losses on trading securities:

A) the word "realized" must be used in the account title.
B) unrealized gains and losses must be labeled "unrealized."
C) unrealized gains go on the balance sheet and realized gains go on the income statement.
D) unrealized losses and realized losses are both part of other expenses on the income statement.
Answer: B
Diff: 2
LO: 5-1
32) Strategies to increase the current ratio may include:

A) increasing sales.
B) paying off current liabilities before the end of the year.
C) the questionable practice of reclassifying long-term investments as short-term investments.
D) all of the above.
Answer: D
Diff: 2
LO: 5-1
7
33) Trading securities purchased for $400,000 were valued at $410,000 at the end of the year. The
adjusting entry to record this difference included a credit to:
A) retained earnings.
B) unrealized gain on investments.
C) short-term investments.
D) none of the accounts since no adjusting entry is required.
Answer: B
Diff: 2
LO: 5-1
34) Trading securities purchased in 2011 for $90,000 were valued at $92,000 on December 31, 2011. At
December 31, 2013 the securities had a fair value of $95,000. The journal entry on December 31, 2013
would include a:
A) debit to the Investment account for $5,000.
B) debit to the Investment account for $3,000.
C) credit to the Unrealized Gain account for $5,000.
D) debit to the Unrealized Loss account for $3,000.
Answer: B
Diff: 3
LO: 5-1
35) Orange Company purchased a trading investment that had a carrying amount of $35,000 when they
decided to sell it. Orange purchased the investment for $31,000. If Orange Company sold this investment
for $43,000, Orange will have a(n):
A) realized gain of $12,000.
B) realized gain of $8,000.
C) an unrealized loss of $3,000
D) an unrealized gain of $11,000.
Answer: B
Explanation: B) 43,000 - 35,000 = 8,000 gain
Diff: 2
LO: 5-1
8
36) Johnson Corporation purchases $620,000 of PM Corporation stock on October 18, 2012. Johnson
classifies this investment as a trading security. On December 31, 2012, Johnson Corporation's investment
in PM Corporation has a fair value of $610,000. Prepare the necessary journal entries.
Answer:
Date Account Debit Credit
Oct 18, 2012 Investment in PM Stock 620,000
Cash 620,000
Dec 31, 2012 Unrealized Loss on Investments 10,000

Investment in PM Stock 10,000
Diff: 2
LO: 5-1
37) Credit Company purchases 1,000 shares of Microsoft Corporation stock at $35 per share on July 31.
The company expects to hold the stock for 6 months and then sell it. At December 31, the market price of
the stock is $42 per share.
1. What type of investment is this for Credit Company? Explain your answer.
2. Journalize the purchase on July 31 and the necessary adjustment on December 31.
3. Discuss how Credit Company would report this investment on its balance sheet at December 31 and
any gain or loss on its income statement for the year ended December 31.
Answer:
1. This is a trading investment because the intent is to sell it in the near future to generate profit.
2. July 31:
Investment in Microsoft Stock 35,000
Cash 35,000
December 31:
Investment in Microsoft Stock 7,000
Unrealized gain on investments 7,000
(42,000 - 35,000)
3. The investment would be reported at current fair value, $42,000, on the balance sheet. The $7,000
unrealized gain would be reported as other revenue on the income statement.
Diff: 2
LO: 5-1
9
38) On April 3, Evan's Boat Store purchased Yacht stock for $26,000 with the intent of selling the stock at a
profit before the boating season starts in two months. On April 28, Evan's Boat Store received dividends
from Yacht of $850. On May 25, the Yacht stock was sold for $24,500.
Required:
1. How will Evan's Boat Store classify the investment?
2. Prepare the journal entries needed to record the transactions.
3. What will Evan's Boat Store report on its income statement for the year ended December 31?
Answer:
1. This is a trading investment because the intent is to sell it in the near future to generate profit.
2.
April 3 Investment in Yacht Stock 26,000
Cash 26,000
April 28 Cash 850

Dividend Revenue 850
May 25 Cash 24,500

Loss on Sale of Stock 1,500
Investment in Yacht Stock 26,000
3. The dividend revenue of $850 would be reported in the in the income statement as other revenue. The
realized loss of $1,500 would also appear on the income statement under the other category.
Diff: 2
LO: 5-1
10
39) On March 1, 2011, Anya's Toy Store purchased Hasbro stock for $33,400 with the intent of selling the
stock at a profit within a few months. On April 10, dividends of $1,075 were received from the Hasbro
stock. On December 31, 2011, the end of Anya's Toy Store's calendar year, the Hasbro stock had a market
value of $32,300. On January 3, 2012, Anya's Toy Store sold all of the Hasbro stock for $34,000.
Prepare the journal entries needed to record the transactions for 2011 and 2012.
Answer:
March 1, 2011 Investment in Hasbro Stock 33,400
Cash 33,400
April 10 Cash 1,075

Dividend Revenue 1,075
Dec 31 Unrealized Loss on Investments 1,100

Investment in Hasbro Stock 1,100
32,300-33,400
Jan 3 Cash 34,000

Investment in Hasbro Stock 32,300
Gain on sale of investments 1,700
Diff: 2
LO: 5-1
40) The ABC Company has current assets of $10,000 and current liabilities of $8,000. They are concerned
about their current ratio and are considering paying liabilities totaling $3,000. The ABC Company has a
loan with First Bank which requires them to maintain a minimum current ratio of 1.4.
Required:
1. What is the formula for the current ratio?
2. Compute the current ratio before the possible payment of the liabilities of $3,000.
3. Compute the current ratio assuming that ABC Company pays the $3,000 in current liabilities.
4. What are some possible consequences if ABC's current ratio falls below the required 1.4?
Answer: 1. Current ratio = Current assets/Current liabilities
2. 10,000/8,000 = 1.25
3. (10,000-3,000)/(8,000-3,000) = 7,000/5,000 = 1.4
4. First Bank can call the loan for immediate payment and if the borrower cannot pay, then the bank
may take over the company.
Diff: 2
LO: 5-1
11
5.2 Objective 5-2
1) Sales discounts and sales returns and allowances are deducted from gross revenue to determine net
revenue.
Answer: TRUE
Diff: 2
LO: 5-2
2) The amount of revenue to be recognized is the cash value of the goods or services transferred from the
seller to the buyer.
Answer: TRUE
Diff: 2
LO: 5-2
3) The shipping terms in the sales contract determine when ownership of goods changes hands between
the buyer and the seller.
Answer: TRUE
Diff: 2
LO: 5-2
4) If the credit terms are 2/10, n/30, the buyer can get a 2% discount if the invoice is paid within 30 days.
Answer: FALSE
Diff: 2
LO: 5-2
5) When goods are shipped FOB destination, revenue is recognized by the seller when the goods leave
their shipping dock.
Answer: FALSE
Diff: 2
LO: 5-2
12
6) ABC Company has shipped goods to one of its customers FOB shipping point. ABC Company will
recognize sales revenue when:
A) their customer has received and inspected the goods.
B) when the goods leave ABC's shipping dock.
C) whenever the two parties agree that revenue should be recognized.
D) when the customer pays the invoice.
Answer: B
Diff: 2
LO: 5-2
7) When goods are shipped FOB destination:

A) revenue is recognized when the goods leave the shipping dock.
B) revenue is recognized after any returns are received by the seller.
C) revenue is recognized only after cash payment is received.
D) revenue is recognized when the goods are received by the customer.
Answer: D
Diff: 2
LO: 5-2
8) If a buyer takes advantage of a sales discount, the journal entry recorded by the seller will include a(n):
A) debit to Cash and a credit to Sales Discount.
B) debit to Cash and a debit to Sales Discount.
C) debit to Cash and debit to Accounts Receivable.
D) debit to Cash and debit to Sales Returns and Allowances.
Answer: B
Diff: 2
LO: 5-2
9) A business offers credit terms of 1/15, n/30. These terms indicate that:
A) the total amount of the invoice must be paid within 15 days.
B) a discount of 1% can be taken if the invoice is paid within 15 days.
C) the buyer can take a 1% discount if the bill is paid within 15 or 30 days.
D) no discount is offered for early payment.
Answer: B
Diff: 2
LO: 5-2
13
10) Which of the following is a true statement about sales?
A) Net revenue is gross revenue plus sales discounts less sales returns and allowances.
B) Sales discounts are offered to customers in order to speed up cash flow.
C) Sales returns and allowances increase a company's profit.
D) Retailers do not generally record sales returns and allowances in a separate account.
Answer: B
Diff: 2
LO: 5-2
11) ABC company sells goods to the XYZ Company for $1,000, It offers credit terms of 2/10, n/30. If XYZ
Company pays the invoice within the discount period, ABC Company will record a debit to cash in the
amount of:
A) $20.
B) $200.
C) $980.
D) $1,000.
Answer: C
Explanation: C) 1,000 * .02 = 20 discount
1,000 - 20 = 980 cash
Diff: 2
LO: 5-2
12) A company has gross revenue of $400,000; sales discounts of $4,500; and sales returns and allowances
of $3,000. Net revenue is:
A) $392,500.
B) $398,500.
C) $401,500.
D) $407,500.
Answer: A
Explanation: A) 400,000 - 4,500 - 3,000 = 392,500
Diff: 2
LO: 5-2
14
13) More Shoes, Inc., reported the following transactions in December:
Dec. 1 Sold merchandise on account to T. Melda, $950, terms 2/10, n/20.
Dec. 4 Sold merchandise on account to N. Moore, $880, terms 2/10, n/20.
Dec. 10 N. Moore returned $100 of merchandise.
Dec. 11 Received payment from T. Melda for the Dec. 1 purchase.
Dec. 31 Received payment from N. Moore for the balance of the Dec 4 sale.
Prepare the adjusting journal entries needed for each INDEPENDENT situation.
Answer:
Dec. 1 Accounts Receivable 950
Sales 950
Dec. 4 Accounts Receivable 880

Sales 880
Dec. 10 Sales Returns & Allowances 100

Accounts Receivable 100
Dec. 11 Cash 931

Sales Discount 19
950 * .02 = 19
Dec. 31 Cash 780

880 - 100 = 780
Diff: 2
LO: 5-2
1) The two major types of receivables are accounts receivable and trade receivables.
Answer: FALSE
Diff: 2
LO: 5-3
15
2) Accounts (trade) receivables are amounts to be collected from customers from the sale of goods or
services.
Answer: TRUE
Diff: 1
LO: 5-3
3) Accounts receivable have a maturity date.

Answer: FALSE
Diff: 1
LO: 5-3
4) The Accounts Receivable account in the general ledger has a separate account for each customer.
Answer: FALSE
Diff: 2
LO: 5-3
5) Businesses that sell on credit receive most of their cash receipts from collections of accounts receivable.
Answer: TRUE
Diff: 2
LO: 5-3
6) By selling on credit, companies run the risk of not collecting some receivables.
Answer: TRUE
Diff: 1
LO: 5-3
7) Formal monetary claims against others acquired mainly by lending money are:
A) accounts receivable.
B) notes receivable.
C) accounts payable.
D) notes payable.
Answer: B
Diff: 1
LO: 5-3
16
8) Monetary claims against others acquired mainly by selling goods and services are:
A) accounts receivable.
B) notes receivable.
C) accounts payable.
D) notes payable.
Answer: A
Diff: 1
LO: 5-3
9) Other receivables will include:

A) notes receivable.
B) accounts receivable.
C) loans to employees.
Answer: C
Diff: 2
LO: 5-3
10) A separate account for each customer is kept in a(n):

A) control account.
B) subsidiary ledger.
C) general ledger.
D) control ledger.
Answer: B
Diff: 2
LO: 5-3
11) ________ may be required on a note receivable as security for the loan.
A) Maturity value
B) Interest
C) Collateral
D) Principal
Answer: C
Diff: 2
LO: 5-3
17
12) One method of establishing proper internal control over the collection of accounts receivable is to:
A) set up a petty cash fund.
B) make all disbursements by cash.
C) establish a bank lock box.
D) designate an authorized check signer.
Answer: C
Diff: 2
LO: 5-3
13) A ledger that contains a separate account for each customer is called a:
A) general ledger.
B) trade ledger.
C) control ledger.
D) subsidiary ledger.
Answer: D
Diff: 2
LO: 5-3
14) The most important internal control over cash is to:

A) have all customers pay by check.
B) separate cash-handling duties from cash-accounting duties.
C) separate cash-handling from the mailroom.
D) have an imprest petty cash fund.
Answer: B
Diff: 2
LO: 5-3
18
15) Tom is the accountant for ABC Auto Stores. Tom receives and opens all mail. Tom follows company
policies by separating customer checks from the remittance advices. Tom deposits the checks in the bank
and posts the payments indicated on the remittance advices to the customers' accounts in the subsidiary
ledger. At the end of each day, Tom totals the amounts posted to the customers' accounts and compares
the total to the bank deposit slip ensure that all receipts are deposited in the bank.
List any internal control weaknesses and propose ways to strengthen the controls.
Answer: Weaknesses:
1. No segregation of the cash-handling duties from the cash-recording duties.
2. The same person receives the cash, deposits the cash, and records the payments.
3. The same person compares the total postings to the bank deposit.
Ways to strengthen the controls:

1. Segregate the cash-handling duties from the cash-recording duties.
2. Consider having the payments sent to a lockbox, especially if this is a small company and there is no
other person to handle some of the duties.
3. If a small company and there is no other person to share the duties, the owner must take an interest
in the cash receipts process and if possible perform some of the duties. At a minimum, he should look at
the daily deposits to see if customer payments match what he thinks should be coming in and he should
reconcile the bank account.
Diff: 2
LO: 5-3
1) Accounts receivable are shown on the balance sheet at their net realizable value.
Answer: TRUE
Diff: 2
LO: 5-4
2) Selling on credit creates both a benefit and a cost.

Answer: TRUE
Diff: 1
LO: 5-4
3) Uncollectible-account expense is an operating expense on the income statement.

Answer: TRUE
Diff: 2
LO: 5-4
19
4) The journal entry to record uncollectible-account expense includes a credit to Accounts Receivable.
Answer: FALSE
Diff: 2
LO: 5-4
5) Companies are prohibited from combining the percent-of sales and the aging methods when
estimating uncollectible accounts.
Answer: FALSE
Diff: 2
LO: 5-4
6) There are two basic ways to estimate uncollectibles—the direct write off method and the allowance
method.
Answer: FALSE
Diff: 2
LO: 5-4
7) Under the direct write-off method, uncollectible-account expense is recorded in the same accounting
period as the sale.
Answer: FALSE
Diff: 2
LO: 5-4
8) The Allowance for Uncollectible Accounts normally has a credit balance.

Answer: TRUE
Diff: 2
LO: 5-4
9) The biggest risk of selling on credit is:

A) the risk of posting a payment to the wrong subsidiary account.
B) the risk of not collecting some of the receivables.
C) the risk of losing a sale.
Answer: B
Diff: 2
LO: 5-4
20
10) The net realizable value of accounts receivable is the difference between accounts receivable and:
A) sales discounts.
B) allowance for uncollectible accounts.
C) uncollectible-account expense.
D) net revenue.
Answer: B
Diff: 2
LO: 5-4
11) The most acceptable way to measure bad debts is by:

A) the direct write-off method.
B) the percent-of-sales method.
C) the allowance method.
Answer: C
Diff: 2
LO: 5-4
12) When evaluating the collectability of accounts receivable:

A) the uncollectible-account expense is a contra account.
B) the allowance for uncollectible accounts is an operating expense in the selling, general and
administrative category.
C) the allowance method uses estimates developed from the company's collection experience.
D) the direct write-off method uses the allowance for uncollectible accounts to record bad debts.
Answer: C
Diff: 2
LO: 5-4
13) The aging-of-receivables method is:

A) not an acceptable method of estimating bad debts.
B) a balance sheet approach, since it focuses on accounts receivable.
C) an income statement approach, since it focuses on the amount of expense to be reported on the income
statement.
D) not concerned with the balance in the Allowance for Doubtful Accounts.
Answer: B
Diff: 2
LO: 5-4
21
14) Under the allowance method:
A) the company records the uncollectible-account expense when the customer does not pay.
B) the allowance for uncollectible accounts is a contra account to gross revenue.
C) the allowance for uncollectible accounts will normally have a debit balance.
D) the company sets up an allowance for uncollectible accounts to estimate the amount of the receivables
the company does not expect to collect.
Answer: D
Diff: 2
LO: 5-4
15) Estimating uncollectible accounts by analyzing individual accounts receivable according to the length
of time they have been outstanding is known as the:
A) aging-of-receivables method.
B) percent-of-sales method.
C) allowance method.
D) direct write-off method.
Answer: A
Diff: 2
LO: 5-4
16) Allowance for uncollectible accounts is classified as:

A) a contra-expense account.
B) a contra-revenue account.
C) a contra-asset account.
Answer: C
Diff: 2
LO: 5-4
17) Which account shows the amount of accounts receivable that the business does NOT expect to collect?
A) Sales Returns and Allowances
B) Unearned Accounts Receivable
C) Allowance for Uncollectible Accounts
D) Uncollectible Accounts Expense
Answer: C
Diff: 2
LO: 5-4
22
18) Which method does NOT use estimates?
A) Direct-write off method
B) Percent-of-Sales
C) Aging-of-receivables method
D) Allowance method
Answer: A
Diff: 2
LO: 5-4
19) The net realizable value of accounts receivable is the:

A) amount the company can collect from a factor when the receivables are sold.
B) amount remaining after uncollectible accounts are written off.
C) amount the company expects to collect from customers.
D) amount the company expects to pay to creditors.
Answer: C
Diff: 2
LO: 5-4
20) The percent-of-sales method of computing uncollectible accounts is used for:

A) interim statements because it is more accurate than the aging method.
B) annual statements because it is more accurate than the aging method.
C) interim statements because it is easier than the aging method.
D) annual statements because it is easier than the aging method.
Answer: C
Diff: 2
LO: 5-4
21) The percent-of-sales method:

A) computes uncollectible-account expense as a percent of accounts receivable.
B) takes a balance sheet approach.
C) employs the expense recognition (matching) concept.
D) will result in the same amount of estimated uncollectible accounts expense as the aging method.
Answer: C
Diff: 3
LO: 5-4
23
22) The allowance method that brings the balance of the allowance account to the needed amount as
determined by the aging schedule is:
A) the percent-of-sale method.
B) the aging-of-receivables method.
C) an income statement approach, since it focuses on the amount of expense to be reported on the income
statement.
Answer: B
Diff: 2
LO: 5-4
23) The entry to write off an account under the allowance method for estimating uncollectible accounts:
A) reduces total assets.
B) reduces net income.
C) has no effect on total assets or net income.
D) increases net income.
Answer: C
Diff: 3
LO: 5-4
24) The aging-of-receivables method:

A) uses an income statement approach.
B) focuses on the amount of receivable that will not be collected.
C) can only be used by service companies.
D) will produce results similar to those under the direct write-off method.
Answer: B
Diff: 2
LO: 5-4
24
25) Under the allowance method, when a company determines that they will not be able to collect from a
particular customer, they will debit:
A) Uncollectible-Account Expense.
B) Accounts Receivable.
C) Allowance for Uncollectible Accounts.
D) Sales Revenue.
Answer: C
Diff: 2
LO: 5-4
26) Under the allowance method, when an account receivable is written off, the journal entry:
A) violates the matching principle.
B) will decrease net income.
C) will decrease total current assets.
D) will have no effect on net accounts receivable.
Answer: D
Diff: 3
LO: 5-4
27) Most companies will use:

A) the percent-of-sales method for interim statements and the aging-of-receivables method at the end of
the year.
B) the aging-of-receivables method for interim statements and the percent-of-sales method at the end of
the year.
C) the direct write-off method.
D) all of the above.
Answer: A
Diff: 3
LO: 5-4
25
28) The direct write-off method:
A) reports receivables at their net realizable value.
B) does not use an allowance for uncollectible accounts.
C) is considered generally acceptable accounting for financial statement purposes.
D) estimates uncollectible accounts as a percentage of sales.
Answer: B
Diff: 2
LO: 5-4
29) The direct-write off method:

A) may overstate accounts receivable on the balance sheet.
B) recognizes the expense in the same period as the sales revenue.
C) credits Allowance for Uncollectible Accounts when an account is written off.
D) credits Uncollectible-Account Expense when an account is written off.
Answer: A
Diff: 3
LO: 5-4
30) Which of the following is a correct statement regarding the direct write-off method?
A) Most companies use the direct-write off method for their financial statements.
B) Companies are required to use the direct write-off method for federal income tax purposes.
C) A company records the uncollectible-account expense when it writes off an individual account
receivable .
D) Both B and C.
Answer: D
Diff: 3
LO: 5-4
31) To record estimated bad debts under the direct write-off method:
A) debit Allowance for Uncollectible Accounts and credit Accounts Receivable.
B) debit Accounts Receivable and credit Allowance for Uncollectible Accounts.
C) debit Uncollectible-Accounts Expense and credit Allowance for Uncollectible Accounts.
D) no journal entry is needed.
Answer: D
Diff: 2
LO: 5-4
26
32) Which of the following is NOT true regarding cash collections from customers?
A) Most companies have a time lag between earning the revenue and collecting the cash.
B) Collections from customers are the single most important source of cash for any business.
C) A company's collections from customers can be computed by analyzing their Accounts Receivable
account.
D) Cash collections from customers will be a debit to Accounts Receivable account.
Answer: D
Diff: 2
LO: 5-4
33) The direct write-off method records uncollectible-account expense:

A) at the end of the year.
B) at the end of the accounting period.
C) when the specific account receivable is determined to be uncollectible.
D) under the percent-of-sale method.
Answer: C
Diff: 2
LO: 5-4
34) The allowance method records uncollectible-account expense:

A) at the end of the year.
B) at the end of the accounting period.
C) when the specific account receivable is determined to be uncollectible.
D) under the percent-of-sale method.
Answer: B
Diff: 2
LO: 5-4
35) The balance in the allowance for uncollectible accounts is considered prior to the year-end adjustment
under:
A) the direct write-off method.
B) the percent-of-sales method.
C) the aging-of- receivables method.
D) both the percent-of-sales and aging-of- receivables method.
Answer: C
Diff: 2
LO: 5-4
27
36) Under the allowance method, the entry to write off a $2,600 uncollectible account includes a:
A) debit to Accounts Receivable for $2,600.
B) credit to Uncollectible-Account Expense for $2,600.
C) credit to Allowance for Uncollectible Accounts for $2,600.
D) debit to Allowance for Uncollectible Accounts for $2,600.
Answer: D
Diff: 2
LO: 5-4
37) A company makes a journal entry to debit Uncollectible-Account Expense and credit Accounts
Receivable. This entry indicates that they are using the ________ method.
A) allowance
B) aging-of-receivables
C) percent-of-sales
D) direct write-off
Answer: D
Diff: 2
LO: 5-4
38) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the
following:
1-30 days $60,000 1%

31-60 days $40,000 3%
61-90 days $20,000 10%
Over 90 days $5,000 50%
The credit balance in Allowance for Uncollectible Accounts was $1,000. Under the aging-of-receivables
method, the uncollectible-account expense for the year is:
A) $1,500.
B) $4,100.
C) $5,300.
D) $6,300.
Answer: C
Explanation: C) (60,000 * .01) + (40,000*.03) + (20,000*.10) + (5,000*.50) =
600 + 1,200 +2,000 + 2,500 = 6,300
6,300 - 1,000 = 5,300
Diff: 2
LO: 5-4
28
39) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the
following:
1-30 days $60,000 1%

31-60 days $40,000 3%
61-90 days $20,000 10%
Over 90 days $5,000 50%
The credit balance in Allowance for Uncollectible Accounts was $5,700. Under aging-of-receivables
method, the balance in the Allowance for Uncollectible Accounts will be ________ after the adjusting
entry is made.
A) $1,500
B) $4,100
C) $5,300
D) $6,300
Answer: D
Explanation: D) (60,000 * .01) + (40,000 * .03) + (20,000*.10) + (5,000 * .50) =
600 + 1,200 +2,000 + 2,500 = 6,300
Diff: 2
LO: 5-4
40) An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3,210. The
Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $2,000. The amount of
the adjusting entry should be for:
A) $1,210.
B) $2,000.
C) $3,210.
D) $5,210.
Answer: A
Explanation: A) 3,210 - 2,000 = 1,210
Diff: 2
LO: 5-4
29
41) Using the percentage-of-sales method, you estimate that total uncollectible accounts is $5,875. The
the adjusting entry for uncollectible accounts expense is:
A) $2,635.
B) $3,240.
C) $5,875.
D) $8,510.
Answer: C
Explanation: C) 5,875 - 0 = 5,875 since the balance in the allowance account is ignored under the
percentage-of-sales method
Diff: 2
LO: 5-4
42) The following item appeared on a balance sheet:

Receivables, less allowance of $100,855 …..$1,432,602
The gross balance in Accounts Receivable before the allowance was deducted was:
A) $1,331,747.
B) $1,432,602.
C) $1,533,457.
D) cannot be determined from the facts.
Answer: C
Explanation: C) 1,432,602 + 100,855 = 1,533,457
Diff: 2
LO: 5-4
30
43) The following account balances were extracted from the accounting records of A and D Corporation:
Accounts Receivable $110,000

Allowance for Uncollectible Accounts $35,000
Uncollectible-Account Expense $60,000
What is the net realizable value of the accounts receivable?

A) $145,000
B) $110,000
C) $ 75,000
D) $ 50,000
Answer: C
Explanation: C) 110,000 - 35,000 = 75,000
Diff: 2
LO: 5-4
44) A company reports accounts receivable on the balance sheet at a net realizable value of $586,592. If
their gross receivables were $612,854, then the balance in the Allowance for Uncollectible Accounts is:
A) $26,262.
B) $38,745.
C) $73,812.
D) cannot be determined from the facts.
Answer: A
Explanation: A) 612,854 - 586,592 = 26,262
Diff: 2
LO: 5-4
45) Using the aging-of-receivables method to estimate uncollectibles, Greeley Corporation estimates that
$9,500 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible
Accounts has a credit balance of $3,000. After all necessary adjusting entries are made, the balance in
Allowance for Uncollectible Accounts will be:
A) $3,000.
B) $6,500.
C) $9,500.
D) $12,500.
Answer: B
Explanation: B) 9,500 - 3,000 = 6,500
Diff: 2
LO: 5-4
31
46) Bigg and Talle Corporation uses the percent-of-sales method to estimate uncollectibles. Net credit
sales for the current year amount to $5,000,000, and management estimates 2% will be uncollectible.
expense reported on the income statement will be:
A) $16,000.
B) $84,000.
C) $100,000.
D) $116,000.
Answer: C
Explanation: C) 5,000,000 * .02 = 100,000
Diff: 2
LO: 5-4
47) Bigg and Talle Corporation uses the percentage-of-sales method to estimate uncollectibles. Net credit
sales for the current year amount to $5,000,000 and management estimates 2% will be uncollectible.
Allowance for Doubtful Accounts prior to adjustment has a credit balance of $16,000. After all necessary
adjusting entries are made, the balance in Allowance for Uncollectible Accounts will be:
A) $16,000.
B) $84,000.
C) $100,000.
D) $116,000.
Answer: D
Explanation: D) 16,000 + 100,000 = 116,000
Diff: 2
LO: 5-4
48) A company who uses the allowance method, writes-off a receivable of $2,000. Prior to the journal
entry, the balance in the Allowance for Uncollectible Accounts was $18,432. After the entry to write-off
the receivable is made, the balance in the Allowance for Uncollectible Accounts will be:
A) $2,000.
B) $12,432.
C) $16,432.
D) $20,432.
Answer: C
Explanation: C) 18,432 - 2,000 = 16,432
Diff: 2
LO: 5-4
32
49) Portia Incorporated uses the percent-of-sales method to estimate uncollectibles. Net credit sales for
the current year amount to $2,000,000, and management estimates 2% will be uncollectible. Allowance for
Uncollectible Accounts prior to adjustment has a debit balance of $1,900. The amount of expense reported
on the income statement and the balance in Allowance for Uncollectible Accounts, respectively, will be:
A) $41,900 and $40,000.
B) $40,000 and $38,100.
C) $38,100 and 40,000.
D) $40,000 and $41,900.
Answer: B
Explanation: B) expense = 2,000,000 * .02=40,000
Allowance balance 1,900 debit bal + 40,000 credit adjustment = 38,100 balance
Diff: 3
LO: 5-4
50) The balance in Accounts Receivable was $650,000 at the beginning of the year and $350,000 at the end
of the year. Credit sales for the year totaled $4,100,000. During the year, $400,000 in customer accounts
were written off. How much cash was collected from customers during the period?
A) $3,750,000
B) $4,000,000
C) $4,400,000
D) $4,800,000
Answer: B
Explanation: B)
Accounts Receivable
Dr Cr
650,000 400,000
4,100,000
Bal
4,350.000
4,000,000 collections
End bal
350,000
Diff: 3
LO: 5-4
33
51) Consider the following INDEPENDENT situations for XYZ Company:
a. The Allowance for Uncollectible Accounts has a $1,200 credit balance prior to adjustment. Net credit
sales during the year are $830,000 and 4% are estimated to be uncollectible. Accounts Receivable has a
balance of $110,000 at the beginning of the year.
b. The Allowance for Uncollectible Accounts has a $900 credit balance prior to adjustment. Based on an
aging schedule of accounts receivable prepared at the end of the year, $17,900 of accounts receivable are
estimated to be uncollectible. Accounts Receivable has a balance of $104,000 at the end of the year.
c. The Allowance for Uncollectible Accounts has a $16,300 credit balance prior to adjustment. Based on
an aging schedule of accounts receivable prepared at the end of the year, $20,000 of accounts receivable
are estimated to be uncollectible. Accounts Receivable has a balance of $958,000 at the end of the year.
d. The Allowance for Uncollectible Accounts has a $500 credit balance prior to adjustment. Net credit
balance of $825,000 at the end of the year.
Prepare the adjusting journal entries needed for each INDEPENDENT situation.
Answer:
a. Uncollectible- Account Expense 33,200
Allowance for Uncollectible Accounts 33,200
830,000 * .04 = 33,200
b. Uncollectible- Account Expense 17,000

17,900 - 900 = 17,000
c. Uncollectible-Account Expense 3,700

20,000 - 16,300 = 3,700
d. Uncollectible - Account Expense 45,000

900,000 * .05 = 45,000
Diff: 2
LO: 5-4
34
52) Consider the following INDEPENDENT situations for XYZ Company:
a. The Allowance for Uncollectible Accounts has a $1,200 credit balance prior to adjustment. Net credit
balance of $110,000 at the beginning of the year.
b. The Allowance for Uncollectible Accounts has a $900 credit balance prior to adjustment. Based on an
aging schedule of accounts receivable prepared at the end of the year, $17,900 of accounts receivable are
estimated to be uncollectible. Accounts Receivable has a balance of $104,000 at the end of the year.
c. The Allowance for Uncollectible Accounts has a $16,300 credit balance prior to adjustment. Based on
an aging schedule of accounts receivable prepared at the end of the year, $20,000 of accounts receivable
are estimated to be uncollectible. Accounts Receivable has a balance of $958,000 at the end of the year.
d. The Allowance for Uncollectible Accounts has a $500 credit balance prior to adjustment. Net credit
balance of $825,000 at the end of the year.
Calculate the net receivables for each situation A through D)

Answer:
Allowance
for
Accounts Uncollectible Net
Situation Receivable Accounts Receivables
a 110,000 34,400 75,600
b 104,000 17,900 86,100
c 958,000 20,000 938,000
d 825,000 45,500 779,500
Diff: 3
LO: 5-4
35
53) The Cat Company obtained the following information from its accounting records for the year ended
December 31, 2012:
Sales during 2012 $876,500

Credit Sales are 80% of sales
Accounts Receivable $205,000
Allowance for Uncollectible Accounts
(before adjustment) $830 credit
Cat Company uses the percent-of-sales method, at 2.0% of credit sales, to estimate uncollectible accounts
for 2012.
The president of the company wants to change to the aging-of-receivables method and estimates $12,450
as the uncollectible amount for 2012.
Prepare a schedule for the president showing the amount of the adjusting entry, ending balance in the
allowance account, and the net realizable value of accounts receivable under each method.
Answer:
Percent-of-Sales Method
Credit Sales 876,500 * 0 701,200
Estimated Uncollectible-Accounts Expense
using percent-of-sales 14,024 (701,200 × 2.0%)

Dec 31, 2012 Uncollectible Accounts Expense 14,024
Allowance of Uncollectible Accounts 14,024
Percent-of-Sales Method
Accounts Receivable 205,000
Allowance for Uncollectible Accounts 830*14,024 14,854
Net Accounts Receivable 190,145
Aging -of-Receivable
Amount from Aging schedule 12,450

Dec 31, 2012 Uncollectible Accounts Expense 11,620
12,450 - 830
Aging of Accounts
Net Accounts Receivable 192,55
Diff: 3
LO: 5-4
36
54) Journalize the following transactions for The Computer Store. The Computer Store uses the direct
write-off method of accounting for uncollectible receivables.
April 5 The Computer Store sells $3,200 of computer equipment on account to Jane Doe.
June 5 Jane Doe pays The Computer Store $2,000 of the amount she owes.
July 7 After repeated attempts to collect the balance due from Jane Doe fail, The Computer Store writes-
off the remainder of the amount she owes.
Answer:
April 5 Accounts Receivable- Jane Doe 3,200

Sales revenue 3,200
June 5 Cash 2,000

Accounts Receivable - Jane Doe 2,000
July 7 Uncollectible - Account Expense 1,200

Diff: 2
LO: 5-4
37
55) Journalize the following transactions for The Computer Store. The Computer Store uses the allowance
method of accounting for uncollectible receivables.
April 5 The Computer Store sells $3,200 of computer equipment on account to Jane Doe.
June 5 Jane Doe pays The Computer Store $2,000 of the amount she owes.
July 7 After repeated attempts to collect the balance due from Jane Doe fail, The Computer Store
writes-off the remainder of the amount she owes.
Answer:
April 5 Accounts Receivable- Jane Doe 3,200

Sales revenue 3,200
June 5 Cash 2,000

July 7 Allowance for Uncollectible Accounts 1,200

Diff: 2
LO: 5-4
38
56) At the end of the current year, Accounts Receivable has a balance of $700,000, the Allowance for
Uncollectible Accounts has a credit balance of $10,000 and net sales for the year are $2,000,000. Using the
aging method, the balance of Allowance for Uncollectible Accounts is estimated at $30,000.
Required:
1. Prepare the adjusting journal entry at the end of the year
2. Determine the adjusted balances for Accounts Receivable and the Allowance for Uncollectible
Accounts.
3. Determine the net realizable value of accounts receivable at the end of the year.
Answer:
1.
Dec. 31 Uncollectible - Account Expense 20,000

Req bal 30,000 less bal in account of 10,000
2. Accounts Receivable balance is $700,000 (no change to the account)

Allowance of Uncollectible Accounts beg bal 10,000 plus 20,000 credit = $30,000
3. Net realizable value = AR- Allowance

700,000 - 30,000 = $670,000
Diff: 2
LO: 5-4
39
57) At the end of the current year, Accounts Receivable has a balance of $1,910,000, the Allowance for
Uncollectible Accounts has a credit balance of $46,104 and net credit sales for the year are $2,535,000.
Using the percent-of -sales method, the company determines that uncollectibles will amount to 3% of net
credit sales.
Required:
1. Prepare the adjusting journal entry at the end of the year
2. Determine the adjusted balances for Accounts Receivable and the Allowance for Uncollectible
Accounts.
3. Determine the net realizable value of accounts receivable at the end of the year.
Answer:
1.
Dec 31 Uncollectible Account Expense 76,050

2,535,000 * .03 = 76,050
2. Accounts Receivable balance is $1,910,000 (no change to the account)

Allowance of Uncollectible Accounts beg bal 46,104 plus 76,050 credit = $122,154
3. Net realizable value = AR- Allowance

1,910,000 - 122,154 = $1,787,846
Diff: 2
LO: 5-4
40
58) Info Times Inc. had service revenue on account for the year of $300,000 and cash collections of
$130,000. During the year, uncollectible accounts receivable of $700 were written off. At December 31, an
aging of accounts receivable indicated that Info Times Inc. will not collect $4,500 of its accounts
receivable. Info Times Inc. had a $2,100 credit balance in the Allowance for Uncollectible Accounts at the
beginning of the year.
1. Journalize the entries to record (1) the service revenue, (2) the cash collections, (3) the write-off of the
uncollectible receivable and (4) the year end entry to record uncollectible account expense.
Answer:
1. Accounts Receivable 300,000

Service Revenue 300,000
2. Cash 130,000
3. Allowance for Uncollectible Accounts 700

4. Uncollectible- Account Expense 3,100

See T account below for calculation
Allowance
Dr Cr Bal
2,100
700 1,400
3,100 4,500
Diff: 2
LO: 5-4
41
59) During its first year of operations, Credit Company had the following transactions. The company uses
the percent-of-sales method to estimate uncollectible accounts.
Credit sales $500,000

Collections on account $380,000
Write-offs of uncollectible accounts $7,500
Uncollectible-account expense 2.5% of credit sales
Journalize the above transactions (explanations are not required.)

Answer:
1. Accounts Receivable 500,000
Revenue 500,000
2. Cash 380,000
3. Allowance for Uncollectible Accounts 7,500

4. Uncollectible-Accounts Expense 12,500

Diff: 2
LO: 5-4
42
60) During its first year of operations, Credit Company had the following transactions. The company uses
the percent-of-sales method to estimate uncollectible accounts.
Credit sales $500,000

Collections on account $380,000
Write-offs of uncollectible accounts $7,500
Uncollectible-account expense 2.5% of credit sales
Create T accounts for accounts receivable, allowance for uncollectible accounts, and uncollectible
accounts expense. Post the journal entries, calculate ending account balances, and answer the following
questions.
1. How much do customers owe the company?

2. What is the net realizable value of the company's accounts receivable?
3. What is the amount of expense reported on the income statement related to uncollectible accounts?
Answer: Accounts Receivable
500,000 380,000
7,500
112,500 Bal.
Allowance
7,500 12,500
5,000 Bal
Uncollectible Accounts Expense

12,500
12,500 Bal
1. Customers owe the company $112,500.

2. The net realizable value is $107,500 (112,500 — 5,000).
3. There is $12,500 of uncollectible-account expense reported on the income statement.
Diff: 2
LO: 5-4
43
61) Debit Company uses the aging of accounts receivable method to estimate uncollectible accounts. The
company started the year with accounts receivable of $85,000 and an allowance for uncollectible accounts
of $10,000. During the year, the company had credit sales of $300,000 and cash collections on account of
$325,000. It also wrote off uncollectible accounts receivable of $7,000. At the end of the year, an aging of
accounts receivable indicated the company will not collect $8,000 of its accounts receivable.
1. Journalize the credit sales, cash collections, write-off, and uncollectible accounts expense for the
year.
2. Create a T account for the allowance for uncollectible accounts, post the necessary entries, and
compute an ending account balance. The T account should support the journal entry for uncollectible
accounts expense.
Answer: 1.
Revenue 300,000
Cash 325,000

Uncollectible-Accounts Expense 5,000

*(10,000 - 7,000 = 3,000 unadjusted balance
2.
Allowance for Uncollectible Accounts
10,000 Bal.
7,000 3,000*
5,000.
8,000 bal
Diff: 2
LO: 5-4
44
62) On December 31, 2012, ABC Inc. has an accounts receivable balance of $300,000 before any year-end
adjustments. The allowance for doubtful accounts has a $10,000 credit balance. The company prepares the
following aging schedule for accounts receivable:
Total balance 1-30 days 31-60 days 61-90 days over 90 days
$300,000 $150,000 80,000 50,000 20,000
Est. uncollectible % .5% 1% 5% 50%
Based on the aging of accounts receivable, is the unadjusted balance of the allowance account adequate?
Why or why not? Journalize the entry required by the aging schedule.
Answer: Computation = (150,000 * .005) + (80,000 * .01) + (50,000 * .05) + (20,000 * .50)
= $750 + 800 + 2,500 + 10,000 = $14,050 adjusted allowance balance.
Uncollectible-Account Expense 4,050

Diff: 3
LO: 5-4
1) The payee of the note records interest on a note receivable as interest revenue.
Answer: TRUE
Diff: 2
LO: 5-5
2) The creditor has a note payable.

Answer: FALSE
Diff: 2
LO: 5-5
3) The maturity value of a note is the sum of the principal amount of a note less the interest due at
maturity.
Answer: FALSE
Diff: 2
LO: 5-5
45
4) The principal amount of the note is the amount borrowed by the debtor.
Answer: TRUE
Diff: 1
LO: 5-5
5) Interest rates are always for an annual period unless stated otherwise.
Answer: TRUE
Diff: 2
LO: 5-5
6) Company A has a Note Receivable of $5,000. The note will be collected in installments. $1,000 is due
within a year and the remainder is due after a year. The classification of the note on the balance sheet is:
A) all $5,000 is a current asset.
B) all $5,000 is a long term asset.
C) $1,000 is a current asset and $4,000 is a long-term asset.
D) $4,000 is a current asset and $1,000 is a long-term asset.
Answer: C
Diff: 2
LO: 5-5
7) A company borrows $10,000 from the bank at 10% interest for sixty days. $10,0000 is the ________ of
the note.
A) maturity value
B) interest amount
C) stated value
D) principal
Answer: D
Diff: 2
LO: 5-5
8) There are two parties to a note and:

A) the creditor has a note receivable and the debtor has a note payable.
B) the creditor has a note payable and the debtor has a note receivable.
C) the creditor and debtor both have notes receivable.
D) the creditor and debtor both have notes payable.
Answer: A
Diff: 2
LO: 5-5
46
9) When a note matures:
A) the debtor must pay the creditor the principal amount of the note.
B) the creditor must pay the debtor the interest due on the note.
C) the debtor must pay the creditor the maturity value of the note.
D) the creditor must pay the debtor the maturity value of the note.
Answer: C
Diff: 2
LO: 5-5
10) When a note matures, ________ on the books of the payee.

A) interest expense will increase
B) interest revenue will increase
C) notes receivable will increase
D) notes payable will decrease
Answer: B
Diff: 2
LO: 5-5
11) A three month, 10% note for $8,000, dated April 15, is received from a customer. The principal of the
note is:
A) $200.
B) $8,000.
C) $8,200.
D) $8,800.
Answer: B
Diff: 2
LO: 5-5
12) A maker and a payee record the same note, respectively, as a:

A) note receivable and note payable.
B) note receivable and account receivable.
C) note payable and note receivable.
D) note payable and account payable.
Answer: C
Diff: 2
LO: 5-5
47
13) A bank loaned Customer D $5,000. On the books of the bank:
A) total assets increased.
B) total assets decreased.
C) total assets remained the same.
D) the impact on total assets cannot be determined.
Answer: C
Diff: 2
LO: 5-5
14) The Last Bank lends money to a customer on a six month note. The entry to record the receipt of the
note by the customer is:
A) debit Note Receivable and credit Service Revenue.
B) debit Cash and credit Note Payable.
C) debit Note Receivable and credit Cash.
D) debit Cash and credit Note Receivable.
Answer: B
Diff: 2
LO: 5-5
15) The Last Bank lends money to a customer on a six month note. The bank accrues interest on the note
at the end of the year. The journal entry on the books of the bank would include a:
A) debit to Cash and a credit to Interest Revenue.
B) debit to Cash and a credit to Interest Payable.
C) debit to Interest Receivable and a credit to Interest Revenue.
D) debit to Interest Revenue and a credit to Interest Receivable.
Answer: C
Diff: 2
LO: 5-5
48
16) Company B receives a note from a customer for a $5,000 sale. On Company B's books:
A) total assets decrease.
B) revenue remains the same.
C) total assets increase.
D) total expenses decrease.
Answer: C
Diff: 2
LO: 5-5
17) If a company receives a note receivable on account:

A) notes receivable will decrease.
B) accounts receivable will increase.
C) total assets will increase.
D) total assets will remain the same.
Answer: D
Diff: 2
LO: 5-5
18) The entry to record accrued interest on a note receivable at year end includes a debit to:
A) Interest Revenue.
B) Interest Receivable.
C) Note Receivable.
D) Cash.
Answer: B
Diff: 2
LO: 5-5
49
19) Boat Company signed a 12-month, $40,000, 8% note on June 1, 2012. The amount of interest to be
accrued on December 31, 2012, is (round to nearest dollar):
A) $1,200.
B) $1,600.
C) $1,867.
D) $3,200.
Answer: C
Explanation: C) 40,000 * .08 * 7/12 = 1,867
Diff: 2
LO: 5-5
20) The maturity value of a $40,000 note at 11% for 5 months is (round to nearest dollar):
A) $41,833.
B) $40,880.
C) $44,400.
D) $47,260.
Answer: A
Explanation: A) 40,000 * .11 * 5/12 = 1,833 interest
Maturity value = 40,000 + 1,833 = 41,833
Diff: 2
LO: 5-5
21) The due date of a 120 day, 10% note for $30,000, dated April 12 is:
A) August 9.
B) August 10.
C) August 11.
D) August 12.
Answer: B
Explanation: B) April 18 days (30-12)
May 31
June 30
July 31
Aug 10
120
Diff: 2
LO: 5-5
50
22) If the interest on a note is 12.5% and the principal was $100,000, what is the maturity value of the note,
if the note is outstanding for 7 months? (Round to the nearest dollar.)
A) $1,143
B) $7,292
C) $107,292
D) $112,500
Answer: C
Explanation: C) PRT=I
PRT = I 100,000 * .125 * 7/12 = 7,292
MV = P + I 100,000 + 7,292 = 107,292
Diff: 3
LO: 5-5
23) On December 31, 2012, the payee on a $4,500, 120-day, 10% note dated November 1, 2012, will
recognize: (Use a 365 day year and round to the nearest dollar.)
A) interest receivable, $148.
B) interest receivable, $75.
C) interest payable, $148.
D) interest payable, $75.
Answer: B
Explanation: B) 4,500 * .10 * 60/365 = 75
Diff: 2
LO: 5-5
51
24) Kate Johnson, president of BQ Industries, executed a note payable on behalf of the company on
October 1, 2012 in the amount of $125,000 with an interest rate of 8% for 15 months.
Calculate the following items:

1. The total interest to be paid over the term of the note
2. The interest that should be accrued at December 31, 2012 (the FYE)
3. The maturity value of the note when the note is due
4. The date that the note is due
Answer:
1.
Total Interest = Principal × Rate × Time
$125,000 × 8% × 15/12
= $12,500
2.
From
October 01 to December 31 (3 months)
All of October November December
Interest to be = Principal × Rate × Time

accrued 12/31 $125,000 × 8% × 3/12
= $2,500
3.
Maturity value = Principal + Total Interest
= $125,000.00 + $12,500
= $137,500
4.
15 months From Oct 01, 2012 2013
November January April July October
December February May August November
(3 months 2012) March June September December
Due date is January 1, 2014
Diff: 2
LO: 5-5
52
25) Complete the following chart by filling in the missing items. Use a 360-day year and round all
answers to the nearest dollar and to 2 decimal places for percentages.
Principal Interest Rate Time Interest Maturity Value

1 $12,000 10% 120 days A B
2 $50,000 8% C D $53,000
3 $15,000 D 180 days $2,500 E
4 F 18% G $10,800 $70,000
5 $90,000 6% H $900 I
Answer:
1 $12,000 10% 120 days $400 $12,400
2 $50,000 8% 9 months $3,000 $53,000
3 $15,000 33.33% 180 days $2,500 $17,500
4 $60,000 18% 1 year $10,800 $70,000
5 $90,000 6% 60 days $900 $90,900
Calculations:
Interest = Principal times Rate times Time
1 $400 $12,000 × 10% × 120/360
2 $3,000 $50,000 × 8% × 9/12
3 $2,500 $15,000 × 33.33% × 180/360
4 $10,800 $60,000 × 18% × 1 year
5 $900 $90,000 × 6% × 60/360
Maturity Value = Principal + Interest
1 $12,400 = $12,000 + $400
2 $53,000 = $50,000 + $3,000
3 $17,500 = $15,000 + $2,500
4 $70,800 = $60,000 + $10,800
5 $90,900 = $90,000 + $900
Diff: 2
LO: 5-5
53
26) For each of the following independent situations, prepare the appropriate adjusting journal entry on
the last day of the fiscal year end (FYE). Use the information provided below for each situation.

1 $12,000 10% 120 days $400 $12,400
2 $50,000 8% 9 months $3,000 $53,000
3 $15,000 33.33% 180 days $2,500 $17,500
4 $60,000 18% 1 year $10,800 $70,000
5 $90,000 6% 60 days $900 $90,900
1 Note executed on July 01, 2012 and FYE is September 30. (92 days)
2 Note executed on April 01, 2012 and FYE is September 30. (6 months)
3 Note executed on October 15, 2012 and FYE is January 31. (108 days)
4 Note executed on January 01, 2012 and FYE is April 30. (4 months)
5 Note executed on September 01, 2012 and FYE is September 30. (30 days)
Answer:
Interest = Principal times Rate times Time
1 $307 $12,000 × 10.00% × 92/360
2 $2,000 $50,000 × 8.00% × 6/12
3 $1,500 $15,000 × 33.3333% × 180/360
4 $3,600 $60,000 × 18.00% × 4/12
5 $450 $90,000 × 6.00% × 30/360
Sept 30, 2012 Interest Expense 307

Interest Payable 307
Sept 30, 2012 Interest Expense 2,000

Interest Payable 2,000
Jan 31, 2013 Interest Expense 1,500

April 30, 2012 Interest Expense 3,600

Sept 30, 2012 Interest Expense 450

Interest Payable 450
Diff: 2
54
LO: 5-5
th
27) The Shark Bank lent Sandy's Pastry Store $34,000 on a sixty day, 7% note dated April 10 . Use a 365
day year when calculating interest and round all amounts to the nearest dollar.
Required:
1. Determine the due date of the note.
2. Determine the maturity value of the note.
3. Journalize the entries to record the receipt of the note by the payee and the receipt by the payee of the
amount due on the note at maturity.
Answer:
1. Calculations: April 20 days (30-10)
May 31
June 9
60
Due date is June 9
2. Maturity value = principal plus interest

I = PRT = 34,000 * .07 * 60/365 = 391
34,000 + 391 = 34,391 maturity value
3.
April 10 Note Receivable 34,000

Cash 34,000
June 4 Cash 34,391

Note Receivable 34,000
Interest Revenue 391
Diff: 2
LO: 5-5
55
28) The Shady Bank lent Dorst Company $8,000 on December 1 for 6 months at an interest rate of 8%. The
Shady Bank has a year end of December 31. Prepare the journal entries to record the (1) issuance of the
note, (2) the accrued interest at December 31, and (3) the collection of the note on June 1. Round any
amounts to the nearest dollar.
Answer:
Dec. 1 Note Receivable 8,000

Cash 8,000
Dec. 31 Interest Receivable 53

Interest Revenue 53
8,000 * .08 * 1/12
May 1 Cash 8,320

Note Receivable 8,000
Interest Receivable 53
Interest Revenue 267
Interest = 8,000 * .08 * 6/12 = 320
MV = 8,000 + 320 + 8,320
Diff: 2
LO: 5-5
29) Following are key terms relating to notes receivable, as well as a list of definitions.
A. Creditor
B. Debtor
C. Interest
D. Maturity date
E. Maturity value
F. Principal
G. Term
______ 1. The amount of money borrowed by the debtor
______ 2. Another term for the lender
______ 3. The cost of borrowing money stated as an annual percentage rate
______ 4. The length of time from when the note was signed to when the note must be paid
______ 5. The maker of the note
______ 6. The date on which the debtor must pay the note
______ 7. The sum of the principal and the interest on the note
Required: Place the appropriate letter (A-G) on the line in front of the statement describing the term.
Answer: 1. F, 2.. A, 3. C, 4. G, 5. B, 6.D, 7. E
Diff: 2
LO: 5-5
56
30) On July 30, 2012, ABC Inc. borrowed $100,000 from First Bank. The company signed a one year note
payable, promising to pay the bank principal plus interest. The interest rate on the note is 5% and the
fiscal year end for First Bank. is December 31.
Journalize First Bank's (a) lending money on the note receivable, (b) accrual of interest revenue at
December 31, 2011, and (c) collection of principal and interest on the maturity date. Round all amounts to
the nearest dollar.
Answer:
A) Note receivable 100,000
Cash 100,000
B) Interest receivable 2,083

Interest revenue 2,083
(100,000 * .05 * 5/12)
C) Cash 105,000
Interest receivable 2,083
Interest revenue 2,917
Note receivable 100,000
100,000 *.05 = 5,000
Diff: 2
LO: 5-5
1) Accepting credit cards can increase revenue for a company, but the added revenue comes at a cost.
Answer: TRUE
Diff: 1
LO: 5-6
2) When a company factors its receivables, accounts receivable will be credited.

Answer: TRUE
Diff: 2
LO: 5-6
57
3) Accounts receivable can be sold to a factor as a means of speeding up cash flows.
Answer: TRUE
Diff: 2
LO: 5-6
4) Cash that results from collections on account are reported as investing activities on the statement of
cash flows.
Answer: FALSE
Diff: 2
LO: 5-6
5) To shorten the collection period, a company may:

A) decide to stop accepting credit cards.
B) stop charging interest on late payments.
C) decrease the discount offered.
D) factor its receivables.
Answer: D
Diff: 2
LO: 5-6
6) In 2012, Krane Company purchases $75,000 of U.S. Treasury bills. This purchase would be reported on
Krane Company's 2012 statement of cash flows as:
A) a financing activity.
B) an operating activity.
C) an investing activity.
Answer: C
Diff: 2
LO: 5-6
7) On a statement of cash flows, collections of accounts receivables are classified as:

A) an operating activity.
B) an investing activity.
C) a financing activity.
Answer: A
Diff: 2
LO: 5-6
58
8) XYZ Company has decided to factor its accounts receivable in order to get the immediate receipt of
cash. The journal entry to record the factoring of the receivables would include:
A) a debit to Accounts Receivable.
B) a credit to Cash.
C) a debit to Financing Expense.
D) a credit to Interest Revenue.
Answer: C
Diff: 2
LO: 5-6
9) Crazy Foods, Inc., factors its receivables to Shady Factoring Company. The effect of this transaction is:
A) Shady Factoring will earn revenue on the transaction.
B) Crazy Foods will retain control over the receivables.
C) Shady Factoring will recognize a factoring expense on the transaction.
D) Crazy Foods will receive cash equal to the face value of the receivables.
Answer: A
Diff: 3
LO: 5-6
10) Which of the following is a correct statement regarding methods to speed up the collection of cash
from receivables?
A) Factoring is used frequently by companies since it is an inexpensive way to raise cash.
B) Credit card companies will charge a fee of 20-30% of the total amount of the sale.
C) The company that factors its receivables maintains control over the collection process.
D) The credit card discount expense is an operating expense.
Answer: D
Diff: 2
LO: 5-6
59
11) Selling accounts receivable typically:
A) decreases assets and increases revenues.
B) decreases assets and increases expenses.
C) increases assets and increases revenues.
D) has no effect on assets and decreases expenses.
Answer: B
Diff: 2
LO: 5-6
12) Terry's Berry Farm accepted a bank-issued credit card in payment of a $1,200 sales transaction. Terry's
bank charges 2% to process the transaction. The journal entry to record the sales transaction will include:
A) a credit to Sales Revenue for $1,176.
B) a debit to Cash for $1,200.
C) a debit to Credit Card Discount Expense for $24.
D) a debit to Accounts Receivable for $1,200.
Answer: C
Explanation: C) 1,200 * 0 -.02 = 24 expense
1,200 - 24 = 1,176 cash
Diff: 2
LO: 5-6
13) If Extol's Inc. sells items to a customer who uses a credit card for $800, and there is a credit card fee of
2%, what is the amount of the debit to Cash?
A) $816
B) $800
C) $784
D) $768
Answer: C
Explanation: C) 800 * .02 =16
800 -16 = 784
Diff: 2
LO: 5-6
60
14) If Abby, Inc. sells items to a customer who uses a credit card for $1,000, and there is a credit card fee
of 1.5%, Abby will record a(n):
A) credit to Sales Revenue for $985.
B) debit to Accounts Receivable for $985.
C) debit to Sales expense for $65.
D) debit to Credit Card Discount Expense for $15.
Answer: D
Explanation: D) 1,000 * .015 = 15 credit card expense
1,000 - 15 = 985 cash
Diff: 2
LO: 5-6
1) Ratios are used only by company management, and not investors, to evaluate the financial health of a
company.
Answer: FALSE
Diff: 1
LO: 5-7
2) Because it includes only cash and short-term investments in the numerator, the current ratio is a more
stringent measure of a firm's ability to pay current liabilities than the quick ratio.
Answer: FALSE
Diff: 2
LO: 5-7
3) The higher the quick ratio, the easier it is to pay current liabilities.
Answer: TRUE
Diff: 2
LO: 5-7
61
4) In order to effectively evaluate the days' sales in receivables, it should be compared to the company's
credit terms.
Answer: TRUE
Diff: 2
LO: 5-7
5) Days' sales in receivables tells a company how long it takes to collect its average level of receivables.
Answer: TRUE
Diff: 1
LO: 5-7
6) The quick ratio helps to measure a company's liquidity.

Answer: TRUE
Diff: 1
LO: 5-7
7) Which of the following is considered to be a more stringent measure of a company's ability to pay its
current liabilities than the current ratio?
A) Accounts payable
B) Quick ratio
C) Liquidity ratio
D) Collection period
Answer: B
Diff: 1
LO: 5-7
8) A measure of the ability of an entity to pay all of its current liabilities if they come due immediately is
the:
A) debt ratio.
B) quick ratio.
C) liquidity ratio.
D) accounts receivable turnover.
Answer: B
Diff: 1
LO: 5-7
62
9) Which of the following is correct regarding the quick ratio?
A) The lower the quick ratio, the easier it is for the company to pay their current liabilities.
B) Traditionally, most companies want a quick ratio of at least 2.0 to be safe.
C) A quick ratio can never be too high.
D) An acceptable quick ration depends on the industry the company is in.
Answer: D
Diff: 2
LO: 5-7
10) The quick ratio and the number of days' sales in receivables measure:
A) a company's ability to pay its long-term debts.
B) a company's profitability.
C) a company's liquidity.
D) all of the above
Answer: C
Diff: 1
LO: 5-7
11) Days' sales in receivables can be computed in two logical steps. In the second step:
A) the collection period must be determined.
B) the average daily sales are computed.
C) the average daily sales are divided by the average receivables.
D) the average receivables are divided by the average daily sales.
Answer: D
Diff: 2
LO: 5-7
12) When computing the acid test ratio, the numerator will include all of the following EXCEPT for:
A) net current receivables.
B) short-term investments.
C) prepaid expenses.
D) cash.
Answer: C
Diff: 2
LO: 5-7
63
13) When calculating the denominator for the quick ratio, you would NOT include:
A) accounts payable.
B) long-term debt.
C) salaries payable.
D) current maturities of long-term debt.
Answer: B
Diff: 2
LO: 5-7
14) If a company wants to increase its quick ratio, it should consider:

A) buying equipment on account.
B) paying off long-term notes.
C) issuing bonds payable.
D) collecting an accounts receivable.
Answer: C
Diff: 3
LO: 5-7
15) Hunter's Nest had net sales for the current period of $310,000 and average receivables were $28,700.
What is Hunter's Nest's average daily sales?
A) $10
B) $78
C) $642
D) $849
Answer: D
Explanation: D) 310,000/365 = 849
Diff: 2
LO: 5-7
64
16) Hunter's Nest had net sales for the current period of $310,000 and average receivables were $28,700.
What is the amount of day's sales in receivables?
A) 10 days
B) 25 days
C) 34 days
D) 79 days
Answer: C
Explanation: C) 310,000/365 = 849 average daily sales
28,700/849 = 4 days
Diff: 2
LO: 5-7
17) A company with net sales of $1,642,500, a beginning balance of net receivables of $187,500, and an
ending balance of net receivables of $235,500 has a days' sales in receivables (rounded) of:
A) 42 days.
B) 47 days.
C) 52 days.
D) 56 days.
Answer: B
Explanation: B) 1,642,500/365 = 4,500 one days sales
Avg rec/one days sale = days sales in avg rec
(187,500 + 235,500)/2 = 211,500
211,500/4500 = 47 days
Diff: 2
LO: 5-7
18) A company has $23,000 in cash, $41,000 in short-term investments, $240,000 in net current receivables,
and $75,000 in inventory. The total current liabilities of the firm are $298,000. The quick ratio of the
company is:
A) 0.63.
B) 0.87.
C) 1.02.
D) 1.27.
Answer: C
Explanation: C) (23,000 + 41,000 + 240,000)/298,000 = 1.02
Diff: 2
LO: 5-7
65
19) Barts Industries, Inc., has $30,000 in cash, $15,000 in short-term investments, $75,000 in net current
receivables, and $12,000 in prepaid expenses. The total current liabilities of the firm are $90,000. Barts
Industries' current ratio is:
A) 1.47.
B) 1.71.
C) 0.64.
D) 1.33.
Answer: A
Explanation: A) (30,000 + 15,000 + 75,000 + 12,000)/90,000 = 1.47 (rounded)
Diff: 2
LO: 5-7
20) A company has net sales of $800,000, a beginning balance of net receivables of $70,000, and an ending
balance of net receivables of $90,000. Its days' sales in receivables is:
A) 110 days.
B) 41 days.
C) 36 days.
D) 32 days.
Answer: C
Explanation: C) 800,000/365 = 2,192 average daily sales
Avg rec/avg. daily sales = days' sales in receivables
(70,000+90,000)/2 = 80,000
80,000/2,192 = 36 days
Diff: 2
LO: 5-7
21) If the current ratio is 3.2, and the current liabilities are $110,000, what is the amount of current assets?
A) $34,375
B) $176,000
C) $320,000
D) $352,000
Answer: D
Explanation: D) 3.2 = CA/CL
3.2/1 = CA/110,000
CA = 352,000
Diff: 3
LO: 5-7
66
22) If the collection period of a company is 31 days, and the average receivables are $70,060, what is the
total amount of the credit sales?
A) $2,260
B) $83,126
C) $824,900
D) $2,171,860
Answer: C
Explanation: C) days sales avg rec = avg rec/one day sales
31/1 = 70,060/one day sale
One day sale = 2,260
2,260 * 365 = 824,900 total credit sales
Diff: 3
LO: 5-7
67
23) Julie Newmar, the controller for Cat Supplies, Inc. scheduled the following accounts. Cat Supplies is
considering purchasing Meow Now Co. and its accounts are shown below:
Cat Supplies Meow Now

Cash $12,000 $15,000
Short-term investments 4,500 0
Year end and average current receivables 22,000 32,000
Year end and average inventory 26,000 18,000
Prepaids 2,000 3,000
Accounts Payable 17,000 28,000
Short-term Notes Payable 2,000 6,000
Total Credit Sales 300,000 200,000
Required:
1. Compute the Current Ratio for both companies
2. Compute the Quick Ratio for both companies
3. Compute the Collection period for both companies
Answer:
1.
Total Current Assets: Cat Supplies Meow Now
Cash 12,000 15,000
Average net current Receivables 22,000 32,000
Average inventory 26,000 18,000
Prepaids 2,0000 3,000
Total Current Assets: 66,500 68,000
Total Current Liabilities: Cat Supplies Meow Now

Short-term Note Payable 2,000 6,000
Total Current Liabilities: 19,000 34,000
Current Ratio = Current Assets / Current Liabilities

66,500 / 19,000 68,000 / 34,000
3.5 2.0
68
2.
Quick Assets: Cat Supplies Meow Now
Cash 12,000 15,000
Average net current Receivables 22,000 32,000
Total Quick Assets: 38,500 47,000
Total Current Liabilities: Cat Supplies Meow Now

Short-term Note Payable 2,000 6,000
Total Current Liabilities: 19,000 34,000
Quick Ratio = Quick Assets / Current Liabilities

38,500 / 19,000 47000 / 34,000
2.03 1.38
3
Collection Period = Average Accounts Receivable / average daily sales
22,000 / (300,000/365) 32,000 / (200,000/365)
22,000 / 822 32,000 /548
27 days 58 days
Diff: 2
LO: 5-7
69
24) TV Company's accountant obtained the following data from the company's records:
Accounts payable $ 76,500

Average accounts receivable $ 47,500
Cash $ 43,700
Inventories $110,000
Long-term bonds payable $320,000
Net accounts receivable $ 42,300
Net sales $514,700
Short-term investments $ 28,000
Required:
1. Compute the company's quick ratio.
2. Compute the company's average daily sales.
3. Compute the company's days' sales in receivables
Answer:
1. Cash + net accounts receivable + short-term investments/total current liabilities
43,700 + 42,300 + 28,000/76,500
114,000/76,500 = 1.49
2. Net sales/365
514,700/365= 1,410
3. Average receivables/average daily sales

47,500/1,410 = 34 days
Diff: 2
LO: 5-7
70
25) Complete the following chart by filling in the missing items. Use a 365-day year.
Average daily Days' sales in Average Accounts

sales average receivables Receivable Credit Sales
1 A B $87,400 $800,000
2 865 D $90,000 C
Answer:
Average daily Days' sales in Average Accounts
sales average receivables Receivable Credit Sales
1 $2,192 40 $87,400 $800,000
2 $865 51 $90,000 $315725
Calculations #1 A: 800,000/365 = 2,192

:B: 87,400/2,192 = 40
Calculations # 2 C: 365 8 865 = 315,725

D: 44,000/865 = 51
Diff: 3
LO: 5-7
71
26) The comparative financial statements of ABC Inc. for 2011, 2010, and 2009 contain the following
selected data.
Balance Sheet (in thousands): 2011 2010 2009

Current assets:
Cash $80 $75 $60
Accounts receivable, net 230 225 250
Inventory 280 340 300
Total current assets 590 640 610
Total current liabilities 510 525 500
Income Statement (in thousands):

Net sales $2,400 $2,200 $1,900
Compute the following ratios for 2011 and 2010 and indicate which ratios improved and which ratios
deteriorated:
a. Acid-test ratio
b. Days' sales in receivables
Answer:
a. 2010 = (75 + 225)/525 = .57
2011 = (80 + 230)/510 = .61
b. 2010 = step 1: 2,200/365 = 6.03

step 2: (250 + 225)/2 = 237.5/6.03 = 39.39 days
2011 = step 1: 2,400/365 = 6.58

step 2: (225 + 230)/2 = 227.5/6.58 = 34.57 days
The acid-test ratio improved because it increased. The days' sales in receivables improved because it
decreased, which indicates the company is doing a better job collecting its outstanding receivables.
Diff: 3
LO: 5-7
72
27) Following is the unclassified balance sheet for Heidi's Hut, Inc.
Heidi's Hut, Inc.

Balance Sheet
March 31, 2012
Assets
Cash $600
Inventory 3,000
Store Supplies 1,900
Prepaid Rent 1,500
Land 23,000
Building 50,000
Accumulated Depreciation—Building (7,500) 42,500
Store Equipment 27,000
Accumulated Depreciation—Store Equipment (15,625) 11,375
Total Assets $85,675
Liabilities and Stockholders' Equity

Liabilities
Accounts Payable $6,000

Salaries Payable 2,500
Unearned Revenue (to be earned in 2 months) 2,000
Long-term note payable 6,000
Total Current Liabilities $16,500
Stockholders' Equity
Common Stock 31,655
Retained Earnings 37,520
Total Stockholders' Equity 69, 175
Total Liabilities and Stockholders' Equity $85, 675
Required:
1. Compute the current ratio (round to 2 decimal places)
2. Compute the acid-test ratio ( round to 2 decimal places)
3. Does it appear that Heidi's Hut will be able to pay its current liabilities on time?
Answer:
1. Current ratio = CA/CL
(600 + 1,800 + 3,000 + 1,900 + 1,500)/(6,000 + 2,500 + 2,000) = 8,800/10,500 = .84
2. Acid test ratio = (600 + 1,800)/10,500 = .23
3. Depends on the industry, but it appears that the ratios are very low.
Diff: 2
LO: 5-7
73
28) The Flower Company had net sales of $830,000 for the year. Its receivables at the beginning of the year
were $47,000 and at the end of the year they had increased to $52,000. The Flower Company has credit
terms of net 10 days. Compute the days' sales in average receivables and evaluate the ratio as strong or
weak. Round all calculations to the nearest dollar or whole day.
Answer: net sales/365 = average daily sales
830,000/365 = 2,274
Avg rec/average daily sales = days sales in avg rec
(47,000 + 52,000)/2 = 49,500 avg receivables
49,500/2,274 = 21 days' sales in average receivables
Collection period of 21 days in comparison to the credit terms of 10 days is poor. It is taking the company
twice as long as it should to collect the receivables.
Diff: 2
LO: 5-7
74

5.1 Learning Objective 5-1: Chapter 5 Short-Term Investments & Receivables

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5.1 Learning Objective 5-1: Chapter 5 Short-Term Investments & Receivables

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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 5 Short-Term Investments & Receivables

5.1 Learning Objective 5-1

1) Another term for short-term investments is held-to-maturity securities.

3) Short-term investments are the most liquid asset.

5) An unrealized gain occurs when a company sells a trading security.

8) Trading securities are originally recorded at their cost.

14) Another name for short-term investments is:

15) Short-term investments:

18) Which of the following statement is correct?

20) The purpose of owning trading securities is to:

24) An unrealized gain:

26) Trading securities are:

28) Unrealized gains or losses on trading securities are reported on the:

31) When dealing with gains and losses on trading securities:

32) Strategies to increase the current ratio may include:

Dec 31, 2012 Unrealized Loss on Investments 10,000

April 28 Cash 850

May 25 Cash 24,500

April 10 Cash 1,075

Dec 31 Unrealized Loss on Investments 1,100

Jan 3 Cash 34,000

7) When goods are shipped FOB destination:

Dec. 4 Accounts Receivable 880

Dec. 10 Sales Returns & Allowances 100

Dec. 11 Cash 931

Dec. 31 Cash 780

5.3 Learning Objective 5-3

3) Accounts receivable have a maturity date.

9) Other receivables will include:

10) A separate account for each customer is kept in a(n):

14) The most important internal control over cash is to:

Ways to strengthen the controls:

5.4 Learning Objective 5-4

2) Selling on credit creates both a benefit and a cost.

3) Uncollectible-account expense is an operating expense on the income statement.

8) The Allowance for Uncollectible Accounts normally has a credit balance.

9) The biggest risk of selling on credit is:

11) The most acceptable way to measure bad debts is by:

12) When evaluating the collectability of accounts receivable:

13) The aging-of-receivables method is:

16) Allowance for uncollectible accounts is classified as:

19) The net realizable value of accounts receivable is the:

20) The percent-of-sales method of computing uncollectible accounts is used for:

21) The percent-of-sales method:

24) The aging-of-receivables method:

27) Most companies will use:

29) The direct-write off method:

33) The direct write-off method records uncollectible-account expense:

34) The allowance method records uncollectible-account expense:

1-30 days $60,000 1%

1-30 days $60,000 1%

42) The following item appeared on a balance sheet:

Accounts Receivable $110,000

What is the net realizable value of the accounts receivable?

b. Uncollectible- Account Expense 17,000

c. Uncollectible-Account Expense 3,700

d. Uncollectible - Account Expense 45,000

Calculate the net receivables for each situation A through D)

b 104,000 17,900 86,100

c 958,000 20,000 938,000

d 825,000 45,500 779,500

Sales during 2012 $876,500