Chapter 7-The Revenue/Receivables/Cash Cycle: Multiple Choice

Chapter 7—The Revenue/Receivables/Cash Cycle
MULTIPLE CHOICE
1. Which of the following is NOT correct?

a. The operating cycle sometimes is longer than one year in duration.
b. The operating cycle always is one year in duration.
c. The operating cycle sometimes is shorter than one year in duration.
d. The operating cycle is a concept applicable both to manufacturing and retailing
enterprises.
ANS: B PTS: 1 DIF: Easy OBJ: LO 1
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking
2. An operating cycle
a. is twelve months or less in length.
b. is the average time required for a company to collect its receivables.
c. is used to determine current assets when the operating cycle is longer than one year.
d. begins with inventory and ends with cash.
ANS: C PTS: 1 DIF: Easy OBJ: LO 1
3. The amount reported as "Cash" on a company's balance sheet normally should exclude
a. postdated checks that are payable to the company.
b. cash in a payroll account.
c. undelivered checks written and signed by the company.
d. petty cash.
ANS: A PTS: 1 DIF: Easy OBJ: LO 4
4. If the balance shown on a company's bank statement is less than the correct cash balance, and neither
the company nor the bank has made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
ANS: D PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Measurement MSC: AACSB Analytic
5. If the cash balance shown in a company's accounting records is less than the correct cash balance, and
neither the company nor the bank has made any errors, there must be
a. outstanding checks.
b. deposits in transit.
c. deposits credited by the bank but not yet recorded by the company.
d. bank charges not yet recorded by the company.
ANS: C PTS: 1 DIF: Medium OBJ: LO 4
6. The FASB specified in Statement No. 140 three conditions that must be met if a transfer of receivables
is to accounted for as a sale. Which of the following is not one of the three conditions specified?
a. The transferred assets have been isolated from the transferor.
b. The transferor's obligation under the recourse provisions can be reasonably estimated.
c. The transferee has the right to pledge or exchange the transferred assets.
d. The transferor does not maintain effective control over the assets through an agreement to
repurchase the assets before their maturity.
ANS: B PTS: 1 DIF: Medium OBJ: LO 6
7. Which one of the following statements is NOT correct?

a. The accounting function should be separated from the custodianship of a company's
assets.
b. Certain clerical personnel in a company should be rotated among various jobs.
c. A company's personnel should be given well-defined responsibilities.
d. The responsibility of receiving merchandise and paying for it usually should be given to
one person.
ANS: D PTS: 1 DIF: Easy OBJ: LO 4
8. A discount given to a customer for purchasing a large volume of merchandise is typically referred to as
a
a. quantity discount.
b. cash discount.
c. trade discount.
d. size discount.
9. When the direct write-off method of recognizing bad debt expense is used, the entry to write off a
specific customer account would
a. increase net income.
b. have no effect on net income.
c. increase the accounts receivable balance and increase net income.
d. decrease the accounts receivable balance and decrease net income.
10. When comparing the allowance method of accounting for bad debts with the direct write-off method,
which of the following is true?
a. The direct write-off method is exact and also better illustrates the matching principle.
b. The allowance method is less exact but it better illustrates the matching principle.
c. The direct write-off method is theoretically superior.
d. The direct write-off method requires two separate entries to write off an uncollectible
account.
11. When the allowance method of recognizing bad debt expense is used, the entry to record the write-off
of a specific uncollectible account would decrease
a. allowance for doubtful accounts.
b. net income.
c. net realizable value of accounts receivable.
d. working capital.
12. When a specific customer's account is written off by a company using the allowance method, the effect
on net income and the net realizable value of the accounts receivable is
Net Realizable Value

Net Income of Accounts Receivable
a. Increase Increase
b. Decrease Decrease
c. None None
d. Decrease None
13. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of a small account previously written off would
a. increase net income.
b. increase the allowance for doubtful accounts.
c. decrease net income.
d. decrease the allowance for doubtful accounts.
14. A method of estimating bad debts that focuses on the balance sheet rather than the income statement is
the allowance method based on
a. direct write-off.
b. specific accounts determined to be uncollectible.
c. credit sales.
d. aging the trade receivable accounts.
15.
Accounts Receivable xxx
Allowance for Uncollectible Accounts xxx
This entry would be made when:

a. a customer pays its account balance.
b. a customer defaults on its account.
c. a previously defaulted customer pays its outstanding balance.
d. estimated uncollectible receivables are too low.
16. What is the accounting principle underlying the recognition of an estimated liability for warranties in
the period of product sale?
a. Matching
b. Materiality
c. Full Disclosure
d. Conservatism
ANS: A PTS: 1 DIF: Medium OBJ: LO 2
17. In calculating a company's accounts receivable turnover, which of the following sets of factors would
be used?
a. Net income and average accounts receivable
b. Average accounts receivable and average total assets
c. Average accounts receivable and net credit sales
d. Net credit sales and average stockholders' equity
18. Which of the following factors are used to compute the number of days' sales in accounts receivable?
a. Inventory turnover and 365 days
b. Accounts receivable turnover and 365 days
c. Net sales and average inventory
d. Average accounts receivable and cost of goods sold
19. Which of the following would NOT be classified as cash?

a. Personal checks
b. Travelers' checks
c. Cashiers' checks
d. Postdated checks
20. Which of the following is NOT a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
21. Bank statements provide information about all of the following except
a. checks cleared during the period.
b. NSF checks.
c. bank charges for the period.
d. errors made by the company.
22. Which of the following items would be added to the book balance on a bank reconciliation?
a. Outstanding checks
b. A check written for $96 entered as $69 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
23. In preparing a bank reconciliation, interest paid by the bank on the account is
a. added to the book balance.
b. subtracted from the bank balance.
c. added to the bank balance.
d. subtracted from the book balance.
24. In preparing a monthly bank reconciliation, which of the following items would be added to the
balance reported on the bank statement to arrive at the correct cash balance?
a. Outstanding checks
b. Bank service charge
c. Deposits in transit
d. A customer's note collected by the bank on behalf of the depositor
25. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the
depositor's records and to identify bank errors. Adjustments should be recorded for
a. bank errors, outstanding checks, and deposits in transit.
b. all items except bank errors, outstanding checks, and deposits in transit.
c. book errors, bank errors, deposits in transit, and outstanding checks.
d. outstanding checks and deposits in transit.
Abe Company sold merchandise on credit to Bee Company for $1,000 on July 1, with terms of 2/10,
net /30. On July 6, Bee returned $200 worth of merchandise claiming the materials were defective. On
July 8, Abe received a payment from Bee and credited Accounts Receivable for $350. On July 24, Bee
Company paid the remaining balance on its account.
26. See Abe Company information above. How much was the total Sales Discounts given to Bee during
July?
a. $7
b. $0
c. $441
d. $2,441
27. See Abe Company information above. What was the total cash received from Bee during July?
a. $441
b. $450
c. $793
d. $800
28. For the month of December, the records of Former Corporation show the following information:
Cash received on accounts receivable .................. $ 70,000

Cash sales ............................................ 60,000
Accounts Receivable, December 1 ....................... 160,000
Accounts Receivable, December 31 ...................... 148,000
Accounts Receivable written off as uncollectible ...... 2,000
The corporation uses the direct write-off method in accounting for uncollectible accounts receivable.
What are the gross sales for the month of December?
a. $144,000
b. $130,000
c. $118,000
d. $120,000
29. An analysis and aging of accounts receivable of the Gibson Company at December 31, 2014, showed
the following:
Accounts Receivable .................................. $800,000

Allowance for Doubtful Accounts
(before adjustment) ................................ 36,000 (cr)
Accounts estimated to be uncollectible ............... 76,800
Compute the net realizable value of the accounts receivable of Gibson Company at December 31,
2014.
a. $804,000
b. $799,200
c. $723,200
d. $727,200
ANS: C PTS: 1 DIF: Challenging OBJ: LO 2
30. An analysis and aging of the accounts receivable of Mahi Company at December 31 revealed the
following data:
Accounts Receivable ................................. $450,000

Allowance for Doubtful Accounts (before adjustment).. 25,000 (cr)
Accounts estimated to be uncollectible .............. 32,000
The net realizable value of the accounts receivable at December 31 should be

a. $450,000.
b. $443,000.
c. $425,000.
d. $418,000.
ANS: D PTS: 1 DIF: Challenging OBJ: LO 2
31. Aspen Company provides for doubtful accounts expense at the rate of 3 percent of credit sales. The
following data are available for last year:
Allowance for Doubtful Accounts, January 1 ..... $ 54,000 (cr)

Accounts written off as uncollectible during the
year ......................................... 60,000
Collection of accounts written off in prior years..
(customer credit was re-established) ........... 15,000
Credit sales, year-ended December 31 ........... 3,000,000
The allowance for doubtful accounts balance at December 31, after adjusting entries, should be
a. $45,000.
b. $99,000.
c. $90,000.
d. $84,000.
ANS: B PTS: 1 DIF: Challenging OBJ: LO 2
32. The following information is from the records of Sumter, Inc. for the year ended December 31, 2014.
Allowance for Doubtful Accounts, January 1, 2014 .. $ 6,000 (cr)

Sales, 2014 ....................................... 2,920,000
Sales Returns and Allowances, 2014 ................ 32,000
If the basis for estimating bad debts is 1 percent of net sales, the correct amount of doubtful accounts
expense for 2014 is
a. $22,800.
b. $23,200.
c. $28,880.
d. $34,880.
33. Based on the aging of its accounts receivable at December 31, Quanto Company determined that the
net realizable value of the receivables at that date is $760,000. Additional information is as follows:
Accounts Receivable at December 31 ................ $880,000

Allowance for Doubtful Accounts at January 1 ...... 128,000 (cr)
Accounts written off as uncollectible during the
year ............................................ 88,000
Quanto's doubtful accounts expense for the year ended December 31 is

a. $80,000.
b. $96,000.
c. $120,000.
d. $160,000.
34. Based on its past collection experience, Base Company provides for bad debts at the rate of 2 percent
of net credit sales. On January 1, 2014, the allowance for doubtful accounts credit balance was
$10,000. During 2014, Base wrote off $18,000 of uncollectible receivables and recovered $5,000 on
accounts written off in prior years. If net credit sales for 2014 totaled $1,000,000, the doubtful
accounts expense for 2014 should be
a. $17,000.
b. $20,000.
c. $23,000.
d. $35,000.
Teeming Company uses the allowance method of accounting for bad debts. The following summary
schedule was prepared from an aging of accounts receivable outstanding on December 31 of the
current year.
No. of Days Probability

Outstanding Amount of Collection
0-30 days $500,000 .98
31-60 days 200,000 .90
Over 60 days 100,000 .80
The following additional information is available for the current year:
Net credit sales for the year .................. $4,000,000

Allowance for Doubtful Accounts:
Balance, January 1 ............................. 45,000 (cr)
Balance before adjustment, December 31 ......... 4,000 (dr)
35. See Teeming Company information above. If Teeming bases its estimate of bad debts on the aging of
accounts receivable, doubtful accounts expense for the current year ending December 31 is
a. $47,000.
b. $48,000.
c. $50,000.
d. $54,000.
36. See Teeming Company information above. If Teeming determines bad debt expense using 1.5 percent
of net credit sales, the net realizable value of accounts receivable on the December 31 balance sheet
will be
a. $738,000.
b. $740,000.
c. $744,000.
d. $750,000.
37. Harris, Inc. reported the following balances (after adjustment) at the end of 2014 and 2013.
12/31/2014 12/31/2013
Total accounts receivable ................. $105,000 $96,000
Net accounts receivable ................... 102,000 94,500
During 2014, Harris wrote off customer accounts totaling $3,200 and collected $800 on accounts
written off in previous years. Harris’ doubtful accounts expense for the year ending December 31,
2014 is
a. $1,500.
b. $2,400.
c. $3,000.
d. $3,900.
ANS: D PTS: 1 DIF: Challenging OBJ: LO 2
38. A new product introduced by Sunbound Promotions carries a two-year warranty against defects. The
estimated warranty costs related to dollar sales are as follows:
Year of sale .............................. 3 percent

Year after sale ........................... 5 percent
Sales and actual warranty expenditures for the years ended December 31, 2013 and 2014, are as
follows:
Actual Warranty
Sales Expenditures
2013 $ 800,000 $18,000
2014 1,000,000 70,000
What amount should Sunbound report as its estimated liability as of December 31, 2014?
a. $4,000
b. $24,000
c. $56,000
d. $74,000
39. Carter Appliance Center sells washing machines that carry a three-year warranty against
manufacturer's defects. Based on company experience, warranty costs are estimated at $60 per
machine. During the year, Carter sold 48,000 washing machines and paid warranty costs of $340,000.
In its income statement for the year ended December 31, Carter should report warranty expense of
a. $680,000.
b. $960,000.
c. $2,200,000.
d. $2,880,000.
40. Windward Corporation's books disclosed the following information for the year ended December 31,
2014:
Net credit sales ..................................... $1,500,000

Net cash sales ....................................... 240,000
Accounts Receivable at beginning of year ............. 200,000
Accounts Receivable at end of year ................... 400,000
Windward’s accounts receivable turnover is
a. 3.75 times.
b. 4.35 times.
c. 5.00 times.
d. 5.80 times.
41. Selected information from the accounting records of Monroe Manufacturing Company follows:
Net sales ............................................ $3,600,000

Cost of goods sold ................................... 2,400,000
Inventories at January 1 ............................. 672,000
Inventories at December 31 ........................... 576,000
What is the number of days' sales in average inventories for the year?
a. 102.2
b. 94.9
c. 87.6
d. 68.1
42. Conan Corporation had the following transactions in its first year of operations:
Sales (90 percent collected in the first year) ....... $900,000

Disbursements for costs and expenses ................. 600,000
Purchases of equipment for cash ...................... 200,000
Proceeds from issuance of common stock ............... 250,000
Payments on short-term borrowings .................... 25,000
Proceeds from short-term borrowings .................. 50,000
Depreciation on equipment ............................ 40,000
Disbursements for income taxes ....................... 45,000
Bad debt write-offs .................................. 30,000
What is the cash balance at December 31 of the first year?

a. $170,000
b. $200,000
c. $240,000
d. $290,000
43. Donovan Company had the following cash balances at December 31, 2014:
Cash in banks ........................................ $375,000

Petty cash funds (all funds were reimbursed on
December 31, 2014) ................................. 5,000
Cash in banks includes $125,000 of compensating balances against short-term borrowing

arrangements at December 31, 2014. The compensating balances are legally restricted as to withdrawal
by Donovan. In the current asset section of Donovan’s December 31, 2014, balance sheet, what total
amount should be reported as Cash?
a. $380,000
b. $375,000
c. $255,000
d. $250,000
44. Assume the following facts for Lowmann Company: The month-end bank statement shows a balance
of $40,000; outstanding checks total $2,000; a deposit of $8,000 is in transit at month-end; and a check
for $400 was erroneously charged against the account by the bank. What is the correct cash balance at
the end of the month?
a. $33,600
b. $34,400
c. $45,600
d. $46,400
45. In preparing the bank reconciliation of Yardley Company for the month of July, the following
information is available:
Balance per bank statement, 7/31 ..................... $60,075

Deposits in transit, 7/31 ............................ 9,375
Outstanding checks, 7/31 ............................. 8,625
Deposit erroneously recorded by bank to Yardley’s 375
account, 7/18 ......................................
Bank service charges for July ........................ 75
What is the correct cash balance at July 31?

a. $52,875
b. $54,375
c. $54,825
d. $60,450
46. The August 31 bank statement of Mervin Inc. showed a balance of $113,000. Deducted in arriving at
this amount was a customer's NSF check for $2,400 that had been returned. Mervin had received no
prior notice concerning this check. In addition to the bank statement, other records showed there were
deposits in transit totaling $17,200 and that outstanding checks totaled $10,800. What is the cash
balance per books at August 31 (prior to adjustments)?
a. $121,800
b. $119,400
c. $117,000
d. $115,400
47. Lawson Corporation's checkbook balance on December 31, 2014, was $8,000. In addition, Lawson
held the following items in its safe on December 31:
Check payable to Lawson Corporation, dated January 2, 2015,

not included in December 31 checkbook balance.. $2,000
Check payable to Lawson Corporation, deposited December 20,
and included in December 31 checkbook balance, but returned
by bank on December 30, stamped "NSF." The check was
redeposited January 2, 2015, and cleared January 7 .. 400
Post-dated checks ....................................... 150
Check drawn on Lawson Corporation's account, payable to a
vendor, dated and recorded December 31, but not mailed until
1,000
January 15, 2015 ..................................
The proper amount to be shown as cash on Lawson’s balance sheet at December 31, 2014, is
a. $7,600.
b. $8,000.
c. $8,600.
d. $9,750.
ANS: C PTS: 1 DIF: Challenging OBJ: LO 4
48. In preparing its bank reconciliation for the month of February, Vance Company has available the
following information:
Balance per bank statement, February 28 ................. $18,025

Deposit in transit, February 28 ......................... 3,125
Outstanding checks, February 28 ......................... 2,875
Check erroneously deducted by bank from Vance's account, 125
February 10 ...........................................
Bank service charges for February ....................... 25
What is the corrected cash balance at February 28?

a. $18,125
b. $18,150
c. $18,275
d. $18,400
49. Alonso Company had the following bank reconciliation at March 31:
Balance per bank statement, 3/31 ........................ $ 93,000

Add: Deposit in transit ................................. 20,600
$113,600
Less: Outstanding checks ................................ (25,200)
Balance per books, 3/31 ................................. $ 88,400
Data per bank statement for the month of April follow:
Deposits .............................................. $116,800

Disbursements ......................................... 99,400
All reconciling items at March 31 cleared through the bank in April. Outstanding checks at April 30
totaled $15,000. What is the amount of cash disbursements per books in April?
a. $89,200
b. $99,400
c. $109,600
d. $114,400
ANS: A PTS: 1 DIF: Challenging OBJ: LO 4
50. Which of the following would be considered part of the category "trade receivables"?
a. Advances to employees
b. Amounts due from customers
c. Dividends receivable
d. Income tax refunds receivable
51. Under GAAP, an entry should be made to the Bad Debt Expense account
a. when an account receivable with terms 2/10, n30 is past thirty days due.
b. when an account receivable previously written off is determined to be collectible.
c. when an account receivable is determined not to be collectible and is written off.
d. in the period when a sale is made and not when the receivable associated with the sale is
determined to be uncollectible.
52. Which of the following accounts is not affected when an account receivable written off as
uncollectible is unexpectedly collected?
a. Cash
b. Accounts Receivable
c. Bad Debt Expense
d. Allowance for Bad Debts
53. A debit balance in the Allowance for Doubtful Accounts

a. should never occur.
b. is always the result of management not providing a large enough allowance in order to
manage earnings.
c. may occur before the end-of-period adjustment for uncollectibles.
d. may exist even after the end-of-period adjustment for uncollectibles.
54. For tax purposes, an entry should be made to Bad Debt Expense
a. when an account is determined to be uncollectible.
b. in the period in which the sale that created the receivable was made.
c. when an account determined to be uncollectible is collected.
d. when an account with terms 2/10, n30 is still unpaid after thirty days.
55. Estimation of uncollectible accounts receivable based on a percentage of sales

a. emphasizes measurement of the net realizable value of accounts receivable.
b. is only acceptable for tax purposes.
c. emphasizes measurement of total assets.
d. emphasizes measurement of bad debt expense.
56. Which of the following is NOT acceptable in estimating uncollectible accounts receivable under
GAAP?
a. The estimate of uncollectible accounts is based on a percentage of sales for the period.
b. The estimate of uncollectible accounts is based on a percentage of the accounts receivable
balance at the end of a period.
c. The estimate of uncollectible accounts is based on an aging schedule.
d. No estimate of uncollectible accounts is made; accounts are written off when it is
determined they cannot be collected.
57. During 2012, Grinder Machinery company introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at
2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales
and actual warranty expenditures for the first three-year period were as follows:
Actual
Warranty
Year Sales Expenditure
2012 $ $ 3,375
225,000
2013 16,875
562,500
2014 50,625
787,500
$ 1,575,000 $
70,875
What amount should Grinder Machinery report as a liability at December 31, 2014?
a. $0
b. $5,625
c. $76,500
d. $118, 125
58. The following information is available for Closer Company relative to 2014 operations:
Accounts receivable, January 1, 2014 $

40,000
Accounts receivable collected during 2014 84,000
Cash sales during 2014 20,000
Inventory, January 1, 2014 48,000
Inventory, December 31, 2014 44,000
Purchases of inventory during 2014 80,000
Gross margin on sales 42,000
What is Closer Company’s accounts receivable balance at December 31, 2014?

a. $82,000
b. $62,000
c. $20,000
d. $146,000
59. Sandy Corporation uses the allowance method of accounting for uncollectible accounts. During 2014,
Sandy had charged $80,000 to Bad Debt Expense, and wrote off accounts receivable of $90,000 as
uncollectible. What was the amount of the decrease in working capital as a result of these entries?
a. $0
b. $90,000
c. $80,000
d. $10,000
60. The following information is available for Longview Company:
Credit sales during 2014 $ 50,000

Allowance for Doubtful Accounts, Dec. 31, 2013 1,800
Accounts receivable written off during 2014 1,900
As a result of a review and aging of accounts receivable, it has been determined that the Allowance for
Doubtful Accounts should show a balance of $2,400 at December 31, 2014. What amount should
Longview record as bad debt expense for the year ended December 31, 2014?
a. $2,500
b. $1,300
c. $2,400
d. $3,700
61. On December 1, 2014, Laramie Company received a $10,000, 60-day, 6% note from a customer. On
December 31, 2014, the company discounted the note at the bank. The bank’s discount rate is 9%.
What were the proceeds that Barnes received from the discounting of the note?
a. $10,024.25
b. $9,700.00
c. $9,924.25
d. $10,050.00
62. Barter Company borrows $20,000 for one year a 9% interest, but must maintain a $1,600
compensating balance. The effective rate of interest on this loan is
a. 9.0%.
b. 17.0%.
c. 9.8%.
d. 8.0%.
63. Corbin Company has two checking accounts. A special account is used for the weekly payroll only,
and the general account is used for all other disbursements. Every week, a check in the amount of the
net payroll is drawn on the general account and deposited in the payroll account. The company
maintains a $5,000 minimum balance in the payroll account. On a monthly bank reconciliation, the
payroll account should
a. reconcile to $5,000.
b. show a zero balance per the bank statement.
c. show a $5,000 balance per the bank statement.
d. be reconciled jointly with the general account in a single reconciliation.
64. Accounts receivable usually are factored

a. with recourse on a notification basis.
b. with recourse on a no-notification basis.
c. without recourse on a notification basis.
d. without recourse on a no-notification basis.
65. A firm factors $40,000 of accounts receivable without recourse. The factor agrees to provide financing
based on these receivables, but imposes a 10% fee. In addition, the transferor and transferee agree that
$3,000 of sales returns and allowances can be expected from these accounts. What is the loss or
expense to recorded by the transferor?
a. $7,000
b. $4,000
c. $3,000
d. $0
66. On August 1, a firm assigned $30,000 of its $56,000 of accounts receivable. The finance company
advanced 90% of the assigned accounts less a $2,000 fee. Interest is 12% and payable monthly on the
beginning-of-period loan balance. A loan payment is remitted at the end of each month. Each payment
includes principal and interest. The amount of each loan payment equals the cash collected on
receivables during the month plus interest on the loan balance.
If $8,000 was collected on accounts receivable during August, the entry for the first loan payment
would include a
a. debit to Interest Expense of $280.
b. credit to Cash of $8,000.
c. credit to Account Receivable Assigned of $8,000.
d. debit to Notes Payable of $8,280.
TOP: AICPA FN-Reporting MSC: AACSB Analytic
67. Halen Company factored $50,000 of its accounts receivable with recourse. The factor retained 8% for
sales adjustments and charged $3,000 as a financing fee. For simplicity, assume the estimated and
actual amounts of the following items are equal:
Sales adjustments $2,500

Uncollectible accounts 500
Assume the transfer is recorded as a sale by Halen Company. What is the loss or financing expense to
be recognized on the transfer?
a. $11,000
b. $6,000
c. $3,000
d. $8,000
68. The plan of organization and all the methods and measures adopted within a business to safeguard its
assets, check the accuracy of its accounting data, promote operational efficiency, and encourage
adherence to managerial policies is called
a. accounting control.
b. administrative control.
c. managerial control.
d. internal control.
69. Eastern Company sells products covered by a 3-year warranty. Based on past experience of other
entities in the industry, Eastern expects to incur warranty costs equal to 1% of sales. Eastern’s sales
were $45,000 in 2013 and $50,000 in 2014. In 2014, the company spent $200 to repair goods sold in
2013 and $300 to repair goods sold in 2014. Eastern received no warranty servicing demands from its
customers in 2013, the company’s first year of operations.
What is the balance in the warranty liability account on January 1, 2015?

a. $450
b. $500
c. $300
d. $0
70. Which of the following is not correct regarding IAS 39, International Accounting Standard 39,
“Financial Instruments: Recognition and Measurement,” and SFAS No. 140, Statement of Financial
Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities: A Replacement of FASB Statement No. 125”?
a. IAS 39 represents a principles-based approach to standard setting.

b. SFAS No. 140 represents a principles-based approach to standard setting.
c. SFAS No. 140 represents a rule-based approach to standard setting.
d. In the large majority of cases, application of the two standards will result in the same
accounting treatment for a receivable transfer.
71. Which of the following is one of the two steps of the 2-step test for derecognition of receivables stated
in IAS 39, International Accounting Standard 39, “Financial Instruments: Recognition and
Measurement”?
a. The transferred assets have been isolated from the transferor such that the transferor and
its creditors cannot access the assets.
b. The transferee has the right to pledge or exchange the transferred assets.
c. If the receivable transfer does not involve the transfer of substantially all the risks and
rewards of ownership, then test to determine if the transferor maintains effective control
over the assets through either an agreement to repurchase the assets before their maturity,
or by the ability to cause the transferee to return specific assets.
d. Determine whether the receivable transfer involves a transfer of substantially all the risks
and rewards of ownership of the receivable and, if so, account for the transfer as a sale of
the receivable.
PROBLEM
1. The information below is from the books of the Pawnee Corporation on June 30:
Balance per bank statement ........................... $12,164

Receipts recorded but not yet deposited in the bank .. 1,340
Bank charges not recorded ............................ 16
Note collected by bank and not recorded on books ..... 1,120
Outstanding checks ................................... 1,100
NSF checks--not recorded on books nor redeposited .... 160
Assuming no errors were made, compute the cash balance per books on June 30 before any
reconciliation adjustments.
ANS:
Balance per bank statement, June 30 ................... $12,164
Add: Receipts not yet deposited ................... 1,340
Bank charges ................................. 16
NSF checks ................................... 160
$13,680
Deduct: Note collected by bank ....................... 1,120
Outstanding checks ........................... 1,100
Balance per books before reconciliation adjustments ... $11,460
PTS: 1 DIF: Easy OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic
2. The books of Barry’s Service, Inc. disclosed a cash balance of $68,757 on June 30. The bank statement
as of June 30 showed a balance of $54,780. Additional information that might be useful in reconciling
the two balances follows:
(a) Check number 748 for $3,000 was originally recorded on the books as $4,500.
(b) A customer's note dated March 25 was discounted on April 12. The note was
dishonored on June 29 (maturity date). The bank charged Barry’s account for
$14,265, including a protest fee of $42.
(c) The deposit of June 24 was recorded on the books as $2,895, but it was actually a
deposit of $2,700.
(d) Outstanding checks totaled $9,885 as of June 30.
(e) There were bank service charges for June of $210 not yet recorded on the books.
(f) Barry’s account had been charged on June 26 for a customer's NSF check for
$1,296.
(g) Barry properly deposited $600 on June 3 that was not recorded by the bank.
(h) Receipts of June 30 for $13,425 were recorded by the bank on July 2.
(i) A bank memo stated that a customer's note for $4,500 and interest of $165 had been
collected on June 27, and the bank charged a $36 collection fee.
Prepare a bank reconciliation statement, using the form reconciling bank and book balances to the
correct cash balance.
ANS:
Balance per bank statement, June 30 ......... $54,780
Add: Deposits in transit ................ $13,425
Bank error--deposit not recorded ............ 600 14,025
$68,805
Deduct: Outstanding checks ................. 9,885
Corrected bank balance ...................... $58,920
Balance per books, June 30 .................. $68,757

Add: Book error--Check No. 748 .......... $ 1,500
Customer note collected by bank ............. 4,629 6,129
$74,886
Deduct: Dishonored note .................... $14,265
Book error--improperly recorded deposit ..... 195
NSF check ................................... 1,296
Bank service charges ........................ 210 15,966
Corrected book balance ...................... $58,920
PTS: 1 DIF: Medium OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic
3. The Ryan Manufacturing Company received its bank statement for the month ending May 31. The
bank statement indicates a balance of $32,400. The cash account as of the close of business on May 31
has a balance of $8,350. In reconciling the balances, the following items are discovered.
(a) Collection by bank of note for $1,500 less collection fees of $250.
(b) Deposits in transit, $51,000.
(c) The bank charged the depositor $800 for overdrafts.
(d) Checks outstanding on May 31, $79,100.
(e) A canceled check issued to Kate Corp. for $4,500 was not recorded on Ryan
Manufacturing Company's books.
Prepare a bank reconciliation statement. (Use the format of reconciling bank and depositor figures to
corrected cash balance.)
ANS:
Balance per bank statement .................. $32,400
Add deposits in transit ..................... 51,000
$83,400
Deduct outstanding checks ................... 79,100
Corrected balance ........................... $ 4,300
Balance per depositor's records ............. $ 8,350
Add note receivable collected by bank ....... 1,250
$ 9,600
Deduct:
Overdrafts ................................ $ 800
Book error--unrecorded check .............. 4,500 5,300
Corrected balance ........................... $ 4,300

MSC: AACSB Analytic
4. The accountant for the Teffen Company assembled the following data:
June 30 July 31
Cash account balance ........................ $ 15,822 $ 39,745
Bank statement balance ...................... 107,082 137,817
Deposits in transit ......................... 8,201 12,880
Outstanding checks .......................... 27,718 30,112
Bank service charge* ........................ 72 60
Customer's check deposited July 10, returned 8,250
by bank on July 16 marked NSF, and
redeposited immediately; no entry made on
books for return or redeposit ..............
Collection by bank of company's notes 71,815 80,900
receivable .................................
* (Recorded on books in month following charge
or collection) ...........................
The bank statements and the company's cash records show these totals:
Disbursements in July per bank statement ................ $218,373

Cash receipts in July per Teffen’s books ................ 236,452
Checks written in July per Teffen’s books ............... 212,529
Receipts in July per bank statement ..................... 249,108
Prepare a 4-column bank reconciliation as of July 31, using the form that reconciles both the book and
bank balances to a correct cash amount.
ANS:
Teffen Company
Reconciliation of Receipts, Disbursements, and Bank Balance
July 31
Beginning Ending
Reconciliation Reconciliation
June 30 Receipts Disbursements July 31
Balance per bank

statement ....... $107,082 $249,108 $218,373 $137,817
Deposits in
transit:
June 30 .......... 8,201 (8,201)
July 31 .......... 12,880 12,880
Outstanding
checks:
June 30 .......... (27,718) (27,718)
July 31 .......... 30,112 (30,112)
NSF check
redeposited ..... (8,250) (8,250)
Corrected bank
balance ......... $ 87,565 $245,537 $212,517 $120,585
Balance per books $ 15,822 $236,452 $212,529 $ 39,745

Bank service
charge:
June ............. (72) (72)
July ............. 60 (60)
Collection of
notes receivable:
June ............. 71,815 (71,815)
July ............. 80,900 80,900
Corrected book
balance ......... $ 87,565 $245,537 $212,517 $120,585
PTS: 1 DIF: Challenging OBJ: LO 4 TOP: AICPA FN-Measurement

MSC: AACSB Analytic
5. The following information was abstracted from the records of the Norrick Corporation:
Accounts Receivable, December 31, 2014 ............ $ 590,000

Allowance for Doubtful Accounts before adjustment,
December 31, 2014 ............................... 18,000 (dr)
Sales--2014........................................ 2,180,000
Sales Discounts--2014 ............................. 18,000
Sales Returns--2014 ............................... 27,000
Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:
(1) 3 percent of outstanding accounts receivable are uncollectible.
(2) 1.5 percent of 2014 net sales are uncollectible.
(3) An aging schedule of the accounts shows that $21,400 of the accounts are
uncollectible.
ANS:
(1)
Doubtful Accounts Expense ................... 35,700
Allowance for Doubtful Accounts ........... 35,700
[(3%  $590,000) + $18,000]
(2)
[1.5%  ($2,180,000 - $18,000 - $27,000)]
(3)
($21,400 + $18,000)

MSC: AACSB Analytic
6. The following information was abstracted from the 2014 financial statements of Keller Company:
Sales ............................................... $747,000 *
Accounts Receivable, December 31, 2014 .............. 128,000
Allowance for Doubtful Accounts ..................... 1,220 (cr)
Sales discounts ..................................... 18,000 *
Sales returns ....................................... 12,400 *
*30% related to credit sales ........................
Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:
(1) 4 percent of current accounts receivable are uncollectible.
(2) 2.5 percent of net credit sales are uncollectible.
ANS:
(1)
Doubtful Accounts Expense
(4%  128,000) - $1,220 .................. 3,900
(2)
30% ($747,000 - $18,000 - $12,400) =
$214,980
(2.5%  $214,980) = $5,375

MSC: AACSB Analytic
7. From inception of operations to December 31, 2013, Centaur Corporation provided for uncollectible
accounts receivable under the allowance method: Provisions were made monthly at 2 percent of credit
sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously
written off were credited to the allowance account; and no year-end adjustments to the allowance
account were made. Centaur’s usual credit terms are net 30 days.
The credit balance in the allowance for doubtful accounts was $260,000 at January 1, 2014. During
2014, credit sales totaled $18,000,000, interim provisions for doubtful accounts were made at 2
percent of credit sales, $180,000 of bad debts were written off, and recoveries of accounts previously
written off amounted to $30,000. Centaur installed a computer system in November 2014 and an aging
of accounts receivable was prepared for the first time as of December 31, 2014. A summary of the
aging is as follows:
Classifications by Balance in Estimated %

Month of Sale Each Category Uncollectible
November-December 2014 $2,280,000 2%
July-October 2014 1,200,000 15%
January-June 2014 800,000 25%
Prior to January 1, 2014 260,000 80%
Based on the review of collectibility of the account balances in the "prior to January 1, 2014" aging
category, additional receivables totaling $120,000 were written off as of December 31, 2014. Effective
with the year ended December 31, 2014, Centaur adopted a new accounting method for estimating the
allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts
receivable.
(1) Prepare a schedule analyzing the changes in the allowance for doubtful accounts for
the year ended December 31, 2014. Show supporting computations in good form.
(2) Prepare the journal entry for the year-end adjustment to the allowance for doubtful
accounts balance as of December 31, 2014.
ANS:
(1)
Centaur Corporation
Analysis of Changes in the Allowance for Doubtful Accounts
For the Year Ended December 31, 2014
Balance at January 1, 2014 ............................... $260,000

Provision for doubtful accounts ($18,000,000  2%) ....... 360,000
Recovery in 2014 of bad debts written off previously ..... 30,000
$650,000
Deduct write-offs for 2014 ($180,000 + $120,000) ......... 300,000
Balance at December 31, 2014, before change in accounting
estimate ............................................... $350,000
Increase due to change in accounting estimate during 2014
($537,600 - $350,000) .................................... 187,600
Balance at December 31, 2014, adjusted (Schedule 1) ...... $537,600
Schedule 1
Computation of Allowance for Doubtful Accounts
at December 31, 2014
Doubtful
Aging Category Balance Percent Accounts
November-December 2014 $2,280,000 2% $ 45,600
July-October 2014 1,200,000 15% 180,000
January-June 2014 800,000 25% 200,000
Prior to January 1, 2014 140,000 * 80% 112,000
$4,420,000 $537,600
* $260,000 - $120,000
(2)
Doubtful Accounts Expense .................... 187,600
Allowance for Doubtful Accounts ............ 187,600
To increase the allowance for doubtful
accounts at December 31, 2014, resulting
from a change in accounting estimate.

MSC: AACSB Analytic
8. You are the auditor of Browning, Inc., a manufacturer of plastic products. In reviewing the balance
sheet of the company, you notice several receivables from the officers of the company. You report
your findings to the president of the company and inform him that these receivables will be considered
related party transactions for purposes of financial accounting and reporting. The president seems
somewhat annoyed by your comments and asks you to explain what you mean by "related party"
transactions and how the financial statements will be affected by these transactions. Prepare a brief
response to the president's question.
ANS:
Related party transactions occur when an enterprise engages in transactions in which one of the parties
to the transaction has the ability to influence significantly the policies of the other, or in which one
party to the transaction has the ability to influence the policies of the two transacting parties. The
following are examples of related party transactions:
a. Transactions between a parent company and its subsidiaries.

b. Transactions between subsidiaries of a common parent.
c. Transactions between an enterprise and trusts for the benefit of employees (such
trusts being controlled or managed by the enterprise).
d. Transactions between an enterprise and its principal owners, management, or
members of immediate families and affiliates.
Transactions between related parties may be controlled entirely by one of the parties so that the
transactions may be affected significantly by considerations other than those in arm's-length
transactions with unrelated parties. Related party transactions frequently involve such things as
borrowing or lending money at abnormally high or low interest rates, real estate sales at amounts that
differ significantly from appraised values, exchanges of nonmonetary assets, and transactions with
"shell" companies (enterprises having no economic substance).
Transactions with related parties are not conducted at arm's-length and thus their form may differ from
their economic substance. In cases where the form of the transaction differs from the substance,
auditors will require that the financial statements properly reflect the substance of the transaction.
Auditors also will require that the financial statements include the following disclosures regarding
related party transactions:
a. The nature of the relationship(s) involved.

b. A description of the transactions, including transactions to which no amounts or
nominal amounts were ascribed for each period for which an income statement is
presented.
c. The dollar amounts of transactions for each of the periods for which income
statements are presented.
d. Amounts due from or to related parties as of the date of each balance sheet presented.
The president may be reluctant to disclose the nature or amounts of related party transactions and may
resist changes in accounting for related party transactions if the transactions have not been accounted
for in accordance with applicable generally accepted accounting principles or do not reflect the
substance of the transactions.
PTS: 1 DIF: Medium OBJ: LO 5 TOP: AICPA FN-Reporting

MSC: AACSB Reflective Thinking
9. Receivables can be used to generate cash through two general categories of transactions:
1. A secured borrowing
2. A sale of the receivables.
Both of these types of transactions require a transfer of the receivables to a new holder, typically a
financial institution.
Required:
Distinguish between a secured borrowing and a sale of receivables as regards the rights of the
transferor and transferee as well as regards the accounting for each type of transaction.
ANS:
A secured borrowing uses the receivable as collateral for the loan. If the borrower assigning or
pledging the receivables defaults on the loan payments, the proceeds from the collection of the pledged
or assigned receivables will be applied directly to the payment of the debt. The term “assigning”
signifies the pledging of specific receivables as collateral, whereas the term pledging refers to pledging
of say all trade receivables as collateral.
The borrower typically cannot borrow up to the full amount of the receivables pledged. The lender
retains this difference in order to provide for accounts on which collection is not made. The lender also
levies a financing charge on the borrower in addition to the interest on the loan itself. Collection of the
receivables may be done by the borrower or the lender. In the case of pledging, the responsibility for
collection of the receivables rests entirely with the borrower.
In the case of a secured borrowing, the transferor maintains the receivables on its books, records a
liability, and recognizes interest expense over the term of the loan. If the transferee is not permitted to
sell or pledge the collateralized receivables unless the transferor defaults, then the transferor continues
to carry the assets with its trade accounts receivable. If the transferee is permitted to sell or pledge the
assets, then the transferor must reclassify the receivables and report them separately from other
receivables.
A sale of receivables requires that the borrower surrender control over the receivables. Specific
requirements are provided by the FASB to determine if a borrower has in fact surrendered control. If
these requirements are met, then the receivables are removed from the borrower’s books and a gain or
loss is recognized. The lender will record the receivables received on its books at fair value.
PTS: 1 DIF: Medium OBJ: LO 6 TOP: AICPA FN-Reporting

MSC: AACSB Analytic
10. Receivables can be used to generate cash through two general categories of transactions:
1. A secured borrowing
2. A sale of the receivables.
Both of these types of transactions require a transfer of the receivables to a new holder, typically a
financial institution.
A sale of receivables results in the receivables being removed from the books of the transferor and the
recognition of gain or loss. From the transferee’s standpoint, a sale of receivables results in the
receivables being recorded on its books at their fair value.
Required:
Identify the conditions that must exist for a transfer of receivables to be accounted for as a sale.
ANS:
A transfer of receivables is accounted for as a sale only if the transferor surrenders control over the
assets transferred. The transferor must receive consideration other than the right to receive cash flows
from the receivables. If the transferor retains the right to receive cash flows from the receivables, then
transferee may not be able to sell the receivables, suggesting that control has not been completely
relinquished by the transferor.
A transfer of receivables must meet the following conditions prescribed by Statement of Financial
Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”:
1. The transferred assets must have been isolated from the transferor--put beyond the reach
of the transferor and its creditors, even in bankruptcy or other receivership.
2. The transferee has the right to pledge or exchange the assets, free of conditions that
restrain it from taking advantage of that right.
3. The transferor does not maintain effective control over the transferred assets through
either
a. an agreement that the transferor repurchase or redeem the transferred assets before
their maturity, or
b. entitles the transferor to repurchase assets that are not readily obtainable.
A recourse obligation alone does not prevent a transfer from being recorded as a sale. An option held
by the transferor to repurchase the receivables does not necessarily require recording a transfer as loan.
For the first condition to be met, neither the transferor nor the creditors of the transferor can retain a
claim to the transferred receivables. Additionally, the transferor cannot retain the right to revoke the
transfer.
The second condition suggests that if a transferee can sell or pledge the receivables without
interference from the transferor or other parties, then the transferor has control over the future cash
flows underlying the receivables, as a result of a past transaction.
The third condition pertains to a requirement that the transferor repurchase the receivables (a “call”
option). If the transferor must repurchase the receivables, then control has not passed to the transferee.
A transferor may wish to reacquire interest-bearing receivables when interest rate changes would be
favorable to someone holding the receivable. Such an option may seem to violate the requirement for
control to pass to the transferee. Nonetheless, such an option does not entitle the transferor to receive
interest or other benefits from the transferred receivables. The transferor does not have custody of the
assets, does not control the disposition of the assets, and cannot access the assets unless the option is
exercised.
The transferee must be capable of fulfilling the option, if exercised. The transferred assets, or similar
assets, must be readily obtainable. If the assets are not readily obtainable, then the transferee would be
unable to sell the assets originally transferred, and thus would not have effective control over the
assets.
PTS: 1 DIF: Challenging OBJ: LO 6 TOP: AICPA FN-Reporting

MSC: AACSB Analytic
11. Securitization is a widely-used arrangement for selling receivables. Many companies use credit card
securitization and other forms of securitizations as part of their overall financing strategies.
Required:
Explain the nature of securitization, how it can be implemented, and the appropriate accounting
procedures related to a securitization. Include in your discussion the effects of recourse provisions on
the securitization.
ANS:
A securitization requires first that a company create a special purpose entity (SPE). This SPE usually is
a trust or a subsidiary. The SPE buys a pool of trade receivables, credit card receivables, or loans from
the company, and then sells securities such as bonds or commercial paper that are backed
(collateralized) by the receivables. To qualify as a sale, the transfer of the receivables must meet
specific criteria that ensure that seller has relinquished control.
Securitization of receivables without recourse means that the buyer assumes the risk of the receivables
not being collectible. The buyer has no recourse to the seller if the customers do not pay the
receivables. The seller accounts for the transaction as a sale of an asset.
Securitization of receivables with recourse means that the seller retains the risk of uncollectibility. The
seller guarantees that the buyer will be paid even if certain receivables are uncollectible. In this case,
the securitization would still be accounted for as a sale by the seller. The seller would be required to
estimate and record the fair value of the recourse obligation as a liability.

MSC: AACSB Analytic
Foreman Company sells specialized machinery and equipment. On January 1, 2014, the company sold
equipment and received a two-year, $10,000 note with a 3 percent stated interest rate. Interest is
payable each December 31, and the entire principal is payable December 31, 2015.
The equipment does not have a readily established market value. The market rate of interest for notes
of this type and level of risk is 10 percent.
12. See Foreman Company information above.
Required:
Prepare the entries on Foreman Company’s books to record the sale of the equipment.
ANS:
Accounting Principles Board Opinion No. 21, “Interest on Receivables and Payables,” requires that the
note be accounted for at the market rate of interest appropriate for the transaction. In this case, that rate
is 10 percent.
The present value of the note is computed as follows:
Present value of the maturity amount:

$10,000 ´ PVF2/10% = $ 8,265
Present value of the nominal interest payments:
($10,000 ´ .03) ´ PVAF2/10% = 521
Present value of note at 10% $ 8,786
The appropriate journal entries are as follows:
January 1, 2014:
Note Receivable 10,000
Discount on Note Receivable
1,214
Sales Revenue
8,786
December 31, 2014:
Cash ($10,000  .03) 300
Discount on Note Receivable 579
Interest Revenue ($8,786  .10)
879
December 31, 2015:

Cash ($10,000  .03) 300
Discount on Note Receivable 636
Interest Revenue ($9,365  .10)
936
December 31, 2015:

Cash 10,000
Note Receivable
10,000

MSC: AACSB Analytic
13. See Foreman Company information above.
Required:
Explain how and why this transaction was structured as it is.
ANS:
Notes with stated interest rates below market are used by companies to increase sales. Such notes
represent yet another means of marketing the seller’s product.
The Foreman Company note uses a low nominal or stated interest rate offset by an increased face
value. Many buyers of costly items, including automobiles, home appliances, and houses are more
concerned about the monthly payment than the final maturity payment (or balloon payment). The
present value of the Foreman Company note is $8,786. A note with a face value of $8,787 and 10
percent interest rate results in the same present value to Foreman Company as a note with a $10,000
face value and a 3 percent interest rate. A 3 percent interest payment on $10,000 ($300) may be more
attractive to a buyer than a 10 percent payment on $8,786 ($879). Foreman Company earns 10 percent
over the two-year term of the note either way. Note that with a face value of $8,786 and a 10 percent
interest rate, Foreman would receive cash totaling $10,544, which is less than the total cash receipts
with a $10,000 face value and 3 percent interest. Foreman would be willing to accept the $8,786 note
at 10 percent interest because it would receive cash more quickly under this arrangement.
Prior to the issuance of Accounting Principles Board Opinion No. 21, “Interest on Receivables and
Payables”, no definitive guidelines existed for accounting for a situation in which the stated and
market rates were unequal. Some companies recorded notes at face value even though the market rate
exceed the stated rate, resulting in inflated values for notes receivable and sales.

MSC: AACSB Analytic
14. On January 1, 2014, Nonsuch Corporation sold specialized equipment originally costing $20,000 and
having a book value of $16,000. The market value of the equipment was not readily determinable.
Nonsuch received a $5,000 downpayment and a $10,000, 4 percent note payable in four equal annual
installments beginning December 31, 2014. The current market rate on notes of a similar nature and
risk is 10 percent.
Required:
Prepare the entries to record the sale of the equipment on January 1, 2014, and the first interest
payment received on December 31, 2014.
ANS:
Computation of the annual payment:
$10,000 /PVAF4/4% $ 2,755
The principal of the note equals the present value of four

payments of $2,755 at 10%:
$2,755 ´ PVAF4/10% = $ 8,733
January 1, 2014:
Cash 5,000
Accumulated Depreciation ($20,000 - $16,000) 4,000
Loss on Sale of Equipment ($16,000 - $5,000 -$8,733) 2,267
Discount on Note Receivable Equipment 1,267
20,000
December 31, 2014:
Cash 2,755
Discount on Note Receivable (.10 ´ $8,733) 873
Interest Revenue (.10 ´ $8,733) 873

MSC: AACSB Analytic
15. Cash, the most liquid of all assets, must be safeguarded. Cash can be easily concealed and transported,
bears no marks of ownership, and is universally valued and accepted. Risk of theft of cash is directly
correlated to the accessibility of cash and cash records. Businesses address these problems through a
system of internal control.
Required:
1. Discuss generally what a system of internal control is designed to accomplish and

identify general controls over cash that should be implemented.
2. Identify internal control procedures for cash receipts.
3. Identify internal control procedures for cash disbursements.
ANS:
1. A system of internal control is designed to:
a. Protect assets.
b. Ensure compliance with laws and company policy.
c. Provide accurate accounting records.
d. Evaluate performance.
An internal control system for cash should include the following:

a. Separation of custody of and accounting for cash.
b. Procedures to insure that all cash transactions are accounted for.
c. Policies resulting in holding only minimal cash balances.
d. Periodic test counts of cash balances.
e. Reconciliation of general ledger and bank cash account balances.
f. Obtain an adequate return on idle cash balances.
g. Provide physical control of cash.
2. Specific controls over cash receipts would include:
a. Separation of responsibilities for handling cash, for recording cash transactions,

and for reconciling cash balances in order to reduce the likelihood of theft and
concealment through false recording.
b. Separation of cash handling and cash-recording responsibilities to ensure a
continuous, uninterrupted flow of cash from receipt to deposit. All cash should be
immediately counted, recorded and deposited.
c. Supervision of all cash-handling and cash-recording functions. Routine and
surprise cash counts, internal audits, and preparation of daily reports of cash
receipts, disbursements, and balances should be required.
3. Specific controls over cash disbursements would include:
a. Separation of responsibilities for cash disbursement documentation, check

writing, check signing, check mailing, and record keeping.
b. Requirements that all disbursements are made by check (except petty cash
disbursements) and that pre-numbered checks are issued and accounted for
numerically.
c. Tight controls and authorization procedures over all petty cash funds.
d. Preparation and signing of checks only if supported by adequate documentation
and verification.
e. Supervision of all cash disbursement and record-keeping functions.

MSC: AACSB Analytic
16. The annual report of McGregor Manufacturing showed the following in the 2014 balance sheet:
Balance Sheet: June 30, 2014
Current assets:
Other receivables $ 10,778,000
Noncurrent assets: $ 31,454,000

Notes receivable
Footnote information:
The fair value of the notes receivable was estimated by discounting the future cash flows using current
rates available to similar borrowers under similar circumstances.
All notes receivable bear interest at 5% to 12% and require future principal payments of approximately
$547,000 in 2015, $3,742,000 in 2016, $1,015,000 in 2017, $683,000 in 2018, $661,000 in 2019, and
$25,353,000 thereafter. The current portion of these long-term notes is included in other receivables in
the consolidated balance sheets.
Required:
1. Estimate the average term of the notes and the interest rates at which these notes were
issued by customers of McGregor.
2. Why would the interest rates vary so much?
3. Are the stated rate and the prevailing market rate of interest similar or quite different at
the date of issue?
ANS:
1. Most of the principal payments are due after 2019 suggesting that the average term is at
least six years (or perhaps longer).
2. Long-term notes are measured at the present value of remaining cash payments
(receipts), using the prevailing market rate of interest at the date of issuance. If the sum
of future principal payments is close to the net valuation of notes in the balance sheet,
then the stated and market rates of interest likely were similar at the date of issuance.
The stated interest rates vary between 5% and 12% which reflects the credit risks
associated with a wide range of customers and the variation in interest rates in effect at
the times the various notes were issued.
The sum of the principal payments for the period 2015 through 2019 and thereafter as
listed in the footnotes is $32,001,000. This amount is close to the amount disclosed for
net long-term notes receivable.
The principal amount due one year from the balance sheet date ($547,000) explains the
difference between the sum of the principal payments ($32,001,000) and the valuation
of long term notes ($31,454,000). This difference suggests that the market rates at
issuance of the notes likely were the same as the stated rates.

MSC: AACSB Analytic
17. The following is information from the books of Gioulis Consulting on September 30:
Balance per bank statement $53,000

Receipts recorded but not yet deposited in the bank 3,800
Bank charges not recorded 75
Note collected by bank and not recorded on books 2,070
Outstanding checks 2,732
NSF checks—not recorded on books nor redeposited 580
Assume no errors exist, compute the cash balance per books on September 30 before any
reconciliation adjustments.
ANS:
Balance per bank statement September 30 $53,000
Add: Receipts not yet deposited 3,800
Bank charges 75
NSF checks 580
Deduct: $57,455
Note collected by bank 2,070
Outstanding checks 2,732
Balance per books before reconciliation adjustments $52,653

MSC: AACSB Analytic

Chapter 7-The Revenue/Receivables/Cash Cycle: Multiple Choice

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Chapter 7-The Revenue/Receivables/Cash Cycle: Multiple Choice

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Chapter 7—The Revenue/Receivables/Cash Cycle

1. Which of the following is NOT correct?

7. Which one of the following statements is NOT correct?

Net Realizable Value

This entry would be made when:

19. Which of the following would NOT be classified as cash?

Cash received on accounts receivable .................. $ 70,000

Accounts Receivable .................................. $800,000

Accounts Receivable ................................. $450,000

The net realizable value of the accounts receivable at December 31 should be

Allowance for Doubtful Accounts, January 1 ..... $ 54,000 (cr)

Allowance for Doubtful Accounts, January 1, 2014 .. $ 6,000 (cr)

Accounts Receivable at December 31 ................ $880,000

Quanto's doubtful accounts expense for the year ended December 31 is

No. of Days Probability

The following additional information is available for the current year:

Net credit sales for the year .................. $4,000,000

Year of sale .............................. 3 percent

Net credit sales ..................................... $1,500,000

Net sales ............................................ $3,600,000

Sales (90 percent collected in the first year) ....... $900,000

What is the cash balance at December 31 of the first year?

Cash in banks ........................................ $375,000

Cash in banks includes $125,000 of compensating balances against short-term borrowing

Balance per bank statement, 7/31 ..................... $60,075

What is the correct cash balance at July 31?

Check payable to Lawson Corporation, dated January 2, 2015,

Balance per bank statement, February 28 ................. $18,025

What is the corrected cash balance at February 28?

Balance per bank statement, 3/31 ........................ $ 93,000

Data per bank statement for the month of April follow:

Deposits .............................................. $116,800

53. A debit balance in the Allowance for Doubtful Accounts

55. Estimation of uncollectible accounts receivable based on a percentage of sales

Accounts receivable, January 1, 2014 $

What is Closer Company’s accounts receivable balance at December 31, 2014?

60. The following information is available for Longview Company:

Credit sales during 2014 $ 50,000

64. Accounts receivable usually are factored

Sales adjustments $2,500

What is the balance in the warranty liability account on January 1, 2015?

a. IAS 39 represents a principles-based approach to standard setting.

Balance per bank statement ........................... $12,164

PTS: 1 DIF: Easy OBJ: LO 4 TOP: AICPA FN-Measurement

Balance per books, June 30 .................. $68,757

PTS: 1 DIF: Medium OBJ: LO 4 TOP: AICPA FN-Measurement

PTS: 1 DIF: Easy OBJ: LO 4 TOP: AICPA FN-Measurement

Disbursements in July per bank statement ................ $218,373

Balance per bank

Balance per books $ 15,822 $236,452 $212,529 $ 39,745

PTS: 1 DIF: Challenging OBJ: LO 4 TOP: AICPA FN-Measurement

Accounts Receivable, December 31, 2014 ............ $ 590,000

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Measurement

PTS: 1 DIF: Medium OBJ: LO 2 TOP: AICPA FN-Measurement

Classifications by Balance in Estimated %

Balance at January 1, 2014 ............................... $260,000

PTS: 1 DIF: Challenging OBJ: LO 2 TOP: AICPA FN-Measurement

a. Transactions between a parent company and its subsidiaries.

a. The nature of the relationship(s) involved.

PTS: 1 DIF: Medium OBJ: LO 5 TOP: AICPA FN-Reporting

PTS: 1 DIF: Medium OBJ: LO 6 TOP: AICPA FN-Reporting

PTS: 1 DIF: Challenging OBJ: LO 6 TOP: AICPA FN-Reporting

PTS: 1 DIF: Challenging OBJ: LO 6 TOP: AICPA FN-Reporting