On December 31, 2014, Swan Company sold for $150,000 an old machine having an original cost of

$170,000 and a book value of $120,000. The terms of the sale were as follows:

$30,000 down payment

$60,000 payable on December 31 each of the next two years

The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of
transaction. What should be the amount of the notes receivable net of the unamortized discount on
December 31, 2014 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9%
for 2 years is 1.75911.)

a. $211,092.

b. $135,546.

c. $120,000.

d. $105,546. (The present value of the annuity is ($60,000 × 1.75911) or $105,546.)

The minimum cash amounts that banks often require customers to whom they lend money to maintain
in checking accounts is called:

a. compensating balances. (Compensating balances are the minimum cash amounts required by
banks to be maintained by their customers.)

b. money market funds.

c. bank overdrafts.

d. cash equivalents.

Which of the following methods of determining annual bad debt expense violates the expense
recognition concept?

a. Direct write-off (The direct write-off method usually fails to record expenses in the same
period as the associated revenue and therefore violates the expense recognition concept.
Percentage of sales and percentage of receivables both estimate bad debt expense and report
in the same period as the related sales.)

b. Percentage of sales

c. Percentage of ending accounts receivable

d. Percentage of average accounts receivable

The percentage-of-receivables method for estimating uncollectible accounts is often referred to as the:

a. direct write-off method.

b. income statement approach.

c. balance sheet approach.

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 d. aging method.

In preparing its August 31, 2014 bank reconciliation, Adel Corp. has available the following information:

Balance per bank statement, 8/31/14 $21,650

Deposit in transit, 8/31/14 $3,900
Return of customer’s check for insufficient funds, 8/30/14 $600
Outstanding checks, 8/31/14 $2,750
Bank service charges for August $100

At August 31, 2014, Adel's correct cash balance is:

a. $22,100.

b. $20,500.

c. $22,800. ($21,650 + $3,900 - $2,750 = $22,800.)

d. $22,200.

In the gross method of recording cash discounts, sales discounts are:

a. recorded at the time of sale.

b. recorded when payment is received within the discount period.

c. never recorded.

d. ignored unless they are material in amount.

Deposit in transit: Added to bank balance

Bank Service Charge: Deducted from book balance
Interest Credited to Account: Added to book balance
Outstanding Checks: Deducted to bank balance
NSF Check Returned: Deducted to book balance
Compensating balanced held in LT borrowing arrangements: Other
Savings Account: Cash
Trust Fund: Other
Checking Account: Cash
Postage Stamps: Other (Office Expense)
Treasury bills maturing in six months: Short Term Investments
Post-Dated checks from customers: Receivables
Certificate of deposit maturing in five years: Other
Common stock of another company (to be sold by Dec. 31, this year): Short Term Investments
Change Fund: Cash

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