Test Bank For Fundamentals of Financial Accounting 6th Edition Fred Phillips Robert Libby Patricia Libby Full Download

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Fundamentals of Financial Accounting, 6e (Phillips)
Chapter 8 Receivables, Bad Debt Expense, and Interest Revenue
1) When a company routinely sells on credit, it is inevitable that some of its customers will not
pay the amount owed.
Answer: TRUE
Explanation: Some customers will not pay because they dispute the price or quality of the
products or services or the customers are having financial difficulties.
Difficulty: 1 Easy
Topic: Pros and Cons of Extending Credit
Learning Objective: 08-01 Describe the trade-offs of extending credit.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) The decision to sell to extend credit to customers will decrease wage costs.
Answer: FALSE
Explanation: The disadvantages of extending credit include increased (rather than decreased)
wage costs. If credit is extended, the company will have to hire people to evaluate whether each
customer is creditworthy, track how much each customer owes, and follow up to collect the
receivable from each customer.
Difficulty: 2 Medium
Bloom's: Understand
3) Notes receivable are typically only used when a company sells large dollar value items (such
as cars).
Answer: FALSE
Explanation: Notes receivable are typically used when a company sells large dollar value items
(e.g., cars), offers extended payment periods, or lends money to individuals or businesses.
Bloom's: Understand
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) The allowance method for uncollectible accounts conforms to the expense recognition
principle.
Answer: TRUE
Explanation: The allowance method for uncollectible accounts conforms to the expense
recognition principle. The allowance method records the Bad Debt Expense in the same period
as the sale.
Topic: Accounts Receivable and Bad Debts
Learning Objective: 08-02 Estimate and report the effects of uncollectible accounts.
Bloom's: Evaluate
5) The Allowance for Doubtful Accounts account is a temporary account, which is closed to
Retained Earnings at the end of the accounting period.
Answer: FALSE
Explanation: The Allowance for Doubtful Accounts is a permanent account, so its balance
carries forward from one accounting period to the next.
Bloom's: Remember
6) The accounts receivable account for each customer is called a subsidiary account.
Answer: TRUE
Explanation: For billing and collection purposes, a company will keep a separate accounts
receivable account (called a subsidiary account) for each customer.
Difficulty: 1 Easy
Bloom's: Remember
2
7) Under the allowance method for uncollectible accounts, the write-off of a specific account
will not affect total assets.
Answer: TRUE
Explanation: A write-off decreases both the total Accounts Receivable and Allowance for
Doubtful Accounts by the same amount. Consequently, since the Allowance for Doubtful
Accounts is a contra-asset account, the write-off of a specific account does not affect total assets.
Bloom's: Analyze
AACSB: Analytical Thinking
8) The aging of accounts receivable method focuses on estimating the ending balance to be
reported in the Allowance for Doubtful Accounts, whereas the percentage of credit sales method
focuses on estimating Bad Debt Expense for the period.
Answer: TRUE
Explanation: The percentage of credit sales method is referred to as the income statement
approach, while the aging of accounts receivable method is called the balance sheet approach.
While the percentage of credit sales method focuses on estimating Bad Debt Expense for the
period, the aging of accounts receivable method focuses on estimating the ending balance to be
reported in the Allowance for Doubtful Accounts.
Topic: Methods for Estimating Bad Debts
Bloom's: Understand
9) The aging of accounts receivable method is based upon the principle that the longer an
account is overdue, the higher the risk of nonpayment.
Answer: TRUE
Explanation: The aging method gets its name because it is based on the "age" of each amount in
Accounts Receivable. The older and more overdue an account receivable becomes, the less likely
it is to be collectible.
Bloom's: Understand
3
10) Because it is easier to use, the direct write-off method for uncollectible accounts is typically
used instead of the allowance method.
Answer: FALSE
Explanation: The allowance method for uncollectible accounts conforms to the expense
recognition principle and, as such, it is required by GAAP. Although the direct write-off method
is easier to use, it overstates the value of Accounts Receivable and it violates the expense
recognition principle. Thus, it is not considered a generally accepted accounting method.
Topic: Methods for Estimating Bad Debts; Accounts Receivable and Bad Debts
Bloom's: Evaluate
11) The direct write-off method for uncollectible accounts is not allowed by GAAP because it
understates the net realizable value of accounts receivable and violates the expense recognition
principle.
Answer: FALSE
Explanation: The direct write-off method for uncollectible accounts is not allowed by GAAP
because it overstates the net realizable value of accounts receivable and violates the expense
recognition principle.
Bloom's: Understand
12) The direct write-off method for uncollectible accounts is not allowed by either GAAP or
IFRS, but is required by the Internal Revenue Service (IRS) for tax purposes.
Answer: TRUE
Explanation: GAAP and IFRS do not allow the use of the direct write-off method, but the IRS
requires it.
Bloom's: Remember
AACSB: Diversity
4
13) Interest on a two-month, 7%, $1,000 note would be calculated as $1,000 × 0.07 × 2/12.
Answer: TRUE
Explanation: The time period covered in the interest calculation is based on the number of
months out of 12. Because the note will be outstanding for only two months, interest would be
calculated as $1,000 × 0.07 × 2/12.
Topic: Notes Receivable and Interest Revenue
Learning Objective: 08-03 Compute and report interest on notes receivable.
Bloom's: Understand
14) Interest revenue from notes receivable is typically reported on a multiple step income
statement as a part of Income from Operations.
Answer: FALSE
Explanation: Except for banks, interest is considered a peripheral source of revenue; as such, it
is reported on the income statement immediately following (rather than being part of) the Income
from Operations subtotal.
Difficulty: 1 Easy
Topic: Recording Notes Receivable and Interest Revenue
Bloom's: Remember
15) The allowance method for uncollectible accounts is used for both accounts receivable and
notes receivable.
Answer: TRUE
Explanation: The allowance method is used for both accounts receivable and notes receivable.
Difficulty: 1 Easy
Bloom's: Remember
5
16) The receivables turnover ratio is calculated as: Average net receivables ÷ Net sales.
Answer: FALSE
Explanation: Receivable turnover ratio = Net sales ÷ Average net receivables
Difficulty: 1 Easy
Topic: Receivables Turnover Analysis
Learning Objective: 08-04 Compute and interpret the receivables turnover ratio.
Bloom's: Remember
17) If the receivables turnover ratio rises significantly, the increase may be a signal that the
company is extending credit to high-risk borrowers or allowing an overly generous repayment
schedule.
Answer: FALSE
Explanation: The receivables turnover ratio measures the number of times receivables turn over
during the period. A higher ratio means faster (better) turnover. Extending credit to high-risk
borrowers or allowing an overly generous repayment schedule would most likely slow down
collections, which would increase Accounts Receivable, and cause the receivables turnover ratio
to decrease.
Difficulty: 3 Hard
Bloom's: Evaluate
18) Factoring refers to an arrangement in which a company sells its receivables to another
company and receives cash immediately.
Answer: TRUE
Explanation: Factoring is an arrangement where receivables are sold to another company (called
a factor) for immediate cash (minus a factoring fee).
Difficulty: 1 Easy
Bloom's: Remember
6
19) If a company factors its receivables, its receivables turnover ratio will be higher than it
would have been if the receivables had not been factored.
Answer: TRUE
Explanation: The accounts receivable turnover ratio equals net sales divided by average net
accounts receivable. If a company factors its receivables, the average net accounts receivable
will decrease and the receivables turnover ratio would increase.
Bloom's: Analyze
20) When credit card sales occur, the seller may receive cash immediately, or within a few days,
depending upon the specific credit card program being used.
Answer: TRUE
Explanation: Credit card companies may make immediate cash payments to the seller or it may
take several days before the seller receives the cash.
Difficulty: 1 Easy
Bloom's: Remember
21) Credit card companies charge a fee to the seller that accepts the credit cards. This fee is
recorded by the seller as a selling expense on its income statement.
Answer: TRUE
Explanation: The credit card fees are included with selling expenses on the income statement.
Difficulty: 1 Easy
Bloom's: Remember
7
22) The potential advantages of extending credit to customers include all of the following except
higher:
A) wage expenses.
B) profits.
C) customer satisfaction.
D) revenues.
Answer: A
Explanation: The advantage of extending credit is that it helps business customers buy products
and services, thereby increasing the seller's revenues and profits. A disadvantage (rather than an
advantage) of selling on credit is increased wage costs. If credit is extended, the company will
have to hire people to evaluate whether each customer is creditworthy, track how much each
customer owes, and follow up to collect the receivable from each customer.
Difficulty: 1 Easy
Bloom's: Understand
23) There are advantages and disadvantages to extending credit to customers. Which of the
following statements below expresses the general reason for extending credit?
A) Lower sales revenues exceed bad debt savings.
B) Wage cost savings exceed delayed receipt of cash.
C) Gross profits exceed bad debt costs.
D) The speed of cash receipts exceeds bad debt costs.
Answer: C
Explanation: Generally, managers find that the incremental gross profit obtained by increasing
sales on account is greater than the additional costs of extending credit (increased wage costs,
bad debt costs, and delayed receipt of cash).
Difficulty: 1 Easy
Bloom's: Understand
8
24) Which of the following statements about the tradeoffs of extending credit is not correct?
A) Extending credit to at least some customers is necessary in a competitive market to avoid
losing sales to competitors.
B) Even if a company were to collect in full from customers, there would be other additional
costs introduced by extending credit to customers.
C) Even though additional costs are incurred if credit is extended, a company expects that the
additional revenue will be more than sufficient to offset the additional costs.
D) Even if there are no bad debts from credit sales, the delayed receipt of cash will always
increase additional costs beyond the increased revenue from the credit sales.
Answer: D
Explanation: The disadvantages of selling on credit are increased wage costs, bad debt costs,
and delayed receipt of cash. The advantage of extending credit is that it helps business customers
buy products and services, thereby increasing the seller's revenues. (If the additional costs are
expected to exceed the increased revenue, the company would not choose to extend credit to
customers.)
Bloom's: Understand
25) Extending credit to customers will introduce all of the following additional costs except:
A) increased wage costs will be incurred to hire people to evaluate whether each customer is
creditworthy, track how much each customer owes, and follow up to collect the receivable from
each customer.
B) bad debt costs will result when amounts cannot be collected from customers.
C) delayed receipt of cash may result in requiring the company to take out short-term loans and
incur interest costs.
D) decreased gross profit from reduced sales.
Answer: D
and delayed receipt of cash. The advantage of extending credit is that it helps business customers
buy products and services, thereby increasing the seller's revenues and profits.
Bloom's: Understand
9
26) All of the following will likely be incurred by a company that extends credit except:
A) increased revenues.
B) increased wage costs.
C) increased advertising expenses.
D) a delay in the receipt of cash.
Answer: C
Explanation: Advertising expenses are unrelated to the decision to extend credit to customers.
Extending credit helps business customers buy products and services, thereby increasing the
seller's revenues. However, there are disadvantages. If credit is extended, the company will have
to hire people to evaluate whether each customer is creditworthy, track how much each customer
owes, and follow up to collect the receivable from each customer. The advantage of extending
credit is that it helps business customers buy products and services, thereby increasing the seller's
revenues. "Bad debts" that arise when customers do not pay their account balances can be a
significant additional cost of extending credit. Even if the company collects in full from
customers, it would likely have to wait 30-60 days before receiving the cash.
Difficulty: 1 Easy
Bloom's: Remember
27) Companies are concerned about the cost of extending credit for all the following reasons
except the:
A) time delay in receiving payment.
B) expense of the extra goods that must be produced or purchased for resale.
C) risk of nonpayment.
D) administrative costs associated with extending credit.
Answer: B
and delayed receipt of cash. The cost of extra goods that must be produced or purchased for
resale is not a concern related to extending credit.
Bloom's: Remember
10
28) The potential disadvantages of extending credit include all of the following except:
A) increased bad debt costs.
B) customers buying too much.
C) the need to hire employees to undertake collection efforts.
D) higher wage costs in the accounting department.
Answer: B
and delayed receipt of cash. If credit is extended, the company will have to hire people to
evaluate whether each customer is creditworthy, track how much each customer owes, and
follow up to collect the receivable from each customer. Some of these costs will be incurred in
the accounting department. The fact that customers might buy too much is certainly not a
concern related to extending credit.
Difficulty: 1 Easy
Bloom's: Understand
29) Which of the following statements about extending credit is not correct?
A) It is common for companies to sell on account to other companies.
B) Some companies extend credit to individual consumers.
C) Bad debts arise from credit sales to individual consumers, but not from credit sales to other
companies.
D) When credit is available, customers often buy more products and services.
Answer: C
Explanation: Bad debts may arise from credit sales to individual consumers as well as from
other companies.
Difficulty: 1 Easy
Bloom's: Understand
11
30) If a company did not extend credit to customers:
A) gross revenue would increase.
B) costs would increase but so would sales revenue.
C) costs would decrease but so would sales revenue.
D) gross profit would increase.
Answer: C
and services, thereby increasing the seller's revenues. However, extending credit introduces
additional costs such as increased wage costs, bad debt costs, and delayed receipt of cash. As a
result, if a company chooses not to extend credit to customers, its revenues and costs would be
expected to decrease.
Bloom's: Understand
31) Although there are some clear disadvantages associated with extending credit to customers,
such as bad debt costs, most managers believe a particular advantage outweighs the costs. To
which primary advantage do they refer?
A) Increased labor costs
B) Increased bad debt expense
C) Delayed receipt of cash
D) Additional sales revenue
Answer: D
and services, thereby increasing the seller's revenues.
Difficulty: 1 Easy
Bloom's: Remember
12
32) The advantage of extending credit to customers is that it helps customers to buy products and
services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs
related to:
A) increased sales.
B) bad debt expense.
C) increased notes receivable.
D) marketing.
Answer: B
Explanation: Generally, managers find that the incremental gross profit obtained by increasing
sales on account is greater than the additional costs of extending credit (increased wage costs,
bad debt costs, and delayed receipt of cash).
Difficulty: 1 Easy
Bloom's: Remember
33) Countryside Corporation is owed $11,890 from a customer for landscaping. The account is
overdue and the customer is having difficulty paying. Countryside might ask the customer to
sign a note for the unpaid amount to:
A) decrease its net income for tax reporting purposes.
B) strengthen Countryside Corporation's legal right to be repaid with interest.
C) reduce its tax liability.
D) eliminate any doubts of collection of the amount due.
Answer: B
Explanation: Notes receivable are viewed as a stronger legal claim than accounts receivable, but
a note does not guarantee payment. This transaction only affects the balance sheet; one asset is
exchanged for another.
Bloom's: Understand
13
34) IBM signs an agreement to lend one of its customers $200,000 to be repaid in one year at 5%
interest. IBM would record this loan as:
A) Notes Payable.
B) Accounts Receivable.
C) Notes Receivable.
D) Unearned Revenue.
Answer: C
Explanation: A note receivable is a promise that requires another party to pay the business
according to a written agreement.
Difficulty: 1 Easy
Bloom's: Understand
35) Accounts receivable:

A) arise from the purchase of goods or services on credit.
B) are amounts owed to a business by its customers.
C) will be collected within the discount period or when due.
D) are reported on the income statement.
Answer: B
Explanation: Accounts receivable are amounts owed to a business by its customers; they arise
from the sale of goods or services on credit. Some accounts receivable are never collected.
Difficulty: 1 Easy
Bloom's: Remember
14
36) Notes Receivable differ from Accounts Receivable in that Notes Receivable:
A) generally charge interest from the day they are signed to the day they are collected.
B) are noncurrent assets.
C) do not have to be created for every new transaction, so they are used more frequently.
D) are generally considered a weaker legal claim.
Answer: A
Explanation: A note receivable is created when a formal written contract ("note") is established
outlining the terms by which a company will receive amounts it is owed. Notes receivable differ
from accounts receivable in that notes generally charge interest from the day they are signed to
the day they are collected. Notes receivable are viewed as a stronger legal claim than accounts
receivable, but a new note needs to be created for every transaction, so they are used less
frequently.
Bloom's: Understand
37) Which of the following are similarities between a six-month note receivable and an account
receivable? They both are:
A) formal written contracts.
B) interest bearing.
C) current liabilities.
D) current assets.
Answer: D
Explanation: Notes receivable differ from accounts receivable in that notes generally charge
interest from the day they are signed to the day they are collected. This note receivable, which is
due in six months, is similar to an accounts receivable in that both will be classified as current
assets on the balance sheet.
Difficulty: 1 Easy
Bloom's: Understand
15
38) Why are estimates of bad debts used to record uncollectible amounts of accounts receivable?
A) Doing so avoids violating the expense recognition ("matching") principle.
B) It is an easier method than waiting for accounts to actually become uncollectible.
C) Because the actual amount of uncollectible accounts can never be known.
D) It is the most conservative approach.
Answer: A
Explanation: To comply with the expense recognition ("matching") principle, a company needs
to record bad debts in the same period as the sale. The only way to do this is to record an
estimate of the amount of bad debts that are likely to arise. Later, the accounting records can be
adjusted when uncollectible amounts become known with certainty.
Difficulty: 1 Easy
Bloom's: Remember
39) Countryside Corporation provides $6,000 worth of lawn care on account during the month.
Experience suggests that about 2% of net credit sales will not be collected. In conformity with
the expense recognition principle, the company should:
A) record an estimate of Bad Debt Expense in the same period as the lawn care is provided.
B) not report the sales revenue until it collects payment.
C) increase the value of its liabilities with an adjustment.
D) wait until the accounts are determined to be uncollectible before making an entry to record
the related Bad Debt Expense.
Answer: A
Explanation: In conformity with the expense recognition principle, an estimate of bad debts
must be recorded in the same period in which the goods or services are provided.
Difficulty: 1 Easy
Bloom's: Understand
16
40) The Allowance for Doubtful Accounts account is a contra-account that offsets:
A) Bad Debt Expense.
B) Cash.
C) Net Income.
D) Accounts Receivable.
Answer: D
Explanation: The Allowance for Doubtful Accounts is a contra-account that is subtracted from
Accounts Receivable on the balance sheet.
Difficulty: 1 Easy
Bloom's: Remember
41) Recording the estimate of bad debt expense:

A) increases assets.
B) increases net income.
C) is done at the same time the credit sale is recorded.
D) follows the expense recognition ("matching") principle.
Answer: D
Explanation: Recording an estimate of Bad Debt Expense match the cost of bad debts to the
accounting period in which the related credit sales are made. The related adjusting entry
increases the Allowance for Doubtful Accounts account, a contra-asset, and increases Bad Debt
Expense, and expense account. As a result, it decreases total assets and net income. The entry is
recorded at the same time as the other adjusting entries at the end of the accounting period.
Difficulty: 1 Easy
Bloom's: Remember
17
42) The adjusting entry to record the estimated bad debts in the period credit sales occur includes
a debit to an:
A) asset account and a credit to a liability account.
B) expense account and a credit to an asset account.
C) expense account and a credit to a revenue account.
D) expense account and a credit to a contra-asset account.
Answer: D
Explanation: The entry to record the estimated bad debts in the period credit sales occur includes
a debit to Bad Debt Expense, an expense account, and a credit to the Allowance for Doubtful
Accounts, a contra-asset account.
Bloom's: Analyze
43) The adjusting entry to record the estimated bad debts in the period credit sales occur would
normally include a debit to:
A) Accounts Receivable and a credit to Allowance for Doubtful Accounts.
B) Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
C) Allowance for Doubtful Accounts and a credit to Accounts Receivable.
D) Bad Debt Expense and a credit to Accounts Receivable.
Answer: B
a debit to Bad Debt Expense, an expense account, and a credit to the Allowance for Doubtful
Accounts, a contra-asset account.
Difficulty: 1 Easy
Bloom's: Analyze
18
44) The adjusting entry used to record the estimated bad debts in the period credit sales occur
decreases:
A) both net income and net accounts receivable.
B) net income and increases liabilities.
C) assets and increases liabilities.
D) both selling expenses and net income.
Answer: A
a debit to Bad Debt Expense and a credit to the Allowance for Doubtful Accounts. The debit
increases an expense account and decreases net income. Since the credit is to a contra-asset
account, the entry decreases total assets.
Bloom's: Analyze
19
45) Assume Zap Industries reported the following adjusted account balances at year-end.
2019 2018
Accounts Receivable $ 2,496,320 $ 1,937,472
Allowance for Doubtful Accounts (126,400) (103,360)
Accounts Receivable, Net $ 2,369,920 $ 1,834,112
Assume the company recorded no write-offs or recoveries during 2019. What was the amount of
Bad Debt Expense reported in 2019?
A) $126,400
B) $103,360
C) $46,080
D) $23,040
Answer: D
Explanation: Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in
Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense
Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Beginning balance
in Allowance for Doubtful Accounts + Write-offs
= $126,400 − $103,360 + $0 = $23,040

Bloom's: Apply
46) Accounts Receivable, Net (or Net Accounts Receivable) equals Accounts Receivable (gross)
minus:
A) Cost of Goods Sold.
B) Bad Debt Expense.
C) Allowance for Doubtful Accounts.
D) Current Liabilities.
Answer: C
Explanation: Accounts Receivable, Net (or Net Accounts Receivable) equals Accounts
Receivable (gross) minus Allowance for Doubtful Accounts.
Difficulty: 1 Easy
Bloom's: Remember
20
47) On the balance sheet, the Allowance for Doubtful Accounts:
A) is included in current liabilities.
B) increases the reported Accounts Receivable, Net.
C) is reported under the heading "Other Assets."
D) is subtracted from Accounts Receivable.
Answer: D
Explanation: The current assets section of the balance sheet reports Accounts Receivable minus
Allowance for Doubtful Accounts to arrive at the subtotal, Accounts Receivable, Net.
Difficulty: 1 Easy
Bloom's: Remember
48) The accounting principle that governs the recording of bad debt expense in the same period
as sales revenue is called the:
A) expense recognition principle ("matching").
B) time period assumption.
C) revenue recognition principle.
D) separate entity assumption.
Answer: A
Explanation: The expense recognition principle, or "matching" principle governs the recording
of expenses and the related revenues so they both are reported in the same period on the income
statement. This principle will lead to less distorted views of net income in the period of the sale
as well as the period of the bad debt expense.
Difficulty: 1 Easy
Bloom's: Remember
21
49) An objective of the expense recognition principle ("matching") is to have bad debt expense
debited in:
A) the same period that the related accounts receivable is determined to be uncollectible.
B) the same period the related credit sales are recorded.
C) a later period after the related credit sales are recorded.
D) the period that a customer eventually becomes bankrupt.
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
50) Failing to record bad debt expense in the same period as the related revenue violates which
principle?
A) Expense recognition principle ("matching")
B) Revenue recognition principle
C) Lower-of-cost-or-market value principle
D) Cost principle
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
22
51) The challenge businesses face when estimating the allowance for previously recorded sales is
that:
A) at the time of the sale, it is not known which particular customer will not make their payment.
B) past default rates are not a good predictor of future default rates.
C) in bad economic times, fewer customers will have problems with their payments.
D) those sales have been closed into retained earnings.
Answer: A
to record bad debts in the same period as the sale. The problem is that time will pass before the
company discovers which particular credit sales and customer balances aren't going to be
collected. These bad debts will likely be discovered in an accounting period following the sale,
rather than in the same period as the sale.
Difficulty: 1 Easy
Bloom's: Remember
52) A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated

Depreciation, has a normal balance of a ________ and causes total assets to:
A) credit; decrease.
B) debit; increase.
C) debit; decrease.
D) credit; increase.
Answer: A
Explanation: To account for any bad credit sales that have been included in Sales Revenue and
Accounts Receivable, we record offsetting amounts in both the balance sheet and income
statement. This adjustment is made at the end of each accounting period to reduce Accounts
Receivable (using a contra-asset account called Allowance for Doubtful Accounts) and reduce
Net Income (using an expense account called Bad Debt Expense). Since it is a contra-asset
account, the Allowance for Doubtful Accounts normally has a credit balance. The adjustment
described, which causes this contra-account to increase, results in a decrease in total assets.
Bloom's: Understand
23
53) Using the allowance method, which is the correct adjusting journal entry to record bad debt
expense?
A) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts.
B) Debit Allowance for Bad Debt Expense and credit Bad Debt Expense.
C) Debit Bad Debt Expense and credit Sales Revenue.
D) Debit Bad Debt Expense and credit Accounts Receivable.
Answer: A
Explanation: The adjusting entry includes a debit to Bad Debt Expense (to increase this expense
account) and a credit to Allowance for Doubtful Accounts (to increase this contra-asset account).
Difficulty: 3 Hard
Bloom's: Apply
54) The adjusting entry to record the allowance for doubtful accounts includes a:
A) debit to Bad Debt Expense.
B) debit to Allowance for Doubtful Accounts.
C) debit to Sales Revenue.
D) credit to Accounts Receivable.
Answer: A
Explanation: The adjusting entry includes a debit to Bad Debt Expense (to increase this expense
account) and a credit to Allowance for Doubtful Accounts (to increase this contra-asset account).
Difficulty: 3 Hard
Bloom's: Apply
24
55) The entry to adjust the Allowance for Doubtful Accounts causes total:
A) assets to increase.
B) liabilities to increase.
C) stockholders' equity to increase.
D) stockholders' equity to decrease.
Answer: D
Explanation: The adjusting entry increases Bad Debt Expense, which causes net income to
decrease and stockholders' equity to decrease, and increases the Allowance for Doubtful
Accounts (a contra-asset account), which causes total assets to decrease.
Bloom's: Understand
56) Allowance for Doubtful Accounts is a:

A) permanent account so its balance carries forward to the next accounting period.
B) permanent account so its balance is closed (zeroed out) at the end of the accounting period.
C) temporary account so its balance is closed (zeroed out) at the end of the accounting period.
D) temporary account so its balance carries forward to the next accounting period.
Answer: A
Explanation: Like all contra-asset accounts, such as Accumulated Depreciation, the Allowance
for Doubtful Accounts is a permanent account, so its balance carries forward from one
accounting period to the next. Bad Debt Expense, which is a temporary account, will have its
balance closed (zeroed out) at the end of each year.
Bloom's: Understand
25
57) Bad Debt Expense is a:
A) permanent account so its balance carries forward to the next accounting period.
B) permanent account so its balance is closed (zeroed out) at the end of the accounting period.
C) temporary account so its balance is closed (zeroed out) at the end of the accounting period.
D) temporary account so its balance carries forward to the next accounting period.
Answer: C
Explanation: Like all contra-asset accounts, such as Accumulated Depreciation, the Allowance
for Doubtful Accounts is a permanent account, so its balance carries forward from one
accounting period to the next. Bad Debt Expense, which is a temporary account, will have its
balance closed (zeroed out) at the end of each year.
Bloom's: Understand
58) For billing and collection purposes, companies keep a separate accounts receivable account
for each customer called a:
A) subsidized account.
B) temporary account.
C) subsidiary account.
D) temporal account.
Answer: C
Explanation: For billing and collection purposes, a company internally keeps a separate accounts
receivable account (called a subsidiary account) for each customer. The total of these accounts is
reported as Accounts Receivable on the balance sheet.
Difficulty: 1 Easy
Bloom's: Remember
26
59) A subsidiary account is:
A) prohibited by GAAP.
B) a separate account maintained internally for billing purposes.
C) used for tax purposes to enable calculation of taxable income.
D) used only for computing the accounts receivable turnover.
Answer: B
Explanation: For billing and collection purposes, a company will keep a separate accounts
receivable account (called a subsidiary account) for each customer.
Difficulty: 1 Easy
Bloom's: Remember
60) Assume the Hart Company uses the allowance method. When the company writes off a
customer's account balance that has no chance of collection:
A) total assets will decrease.
B) total liabilities will increase.
C) expenses and revenues will both increase.
D) total assets do not change.
Answer: D
Explanation: When the allowance method is used and a customer account is written off, a
decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account,
Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets,
while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result,
total assets do not change. A write-off does not affect liabilities, revenues, or expenses.
Bloom's: Analyze
27
61) Cambridge Co. uses the allowance method. During January 2019, Cambridge writes off a
$640 customer account balance when it becomes clear that the customer will never pay. The
entry to record the write-off will:
A) decrease total assets by $640.
B) decrease net income in 2019 by $640.
C) decrease net accounts receivable by $640.
D) not affect expenses in 2019.
Answer: D
Bloom's: Analyze
62) When the allowance method is used, the entry to record the write-off of specific uncollectible
accounts would decrease:
A) the Allowance for Doubtful Accounts account.
B) Net Income.
C) Accounts Receivable, Net.
D) Bad Debt Expense.
Answer: A
Bloom's: Analyze
28
63) Marilyn Corporation uses the allowance method. Marilyn writes off a $560 customer account
balance when it becomes clear that the customer will never pay. Marilyn should debit:
A) Bad Debt Expense and credit Accounts Receivable for $560.
B) Allowance for Doubtful Accounts and credit Accounts Receivable for $560.
C) Bad Debt Expense and credit Cash for $560.
D) Accounts Receivable and credit Bad Debt Expense for $560.
Answer: B
Explanation: Using the allowance method, the entry to record a write-off includes a debit to
Allowance for Doubtful Accounts and a credit to Accounts Receivable.
Bloom's: Analyze
64) The write-off of a specific customer account receivable involves decreasing an asset account
and:
A) increasing an expense account.
B) decreasing a liability account.
C) decreasing a revenue account.
D) decreasing a contra-asset account.
Answer: D
Explanation: Writing-off a specific customer's account receivable balance after it has been
determined to be uncollectible involves decreasing the Allowance for Doubtful Accounts, a
contra-asset account, and decreasing Accounts Receivable, an asset account.
Bloom's: Understand
29
65) Charleston, Inc. has Accounts Receivable of $320,000 and an Allowance for Doubtful
Accounts of $16,000. If it writes-off a customer account balance of $1,600, what is the amount
of its net accounts receivable?
A) $318,400
B) $320,000
C) $304,000
D) $302,400
Answer: C
Explanation: Before the write-off, the balance in the Accounts Receivable account is $304,000
(or $320,000 − $16,000). After the write-off, the balance in Allowance for Doubtful Accounts
account is $14,400 (or $16,000 − $1,600) and the balance in Accounts Receivable is $318,400
(or $320,000 − $1,600). As a result, net accounts receivable equals $304,000 (or $318,400 −
$14,400). Notice that the net accounts receivable after a write-off is the same as the net amount
before the write-off.
Difficulty: 3 Hard
Bloom's: Apply
66) Kata Company uses the allowance method. On May 1, Kata wrote off a $22,000 customer
account balance when it becomes clear that the particular customer will never pay. The journal
entry to record the write-off on May 1 would include which of the following?
A) Debit to Bad Debt Expense and credit to Allowance for Doubtful Accounts.
B) Debit to Accounts Receivable and credit to Allowance for Doubtful Accounts.
C) Debit to Allowance for Doubtful Accounts and credit to Bad Debt Expense.
D) Debit to Allowance for Doubtful Accounts and credit to Accounts Receivable.
Answer: D
Bloom's: Apply
30
67) Lakeview Inc. uses the allowance method. During the year, Lakeview concludes that specific
customers will never pay their account balances, which total $6,844. The entry to record the
write-off of these accounts receivable would debit:
A) Accounts Receivable and credit Allowance for Doubtful Accounts for $6,844.
B) Accounts Receivable and credit Bad Debt Expense for $6,844.
C) Bad Debt Expense and credit Accounts Receivable for $6,844.
D) Allowance for Doubtful Accounts and credit Accounts Receivable for $6,844.
Answer: D
Bloom's: Analyze
68) Grandview, Inc. uses the allowance method. At December 31, 2018, the company's balance
sheet reports Accounts Receivable, Net in the amount of $27,200. On January 2, 2019,
Grandview writes off a $2,400 customer account balance when it becomes clear that the
customer will never pay. What is the amount of Accounts Receivable, Net after the write-off?
A) $27,200
B) $2,400
C) $29,600
D) $24,800
Answer: A
while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, the
amount reported as Accounts Receivable, Net does not change.
Bloom's: Analyze
31
69) Marconi Co. has the following information available for the current year:
Net Sales $ 1,125,000

Bad Debt Expense 90,000
Accounts Receivable, Beginning of Year 180,000
Accounts Receivable, End of Year 82,500
Allowance For Doubtful Accounts, Beginning of Year 63,000
Allowance For Doubtful Accounts, End of Year 93,000
What was the amount of write-offs during the year?

A) $93,000
B) $67,500
C) $82,500
D) $60,000
Answer: D
Explanation: Ending balance in Allowance for Doubtful Accounts = Beginning balance in
Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense
Write-offs = Beginning balance in Allowance for Doubtful Accounts + Bad Debt Expense −
Ending credit balance in Allowance for Doubtful Accounts
= $63,000 + $90,000 − $93,000 = $60,000

Difficulty: 3 Hard
Bloom's: Apply
70) Removing an uncollectible account and its corresponding allowance from the accounting
records is called:
A) a write-off.
B) a write-up.
C) double entry accounting.
D) elimination accounting.
Answer: A
Explanation: A write-off is the act of removing an uncollectible account and its corresponding
allowance from the accounting records.
Difficulty: 1 Easy
Bloom's: Remember
32
71) The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts
Receivable is a(n):
A) write-off of a specific customer's account.
B) adjusting entry to allow for estimated bad debts.
C) subsidiary entry to increase a customer's account for credit sales.
D) net realizable entry to report the amount expected to be collected.
Answer: A
allowance from the accounting records. The entry includes a debit to Allowance for Doubtful
Accounts (to decrease that contra-asset account) and a credit to Accounts Receivable (to
decrease that asset account).
Bloom's: Understand
72) Accounts Receivable has a $3,450 balance, and the Allowance for Doubtful Accounts has a
$300 credit balance. An $120 account receivable is written-off. Net receivables (net realizable
value) after the write-off equals:
A) $3,030.
B) $3,150.
C) $3,270.
D) $3,330.
Answer: B
allowance from the accounting records. The entry includes a debit to Allowance for Doubtful
Accounts (to decrease that contra-asset account) and a credit to Accounts Receivable (to
decrease that asset account). Notice that the write-off decreased both the total Accounts
Receivable and Allowance for Doubtful Accounts by the same amount ($120). Consequently, the
net receivable balance after the write-off ($3,330 − $180 = $3,150) is unchanged from the net
receivable balance before the write-off ($3,450 − $300 = $3,150).
Difficulty: 3 Hard
Bloom's: Apply
33
73) Which method for estimating bad debts is generally considered to be the most accurate?
A) Percentage of credit sales
B) Allowance method
C) Specific account method
D) Aging of accounts receivable method
Answer: D
Explanation: The allowance method is the general idea of estimating uncollectible accounts,
using either the percentage of credit sales method or the aging of accounts receivable method. Of
these two estimation methods, the aging of accounts receivable method is generally considered to
be more accurate than the percentage of credit sales method. The aging of accounts receivable
method takes into consideration that, generally, the longer a receivable goes unpaid the less
likely it is to be paid.
Difficulty: 1 Easy
Bloom's: Remember
74) Kelton Inc. reported net credit sales of $450,000 for the current year. The unadjusted credit
balance in its Allowance for Doubtful Accounts is $750. The company has experienced bad debt
losses of 1% of credit sales in prior periods. Using the percentage of credit sales method, what
amount should the company record as an estimate of Bad Debt Expense?
A) $3,750
B) $4,500
C) $4,470
D) $4,800
Answer: B
Explanation: The percentage of credit sales method estimates Bad Debt Expense by multiplying
the historical percentage of bad debt losses by the current period's credit sales.
Bad Debt Expense = Net credit sales × Bad debt loss rate
= $450,000 × 0.01 = $4,500

Bloom's: Apply
34
75) Creek Co. uses the percentage of credit sales method in determining its bad debt expense.
The following information comes from the accounting records of Creek Co.:
Cash sales $ 300,000

Credit sales 1,200,000
Total sales 1,500,000
Credit balance in the Allowance for Doubtful Accounts 7,500
Bad debt loss rate 3%
What is the estimate of bad debt expense?

A) $36,000
B) $37,500
C) $43,500
D) $45,000
Answer: A
Explanation: Bad debt expense = Credit sales × Bad debt loss rate
= $1,200,000 × 0.03 = $36,000

Difficulty: 3 Hard
Bloom's: Apply
35
76) Libre, Inc. has experienced bad debt losses of 4% of credit sales in prior periods. At the end
of the year, the balance of Accounts Receivable is $100,000 and the Allowance for Doubtful
Accounts has an unadjusted credit balance of $500. Net credit sales during the year were
$150,000. Using the percentage of credit sales method, what is the estimated Bad Debt Expense
for the year?
A) $4,000
B) $5,600
C) $6,000
D) $6,400
Answer: C
= $150,000 × 0.04 = $6,000

Difficulty: 1 Easy
Bloom's: Apply
77) Libby Company uses the percentage of credit sales method for calculating Bad Debt
Expense. The company reported $216,000 in total sales during the year; $178,000 of which were
on credit. Libby has experienced bad debt losses of 5% of credit sales in prior periods. What is
the estimated amount of Bad Debt Expense for the year?
A) $10,800
B) $8,900
C) $38,000
D) $1,900
Answer: B
= $178,000 × 0.05 = $8,900

Bloom's: Apply
36
78) Saint John Industries uses the percentage of credit sales method to estimate Bad Debt
Expense. The company reported net credit sales of $500,000 during the year. Saint John has
experienced bad debt losses of 3% of credit sales in prior periods. At the beginning of the year,
Saint John has a credit balance in its Allowance for Doubtful Accounts of $4,000. No write-offs
or recoveries were recorded during the year. What amount of Bad Debt Expense should Saint
John recognize for the year?
A) $6,000
B) $9,000
C) $15,000
D) $21,000
Answer: C
= $500,000 × 0.03 = $15,000

Bloom's: Apply
37
79) Wrangler Inc. uses the percentage of credit sales method to estimate Bad Debt Expense. At
the end of the year, the company's unadjusted trial balance includes the following:
Accounts Receivable $ 349,000

Allowance for Doubtful Accounts (credit balance) 200
Net Credit Sales 900,000
Wrangler has experienced bad debt losses of 0.5% of credit sales in prior periods. What is the
Bad Debt Expense to be recorded for the year?
A) $4,500
B) $4,300
C) $4,700
D) $45,000
Answer: A
= $900,000 × 0.005 = $4,500

Bloom's: Apply
38
80) Utopia Corporation provides $6,000 worth of lawn care on account during the month.
Experience suggests that about 3% of net credit sales will not be collected. To record the
potential bad debts, Utopia Corporation would debit:
A) Accounts Receivable and credit Allowance for Doubtful Accounts for $180.
B) Allowance for Doubtful Accounts and credit Bad Debt Expense for $180.
C) Bad Debt Expense and credit Allowance for Doubtful Accounts for $180.
D) Bad Debt Expense and credit Accounts Receivable for $180.
Answer: C
= $6,000 × 0.03 = $180
Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $180.
Bloom's: Analyze
39
81) Morrow Inc. uses the percentage of credit sales method of estimating doubtful accounts. The
Allowance for Doubtful Accounts has an unadjusted credit balance of $2,700 and the company
had $140,000 of net credit sales during the period. Morrow has experienced bad debt losses of
6% of credit sales in prior periods. After making the adjusting entry for estimated bad debts,
what is the ending balance in the Allowance for Doubtful Accounts account?
A) $11,100
B) $8,400
C) $8,238
D) $5,700
Answer: A
= $140,000 × 0.06 = $8,400
Ending balance in Allowance for Doubtful Accounts = Unadjusted credit balance in Allowance
for Doubtful Accounts + Bad Debt Expense
= $2,700 + $8,400 = $11,100

Bloom's: Apply
40
82) Phantom Inc. has an unadjusted debit balance of $5,250 in its Allowance for Doubtful
Accounts. The company has experienced bad debt losses of 2% of credit sales in prior periods.
Phantom reported net credit sales of $2,250,000 for the current period. To record the potential
bad debts, Phantom would debit:
A) Allowance for Doubtful Accounts for $45,000.
B) Allowance for Doubtful Accounts for $50,250.
C) Bad Debt Expense for $50,250.
D) Bad Debt Expense for $45,000.
Answer: D
= $2,250,000 × 0.02 = $45,000

Bloom's: Apply
41
83) Grayhawk Company reported net credit sales of $588,000 for the year ending December 31,
2019. On January 1, 2019, the Allowance for Doubtful Accounts had a credit balance of $14,400.
During 2019, $24,000 of uncollectible accounts receivable were written off. Grayhawk has
experienced bad debt losses of 3% of credit sales in prior periods. Using the percentage of credit
sales method, what is the adjusted balance in the Allowance for Doubtful Accounts at December
31, 2019?
A) $8,040
B) $8,400
C) $17,640
D) $27,600
Answer: A
= $588,000 × 0.03 = $17,640
Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance
for Doubtful Accounts − Write-offs + Bad Debt Expense
= $14,400 − $24,000 + $17,640 = $8,040

Difficulty: 3 Hard
Bloom's: Apply
42
84) Which of the following statements about the Allowance for Doubtful Accounts is correct?
A) The Allowance for Doubtful Accounts is credited when a specific write-off is recorded.
B) Under the aging of accounts receivable method, Bad Debt Expense is calculated and then
added to the beginning balance in the Allowance for Doubtful Accounts.
C) The Allowance for Doubtful Accounts is a contra-revenue account.
D) The Allowance for Doubtful Accounts has a normal credit balance.
Answer: D
Explanation: The Allowance for Doubtful Accounts is a contra-asset account; as such, it has a
normal credit balance. Specific write-offs are recorded with a debit to Allowance for Doubtful
Accounts and a credit to Accounts Receivable. Under the aging of accounts receivable method,
the desired ending balance of the Allowance for Doubtful Accounts is determined, and then an
entry is made to adjust the Allowance for Doubtful Accounts account to the desired balance.
Bloom's: Remember
85) The amount of uncollectible accounts at the end of the year is estimated to be $25,000, using
the aging of accounts receivable method. The balance in the Allowance of Doubtful Accounts
account is an $8,000 credit before adjustment. What is the adjusted balance of the Allowance for
Doubtful Accounts at the end of the year?
A) $8,000
B) $17,000
C) $25,000
D) $33,000
Answer: C
Explanation: The aging of accounts receivable method focuses on estimating the ending balance
to be reported in the Allowance for Doubtful Accounts. To compute the amount of the
adjustment, you must determine how much to increase (credit) the Allowance for Doubtful
Accounts to reach the desired adjusted balance.
Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in
Allowance for Doubtful Accounts + Bad Debt Expense
Difficulty: 1 Easy
Bloom's: Apply
43
86) Using the aging method of accounts receivable method, $5,000 of the company's Accounts
Receivable are estimated to be uncollectible. At the end of the year, the balance of Accounts
Receivable is $100,000 and the unadjusted credit balance of the Allowance for Doubtful
Accounts is $500. Credit sales during the year totaled $150,000. What is the current year's Bad
Debt Expense?
A) $4,500
B) $5,000
C) $7,000
D) $7,500
Answer: A
Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending
credit (debit) balance in Allowance for Doubtful Accounts
= $5,000 − $500 = $4,500

Bloom's: Apply
44
87) Wheeling Inc. uses the aging of accounts receivable method. Its estimate of uncollectible
receivables resulting from the aging analysis equals $5,000. At the end of the year, the balance of
Accounts Receivable is $100,000 and the unadjusted debit balance of the Allowance for
Doubtful Accounts is $500. Credit sales during the year totaled $150,000. What is the estimated
Bad Debt Expense for the current year?
A) $4,500
B) $5,000
C) $5,500
D) $7,000
Answer: C
= $5,000 − ($500) = $5,500

Difficulty: 3 Hard
Bloom's: Apply
45
88) Quill Industries uses the aging of accounts receivable method. Its estimate of uncollectible
receivables resulting from the aging analysis equals $20,000. The unadjusted credit balance in
the Allowance for Doubtful Accounts account is $6,400. What is the estimated Bad Debt
Expense for the period?
A) $6,400
B) $13,600
C) $20,000
D) $26,400
Answer: B
= $20,000 − $6,400 = $13,600

Bloom's: Apply
46
89) As of December 31, Frappe Company has a balance of $5,000 in accounts receivable. Of this
amount, $500 is past due and the remainder is not yet due. Frappe has a credit balance of $45 in
the Allowance for Doubtful Accounts. Frappe Company estimates its bad debt losses using the
aging of receivables method, with estimated bad debt loss rates equal to 1% of accounts not yet
due and 10% of past due accounts. How will the Bad Debt Expense account be included in the
required adjusting journal entry at year-end?
A) Debit of $95
B) Credit of $95
C) Debit of $50
D) Credit of $50
Answer: C
Adjusted balance of Allowance for Doubtful Accounts = ($4,500 × 1%) + ($500 × 10%) = $95
= $95 − $45 = $50
The entry will include a debit to Bad Debt Expense and a credit to Allowance for Doubtful
Accounts for $50.
Bloom's: Apply
47
90) The unadjusted trial balance at the end of the year includes the following:

Allowance for Doubtful Accounts 2,000
Both accounts have normal balances. The company uses the aging of accounts receivable
method. Its estimate of uncollectible receivables resulting from the aging analysis equals
$11,600. What is the amount of Bad Debt Expense to be recorded for the year?
A) $11,600
B) $9,600
C) $13,600
D) $15,600
Answer: B
= $11,600 − $2,000 = $9,600

Difficulty: 1 Easy
Bloom's: Apply
48
91) Legacy Company uses the aging of accounts receivable method. The company performed an
aging of accounts receivable on December 31 and gathered the following information:

Unadjusted Credit balance in Allowance for Doubtful Accounts 16,000
Estimated Uncollectible Accounts Receivable 23,200
What is the amount of Accounts Receivable, Net that will be reported on the balance sheet at
December 31?
A) $404,000
B) $396,800
C) $373,600
D) $412,800
Answer: B
Explanation: The adjusted balance of the Allowance for Doubtful Accounts will equal the
estimated uncollectible accounts.
Net Realizable Value = Accounts Receivable − Adjusted balance of Allowance for Doubtful
Accounts
= $420,000 − $23,200 = $396,800

Bloom's: Apply
49
92) Rimrock, Inc. used the aging of accounts receivable method. At December 31, management
determined that the net realizable value of accounts receivable was $608,000. The balance in
Accounts Receivable was $768,000 and the unadjusted credit balance in Allowance for Doubtful
Accounts was $32,000. What was the amount of Bad Debt Expense for the year?
A) $192,000
B) $128,000
C) $160,000
D) $32,000
Answer: B
Explanation: First, you need to determine the estimated uncollectible accounts, which becomes
the adjusted balance of the Allowance for Doubtful Accounts
Net realizable value = Accounts Receivable − Adjusted balance in Allowance for Doubtful
Accounts
Adjusted balance in Allowance for Doubtful Accounts = Accounts Receivable − Net realizable
value
= $768,000 − $608,000 = $160,000
= $160,000 − $32,000 = $128,000

Difficulty: 3 Hard
Bloom's: Analyze
50
93) Your company uses the aging of accounts receivable method. Net credit sales are unchanged
from last year, the year-end balance in Accounts Receivable is unchanged from the previous
year's ending balance, and there were no write-offs during the current year. The company
previously averaged about 20% of its total accounts receivable in the "over 90 days past due"
category and now has 35% in this category at the end of the current year. The dollar amount of
the adjustment to record Bad Debt Expense in the current year:
A) declines, thus increasing the ending balance of the Allowance for Doubtful Accounts account.
B) increases, thus increasing the ending balance of the Allowance for Doubtful Accounts
account.
C) declines, thus reducing the ending balance of the Allowance for Doubtful Accounts account.
D) increases, thus reducing the ending balance of the Allowance for Doubtful Accounts account.
Answer: B
Explanation: History has shown that the older the accounts, the higher the percentage
uncollectible. So, with a higher percentage of accounts receivable in the older category, the
estimate of uncollectible amounts will be higher and this will result in an increase in the
allowance account.
Difficulty: 3 Hard
Bloom's: Analyze
51
94) Cedar Mill, Inc. uses the Aging of Accounts Receivable method for estimating uncollectible
accounts. The accounting records show the following information at the end of the year:
Number of Days Unpaid

0 - 30 31 - 60 61 - 90 Over 90
Accounts
$ 740,000 $ 480,000 $ 220,000 $ 160,000
Receivable
Estimated %
5% 10% 15% 25%
Uncollectible
If the unadjusted credit balance in the Allowance for Doubtful Accounts account before is
$30,000, what would be the amount of the adjustment for bad debts?
A) $128,000
B) $158,000
C) $90,000
D) $69,000
Answer: A
Explanation:
The Allowance for Doubtful Accounts had an unadjusted credit balance of $30,000; an
adjustment is required to increase the balance to $158,000. The related adjusting entry includes a
debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $128,000 (or desired
credit balance of $158,000 − unadjusted credit balance of $30,000).
Difficulty: 3 Hard
Bloom's: Apply
52
95) Star Enterprises uses the aging of accounts receivable method. The following information
comes from its accounting records:
Cash sales $ 400,000

Credit sales 1,600,000
Total sales 2,000,000
Credit balance in the Allowance for Doubtful Accounts 10,000
Estimated uncollectible accounts receivables 38,000
What is the estimate of bad debt expense?

A) $10,000
B) $18,000
C) $28,000
D) $38,000
Answer: C
Explanation: The estimated uncollectible accounts receivable is the desired balance in the
Allowance for Doubtful Accounts. The entry for bad debts expense equals $28,000, which is the
difference between the current credit balance of $10,000 and the desired credit balance of
$38,000.
Difficulty: 3 Hard
Bloom's: Apply
96) Nevada Wolf, Inc. determined at the end of the year that estimated uncollectible accounts
was $50,000. If the Allowance for Doubtful Accounts currently has an unadjusted debit balance
of $10,000, what is the amount of bad debts to be recorded at the end of the year?
A) $55,000
B) $50,000
C) $40,000
D) $60,000
Answer: D
Explanation: The Allowance for Doubtful Accounts had an unadjusted debit balance of $10,000;
an adjustment is required to increase the balance to a credit of $50,000. The related adjusting
entry includes a debit Bad Debt Expense and credit Allowance for Doubtful Accounts for
$60,000 (or desired credit balance of $50,000 + unadjusted debit balance of $10,000).
Difficulty: 3 Hard
Bloom's: Apply
53
97) At the end of the period, the manager of Olive Co. estimated that $80,000 of its accounts
receivable were uncollectible. If the Allowance for Doubtful Accounts has a credit balance of
$22,400, which of the following sets forth the adjusting entry to record bad debts for the period?
Assume the allowance method is used.
A) Debit Bad Debt Expense and credit Accounts Receivable for $80,000.
B) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $57,600.
C) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $80,000.
D) Debit Bad Debt Expense and credit Accounts Receivable for $57,600.
Answer: B
Explanation: The Allowance for Doubtful Accounts had an unadjusted credit balance of
$22,400; an adjustment is required to increase the balance to $80,000. The related adjusting entry
includes a debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $57,600 (or
desired credit balance of $80,000 − unadjusted credit balance of $22,400).
Difficulty: 3 Hard
Bloom's: Apply
98) Your company has previously averaged about 16% of its accounts receivable in the "over 90
days past due" category. This year management forecasts that 20% of its accounts receivable will
be in this category at the end of the current year. The company uses the aging of accounts
receivable method of estimating Bad Debt Expense. If the total of credit sales and year-end
balance in accounts receivable remain unchanged from the previous year and no write offs were
made during the current year, this year's bad expense will:
A) decrease over the estimate for previous months.
B) increase over the estimate for previous months.
C) not change.
D) will depend on the percentage of credit sales deemed uncollectible.
Answer: B
Explanation: The older and more overdue an account receivable becomes, the less likely it is to
be collectible. If the percentage of accounts in the "over 90 days" category increases, then the
percentages in the "under 90 days" categories will decrease. Overall, the company's accounts
receivable balances will be more overdue, which will result in higher Bad Debt Expense for the
current year.
Bloom's: Analyze
54
99) The Allowance for Doubtful Accounts will have a debit balance before adjustments when:
A) the company increased its collection efforts.
B) the company recovered some accounts previously written off.
C) bad debts were underestimated at the end of the prior period.
D) bad debts were overestimated at the end of the prior period.
Answer: C
Explanation: Although the Allowance for Doubtful Accounts normally has a credit balance, it
may have a debit balance before it is adjusted. This happens when a company has recorded
write-offs that exceed previous estimates of uncollectible accounts. Increased collection efforts,
recovery of previously written off accounts, and overestimated bad debts are more likely
associated with credit balances in the Allowance for Doubtful Accounts.
Bloom's: Understand
100) Total doubtful accounts at the end of the year are estimated to be $12,500 based on an aging
of accounts receivable. If the balance in the Allowance for Doubtful Accounts is a $3,500 debit
before adjustment, what is current year's Bad Debt Expense?
A) $3,500
B) $9,000
C) $12,500
D) $16,000
Answer: D
= $12,500 − ($3,500) = $16,000

Bloom's: Apply
55
101) A company's unadjusted trial balance at the end of the year includes the following:

Unadjusted debit balance in Allowance for Doubtful Accounts 1,000
The company uses the aging of accounts receivable method. Its estimate of uncollectible
receivables resulting from the aging analysis equals $5,800. What is the amount of Bad Debt
Expense to be recorded for the year?
A) $5,800
B) $4,800
C) $6,800
D) $7,800
Answer: C
= $5,800 − ($1,000) = $6,800

Bloom's: Apply
56
102) Cachet Co. has the following information:
Adjusted balance in Allowance for Doubtful Accounts $ 3,000

Bad debts estimated for the current year 8,000
Unadjusted credit balance in Allowance for Doubtful Accounts 4,000
No recoveries were recorded during the year. What was the amount of accounts written off
during the year?
A) $15,000
B) $9,000
C) $8,000
D) $4,000
Answer: B
Allowance for Doubtful Accounts + Bad debt expense − Write-offs + Recoveries
Write-offs = Beginning credit balance in Allowance for Doubtful Accounts + Bad debt expense
+ Recoveries − Ending balance in Allowance for Doubtful Accounts
= $4,000 + $8,000 + $0 − $3,000 = $9,000

Difficulty: 3 Hard
Bloom's: Apply
57
103) Mills Corporation's balance sheet included the following information:

Less: Allowance for Doubtful Accounts 65,000
Accounts Receivable, Net of Allowance $ 435,000
If the Allowance account had a credit balance of $27,500 immediately before the year-end
adjustment for bad debts and no accounts were written-off or allowed for during the year, what
was the amount of Bad Debt Expense recognized during the year?
A) $65,000
B) $27,500
C) $32,500
D) $37,500
Answer: D
Allowance for Doubtful Accounts + Bad debt expense − Write-offs + Recoveries
Bad debt expense = Ending balance in Allowance for Doubtful Accounts − Beginning credit
balance in Allowance for Doubtful Accounts + Write-offs − Recoveries
= $65,000 − $27,500 + $0 − $0 = $37,500

Difficulty: 3 Hard
Bloom's: Apply
58
104) To ensure that the Allowance for Doubtful Accounts account does not become materially
misstated over time, companies revise overestimates of prior periods by:
A) recording a retroactive correcting entry.
B) lowering estimates in the current period.
C) increasing estimates in the current period.
D) notifying the users of its financial statements of the error.
Answer: B
Explanation: Bad debt estimates always differ somewhat from the amounts that are later written
off. To ensure that the Allowance for Doubtful Accounts account does not become materially
misstated over time, companies revise overestimates of prior periods by lowering estimates in the
current period. Alternatively, they would raise estimates in the current period to correct
underestimates of prior periods.
Bloom's: Understand
105) On June 12, because management knew with near certainty that it had no chance of
collection, Sheave Company wrote off a customer's account balance in the amount of $350. On
November 3, the customer mailed a payment for $350 to Sheave. To record the receipt of this
payment from the customer, the company would debit:
A) Bad Debt Expense and credit Cash.
B) Accounts Receivable and credit Bad Debt Expense, and then debit Cash and credit Allowance
for Doubtful Accounts.
C) Cash and credit Accounts Receivable.
D) Accounts Receivable and credit Allowance for Doubtful Accounts, and then debit Cash and
credit Accounts Receivable.
Answer: D
Explanation: Collection of a previously written off account is called a recovery and it is
accounted for in two parts. First, the receivable is put back on the books by recording a journal
entry that is the opposite of the entry used to record the write-off; this entry includes a debit to
Accounts Receivable and a credit to Allowance for Doubtful Accounts. Second, the collection of
the account receivable is recorded with a debit to Cash and a credit to Accounts Receivable.
Bloom's: Understand
59
106) Carrington Company uses the allowance method for recording bad debts. On February 1,
Carrington wrote off a $3,500 customer account balance when it became clear that the particular
customer would never pay. On May 29, Carrington unexpectedly received a check for $3,500
from the customer. On May 29, Carrington will:
A) Debit Cash and credit Bad Debt Expense for $3,500; debit Accounts Receivable and credit
Allowance for Doubtful Accounts for $3,500.
B) Debit Allowance for Doubtful Accounts and credit Accounts Receivable for $3,500; debit
Cash and credit Bad Debt Expense for $3,500.
C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts for $3,500; debit
Cash and credit Accounts Receivable for $3,500.
D) Debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $3,500; debit Cash
and credit Accounts Receivable for $3,500.
Answer: C
accounted for in two parts. First, the receivable is put back on the books by recording a journal
entry that is the opposite of the entry used to record the write-off; this entry includes a debit to
Accounts Receivable and a credit to Allowance for Doubtful Accounts. Second, the collection of
the account receivable is recorded with a debit to Cash and a credit to Accounts Receivable.
Bloom's: Apply
107) The entry to record a recovery causes:

A) an increase in net accounts receivable.
B) a decrease in net accounts receivable.
C) net accounts receivable to stay the same.
D) an increase in total revenues.
Answer: C
Explanation: When a previously written-off account is collected, two entries are recorded—one
to reverse the entry that was recorded when the account was written off and the second entry to
record the cash payment. The net effect of these entries will not change the amount of net
accounts receivable.
Difficulty: 3 Hard
Bloom's: Understand
60
108) Adams Co. uses the allowance method of determining bad debt expense. It collects $250
from a customer that Adams had previously written-off. As a result of collecting this $250, its:
A) total assets increases by $250.
B) net income increases by $250.
C) total assets remains the same.
D) stockholders' equity increases by $250.
Answer: C
Explanation: When Adams Co. collects an amount that was previously written-off, it must
record two journal entries: (1) debit Accounts Receivable $250 and credit Allowance for
Doubtful Accounts $250 and (2) debit Cash $250 and credit Accounts Receivable $250. The first
entry increases an asset account and increases a contra-asset account. The second entry increases
one asset account and decreases another asset account. Overall, there is no change in total assets.
Neither entry includes a revenue or expense; as such, there is no effect on net income of total
stockholders' equity.
Bloom's: Understand
109) A customer of Halifax Manufacturing recently filed for bankruptcy protection two months
ago, leading Halifax's credit manager to conclude that the company would never collect the
balance of $15,600 owed by the customer.
Which of the following journal entries would be made by Halifax to record the write-off of the
customer's Accounts Receivable balance?
A) Debit Allowance for Doubtful Accounts and credit Accounts Receivable for $15,600.
B) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $15,600.
C) Debit Bad Debt Expense and credit Accounts Receivable for $15,600.
D) Debit Sales and credit Accounts Receivable for $15,600.
Answer: A
Explanation: Writing-off a specific customer's account receivable balance after it has been
determined to be uncollectible involves debiting the Allowance for Doubtful Accounts (to
increase this contra-asset account) and crediting Accounts Receivable (to decrease that asset
account) for $15,600, the account balance.
Difficulty: 3 Hard
Bloom's: Apply
61
110) A customer of Halifax Manufacturing recently filed for bankruptcy protection two months
ago, leading Halifax's credit manager to conclude that the company would never collect the
balance of $15,600 owed by the customer.
Suppose that three months after filing bankruptcy, Halifax's customer paid its outstanding
account balance. Which of the following journal entries would be made to record this
transaction?
A) Debit Cash and credit Bad Debt Expense for $15,600.
B) Debit Cash and credit Accounts Receivable for $15,600.
C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts for $15,600; debit
Cash and credit Accounts Receivable for $15,600.
D) Debit Cash and credit Sales for $15,600.
Answer: C
Explanation: Two entries are required: (1) debit to Accounts Receivable (to increase that asset
account) and credit Allowance for Doubtful Accounts (to increase that contra-asset account) for
$15,600 and (2) debit to Cash (to increase that asset account) and credit Accounts Receivable (to
decrease that asset account) for $15,600.
Difficulty: 3 Hard
Bloom's: Apply
62
111) The balance of the Allowance for Doubtful Accounts was $12,656 at the beginning of the
year and $14,348 at the end of the year. Bad Debt Expense was $3,879 for the year. Recoveries
in the amount of $100 were recorded during the year. Which of the following statements is
correct?
A) The Allowance for Doubtful Accounts account was retroactively debited for $2,187 to record
additional bad debts that became apparent in a future time period.
B) The Allowance for Doubtful Accounts account was debited for $2,287 to record write-offs
during the year.
C) The Allowance for Doubtful Accounts account was credited $2,287 for payments from
customer whose account balances were previously written off.
D) The Allowance for Doubtful Accounts account was credited $2,187 for the difference
between the percent of credit sales method and the aging of accounts receivable method.
Answer: B
Explanation: We have all of the information about the changes in the account except for the
write-offs.
Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance
for Doubtful Accounts − Write-offs + Recoveries + Bad Debt Expense
Write-offs = Beginning credit balance in Allowance for Doubtful Accounts + Recoveries + Bad
Debt Expense − Ending balance in Allowance for Doubtful Accounts
= $12,656 + $100 + $3,879 − $14,348 = $2,287

Difficulty: 3 Hard
Bloom's: Analyze
63
112) Which of the following statements about methods of accounting for bad debts is correct?
A) When the allowance method is used, the journal entry to write-off an uncollectible account
does not change the amount reported as Accounts Receivable, Net on the balance sheet.
B) The two methods of accounting for bad debts that are acceptable under GAAP are the
allowance method and the direct write-off method.
C) When the allowance method is used, Bad Debt Expense is equal to the write-offs that
occurred during the period.
D) When the allowance method is used, if actual results differ from the estimates, the prior year
financial statements must be corrected.
Answer: A
Explanation: When the allowance method is used, the entry to record a write-off includes a debit
to Allowance for Doubtful Accounts and a credit to Accounts Receivable. The decrease in
Accounts Receivable is offset by the decrease in the Allowance for Doubtful Accounts. As a
result, the amount reported as Accounts Receivable, Net on the balance sheet does not change.
Only the allowance method of accounting for bad debts is acceptable under GAAP. When the
direct write-off method is used, Bad Debt Expense is equal to the write-offs that occurred during
the period. To ensure bad debts and the allowance for doubtful accounts do not become
materially misstated over time, companies revise overestimates of prior periods by lowering
estimates in the current period, or they raise estimates in the current period to correct
underestimates of prior periods.
Difficulty: 3 Hard
Bloom's: Understand
113) Which method requires first estimating the desired amount for the Allowance for Doubtful
Accounts and then determining the amount of the expense required to get to this desired balance
given the amount of the unadjusted balance?
A) Aging of accounts receivable method
B) Percentage of credit sales method
C) Direct write-off method
D) Percentage of bad debts method
Answer: A
Explanation: Allowance method is a method of accounting that reduces accounts receivable (as
well as net income) for an estimate of uncollectible accounts (bad debts).
Difficulty: 1 Easy
Bloom's: Remember
64
114) Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000, a
credit balance in its Allowance for Doubtful Accounts of $50, and Sales Revenue of $100,000.
Based on an aging of its receivables, management estimates that $1,000 of receivables will be
uncollectible. Delectable's financial statements will show:
A) Bad Debt Expense of $1,000.
B) Allowance for Doubtful Accounts of $(1,050).
C) Allowance for Doubtful Accounts of $(950).
D) Bad Debt Expense of $950.
Answer: D
= $1,000 − $50 = $950

Difficulty: 3 Hard
Bloom's: Apply
65
115) Using the aging approach, management estimates that 10% of the $30,000 of Accounts
Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $300 unadjusted
debit balance. The adjusting entry to record estimated bad debts includes a:
A) debit to Bad Debt Expense of $3,300.
B) debit to Bad Debt Expense of $2,700.
C) debit to Bad Debt Expense of $3,000.
D) credit to Allowance for Doubtful Accounts of $3,000.
Answer: A
= ($30,000 × 0.10) − ($300) = $3,000 − ($300) = $3,300
The entry includes a debit to Bad Debt Expense for $3,300 and a credit to Allowance for
Doubtful Accounts for $3,300.
Difficulty: 3 Hard
Bloom's: Apply
66
116) Using the aging approach, management estimates that 10% of the $10,000 of Accounts
Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted
debit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income
statement will be ________ the Allowance for Doubtful Accounts on the balance sheet.
A) $100 less than
B) $100 more than
C) the same amount as
D) $9,900 more than
Answer: B
Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts - Unadjusted ending
= ($10,000 × 0.10) – ($100) = $1,000 – ($100) = $1,100
The entry includes a debit to Bad Debt Expense for $1,100 (which becomes its adjusted balance)
and a credit to Allowance for Doubtful Accounts for $1,100 (which ends up with an adjusted
balance of $1,000).
Difficulty: 3 Hard
Bloom's: Apply
67
117) Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its
$4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the
unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the
adjustment, the:
A) Allowance for Doubtful Accounts will have a $90,000 credit balance.
B) Allowance for Doubtful Accounts will have an $89,000 credit balance.
C) Allowance for Doubtful Accounts will have a $91,000 credit balance.
D) Bad Debt Expense will equal $90,000.
Answer: A
= $90,000 − $1,000 = $89,000

Difficulty: 3 Hard
Bloom's: Apply
68
118) Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its
$4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the
unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the
adjustment, the:
A) Allowance for Doubtful Accounts will have a $90,000 credit balance.
B) Allowance for Doubtful Accounts will have an $89,000 credit balance.
C) Allowance for Doubtful Accounts will have a $91,000 credit balance.
D) Bad Debt Expense will equal $90,000.
Answer: A
= $90,000 − ($1,000) = $91,000

Difficulty: 3 Hard
Bloom's: Apply
69
119) If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year
$9,000 of specific customers' accounts were written off, then its Allowance for Doubtful
Accounts will have an unadjusted balance of:
A) $1,000 credit.
B) $1,000 debit.
C) $10,000 credit.
D) $9,000 debit.
Answer: A
Explanation: Unadjusted ending balance in Allowance for Doubtful Accounts = Beginning
balance in Allowance for Doubtful Accounts − Write-offs + Recoveries
= $10,000 credit balance − debit of $9,000 + credit of $0 = $1,000 credit balance

Difficulty: 3 Hard
Bloom's: Apply
120) If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year
$11,000 of specific customers' accounts were written off, then its Allowance for Doubtful
Accounts will have an unadjusted balance of:
A) $1,000 credit.
B) $1,000 debit.
C) $10,000 credit.
D) $9,000 debit.
Answer: B
Explanation: Unadjusted ending balance in Allowance for Doubtful Accounts = Beginning
balance in Allowance for Doubtful Accounts − Write-offs + Recoveries
= $10,000 credit balance − debit of $11,000 + credit of $0 = $1,000 debit balance

Difficulty: 3 Hard
Bloom's: Apply
70
121) Given the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the
amount of receivables written off was ________ than the amount estimated in the prior period.
Thus, bad debt expense will be ________ in the current period than had the unadjusted balance
been a credit balance.
A) less; less
B) greater; greater
C) greater; less
D) less; greater
Answer: B
write-offs that exceed previous estimates of uncollectible accounts.
Bloom's: Understand
122) If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-
of-period adjusting entry for bad debts, then it must mean that:
A) $1,000 more accounts receivables were written off than were estimated back when the prior
period's adjusting entry for bad debts was recorded.
B) $1,000 fewer accounts receivables were written off than were estimated back when the prior
period's adjusting entry for bad debts was recorded.
C) the direct write-off method was used.
D) the aging method was used.
Answer: A
Bloom's: Understand
71
123) If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-
of-period adjusting entry for bad debts using the aging of accounts receivable method, then it
must mean that the:
A) debit to Bad Debt Expense will be $1,000 more than the desired ending balance in the
Allowance for Doubtful Accounts.
B) debit to Bad Debt Expense will be $1,000 less than if the Allowance balance had been $0.
C) direct write-off method was used.
D) percentage of sales method was used.
Answer: A
Bloom's: Understand
124) The entry to record the collection of a previously written-off account needs to be recorded
because a customer paid $9,600 after its accounts receivable had been written off. This entry
includes a:
A) debit to Allowance for Doubtful Accounts of $9,600.
B) debit to Bad Debt Expense of $9,600.
C) credit to Bad Debt Expense of $9,600.
D) credit to Allowance for Doubtful Accounts of $9,600.
Answer: D
accounted for in two parts. First, put the receivable back on the books by recording the opposite
of the write-off. Second, record the collection of the account. The entries include (1) a debit to
Accounts Receivable and a credit to Allowance for Doubtful Accounts for $9,600 and (2) a debit
to Cash and a credit to Accounts Receivable for $9,600.
Difficulty: 3 Hard
Bloom's: Apply
72
125) The direct write-off method is not allowed under GAAP because it violates the:
A) cost principle.
B) revenue recognition principle.
C) sales method.
D) expense recognition principle ("matching").
Answer: D
Explanation: GAAP does not allow the use of the direct write-off method because it violates the
expense recognition principle.
Difficulty: 1 Easy
Bloom's: Understand
126) The direct write-off method for uncollectible accounts:

A) violates the expense recognition principle.
B) is an acceptable alternative method of recognizing Bad Debt Expense under GAAP.
C) results in higher Bad Debt Expense for most companies.
D) may only be used by companies that do not extend credit to their customers.
Answer: A
Explanation: GAAP does not allow the use of the direct write-off method because it violates the
expense recognition principle.
Difficulty: 1 Easy
Bloom's: Understand
73
127) The Allowance for Doubtful Accounts:
A) is a contra-revenue account.
B) has a normal debit balance.
C) is not listed on the chart of accounts of a company that uses the direct write-off method.
D) is reported on the Income Statement.
Answer: C
Explanation: When the direct write-off method is used, the company records Bad Debt Expense
only when a company writes off specific accounts. As a result, since an estimate of uncollectible
accounts is not recorded, a company using the direct write-off method would not have an
Allowance for Doubtful Accounts account.
Bloom's: Remember
128) Company A lends $100,000 to Company B. The interest on the loan is reported as:
A) an expense to Company A and a revenue to Company B.
B) an asset to Company A and a revenue to Company B.
C) a liability to Company A and an asset to Company B.
D) a revenue to Company A and an expense to Company B.
Answer: D
Explanation: Company A, the lender, earns the interest (Interest Revenue) and Company B, the
borrower, incurs the cost (Interest Expense).
Difficulty: 1 Easy
Bloom's: Understand
74
129) In the interest formula, the interest rate is on a(n) ________ basis; therefore, the time
variable must reflect how many ________ out of ________ in the interest period.
A) monthly; months; 6
B) annual; years; 1
C) monthly; months; 12
D) annual; months; 12
Answer: D
Explanation: Because interest rates are always stated as an annual percentage even if the note is
for less than a year, the time period is the portion of a year for which interest is calculated. Ask
yourself how many months out of 12 or how many days out of 365 the interest period covers.
Difficulty: 1 Easy
Bloom's: Remember
130) When interest is calculated for periods shorter than a year, the formula to calculate interest
is:
A) I = P × R × T, where I = interest calculated, P = principal, R = annual interest rate, and T =
number of months.
B) I = P × R × T, where I = interest calculated, P = principal, R = annual interest rate, and T =
(number of months ÷ 12).
C) I = P × R × T, where I = interest calculated, P = principal, R = monthly interest rate, and T =
(number of months ÷ 12).
D) I = (MV − P)/T, where I = interest calculated, MV = maturity value, P = principal and T =
number of months.
Answer: B
Explanation: Because interest rates are always stated as an annual percentage even if the note is
for less than a year, the time period is the portion of a year for which interest is calculated. Ask
yourself how many months out of 12 or how many days out of 365 the interest period covers. As
such, in the interest equation, T equals the number of months ÷ 12.
Bloom's: Remember
75
131) On January 1, Portillo, Inc. lends a corporate customer $240,000 at 6% interest. The amount
of interest revenue that should be recorded for the quarter ending March 31 equals:
A) $14,400.
B) $3,600.
C) $1,200.
D) $4,800.
Answer: B
Explanation: Interest = Principal × Interest Rate × Time
= $240,000 × 0.06 × 3/12 (January through March) = $3,600

Bloom's: Apply
132) Knoll Manufacturing lends its supplier $300,000 for 3 years at a 6% annual interest rate.
Interest payments are to be made twice a year. Each interest payment will be for:
A) $18,000.
B) $27,000.
C) $9,000.
D) $54,000.
Answer: C
Explanation: Interest payments are made twice per year; six months are covered by each interest
payment.
Interest = Principal × Interest Rate × Time
= $300,000 × 0.06 × 6/12 = $9,000

Bloom's: Apply
76
133) For a note receivable that was created on November 1, 2018 and is due for repayment on
October 31, 2019, what is the time fraction needed to compute interest revenue for the year
ended December 31, 2018?
A) 2/12
B) 2/10
C) 12/12
D) 22/12
Answer: A
Explanation: Recall that: Interest = Principal × Interest Rate × Time. For the computation of
interest earned through December 31, the time component of this equation will be 2/12 (or the
two months from November 1 through December 31 divided by the twelve months covered by
the interest rate).
Bloom's: Apply
134) What is the annual rate of interest being charged on a 9-month note receivable of $150,000
if the total interest is $9,000?
A) 6%
B) 8%
C) 12%
D) 10%
Answer: B
Explanation: Interest = Principal × Interest Rate × Time
Interest Rate = Interest ÷ (Principal × Time)
= $9,000 ÷ ($150,000 × 9/12) = 0.08 or 8%

Difficulty: 3 Hard
Bloom's: Apply
77
135) A company lent $10,000 to an employee who signed a 9%, 6-month promissory note. The
entry made by the company to record this loan to the employee will include a:
A) debit to Accounts Receivable for $10,000.
B) credit to Sales for $10,000.
C) debit to Notes Receivable for $10,000.
D) credit to Notes Payable for $10,000.
Answer: C
Explanation: The entry includes a debit to Notes Receivable and a credit to Cash for $10,000.
Difficulty: 1 Easy
Bloom's: Apply
136) A company lends its supplier $150,000 for 3 years at a 6% annual interest rate. Interest
payments are to be made twice a year. The entry to record this lending transaction includes a
debit to:
A) Notes Receivable and a credit to Cash for $150,000.
B) Cash and a credit to Notes Payable for $150,000.
C) Cash and a credit to Interest Revenue for $9,000.
D) Interest Receivable and a credit to Interest Revenue for $4,500.
Answer: A
Explanation: The entry includes a debit to Notes Receivable and a credit to Cash for $150,000.
No interest is recorded on the day the note is established. Interest is earned over time.
Bloom's: Analyze
78
137) Establishing a note receivable by loaning cash to another company will have which of the
following net effects on the accounting equation?
A) Increase assets; No effect on liabilities; Increase stockholders' equity
B) Increase assets; No effect on liabilities; No effect on stockholders' equity
C) No effect on assets; No effect on liabilities; Decrease stockholders' equity
D) No effect on assets; No effect on liabilities; No effect on stockholders' equity
Answer: D
Explanation: Establishing a note receivable for a loan increases Note Receivable, an asset
account, and decreases Cash, another asset account by the same amount; as a result, it has no
effect on total assets, liabilities, or stockholder's equity.
Bloom's: Understand
138) Specialty Inc. converts an existing account receivable to a note receivable to allow an
extended payment period. Specialty receives a $2,000, 3-month, 12% promissory note from its
customer. What entry will Specialty make upon receipt of the note?
A) Debit Notes Receivable and credit Accounts Receivable for $2,060.
B) Debit Accounts Receivable and credit Notes Receivable for $2,000.
C) Debit Notes Receivable for $2,000, debit Interest Receivable for $60, credit Accounts
Receivable for $2,000, and credit Interest Revenue for $60.
D) Debit Notes Receivable and credit Accounts Receivable for $2,000.
Answer: D
Explanation: The entry includes a debit to Notes Receivable and a credit to Cash for $2,000. No
interest is recorded on the day the note is established. Interest is earned over time.
Bloom's: Apply
79
139) When a company lends cash to a customer who signs a promissory note:
A) total assets decrease when the lending transaction occurs, but increase when the amount
borrowed by the customer is repaid.
B) total assets increase when the lending transaction occurs and revenues increase when the
amount borrowed by the customer is repaid.
C) total assets increase and liabilities increase when the lending transaction occurs.
D) total assets and net income do not change when the lending transaction occurs.
Answer: D
Explanation: When a company makes a loan, Cash decreases and Notes Receivable increases.
One asset is being exchanged for another; there is no change in total assets. No interest is
recorded on the day the note is established. Interest is earned over time. As such, net income is
not affected.
Bloom's: Understand
140) Maple Broadcasting Co. lends $20,000 to an employee who signs a 9%, 6-month
promissory note. What is the total amount of interest on this note?
A) $1,800
B) $900
C) $20,900
D) $5,400
Answer: B
Explanation: Interest = Principal × Interest rate × Time
= $20,000 × .09 × 6/12 = $900

Difficulty: 1 Easy
Bloom's: Apply
80
141) On July 1, 2018, Empire Inc. lends $8,000 to a customer and receives a 9% note due in two
years. Interest is due in full on July 1, 2020, the due date of the note. What is the amount of
Interest Revenue that will be reported on Empire's income statement for the year ended
December 31, 2018?
A) $1,440
B) $720
C) $420
D) $360
Answer: D
= $8,000 × 0.09 × 6/12 (July 1 through December 31) = $360

Bloom's: Apply
142) If a $40,000, 6%, note receivable with a two-year maturity date was signed three months
ago, how much interest has been earned?
A) $2,400
B) $600
C) $4,800
D) $300
Answer: B
Explanation: Interest revenue = Principal × Interest rate × Time
= $40,000 × 0.06 × 3/12 = $600

Difficulty: 3 Hard
Bloom's: Apply
81
143) Best, Inc. loaned $100,000 for three months on November 1 to one of its customers at the
rate of 6%. The principal amount of the loan plus interest is due on the following February 1.
Which of the following is the adjusting journal entry that will be recorded on December 31?
A) Debit Cash and credit Interest Revenue for $4,000.
B) Debit Interest Receivable and credit Interest Revenue for $4,000.
C) Debit Interest Receivable and credit Interest Revenue for $1,000.
D) Debit Interest Receivable and credit Interest Revenue for $500.
Answer: C
Explanation: Interest was earned during November and December. The adjusting journal entry
includes a debit to Interest Receivable and a credit to Interest Revenue for $1,000 (or $100,000 ×
6% × 2/12).
Difficulty: 3 Hard
Bloom's: Apply
144) Which of the following statements about the recording of interest on notes receivable is
correct?
A) Interest on notes receivable is recorded as revenue only when the cash is received.
B) When a company makes an interest payment on a note, the payment is debited to Interest
Receivable.
C) Interest on notes receivable is recognized when it is earned, which is not necessarily when the
interest is received in cash.
D) Interest earned but not yet received must be recorded in an adjusting entry which includes a
debit to Interest Revenue.
Answer: C
Explanation: Under accrual basis accounting, interest revenue is recorded when it is earned. The
adjusting entry to accrue interest includes a debit to Interest Receivable and a credit to Interest
Revenue.
Bloom's: Understand
82
145) On January 1, a company lends $90,000 to a customer for one year at a 7% annual interest
rate. The note requires the payment of interest twice each year on June 30 and December 31. The
company records adjusting entries on a monthly basis. At the end of each month in which the
company does not receive any interest payments, the company:
A) records an entry with a debit to Cash of $525 and a credit to Interest Revenue of $525.
B) records an entry with a debit to Notes Receivable of $525 and a credit to Cash of $525.
C) records an entry with a debit to Interest Receivable of $525 and a credit to Interest Revenue of
$525.
D) does not record an adjusting entry, since no transaction has occurred.
Answer: C
Explanation: Monthly Interest Revenue = Principal × Interest rate × Time
= $90,000 × 0.07 × 1/12 = $525
The monthly adjusting entry to accrue interest includes a debit to Interest Receivable and a credit
to Interest Revenue for $525.
Difficulty: 3 Hard
Bloom's: Apply
146) Best, Inc. loaned $100,000 for three months on November 1 to one of its customers at the
rate of 6%. The principal amount of the loan plus interest is due on the following February 1.
The related adjusting entry was recorded on December 31. What is the amount of interest
revenue that should be included in the entry dated February 1?
A) 0
B) $2,000
C) $1,000
D) $500
Answer: D
Explanation: Interest was earned during January in the amount of $500 (or 100,000 × 6% ×
1/12).
Difficulty: 3 Hard
Bloom's: Apply
83
147) On August 1, Jackson Radiology signed a one-year note receivable of $60,000 with interest
at of 15% payable every six months. Jackson properly accrued interest on the note on December
31. What journal entry would Jackson make on the following February 1 to record the interest
payment received on that date?
A) Debit Cash and credit Interest Revenue for $4,500.
B) Debit Cash and credit Interest Revenue for $750.
C) Debit Cash for $4,500, credit Interest Receivable for $3,750, and credit Interest Revenue for
$750.
D) Debit Cash for $750, debit Interest Receivable for $3,750, and credit Interest Revenue for
$4,500.
Answer: C
Explanation: The time period from August 1 through December 31 included five months; the
related amount was accrued at December 31 by debiting Interest Receivable and crediting
Interest Revenue for $3,750 (or $60,000 × .15 × 5/12). The final month of interest was earned
during January.
Debit Cash (to increase this asset account) for $4,500 (or $60,000 × 0.15 × 6/12), credit Interest
Receivable (to decrease this asset account) for $3,750 (or $60,000 × 0.15 × 1/12), and credit
Interest Revenue (to increase this revenue account) for $750 (or $60,000 × 0.15 × 1/12).
Difficulty: 3 Hard
Bloom's: Apply
84
148) On March 1, Preston Corporation loans $3,000 to an employee and receives a 5%, three-
month note. Interest will be paid when the note matures on May 31. Assuming that interest on
the note has not previously been accrued, what entry will Preston make on April 30?
A) Debit Interest Revenue and credit Interest Receivable $25.
B) Debit Interest Receivable and credit Interest Revenue $25.
C) Debit Interest Receivable and credit Interest Revenue $50.
D) Debit Cash and credit Interest Revenue for $50.
Answer: B
= $3,000 × 0.05 × 2/12 (March and April) = $25
The adjusting entry includes a debit to Interest Receivable and a credit to Interest Revenue for
$25.
Bloom's: Apply
149) Generous Inc. lends Blue Inc. $40,000 on April 1 and receives a four-month, 4.5% interest-
bearing note. Generous Inc. prepares financial statements on April 30. What adjusting entry
should be made by Generous Inc. before its financial statements are prepared?
A) Debit Note Receivable and credit Cash for $40,000.
B) Debit Interest Receivable and credit Interest Revenue for $150.
C) Debit Cash and credit Interest Revenue for $150.
Answer: B
= $4,000 × 0.045 × 1/12 (April 1 through April 30) = $150
The adjusting entry includes a debit to Interest Receivable and a credit to Interest Revenue for
$150.
Bloom's: Apply
85
150) On October 1, a company lends $10,000 to an employee who signs a 9%, 6-month
promissory note. The company is preparing its year-end financial statements on December 31.
No adjusting entries have been recorded in connection with this note. What adjusting entry
should be recorded before the financial statements are prepared?
A) Debit Interest Revenue and credit Interest Receivable for $225.
C) Debit Interest Revenue and credit Interest Receivable for $450.
Answer: D
= $10,000 × 0.09 × 3/12 (October 1 through December 31) = $225
The entry includes a debit to Interest Receivable and a credit to Interest Revenue for $225.
Bloom's: Apply
151) On December 1, 2018, a company lends a new employee $20,000 to assist with her
relocation expenses. The employee signs a 6-month note, with interest of 9%. The company
prepares year-end financial statements at December 31. What is the required adjusting entry at
December 31 as a result of this note transaction?
A) Debit Interest Revenue and credit Interest Receivable for $900.
C) Debit Interest Revenue and credit Interest Receivable for $150.
Answer: D
= $20,000 × 0.09 × 1/12 (December 1 through 31) = $150
The entry includes a debit to Interest Receivable and a credit to Interest Revenue for $150.
Bloom's: Apply
86
152) Interest Receivable:
A) is an asset reported on the balance sheet.
B) is a temporary account reported on the income statement.
C) is a permanent account reported on the income statement.
D) represents the amount of interest the company has received on promissory notes.
Answer: A
Explanation: Interest Receivable is an asset account. Although it is a permanent account, it is
reported on the balance sheet (rather than the income statement). It represents the amount of
interest to be received on promissory notes.
Difficulty: 1 Easy
Bloom's: Remember
153) On January 1, a company lends a customer $90,000 for one year at a 7% annual interest
rate. The note requires the payment of interest twice each year on June 30 and December 31. An
adjusting entry to accrue interest is recorded at the end of every month. On July 2, a check for
the interest payment for January through June comes in the mail. What journal entry will the
company record on July 2?
A) Debit Interest Receivable for $3,150 and credit Interest Revenue for $3,150.
B) Debit Cash for $3,150 and credit Notes Receivable for $3,150.
C) Debit Interest Revenue for $3,150 and credit Cash for $3,150.
D) Debit Cash for $3,150 and credit Interest Receivable for $3,150.
Answer: D
= $90,000 × 0.07 × 6/12 (January through June) = $3,150
Adjusting entries have been recorded at the end of each month to accrue the interest earned.
Accordingly, at June 30, the Interest Receivable and Interest Revenue accounts include six
months (January through June) of accrued interest. As a result, the entry to record the receipt of
the semi-annual interest payment includes a debit to Cash and a credit to Interest Receivable for
$3,150.
Difficulty: 3 Hard
Bloom's: Apply
87
154) On December 31, 2018, Infinity Inc. records an adjusting entry to accrue interest on a note.
On January 31, 2019, Infinity receives a check for $4,680, which represents two months of
accumulated interest on the note. Upon receipt of this interest payment, Infinity should debit:
A) Interest Receivable for $2,340, debit Cash $2,340, and credit Interest Revenue for $4,680.
B) Cash for $4,680, credit Interest Receivable for $2,340, and credit Interest Revenue for $2,340.
C) Cash for $4,680 and credit Interest Receivable for $4,680.
D) Cash for $4,680 and credit Interest Revenue for $4,680.
Answer: B
Explanation: The entry includes a debit to Cash for $4,680 (the amount of the payment), a credit
to Interest Receivable for $2,340 (the one month of interest accrued at December 31, 2018), and
credit Interest Revenue for $2,340 (the second month of interest earned during January 2019).
Difficulty: 3 Hard
Bloom's: Apply
88
155) On December 1, 2018, a company converted an existing account receivable in the amount
of $6,000 to a note receivable to allow an extended payment period. The note is due in three
months and includes an annual interest rate of 9%. The company prepares year-end financial
statements on December 31 and recorded adjusting entries at that time. What entry should the
company make on March 1, 2019, when the interest is paid at maturity?
A) Debit Cash and credit Notes Receivable for $6,135.
B) Debit Cash for $6,135, credit Notes Receivable for $6,000, and credit Interest Revenue for
$135.
C) Debit Cash for $135 and credit Interest Revenue for $135.
D) Debit Cash for $135, credit Interest Receivable for $45, and credit Interest Revenue for $90.
Answer: D
Accrued at December 31:
= $6,000 × 0.09 × 1/12 = $45
Earned from January 1 through March 1:
= $6,000 × 0.09 × 2/12 = $90
The entry includes a debit to Cash for $135, a credit to Interest Receivable for $45 (the amount
accrued at December 31, 2018), and credit Interest Revenue for $90 (the amount of interest
earned from January 1 through March 1, 2019).
Difficulty: 3 Hard
Bloom's: Apply
89
156) Your company converted an existing account receivable in the amount of $5,000 to a note
receivable to allow an extended payment period. The note is due in one year and includes an
annual interest rate of 5%. The customer repays the principal at the maturity date. The entry to
record the receipt of the principal includes a debit to:
A) Cash and credit to Notes Receivable.
B) Notes Receivable and credit to Accounts Receivable.
C) Cash and credit to Interest Receivable.
D) Notes Receivable and credit to Cash.
Answer: A
Explanation: The entry includes a debit to Cash and a credit to Notes Receivable.
Bloom's: Apply
157) On the maturity date of a $10,000, 3-month, 8% note, the borrower sends a check that
includes the principal and all of the interest due on the note. What is the amount of the
borrower's check?
A) $10,200
B) $10,600
C) $10,800
D) $10,000
Answer: A
= $10,000 × 0.08 × 3/12 = $200
Payment = Principal + Interest
= $10,000 + $200 = $10,200

Bloom's: Apply
90
158) Which of the following is recorded with a debit to Cash and a credit to Notes Receivable?
A) The adjusting entry to record interest owed.
B) The receipt of an interest payment.
C) The receipt of the principal payment.
D) The issuance of a note.
Answer: C
Explanation: The debit to Cash increases that asset account and the credit to Notes Receivable
decreases that asset account. This entry would be made when a principal payment is received.
Difficulty: 3 Hard
Bloom's: Apply
159) Which of the following is recorded with a debit to Cash and a credit to Interest Receivable?
A) The receipt of the principal payment.
B) The adjusting entry to record interest owed.
C) The receipt of an interest payment.
D) The issuance of a note.
Answer: C
Explanation: The debit to Cash increases that asset account and the credit to Interest Receivable
decreases that asset account. This entry would be made when an interest payment is received.
Difficulty: 3 Hard
Bloom's: Apply
91
160) On March 1, Cents, Inc. lent $1,000 to an employee at a rate of 6% for 3 months. The entry
to record the loan of $1,000 to its employee includes a:
A) credit to Cash of $1,000.
B) debit to Cash of $1,000.
C) credit to Notes Receivable of $1,000.
D) credit to Interest Revenue of $15.
E) debit to Interest Revenue of $15.
Answer: A
Explanation: The entry to establish this note receivable includes a debit to Notes Receivable (to
increase that asset account).and a credit to Cash (to decrease that asset account) for $1,000.
Difficulty: 3 Hard
Bloom's: Apply
161) If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then:
A) assets, net income, and stockholders' equity are overstated by $1,000.
B) assets, net income, and stockholders' equity are understated by $1,000.
C) liabilities are understated by $1,000, net income is overstated by $1000, and stockholders'
equity is overstated by $1,000.
D) assets are overstated, net income is understated, and stockholders' equity is understated.
Answer: B
Explanation: The adjusting entry to accrue the interest earned includes a debit to Interest
Receivable (to increase that asset account).and a credit to Interest Revenue (to increase that
revenue account) for $1,000. If that entry is not made, assets will be understated and net income
will be understated. As a result, stockholders' equity will also be understated.
Difficulty: 3 Hard
Bloom's: Apply
92
162) When a company has earned interest in the current period but has not yet recorded the
interest, what type of adjustment is the company required to make?
A) Make an adjusting entry at the end of the current period to accrue the interest earned.
B) Make no adjusting entry at the end of the period because interest has not been earned yet.
C) Make an adjusting entry at the end of the next period to accrue interest earned.
D) No adjustment is necessary until the cash is collected.
Answer: A
Explanation: An adjusting entry must be recorded at the end of the accounting period to accrue
the interest earned includes a debit to Interest Receivable (to increase that asset account).and a
credit to Interest Revenue (to increase that revenue account).
Difficulty: 3 Hard
Bloom's: Apply
163) What effect does the adjusting entry for interest earned but yet not received have on the
accounting equation?
A) It results in an increase in assets and stockholders' equity.
B) It results in a decrease in assets and stockholders' equity.
C) It results in an increase in assets and liabilities.
D) It results in an increase in assets and decrease in stockholders' equity.
Answer: A
Explanation: An adjusting entry must be recorded at the end of the accounting period to accrue
the interest earned includes a debit to Interest Receivable (to increase that asset account).and a
credit to Interest Revenue (to increase that revenue account). When that entry is made, assets will
increase and net income will also increase. As a result, stockholders' equity will also increase.
Bloom's: Apply
93
164) ABC Corp. received a 3-month, at 8% per year, $1,500 note receivable on November 1.
The adjusting entry on December 31 will include a:
A) debit to Interest Revenue of $20.
B) credit to Interest Receivable of $10.
C) credit to Interest Revenue of $120.
D) credit to Interest Revenue of $20.
Answer: D
= $1,500 × 0.08 × 2/12 (for November and December) = $20
An adjusting entry must be recorded at the end of the accounting period to accrue the interest
earned includes a debit to Interest Receivable (to increase that asset account).and a credit to
Interest Revenue (to increase that revenue account) for $20.
Difficulty: 1 Easy
Bloom's: Apply
165) ABC Corp. received a 3-month, 8% per year, $1,500 note receivable on December 1. The
adjusting entry on December 31 will include a:
A) debit to Interest Revenue of $10.
B) credit to Interest Receivable of $20.
C) credit to Interest Revenue of $30.
D) debit to Interest Receivable of $10.
Answer: D
= $1,500 × 0.08 × 1/12 (for December) = $10
Interest Revenue (to increase that revenue account) for $10.
Difficulty: 1 Easy
Bloom's: Apply
94
166) On November 1, 2018, Lendem, Inc. loaned an employee $100,000 at 6% with both the
interest and principal due in one year. No adjusting entries have been recorded in connection
with this note. The adjusting entry to record the interest earned but not received as of December
31, 2018 includes a:
A) debit to Interest Receivable of $6,000.
B) debit to Interest Payable of $6,000.
C) debit to Cash of $5,000.
D) debit to Interest Receivable of $1,000.
E) debit to Interest Revenue of $1,000.
Answer: D
= $100,000 × 0.06 × 2/12 (for November and December) = $1,000
Interest Revenue (to increase that revenue account) for $1,000.
Difficulty: 1 Easy
Bloom's: Apply
167) What effect does the collection of a note receivable, excluding interest, have on the
accounting equation?
A) Total assets remain the same.
B) Assets are reduced and stockholders' equity is reduced.
C) Assets are increased and stockholders' equity is increased.
D) Assets are reduced and liabilities are reduced.
Answer: A
Explanation: The entry includes a debit to Cash (to increase that asset account) and a credit to
Notes Receivable (to decrease that asset account). Total assets remain the same. Liabilities and
stockholders' equity are not affected.
Bloom's: Understand
95
168) The receivables turnover ratio:
A) is calculated as the average number of days from the time a sale is made on account to the
time cash is collected.
B) is calculated as the average number of days from the time a sale is made on account to the
time payment is due.
C) measures how many times a year receivables go uncollected.
D) measures how many times, on average, the process of selling and collecting is repeated
during the period.
Answer: D
Explanation: The receivables turnover ratio indicates how many times, on average, this process
of selling and collecting is repeated during the period. It is calculated by dividing net sales
revenue by average net receivables.
Bloom's: Remember
169) Inglewood Industries has net sales of $936,600 and average net receivables of $223,000 for
the year. Which of the following statements is correct? (Round all calculations to one decimal
place.)
A) The receivables turnover ratio is 4.2 and the days-to-collect is 0.01.
B) The receivables turnover ratio is 0.2 and the days-to-collect is 1,520.
C) The receivables turnover ratio is 4.2 and the days-to-collect is 86.9.
D) The receivables turnover ratio is 0.2 and the days-to-collect is 87.6.
Answer: C
Explanation: Receivables turnover ratio = Net sales revenue ÷ Average net receivables
= $936,600 ÷ $223,000 = 4.2 times
Days to collect = 365 ÷ Receivables turnover ratio
= 365 ÷ 4.2 = 86.9 days

Bloom's: Apply
96
170) Grandview Grinding, Inc. had net accounts receivable of $135,800 at the beginning of the
year and $144,800 at the end of the year. If the company's net sales revenue during the year was
$1,753,750, what is the receivables turnover ratio?
A) 12.5
B) 29.2
C) 0.08
D) 0.034
Answer: A
Explanation: Receivables turnover ratio = Net sales revenue ÷ Average net receivables
= $1,753,750 ÷ [($135,800 + $144,800) ÷ 2] = 12.5 times

Bloom's: Apply
171) The following information is available:
Net accounts receivable, December 31, 2018 $ 394,200

Net accounts receivable, December 31, 2019 435,900
Net credit sales for 2018 3,521,400
The receivables turnover ratio for 2019 is closest to:

A) 8.93 times
B) 8.48 times
C) 8.71 times
D) 9.14 times
Answer: D
Explanation: Receivables turnover ratio = Net sales ÷ Average net receivables
$3,795,300 ÷ [($394,200 + $435,900) ÷ 2] = 9.14 times

Difficulty: 1 Easy
Bloom's: Apply
97
172) A low accounts receivable turnover ratio indicates:
A) the company's sales are increasing.
B) a large proportion of the company's sales are on credit.
C) customers are making payments slowly.
D) the company is taking longer to sell inventory.
Answer: C
Explanation: The lower the receivables turnover ratio, the slower the collection of receivables.
Bloom's: Understand
173) Legacy, Inc.'s receivables turnover ratio increased from 11.8 last year to 14.1 this year.
Which of the following statements is correct?
A) This could be an indication that the company is using more efficient collection methods.
B) This is an indication that the company is experiencing declining credit costs.
C) This indicates that the company is taking longer to collect credit payments.
D) This is an indication that the company is buying and selling financial assets less rapidly.
Answer: A
Explanation: The higher the receivables turnover ratio, the faster the collection of receivables.
Bloom's: Understand
98
174) Norwood Co. reported a receivables turnover ratio of 8.0. Cost of goods sold was $700,000
and net sales revenue was $960,000. The average net receivables must have been
A) $90,000.
B) $240,000.
C) $120,000.
D) $180,000.
Answer: C
Explanation: Receivables turnover ratio = Net sales ÷ Average net receivables
Average net receivables = Net sales ÷ Receivables turnover ratio
= $960,000 ÷ 8.0 = $120,000

Bloom's: Apply
175) The days-to-collect measures the:

A) number of days it takes to collect accounts receivable.
B) average number of times the firm completes the selling and collecting cycle during the year.
C) average number of days for a customer's payment to clear the banking system.
D) average number of days before the company receives a customer's payment and uses the cash
to re-order merchandise.
Answer: A
Explanation: The days to collect ratio measures the length of time (in days) it takes to collect
accounts receivable.
Bloom's: Remember
99
176) The following information is available:
Net accounts receivable, December 31, 2018 $ 394,200

Net accounts receivable, December 31, 2019 435,900
The days to collect for 2019 is closest to:

A) 40 days.
B) 41 days.
C) 43 days.
D) 42 days.
Answer: A
Explanation: Days to collect = 365 ÷ Receivables turnover ratio
= 365 ÷ 9.14 = 40 days (rounded)

Difficulty: 1 Easy
Bloom's: Apply
177) The financial statements of Pomegranate Produce contained the following information:
Net Sales Revenue $ 1,000,000

Net Accounts Receivable, beginning of year 200,000
Net Accounts Receivable, end of year 120,000
What is the receivables turnover ratio?

A) 5.00 times
B) 6.25 times
C) 12.50 times
D) 8.34 times
Answer: B
Explanation: Receivables turnover ratio = Net Sales Revenue ÷ Average Accounts Receivable
= $1,000,000 ÷ [($200,000 + $120,000) ÷ 2] = 6.25 times

Difficulty: 3 Hard
Bloom's: Apply
100
178) The financial statements of Pomegranate Produce contained the following information:
Net Sales Revenue $ 1,000,000

Net Accounts Receivable, beginning of year 200,000
Net Accounts Receivable, end of year 120,000
The average length of time it takes for Pomegranate Produce to collect accounts receivable is
approximately:
A) 120 days.
B) 72 days.
C) 84 days.
D) 58 days.
Answer: D
Explanation: Receivables turnover ratio = Net Sales Revenue ÷ Average Accounts Receivable
= $1,000,000 ÷ [($200,000 + $120,000) ÷ 2] = 6.25 times
= 365 ÷ 6.25 = 58.4 days

Difficulty: 3 Hard
Bloom's: Apply
101
179) The days to collect receivables increased from 32 days last year to 48 days this year. Which
of the following statements is correct?
A) The company is likely to see its Bad Debt Expense decrease.
B) The company is becoming more efficient at collecting payment.
C) The receivables turnover rate must have increased from last year to this year.
D) The receivables turnover rate decreased from approximately 11.4 to 7.6 from last year to this
year.
Answer: D
Explanation: Days to collect = 365 ÷ Receivables turnover ratio
Receivables turnover ratio = 365 ÷ Days to Collect
Last year:
= 365 ÷ 32 = 11.4 times
This year:
= 365 ÷ 48 = 7.6 times
An increase in the days to collect means a longer (worse) time to collect, which would cause an
increase (rather than a decrease) in Bad Debt Expense. The receivables turnover increased (rather
than decreased) from last year to this year.
Bloom's: Analyze
102
180) The Perry Company reported Accounts Receivable, Net of $66,600 at the beginning of the
year and $72,600 at the end of the year. If the company's net sales revenue during the fourth year
was $876,000, what are the days to collect during year? (Round all calculations to 1 decimal
place.)
A) 12.6
B) 29.0
C) 8.0
D) 34.0
Answer: B
Explanation: Receivables turnover ratio = Net sales ÷ Average net accounts receivable
= $876,000 ÷ [($66,600 + $72,600) ÷ 2] = 12.6 times (rounded)
Days to Collect = 365 ÷ Receivables turnover ratio
= 365 ÷ 12.6 = 29.0 days

Bloom's: Apply
181) Which of the following statements about the receivables turnover analysis is correct?
A) Accounts receivable decline as companies sell on credit.
B) Accounts receivable increase as companies receive payment.
C) Receivables turnover refers to how fast receivables are collected.
D) The days to collect will increase as the receivables turnover increases.
Answer: C
Explanation: The receivables turnover ratio measures the number of times receivables turn over
during the period. The higher the ratio, the faster the collection of receivables. Accounts
receivable would increase (rather than decrease) as companies sell on credit and decrease when
(rather than increase) when payments are collected. The days to collect ratio is calculated by
dividing 365 by the receivables turnover ratio; as a result, the days to collect ratio would
decrease (rather than increase) when the receivables turnover increases.
Bloom's: Understand
103
182) All other things being equal, a company is better off when its receivable turnover ratio:
A) and its days-to-collect measure are both low.
B) is high and its days-to-collect measure is low.
C) and its days-to-collect measure are both high.
D) is low and its days-to-collect measure is high.
Answer: B
Explanation: It is better to have a higher receivables turnover ratio (which means faster the
collection of receivables) and a lower number of days to collect (which means a shorter time to
collect).
Difficulty: 1 Easy
Bloom's: Understand
183) Bolster Soda had an accounts receivable turnover ratio of 9.9 this year and 11.0 last year.
Castor Soda had a turnover ratio of 9.3 this year and 9.3 last year. This implies:
A) Castor's receivables turnover ratios were better than Bolster's for both years.
B) Bolster's receivables turnover ratios were better than Castor's for both years.
C) Castor has credit policies that need to be tightened.
D) Castor collected receivables more quickly than Bolster in both years.
Answer: B
collection of receivables.) Bolster's receivables turnover ratios were better than Castor's for both
years.
Bloom's: Analyze
104
184) Katy Company uses the allowance method. Katy writes off a customer account balance
when it becomes clear that the particular customer will never pay. How will this write-off affect
the company's net income and accounts receivable turnover ratio?
A) Net income and the account receivable turnover ratio will both decrease.
B) Net income will decrease; the account receivable turnover ratio will not change.
C) Net income will not change; the account receivable turnover ratio will decrease.
D) Net income will not change; the account receivable turnover ratio will not change.
Answer: D
decrease is recorded in Accounts Receivable, which would be offset by a decrease in the contra-
account, Allowance for Doubtful Accounts. A write-off does not affect revenues, expenses, or
net income. The accounts receivable turnover ratio is calculated by dividing net sales revenue by
average net receivables. Since net receivables are not affected by a write-off, this ratio would not
be impacted.
Difficulty: 3 Hard
Bloom's: Analyze
185) Momentum Products Inc. just recorded an adjusting journal entry for the current year's
estimate of bad debts. Assuming all else is equal, this adjusting journal entry will cause:
A) the accounts receivable turnover ratio to increase.
B) net income to increase.
C) total assets to remain unchanged.
D) net accounts receivable to increase.
Answer: A
Explanation: The journal entry includes a debit to Bad Debt Expense, which increases expenses
and decreases (rather than increases) net income. The entry also includes a credit to Allowance
for Doubtful Accounts, a contra-asset account, which decreases net accounts receivable. The
accounts receivable turnover ratio is calculated by dividing net sales revenue by average net
receivables. Since this entry decreases average net receivables, the receivables turnover ratio will
increase.
Difficulty: 3 Hard
Topic: Accounts Receivable and Bad Debts; Receivables Turnover Analysis
Learning Objective: 08-02 Estimate and report the effects of uncollectible accounts.; 08-04
Compute and interpret the receivables turnover ratio.
Bloom's: Analyze
105
186) Foothill Construction uses the allowance method for bad debts. If management is overly
pessimistic about its ability to collect customer accounts, the company will overstate Bad Debt
Expense and:
A) understate net income and days to collect will increase.
B) understate net income but days to collect will decline.
C) overstate net income and days to collect will increase.
D) overstate net income and days to collect will decline.
Answer: B
Explanation: If Bad Debt Expense is overstated, then net income will be understated. The days
to collect ratio measures the average number of days from sale on account to collection. If the
company is overly pessimistic about its ability to collect, it follows that the number of days to
collect will decrease (since it will take shorter than expected to collect receivables).
Difficulty: 3 Hard
Topic: Accounts Receivable and Bad Debts; Receivables Turnover Analysis
Bloom's: Analyze
187) Which of the following situations depicts the best receivables management?
A) Receivables turnover ratio increases and the days to collect decreases.
B) Receivables turnover ratio increases and the days to collect increases.
C) Receivables turnover ratio decreases and the days to collect increases.
D) Receivables turnover ratio decreases and the days to collect decreases.
Answer: A
Explanation: Good receivables management occurs when the receivables turnover is increasing
and the number of days to collect is decreasing. The more frequently that receivables are turning
over, the more frequently the receivables are being collected. A lower the days to collect means
that a company is collecting its receivables more quickly.
Difficulty: 1 Easy
Bloom's: Remember
106
188) What does a low receivable turnover ratio indicate?
A) Cash collections are sluggish, taking longer to collect.
B) Sales are growing.
C) Credit sales are much greater than cash sales.
D) Customer payments are collected relatively soon after the sale has been made.
Answer: A
Explanation: A low receivables turnover ratio indicates that the process of selling and collecting
cash from credit sales is being made less frequently, resulting in more time between the credit
sale and its collection. This generally means that less cash is available for business operations.
Difficulty: 1 Easy
Bloom's: Understand
189) Which of the following statements about the interpretation of the receivables turnover ratio
is not correct?
A) Analysts often interpret a sudden increase in the receivables turnover ratio as a signal of a
developing problem.
B) The smaller the receivables turnover ratio the larger the days to collect.
C) A change in the receivables turnover ratio may indicate a change in the company's credit
granting policies.
D) A change in the receivables turnover ratio may indicate a change in economic conditions.
Answer: A
Explanation: Analysts watch for changes in the receivables turnover ratio because a sudden
decline (rather than a sudden increase) may mean that a company is recording sales of
merchandise that customers are likely to return later.
Bloom's: Understand
107
190) Which of the following statements about receivables turnover analysis is correct?
A) The receivables turnover ratio indicates how many times, on average, the process of selling to
and collecting from customers occurs during the accounting period.
B) Companies of similar size in different industries tend to have similar receivables turnover
ratios.
C) A high turnover ratio may suggest the company is allowing too much time for customers to
pay.
D) The days to collect ratio is found by dividing the receivables turnover ratio by 365 days.
Answer: A
Explanation: The receivable turnover ratio determines the average number of times the process
of selling and collecting occurs during the period. This ratio often varies across industries. A low
(rather than not high) turnover ratio may suggest the company is allowing too much time for
customers to pay. The days to collect ratio is calculated by dividing 365 by the receivables
turnover ratio.
Bloom's: Understand
191) Companies A and B both report net income growth of 12% per year. Company A has a
receivables turnover ratio of 5.6, which is lower than last year. Company B has a receivables
turnover ratio of 11.3, which is higher than last year. All other things being equal:
A) Company A is more effectively managing its receivables.
B) Company B is more effectively managing its receivables.
C) Company A's days to collect is lower than Company B's in both years.
D) Company B's days to collect increased.
Answer: B
collection of receivables.) Company B has the better turnover ratio when compared to Company
A, so this suggests that Company B is more effectively managing its receivables.
Difficulty: 3 Hard
Bloom's: Analyze
108
192) A company's number of days to collect is higher than the length of credit period. Analysts
might conclude:
A) customers are dissatisfied with the product or service they bought.
B) the company is effectively managing its receivables.
C) the company has begun estimating the amount of uncollectibles using percentage of net sales
rather than aging the receivables.
D) the company's payment terms have been tightened and customers are paying within the
payment period granted.
Answer: A
Explanation: By comparing the number of days to collect to the length of credit period, analysts
can gain a sense of whether customers are complying with the stated policy. Managers inside a
company watch this closely, and so do investors and creditors on the outside. If customers appear
to be disregarding the stated credit period, it may be a sign they are dissatisfied with the product
or service they bought. If the company's payment terms have been relaxed, the length of the
credit period and the number of days to collect would both increase. If the company's payment
terms have been tightened, the length of the credit period and the number of days to collect
would both decrease. The method used to estimate uncollectibles will not impact the length of
the credit period nor the number of days to collect.
Difficulty: 3 Hard
Bloom's: Understand
193) A high receivables turnover ratio is a sign of a company's:

A) effectiveness in granting and collecting credit.
B) weakness in granting and collecting credit.
C) profitability.
D) ability to sell goods quickly.
Answer: A
Explanation: A higher receivables turnover ratio means faster (better) turnover.
Difficulty: 1 Easy
Bloom's: Remember
109
194) The receivables turnover ratio gives information on:
A) how many times inventory is turned over per year.
B) how many times the company sells and collects amounts on account per year.
C) how many customers default per year.
D) the profitability of a company.
Answer: B
Explanation: The receivables turnover ratio indicates how many times, on average, this process
of selling and collecting is repeated during the period. The higher the ratio, the faster the
collection of receivables.
Difficulty: 1 Easy
Bloom's: Remember
195) A scenario under which a company's credit sales are increasing and its accounts receivable
turnover is decreasing might suggest:
A) channel stuffing.
B) cookie jar accounting.
C) an investment opportunity.
D) improved receivables monitoring.
Answer: A
Explanation: Analysts watch for changes in the receivables turnover ratio because a sudden
decline may mean that a company is recording sales of merchandise that customers are likely to
return later. It also may mean that the company is selling to less financially secure customers or
is allowing customers more time to pay their accounts to entice them to buy as much as
possible—a practice known as channel stuffing.
Difficulty: 1 Easy
Bloom's: Understand
110
196) Receivables might be sold ("factored") to:
A) lengthen the time to collect from customers.
B) reduce the receivables turnover ratio.
C) generate cash immediately.
D) generate a gain on sale.
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
197) If your company factors its accounts receivable, it:

A) will focus its collection activities on only the largest Accounts Receivable balances.
B) sells outstanding receivables to another company.
C) will use major national credit cards to allow its customers to pay for goods.
D) will engage in aggressive hounding of its clients to pay their bills.
Answer: B
Explanation: The way this factoring arrangement works is that your company receives cash for
the receivables it sells to the factor (minus a factoring fee) and the factor then has the right to
collect the outstanding amounts owed by the your customers.
Difficulty: 1 Easy
Bloom's: Remember
111
198) An arrangement where receivables are sold to another company for immediate cash is
called:
A) factoring.
B) leasing.
C) depreciating.
D) Renting.
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
199) Assume ABC sells its receivables to another company for immediate cash on a regular
basis. How should the factoring fee be reported in the income statement?
A) Selling expense.
B) Non-operating expense.
C) Sales returns.
D) Not at all.
Answer: A
Explanation: Companies that regularly sell receivables report the cost of factoring on the income
statement as a selling expense.
Difficulty: 1 Easy
Bloom's: Remember
112
200) A company decides to start allowing its customers to pay with national credit cards and
PayPal. This decision would:
A) slow down its cash collection.
B) speeds up its cash collection, but increase losses from customers writing bad checks.
C) speeds up its cash collection and reduces losses from customers writing bad checks.
D) slow down its cash collection, but decrease losses from customers writing bad checks.
Answer: C
Explanation: National credit card companies and PayPal pay the seller within one to three days
of the sale, which speeds up cash collection, If customers can pay by credit card or use PayPal
instead of writing checks, losses from customers' bad checks would be reduced.
Bloom's: Understand
201) PayPal and national credit card companies charge Abbigail Company a 3% fee for their
services. Abbigail Company's net sales revenue was $10,000 on the last weekend of November.
How much cash will be deposited into Abbigail's bank account as a result of these sales?
A) $30
B) $9,700
C) $10,000
D) $10,030
Answer: B
Explanation: Cash = Net sales revenue − Transaction fee charged
= $10,000 − ($10,000 × 0.03) = $9,700

Difficulty: 1 Easy
Bloom's: Understand
113
202) PayPal and national credit card companies charge a fee for their services. How do sellers
report these transaction fees on their financial statements?
A) As current assets on the balance sheet.
B) As a deduction from net sales revenue on the income statement.
C) As selling expenses on the income statement.
D) As cost of goods sold on the income statement.
Answer: C
Explanation: These transaction fees are included with selling expenses on the income statement.
Bloom's: Understand
203) Santiago Cleaners allows customers make purchases using their VISA credit cards. If
customers purchase from Santiago using VISA credit cards, which of the following statements is
correct?
A) VISA pays Santiago the full amount of purchase, without charging a fee.
B) VISA will wait until the customer makes payment to the credit card company until
forwarding payment to Santiago.
C) Santiago does not have to collect directly from customers.
D) Santiago must bear any losses from uncollectible accounts.
Answer: C
Explanation: Unlike private credit card programs, where the seller pursues collection from
customers, national credit card companies, such as VISA, pay the seller within one to three days
of the sale. Most banks accept credit card receipts as overnight deposits into the company's bank
account as if they're cash. This not only speeds up the seller's cash collection, but also reduces
losses from customers writing bad checks. The credit card companies charge a fee for their
services, often around 3% of the total sales price.
Difficulty: 1 Easy
Bloom's: Remember
114
204) The direct write-off method for uncollectible accounts is required:
A) by the IRS.
B) by GAAP.
C) by IFRS.
D) for external financial reporting.
Answer: A
Explanation: The direct write-off method is required for tax purposes but is not allowed under
GAAP or IFRS and, so, it is generally not used for external financial reporting.
Difficulty: 1 Easy
Topic: Direct Write-Off Method
Learning Objective: 08-S1 Record bad debts using the direct write-off method.
Bloom's: Remember
AACSB: Diversity
205) Why is the direct write-off method not allowed under GAAP to account for doubtful
accounts?
A) It is too difficult to implement.
B) It is allowed in certain circumstances.
C) It violates the expense recognition principle ("matching").
D) It is only allowed under IFRS.
Answer: C
Explanation: The reason the direct write-off method isn't considered a GAAP method is that it
reports Accounts Receivable at the total amount owed by customers (an overly optimistic point
of view) rather than what is estimated to be collectible (a more realistic viewpoint). The direct
write-off method also breaks the expense recognition ("matching") principle by recording Bad
Debt Expense in the period customer accounts are determined to be bad rather than the period
when the credit sales are actually made.
Difficulty: 1 Easy
Bloom's: Understand
115
206) A company uses the direct write-off method. The company writes off a $3,000 customer
account balance when it becomes clear that the particular customer will never pay. What is the
journal entry that would be prepared to record this write-off?
A) Debit Bad Debt Expense and credit Accounts Receivable for $3,000.
B) Debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $3,000.
C) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $3,000.
D) Debit Accounts Receivable and credit Bad Debt Expense for $3,000.
Answer: A
Explanation: When the direct write-off method is used, the entry to record a write-off includes a
debit to Bad Debt Expense and a credit to Accounts Receivable.
Difficulty: 1 Easy
Bloom's: Apply
207) When the direct write-off method is used to account for uncollectible accounts, which of the
following accounts would not be used?
A) Bad Debt Expense
B) Accounts Receivable
C) Allowance for Doubtful Accounts
D) Notes Receivable
Answer: C
only when a company writes off specific accounts. As a result, since an estimate of uncollectible
accounts is not recorded, a company using the direct write-off method would not have the
account, Allowance for Doubtful Accounts.
Difficulty: 1 Easy
Bloom's: Remember
116
208) The direct write-off method:
A) results in better matching of costs with revenues than the allowance method.
B) is an acceptable method under generally accepted accounting principles (GAAP).
C) requires that losses from bad debts be recorded in the period in which sales are made.
D) does not report accounts receivable on the balance sheet at their net realizable value.
Answer: D
Explanation: The reason the direct write-off method isn't considered a GAAP method is that it
reports Accounts Receivable at the total amount owed by customers rather than what is estimated
to be collectible (the net realizable value). The direct write-off method also violates the expense
recognition ("matching") principle by recording Bad Debt Expense in the period customer
accounts are determined to be bad rather than the period when the credit sales are actually made.
Bloom's: Understand
209) When the direct write-off method is used, the entry to write-off a specific account would:
A) increase net income.
B) have no effect on net income.
C) increase Accounts Receivable and increase net income.
D) decrease Accounts Receivable and decrease net income.
Answer: D
debit to Bad Debt Expense, which increases expenses and decreases net income, and a credit to
Accounts Receivable, which decreases Accounts Receivable.
Bloom's: Analyze
117
210) Under the direct write-off method, the entry to write off a customer's account would include
a debit to:
A) Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
B) Bad Debt Expense and a credit to Accounts Receivable.
C) Write-off Expense and a credit to Accounts Receivable.
D) Sales and a credit to Accounts Receivable.
Answer: B
debit to Bad Debt Expense, which increases expenses and decreases net income, and a credit to
Accounts Receivable, which decreases Accounts Receivable.
Bloom's: Apply
211) When the direct write-off method is used:

A) the estimated amount of bad debts is debited to Bad Debt Expense.
B) the estimated amount of bad debts is debited to Allowance for Doubtful Accounts.
C) the estimated amount of bad debts is debited to which account Accounts Receivable.
D) bad debts are not estimated.
Answer: D
only when a company writes off specific accounts. As a result, an estimate of uncollectible
accounts is not recorded and the company would not have an Allowance for Doubtful Accounts
account.
Bloom's: Remember
118
212) Twilight Company uses the aging of accounts receivable method to estimate Bad Debt
Expense. The balance of each account receivable is aged on the basis of three categories as
follows: (1) 1-30 days old, (2) 31-90 days old, and (3) more than 90 days old. Based on
experience, management has estimated what portion of receivables of a specific age will not be
paid as follows: (1) 1%, (2) 15%, and (3) 40%, respectively.
At December 31, 2019, the unadjusted credit balance in the Allowance for Doubtful Accounts
was $80. The total Accounts Receivable in each age category were: (1) 1-30 days old, $52,000,
(2) 31-90 days old, $8,000, and (3) more than 90 days old, $3,200.
Required:
Part a. Calculate the estimate of uncollectible accounts at December 31, 2019.

Part b. Prepare the appropriate adjusting entry dated December 31, 2019.
Answer:
Part a
Estimated uncollectible accounts = ($52,000 × 1%) + ($8,000 × 15%) + ($3,200 × 40%) =

$3,000
Part b
The aging of accounts receivable method focuses on estimating the ending balance to be reported
in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must
determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the
desired adjusted balance.
Ending balance in Allowance for Doubtful Accounts (or estimated uncollectible accounts) =
Unadjusted credit balance in Allowance for Doubtful Accounts + Bad Debt Expense
Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts – Unadjusted ending
credit balance in Allowance for Doubtful Accounts
= $3,000 – $80 = $2,920

Bloom's: Apply
119
213) Samberg Inc. had the following transactions.
Oct. 1 – Sold $10,000 of merchandise on account, 1/10, n/30 to McCormick Industries.
Nov. 1 – Received a $10,000, 90-day, 10% note from McCormick Industries to settle its $10,000
unpaid balance.
Dec. 31 – Accrued interest on the note. (Round your answer to the nearest whole dollar amount.)
Jan. 31 – Received the interest on the note's maturity date.
Jan. 31 – Received the principal on the note's maturity date. (Round your answer to the nearest
whole dollar amount.)
Required:
Prepare the required journal entries.
Answer:
December 31
Interest Revenue: $10,000 × 0.10 × 2/12 = $167
January 31
Interest Revenue: $10,000 × 0.10 × 1/12 = $83

Bloom's: Apply
120
214) The following summarizes the aging of accounts receivable for Johnston Supplies, Inc. as
of July 31, 2019:
Total Accounts Historical %

Number of Days Unpaid Receivable Uncollectible
Not yet due $ 126,500 2%
1-30 days past due 89,200 12%
31-60 days past due 53,600 18%
Over 60 days past due 31,800 35%
Required:
Part a. The unadjusted balance of the Allowance for Doubtful Accounts of Johnston Supplies,
Inc. is a credit balance in the amount of $28,947 on July 31, 2019. Prepare the required adjusting
entry to record Bad Debt Expense for the year.
Part b. Johnston Supplies, Inc. writes off $3,081 of uncollectible accounts on August 15, 2019.
Prepare the required adjusting entry to record the write-off.
Part c. Use a T-account to determine the account balance in the Allowance for Doubtful
Accounts on August 15, 2019.
121
Answer:
Part a.
Estimated amount uncollectible is calculated as follows:
Total
Number of Days Accounts Historical % Estimated Amount
Unpaid Receivable Uncollectible Uncollectible
Not yet due $ 126,500 2% $ 2,530
1-30 days past due 89,200 12% 10,704
31-60 days past due 53,600 18% 9,648
Over 60 days past
31,800 35% 11,130
due
Estimated
$ 34,012
Uncollectible
Adjusted balance in Allowance for Doubtful Accounts (or estimated uncollectible) = Unadjusted
balance in Allowance for Doubtful Accounts + Bad Debt Expense
Bad Debt Expense = Adjusted balance in Allowance for Doubtful Accounts – Unadjusted
balance in Allowance for Doubtful Accounts
= $34,012 – $28,947 = $5,065
July 31 Bad Debt Expense 5,065

Allowance for Doubtful Accounts 5,065
Part b.
Aug. 15 Allowance for Doubtful Accounts 3,081

Accounts Receivable 3,081
Part c.
Difficulty: 3 Hard
Bloom's: Apply
122
215) The Dubious Company operates in an industry where all sales are made on account. The
company has experienced bad debt losses of 1% of credit sales in prior periods.
Presented below is the company's forecast of sales and expenses over the next three years.
Year 1 Year 2 Year 3

Sales Revenue $ 368,000 $ 374,000 $ 373,000
Bad Debt
Unknown Unknown Unknown
Expense
Other Expenses 340,000 342,000 342,750
Net Income Unknown Unknown Unknown
Required:
a. Calculate Bad Debt Expense and net income for each of the three years, assuming
uncollectible accounts are estimated as 1.0% of sales.
b. Assume that the company changes its estimate of uncollectible credit sales to 1.0% in Year 1,
2.0% in Year 2 and 1.5% in Year 3. Calculate the Bad Debt Expense and net income for each of
the three years under this alternative scenario.
Answer:
a.

Sales Revenue $ 368,000 $ 374,000 $ 373,000
Bad Debt Expense (Net Sales
3,680 3,740 3,730
Revenue × 0.01)
Other Expenses 340,000 342,000 342,750
Net Income $ 24,320 $ 28,260 $ 26,520
b.

Sales Revenue $ 368,000 $ 374,000 $ 373,000
Bad Debt Expense (Net Sales
Revenue × 0.01, 0.02 and 0.015, 3,680 7,480 5,595
respectively)
Other Expenses 340,000 342,000 342,750
Net Income $ 24,320 $ 24,520 $ 24,655
Difficulty: 3 Hard
Topic: Methods for Estimating Bad Debts; Receivables Turnover Analysis
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
123
216) Geisel, Inc. reported net sales revenue of $600,000 in 2018 and $500,000 in 2019. The
company's average net receivables were $120,000 during 2017 and $130,000 during 2018. At
December 31, 2019, the company had Accounts Receivable of $148,000 and an unadjusted debit
balance in its Allowance for Doubtful Accounts account of $1,000. The company reported Bad
Debt Expense of $6,000 during 2018.
Required:
a. Determine the net receivables at December 31, 2019.

b. Calculate the receivables turnover ratio for 2018 and 2019.
c. Calculate the days to collect for 2018 and 2019.
124
Answer:
a.

Less Allowance for Doubtful Accounts:
Unadjusted balance (debit) $ 1,000
Adjustment (Bad Debt Expense) (6,000)
Adjusted balance (5,000 )
Net receivables $ 143,000
b.
Receivable Turnover = Net credit sales ÷ Average net receivables
Receivable Turnover = Net credit sales ÷ (Beginning net receivables + Ending net receivables) ÷
2
2018
= $600,000 ÷ [($120,000 + $130,000) ÷ 2] = $600,000 ÷ $125,000 = 4.8 times
2019
= $500,000 ÷ [(130,000 + $143,000) ÷ 2] = $500,000 ÷ $136,500 = 3.7 times
c.
2018
365 ÷ 4.8 (from above) = 76.0 days
2019
365 ÷ 3.7 (from above) = 98.6 days

Difficulty: 3 Hard
Topic: Methods for Estimating Bad Debts; Accounts Receivable and Bad Debts; Receivables
Turnover Analysis
Bloom's: Analyze; Apply
AACSB: Communication; Reflective Thinking
125
Match the term and its definition. There are more definitions than terms.
A) The process of removing specific customers' accounts deemed uncollectible.

B) When a company increases the amount of accounts receivable by adding the interest earned as
accounts age without being collected.
C) How much money you can expect to earn over a period of time selling your goods.
D) Selling accounts receivable to another company for immediate cash.
E) Credit that a company receives when one good is exchanged for another.
F) Also known as net accounts receivable.
G) The length of the credit period and any discounts offered for prompt payment.
H) The amount of money lent.
I) A method of estimating uncollectible debts by forecasting the probability of not collecting late
accounts.
J) The interest earned by money over a period of time.
K) A method of estimating uncollectible debts by looking at the historical average of credit sales
not collected.
L) The account in which the estimated amount of accounts receivable expected to be
uncollectible is recorded.
217) Net Realizable Value

Topic: Accounts Receivable and Bad Debts; Methods for Estimating Bad Debts; Receivables
Turnover Analysis
Compute and report interest on notes receivable.; 08-04 Compute and interpret the receivables
turnover ratio.
Bloom's: Understand
AACSB: Reflective thinking
218) Percentage of Credit Sales Method

Turnover Analysis
turnover ratio.
Bloom's: Understand
126
219) Allowance for Doubtful Accounts
Turnover Analysis
turnover ratio.
Bloom's: Understand
220) Principal
Turnover Analysis
turnover ratio.
Bloom's: Understand
221) Write-Off
Turnover Analysis
turnover ratio.
Bloom's: Understand
222) Aging of Accounts Receivable

Turnover Analysis
turnover ratio.
Bloom's: Understand
127
223) Credit Terms
Turnover Analysis
turnover ratio.
Bloom's: Understand
224) Factoring
Turnover Analysis
turnover ratio.
Bloom's: Understand
Answers: 217) F 218) K 219) L 220) H 221) A 222) I 223) G 224) D
128
A) The portion of Accounts Receivable that the company expects to collect.

B) The time at which a loan must be repaid.
C) An agreement by a borrower to repay the lending company with interest during a specified
time period.
D) The days of the year divided by the net sales revenue.
E) A financial statement that shows the calculation of Bad Debt Expense for a company.
F) Total money owed the company for sales made on credit.
G) An account that is debited for the amount of credit sales estimated as uncollectible.
H) A contra-asset account.
I) The time at which a borrower must make annual interest payments.
J) Net credit sales revenue divided by the average net receivables.
K) Net credit sales revenue divided by the net income.
L) The days of the year divided by the receivables turnover ratio.
225) Promissory Note

Topic: Accounts Receivable and Bad Debts; Methods for Estimating Bad Debts; Notes
Receivable and Interest Revenue; Receivables Turnover Analysis
turnover ratio.
Bloom's: Understand
226) Net Accounts Receivable

turnover ratio.
Bloom's: Understand
227) Bad Debt Expense

turnover ratio.
Bloom's: Understand
129
228) Maturity Date
turnover ratio.
Bloom's: Understand
229) Days to Collect

turnover ratio.
Bloom's: Understand
230) Accounts Receivable

turnover ratio.
Bloom's: Understand
231) Allowance For Doubtful Accounts

turnover ratio.
Bloom's: Understand
130
232) Receivables Turnover
turnover ratio.
Bloom's: Understand
Answers: 225) C 226) A 227) G 228) B 229) L 230) F 231) H 232) J
131
A) The total amount of money loaned through notes that the lender has not yet collected.
B) A system used by companies to allocate their budgets over the different operating expenses.
C) The interest that a company receives during the year divided by the principal of the loan.
D) Another name for a company's total revenue, which is calculated by multiplying the quantity
sold by the average price.
E) The denominator of the receivables turnover ratio.
F) The amount of interest a lender receives during a year.
G) The costs of maintaining accounts with customers who have not made recent purchases.
H) A separate record for each accounts receivable customer.
I) Used by the percentage of credit sales method to estimate bad debts.
J) The rate at which a company pays off its liabilities or debts.
K) The numerator of the receivables turnover ratio.
L) The portion of past credit sales that have not yet been collected.
M) An accounting method which involves estimating bad debts.
N) The average level of net sales revenue the firm earns each month.
233) Net Sales Revenue

Topic: Pros and Cons of Extending Credit; Accounts Receivable and Bad Debts; Methods for
Estimating Bad Debts; Notes Receivable and Interest Revenue; Receivables Turnover Analysis
Learning Objective: 08-01 Describe the trade-offs of extending credit.; 08-02 Estimate and
report the effects of uncollectible accounts.; 08-03 Compute and report interest on notes
receivable.; 08-04 Compute and interpret the receivables turnover ratio.
Bloom's: Understand
234) Allowance Method

Bloom's: Understand
235) Notes Receivable

Bloom's: Understand
132
236) Accounts Receivable
Bloom's: Understand
237) Average Net Receivables

Bloom's: Understand
238) Subsidiary Account

Bloom's: Understand
239) Historical Percentage of Bad Debt Losses

Bloom's: Understand
133
Test Bank for Fundamentals of Financial Accounting, 6th Edition, Fred Phillips, Robert Libby
240) Annual Interest Rate

Bloom's: Understand
Answers: 233) K 234) M 235) A 236) L 237) E 238) H 239) I 240) C
134
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35) Accounts receivable:

41) Recording the estimate of bad debt expense:

= $126,400 − $103,360 + $0 = $23,040

52) A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated

56) Allowance for Doubtful Accounts is a:

Net Sales $ 1,125,000

What was the amount of write-offs during the year?

= $63,000 + $90,000 − $93,000 = $60,000

= $450,000 × 0.01 = $4,500

Cash sales $ 300,000

What is the estimate of bad debt expense?

= $1,200,000 × 0.03 = $36,000

= $150,000 × 0.04 = $6,000

= $178,000 × 0.05 = $8,900

= $500,000 × 0.03 = $15,000

Accounts Receivable $ 349,000

= $900,000 × 0.005 = $4,500

= $6,000 × 0.03 = $180

= $140,000 × 0.06 = $8,400

= $2,700 + $8,400 = $11,100

= $2,250,000 × 0.02 = $45,000

= $588,000 × 0.03 = $17,640

= $14,400 − $24,000 + $17,640 = $8,040

= $5,000 − $500 = $4,500

= $5,000 − ($500) = $5,500

= $20,000 − $6,400 = $13,600

= $95 − $45 = $50

Accounts Receivable $ 196,000

= $11,600 − $2,000 = $9,600

Accounts Receivable $ 420,000

= $420,000 − $23,200 = $396,800

= $768,000 − $608,000 = $160,000

= $160,000 − $32,000 = $128,000

Number of Days Unpaid

Cash sales $ 400,000

What is the estimate of bad debt expense?

= $12,500 − ($3,500) = $16,000

Accounts Receivable $ 98,000

= $5,800 − ($1,000) = $6,800

Adjusted balance in Allowance for Doubtful Accounts $ 3,000

= $4,000 + $8,000 + $0 − $3,000 = $9,000

Accounts Receivable $ 500,000

= $65,000 − $27,500 + $0 − $0 = $37,500

107) The entry to record a recovery causes:

= $12,656 + $100 + $3,879 − $14,348 = $2,287

= $1,000 − $50 = $950

= ($30,000 × 0.10) − ($300) = $3,000 − ($300) = $3,300

= ($10,000 × 0.10) – ($100) = $1,000 – ($100) = $1,100

= $90,000 − $1,000 = $89,000

= $90,000 − ($1,000) = $91,000

= $10,000 credit balance − debit of $9,000 + credit of $0 = $1,000 credit balance

= $10,000 credit balance − debit of $11,000 + credit of $0 = $1,000 debit balance

126) The direct write-off method for uncollectible accounts:

= $240,000 × 0.06 × 3/12 (January through March) = $3,600

Interest = Principal × Interest Rate × Time

= $300,000 × 0.06 × 6/12 = $9,000

Interest Rate = Interest ÷ (Principal × Time)

= $9,000 ÷ ($150,000 × 9/12) = 0.08 or 8%

= $20,000 × .09 × 6/12 = $900