Intermediate Accounting 1st Edition Gordon Test Bank

Intermediate Accounting 1st Edition
Gordon Test Bank

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Intermediate Accounting (Gordon)
Chapter 9 Short-Term Operating Assets: Cash and Receivables
9.1 Accounting for Cash and Cash Equivalents
1) Cash equivalents are short-term, highly liquid investments with original maturities of one year or
less.
Answer: FALSE
Diff: 1
Objective: 9.1
IFRS/GAAP: GAAP/IFRS
AACSB: Application of knowledge
2) Cash equivalents may include Treasury bills and certificates of deposit.

Answer: TRUE
Diff: 1
Objective: 9.1
3) According to U.S. GAAP, checks written in excess of the balance of a bank account are deducted from
the cash account on the balance sheet.
Answer: FALSE
Diff: 1
Objective: 9.1
IFRS/GAAP: GAAP
4) A compensating cash balance held as support of a credit agreement is not classified as cash on the
balance sheet.
Answer: TRUE
Diff: 1
Objective: 9.1
5) Accounting standards require separate disclosure for cash and cash equivalents that are restricted
from use in operations.
Answer: TRUE
Diff: 1
Objective: 9.1
1
Copyright © 2016 Pearson Education, Inc.
6) Which of the following is considered to be cash (not a cash equivalent)?
A) treasury bill
B) money market fund
C) certificate of deposit
D) money order
Answer: D
Diff: 2
Objective: 9.1
7) What is the balance sheet classification of a bank account whose fund balance is restricted for
retirement of bonds that mature in six years?
A) current asset
B) non-current asset
C) current liability
D) non-current liability
Answer: B
Diff: 2
Objective: 9.1
8) What is a compensating balance?

A) reclassification of a cash amount that is restricted from use in the current operating cycle
B) negative cash balance that occurs when a company writes a check in an amount that exceeds the
account balance
C) short-term liquid investment with original maturity of three months or less
D) minimum cash balance required to be maintained by a credit agreement
Answer: D
Diff: 2
Objective: 9.1
9) What is a cash equivalent?

account balance
Answer: C
Diff: 2
Objective: 9.1
2
10) What is a bank overdraft?
account balance
Answer: B
Diff: 2
Objective: 9.1
11) Under U.S. GAAP, bank overdraft should generally be reported as ________.
A) a decrease in the balance of Cash and Cash Equivalents
B) a decrease in other current assets
C) an increase in operating expenses
D) an increase in current liabilities
Answer: D
Diff: 2
Objective: 9.1
IFRS/GAAP: GAAP
12) Which of the following must be disclosed in the footnotes to the financial statements?
account balance
Answer: B
Diff: 2
Objective: 9.1
3
13) Grisson Enterprises provides the following information:
Currency and coins 300

First Bank - Checking 3,000
Second Bank - Checking (700)
First Bank - Savings * 20,000*
2-month CD 13,000
5 month CD 11,000
* Restricted fund for bond retirement
Following U.S. GAAP, what is the dollar amount of Cash and Cash Equivalents reported on Grisson's
balance sheet?
A) $27,300
B) $26,600
C) $16,300
D) $15,600
Answer: C
Diff: 2
Objective: 9.1
14) Bordelain Company has cash in bank of $20,000, restricted cash in a separate account of $6,000, and
a bank overdraft in an account at another bank of $2,000. Kennison should report cash of ________.
A) $18,000
B) $20,000
C) $24,000
D) $26,000
Answer: B
Diff: 2
Objective: 9.1
15) Under what circumstances may cash in a bank account be classified as a non-current asset?
Answer: When cash is legally restricted from use in the current operating cycle, the company
reclassifies the restricted amount from the regular cash line item on the balance sheet into restricted
cash. If the restriction extends beyond one year from the balance sheet date, the restricted funds account is
classified as a noncurrent asset and included in the other assets section of the balance sheet.
In addition, compensating balances are minimum cash balances that debtors are required to keep on
deposit as support for existing credit agreements that are either part of a contractual agreement or
informal. If the balance is held against long-term debt, reclassify the amount of cash held as a
noncurrent asset on the balance sheet.
Diff: 2
Objective: 9.1
4
16) How do accounting standards for bank overdrafts differ under U.S. GAAP and IFRS?
Answer: Under U.S. GAAP, firms typically report bank overdrafts as current liabilities on the balance
sheet. Under IFRS, bank overdrafts are permitted to be included in cash and cash equivalents as a
reduction if the overdraft balance is part of an integrated cash management strategy.
In addition, compensating balances are minimum cash balances that debtors are required to keep on
deposit as support for existing credit agreements that are either part of a contractual agreement or
informal. If the balance is held against long-term debt, reclassify the amount of cash held as a
noncurrent asset on the balance sheet.
Diff: 2
Objective: 9.1
5
17) Grisson Enterprises provides the following data:

Customer checks and money orders 600
First Bank - Savings *1 5,000
Second Bank - Checking (1,100)
Third Bank - Savings *2 15,000
Treasury bills – mature in 65 days 9,000
Note receivable – matures in 20 days 7,000
2-month CD 13,000
5 month CD 11,000
Notes related to these data include:
*1 A current loan obligation to First Bank requires Grisson to maintain a $1,200 compensating balance in
the Savings account
*2 Grisson’s board of directors have specified that these funds are restricted to provide for retirement of
company bonds that mature in seven years.
Required:
a. Following U.S. GAAP, what is the dollar amount of Cash and Cash Equivalents reported on Grisson's
balance sheet?
b. Describe appropriate accounting treatment for any given data that is excluded from Cash and Cash
Equivalents.
Answer:
a.
Cash and Cash Equivalents reported on Grisson's balance sheet:
Customer checks and money orders 600
First Bank - Savings 3,800
Treasury bills – mature in 65 days 9,000
2-month CD 13,000
Total Cash and Cash Equivalents 29,650
b.
Short-term Investments:
First Bank - Savings 1,200
Second Bank - Checking (1,100)
Long-term Investments
Third Bank - Savings 15,000
5 month CD 11,000
Receivables:
Note receivable – matures in 20 days 7,000
Diff: 2
Objective: 9.1
6
9.2 Accounting for Accounts Receivable: Initial Measurement
1) A trade discount reduces the list price for customers purchasing a large quantity of merchandise.
Answer: FALSE
Diff: 1
Objective: 9.2
2) Sales discounts are reductions granted to customers to encourage quick invoice payment.
Answer: TRUE
Diff: 1
Objective: 9.2
3) Under the gross method of recording accounts receivable, a customer must pay the gross amount of
the invoice.
Answer: FALSE
Diff: 1
Objective: 9.2
4) Under the net method of recording accounts receivable, a company assumes that the customer will
take the sales discount.
Answer: TRUE
Diff: 1
Objective: 9.2
5) The Sales Discounts Forfeited account is classified as a contra-revenue account.

Answer: FALSE
Diff: 1
Objective: 9.2
6) Which of the following is a reduction of a catalog price whenever a company sells to a reseller in the
same industry?
A) trade discount
B) sales discount
C) net discount
D) gross discount
Answer: A
Diff: 1
Objective: 9.2
7
7) The two acceptable approaches to recording sales discounts are ________.
A) the net method and the aging method
B) the allowance method and the aging method
C) the net method and the gross method
D) the allowance method and the gross method
Answer: C
Diff: 1
Objective: 9.2
8) If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as ________.
A) sales discounts forfeited on the income statement
B) an item of "other income and expense" on the income statement
C) an increase to sales revenue on the income statement
D) a deduction from sales revenue on the income statement
Answer: D
Diff: 1
Objective: 9.2
9) If a company employs the net method of recording accounts receivable from customers, then sales
discounts forfeited should be reported as ________.
A) sales discounts forfeited on the income statement
B) an item of "other income and expense" on the income statement
C) an increase to sales revenue on the income statement
D) a deduction from sales revenue on the income statement
Answer: C
Diff: 1
Objective: 9.2
10) A company uses the gross method to account for cash discounts offered to its customers. If payment
is made before the discount period expires, which of the following is correct?
A) Sales discounts is debited for the amount of discounts taken by customers.
B) Sales discounts is credited for the amount of discounts taken by customers.
C) Accounts receivable is debited for the gross amount of cash received from customers.
D) Accounts receivable is credited for the net amount of cash received from customers.
Answer: A
Diff: 1
Objective: 9.2
8
11) Frigart Company sold goods for $1,000 with terms 2/10, n/30. How much would Frigart receive if the
account were paid within the discount period?
A) $998
B) $980
C) $970
D) $900
Answer: B
Diff: 1
Objective: 9.2
12) Darko Inc. made a $10,000 sale on account with terms: of 1/15, n/30. If the company uses the gross
method, which of the following will be included in the journal entry to record the sale on account?
A) credit Accounts Receivable $10,000
B) debit Sales Discount $100
C) credit Sales Revenue $10,000
D) debit Cash $10,000
Answer: C
Diff: 1
Objective: 9.2
13) Eurobake Inc. made a $10,000 sale on account with terms: of 1/15, n/30. If the company uses the net
method, which of the following will be included in the journal entry to record the sale on account?
A) debit Accounts Receivable $10,000
B) debit Accounts Receivable $9,900
C) debit Sales Discount Forfeited $100
D) credit Sales Discount Forfeited $100
Answer: B
Diff: 1
Objective: 9.2
14) Fraxon Inc. made a $10,000 sale on account with terms: of 1/15, n/30. If the company uses the gross
method, which of the following will be included in the journal entry to record customer payment within
the discount period?
B) credit Sales Discount $100
D) credit Cash $9,900
Answer: A
Diff: 1
Objective: 9.2
9
15) Gappule Corp. made a $10,000 sale on account with terms: of 1/15, n/30. If the company uses the net
method, which of the following will be included in the journal entry to record customer payment within
the discount period?
B) debit Sales Discounts Forfeited $100
D) debit Cash $9,900
Answer: D
Diff: 1
Objective: 9.2
16) Why are trade discounts not recorded in the accounts like sales discounts?
Answer: Trade discounts are not recorded in the accounts because the price finally quoted is generally
an accurate statement of the fair value of the product on that date. In addition, no subsequent changes
can occur to affect this value from an accounting standpoint. With a sales discount, the buyer receives a
choice and events subsequent to the original transaction affect the journal entries that may be needed.
Diff: 2
Objective: 9.2
10
17) On June 1, Homart Wholesalers, Inc. sells 2,000 cases of facial products for $8 per case with terms of
3/15, n/30.
a. If Homart uses the gross method, what is the journal entry to record the sale on June 1?
b. If Homart uses the gross method, what is the journal entry to record customer payment on June 12?
c. If Homart uses the gross method, what is the journal entry to record customer payment on June 30?
d. If Homart uses the net method, what is the journal entry to record the sale on June 1?
e. If Homart uses the net method, what is the journal entry to record customer payment on June 12?
f. If Homart uses the net method, what is the journal entry to record customer payment on June 30
Answer:
a. Accounts Receivable 16,000
Sales 16,000
b. Cash 15,520
Sales Discounts 480
Accounts Receivable 16,000
c. Cash 16,000
d. Accounts Receivable 15,520

Sales 15,520
e. Cash 15,520
f. Cash 16,000
Sales Discounts Forfeited 480
Diff: 2
Objective: 9.2
11
9.3 Accounting for Accounts Receivable: Subsequent Measurement
1) Net realizable value (NRV) describes the estimated amount of a company's expected cost of
uncollectible accounts.
Answer: FALSE
Diff: 1
Objective: 9.3
2) The balance-sheet value of the asset Accounts Receivable represents the amount of cash the company
is expected to collect from its customers.
Answer: TRUE
Diff: 1
Objective: 9.3
3) The allowance method is used to estimate not only the net realizable value of accounts receivable but
also the current period's bad debt expense.
Answer: TRUE
Diff: 1
Objective: 9.3
4) The account Allowance for Uncollectible Accounts is classified as a contra-revenue account.

Answer: FALSE
Diff: 1
Objective: 9.3
5) Bad debt expense represents the amount of receivables written off during the period.
Answer: FALSE
Diff: 1
Objective: 9.3
6) Net realizable value is calculated as ________.

A) net receivables plus sales discounts forfeited
B) gross receivables minus sales discounts taken
C) gross receivables minus sales discounts forfeited
D) gross receivables minus allowance for uncollectible accounts
Answer: D
Diff: 1
Objective: 9.3
12
7) Bad debt expense represents the amount of ________.
A) gross sales that is written off during the current period
B) current period sales that is expected to be uncollectible
C) gross receivables that is expected to be uncollectible
D) net receivables that is written off during the current period
Answer: B
Diff: 1
Objective: 9.3
8) What type of account is Allowance for Uncollectible Accounts?

A) current liability
B) expense
C) contra asset
D) contra revenue
Answer: C
Diff: 1
Objective: 9.3
9) What is the normal journal entry for recording bad debt expense?
A) debit Bad Debt Expense, credit Allowance for Uncollectible Accounts
B) debit Allowance for Uncollectible Accounts, credit Bad Debt Expense
C) debit Bad Debt Expense, credit Accounts Receivable
D) debit Accounts Receivable, credit Bad Debt Expense
Answer: A
Diff: 1
Objective: 9.3
10) Recording bad debt expense during the period when an account is determined to be uncollectible,
which is generally not allowed under U.S. GAAP, is known as the ________.
A) allowance method
B) non-allowance method
C) direct write-off method
D) net write-off method
Answer: C
Diff: 1
Objective: 9.3
13
11) Why are the objectives of the allowance method of accounting for uncollectible receivables?
Answer: There are two key objectives related to uncollectible accounts:
1. The measurement of accounts receivable on the balance sheet at estimated net realizable value.
2. The inclusion of bad debt expense related to the uncollectible accounts on the income statement in the
appropriate period, so as to match the expenses with the revenues that caused those expenses to occur.
Diff: 2
Objective: 9.3
9.4 Uncollectible Accounts Estimates
1) The percentage-of-sales method estimates current-period bad debt expense by focusing on balance
sheet relationships.
Answer: FALSE
Diff: 1
Objective: 9.4
2) The aging-of-receivable method determines current-period bad debt expense by focusing on balance
sheet relationships.
Answer: TRUE
Diff: 1
Objective: 9.4
3) The percentage-of-sales method directly estimates the appropriate balance of the Allowance for
Uncollectible Accounts.
Answer: FALSE
Diff: 1
Objective: 9.4
4) The aging-of-receivable method focuses on matching bad debt expense to the revenues that generated
those revenues.
Answer: FALSE
Diff: 1
Objective: 9.4
5) A company writes off an account receivable when it no longer expects to collect the amount due from
the customer.
Answer: TRUE
Diff: 1
Objective: 9.4
14
6) The two acceptable approaches to estimating bad debt expense are ________.
A) the net method and the gross method
B) the aging method and the percent-of-sales method
C) the gross method and the aging method
D) the percent-of-sales method and the allowance method
Answer: B
Diff: 1
Objective: 9.4
7) Which method of estimating bad debt expense focuses on faithful representation of the net realizable
value of receivables?
A) net method
B) allowance method
C) aging method
D) percentage-of-sales method
Answer: C
Diff: 1
Objective: 9.4
8) Which method of estimating bad debt expense focuses on balance sheet relationships?
A) net method
B) allowance method
C) aging method
Answer: C
Diff: 1
Objective: 9.4
9) Which method of estimating bad debt expense focuses on matching that expense to revenues
generated from offering credit sales?
A) net method
B) allowance method
C) aging method
Answer: D
Diff: 1
Objective: 9.4
15
10) Which method of estimating bad debt expense focuses on income statement relationships?
A) net method
B) allowance method
C) aging method
Answer: D
Diff: 1
Objective: 9.4
11) Under the allowance method, the write-off of an uncollectible account ________.
A) has no effect on the allowance for uncollectible accounts
B) has no effect on net income
C) increases expenses
D) decreases total assets
Answer: B
Diff: 1
Objective: 9.4
12) Under the allowance method, the recovery of an account previously written-off ________.
A) has no effect on the allowance for uncollectible accounts
B) has no effect on total assets
C) increases net income
D) increases net realizable value of receivables
Answer: B
Diff: 1
Objective: 9.4
13) How can accounting for bad debts be used for earnings management?
A) changing the percentage of aged receivables that comprise the allowance balance
B) using the percentage-of-sales method to determine bad debt expense
C) determining which accounts to write-off
D) reversing previous write-offs
Answer: A
Diff: 1
Objective: 9.4
16
14) Lithotech, Inc had net sales in 2016 of $700,000. At December 31, 2016, before adjusting entries, the
balances in selected accounts were: accounts receivable $125,000 debit, and allowance for doubtful
accounts $1,200 credit. Lithotech estimates that 2% of its net sales will prove to be uncollectible. What is
the cash realizable value of the receivables reported on the statement of financial position at December
31, 2016?
A) $109,800
B) $111,000
C) $112,200
D) $122,500
Answer: A
Explanation: A) Accounts Receivable $125,000
Less Allowance for Doubtful Accounts* (15,200)
Net Realizable Value $109,800
* $700,000 × .02 = $14,000 + $1,200 credit balance = $15,200
Diff: 1
Objective: 9.4
AACSB: Analytical thinking
15) Lithotech, Inc had net sales in 2016 of $700,000. At December 31, 2016, before adjusting entries, the
balances in selected accounts were: accounts receivable $125,000 debit, and allowance for doubtful
accounts $1,200 debit. Lithotech estimates that 2% of its net sales will prove to be uncollectible. What is
the cash realizable value of the receivables reported on the statement of financial position at December
31, 2016?
A) $109,800
B) $111,000
C) $112,200
D) $122,500
Answer: B
Diff: 1
Objective: 9.4
16) Marston Company has outstanding accounts receivable totaling €6.5 million as of December 31 and
sales on credit during the year of €24 million. There is also a credit balance of €12,000 in the allowance
for doubtful accounts. After aging its receivables, the company estimates that 8% of its total outstanding
receivables will be uncollectible. What will be the amount of bad debt expense recognized for the year?
A) €532,000
B) €520,000
C) €512,000
D) €508,000
Answer: D
Diff: 1
Objective: 9.4
17
17) Marston Company has outstanding accounts receivable totaling €6.5 million as of December 31 and
sales on credit during the year of €24 million. There is also a credit balance of €12,000 in the allowance
for doubtful accounts. After aging its receivables, the company estimates that 2% of its credit sales will
be uncollectible. What will be the balance for the Allowance for Uncollectible Accounts after the year-
end adjustment is made to record bad debt expense?
A) €492,000
B) €488,000
C) €480,000
D) €468,000
Answer: A
Diff: 1
Objective: 9.4
18) Prior to adjustments, Willett Company's account balances at December 31, 2017, for Accounts
Receivable and the related Allowance for Uncollectible Accounts were $2,400,000 and $120,000,
respectively. An aging of accounts receivable indicated that $212,000 of the December 31, 2017,
receivables may be uncollectible. The net realizable value of accounts receivable at December 31, 2017,
was ________.
A) $2,308,000
B) $2,280,000
C) $2,188,000
D) $2,068,000
Answer: C
Diff: 1
Objective: 9.4
19) During the year, Liptom Company made an entry to write off a $4,000 uncollectible account. Before
this entry was made, the balance in accounts receivable was $60,000 and the balance in the allowance
account was $4,500 (normal balance). What is the net realizable value of accounts receivable after the
write-off entry?
A) $60,000
B) $59,500
C) $55,500
D) $51,500
Answer: C
Diff: 2
Objective: 9.4
18
20) Teeter Company began 2017 with accounts receivable of $400,000 and an allowance for uncollectible
accounts of $20,000 (credit balance). Bad debt expense for the year was $33,000 and the ending balance
in the allowance for uncollectible accounts account was $15,000. What was the amount of accounts
receivable written off during the year?
A) $5,000
B) $38,000
C) $438,000
D) $405,000
Answer: B
Diff: 2
Objective: 9.4
21) What factors are considered when determining either the percentage of sales or the percentage of
aged receivables used in determining the adjustment for bad debt expense?
Answer: Estimates for uncollectible accounts are based on a firm's prior bad debt experience with
consideration given to changes in credit policy and forecasted general or industry business conditions.
Diff: 1
Objective: 9.4
22) On January 1, 2016, Willett Company's account balances for Accounts Receivable and the related
Allowance for Uncollectible Accounts were $3,600,000 and $90,000, respectively. During the year, sales
revenue totaled $40 million, of which 70% were credit sales and the remainder were cash sales.
Altogether, cash collections from all customers amounted to $30 million. Also, write-offs of accounts
deemed to be uncollectible totaled $250,000. At the end of the year, an analysis of aged accounts
receivable indicated that 2% of total gross receivables may be uncollectible.
Required:
Determine the amount of bad debt expense for the year and net realizable value of receivables at the
end of the year.
Answer: Summary of activity affecting the Accounts Receivable account:
Beginning balance (January 1) $3,600,000

Total sales 40,000,000
Total collections (30,000,000)
Write-offs (250,000)
Gross receivables (December 31) $13,350,000
Diff: 2
Objective: 9.4
19
9.5 Financing with Accounts Receivable
1) Pledged receivables are collateral for a financing arrangement.

Answer: TRUE
Diff: 1
Objective: 9.5
2) Pledged receivables are reported as current assets while assigned receivables are reported as non-
current assets.
Answer: FALSE
Diff: 1
Objective: 9.5
3) Factored receivables have been sold to another company.

Answer: TRUE
Diff: 1
Objective: 9.5
4) Factored receivables sold without recourse are classified as a liability.

Answer: FALSE
Diff: 1
Objective: 9.5
5) To be recognized as a sale under IFRS, companies must give up effective control of factored
receivables.
Answer: FALSE
Diff: 1
Objective: 9.5
IFRS/GAAP: IFRS
6) To be recognized as a sale under IFRS, factored receivables do not have to be isolated.

Answer: TRUE
Diff: 1
Objective: 9.5
IFRS/GAAP: IFRS
20
7) Securitization of receivables involves taking many separate receivables and bundling them into a
single investment pool.
Answer: TRUE
Diff: 1
Objective: 9.5
IFRS/GAAP: IFRS
8) Securitization of receivables eliminates the risk of non-collection.

Answer: FALSE
Diff: 1
Objective: 9.5
IFRS/GAAP: IFRS
9) In which of the following situations are a company's receivables sold to another entity?
A) recoursing
B) assigning
C) factoring
D) pledging
Answer: C
Diff: 1
Objective: 9.5
10) In which of the following situations are a company's receivables held as collateral for a financing
situation?
A) collateralization
B) securitization
C) factoring
D) pledging
Answer: D
Diff: 1
Objective: 9.5
11) In which of the following transactions is a "hold back" feature applicable?

A) collateralization
B) securitization
C) factoring
D) pledging
Answer: C
Diff: 1
Objective: 9.5
21
12) Which of the following is true when accounts receivable are factored without recourse?
A) The receivables are used as collateral for a promissory note issued to the factor by the owner of the
receivables.
B) The financing cost (interest expense) should be recognized ratably over the collection period of the
receivables.
C) The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.
D) The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the
substance of the transaction.
Answer: C
Diff: 1
Objective: 9.5
13) Which of the following is not a requirement for recognizing that a transaction can be recorded as a
sale of receivables?
A) The factor discounts the amount remitted to the seller.
B) The selling company does not maintain effective control over the receivables.
C) The factor has the ability to pledge the receivables.
D) The receivables are isolated from the selling company.
Answer: A
Diff: 1
Objective: 9.5
14) Under U.S. GAAP, which of the following would be included in the journal entry to record the sale
of receivables to a factor without recourse?
A) debit Accounts Receivable
B) debit Loss on Sale of Receivables
C) credit Cash
D) credit Receivable from Factor
Answer: B
Diff: 1
Objective: 9.5
IFRS/GAAP: GAAP
15) Gant Company factored its receivables with recourse to Rowlin Bank. Gant received cash as a result
of this transaction. This transaction is best described as a ________.
A) loan from Rowlin collateralized by Gant's accounts receivable
B) loan from Rowlin to be repaid by the proceeds from Gant's accounts receivable
C) sale of Gant's receivables to Rowlin with the risk of uncollectible accounts retained by Gant
D) sale of Gant's receivables to Rowlin with the risk of uncollectible accounts transferred to Rowlin
Answer: C
Diff: 1
Objective: 9.5
IFRS/GAAP: GAAP
22
16) Danzig Inc. factors $2,000,000 of its accounts receivables without recourse for a finance charge of 5%.
The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. What would be recorded by Danzig as a gain (loss) on the transfer of receivables?
A) gain of $100,000
B) loss of $100,000
C) loss of $200,000
D) loss of $300,000
Answer: B
Diff: 1
Objective: 9.5
IFRS/GAAP: GAAP
17) Ming Company assigns $2,000,000 of its accounts receivables for a finance charge of 4%. The finance
company retains an amount equal to 8% of the accounts receivable for possible adjustments. What
amount of cash would Ming receive as a result of this initial transaction?
A) $1,920,000
B) $1,840,000
C) $1,760,000
D) $1,540,000
Answer: C
Diff: 1
Objective: 9.5
IFRS/GAAP: GAAP
18) Popper Enterprises factors $800,000 of its accounts receivables to Third Bank with recourse for a
finance charge of 5%. The finance company retains an amount equal to 7% of the accounts receivable for
possible adjustments. Third Bank will return the hold back to Popper when it collects the receivables. In
addition, the fair value of the recourse liability is estimated at $20,000. What amount of cash would
Popper receive as a result of this transaction?
A) $764,000
B) $724,000
C) $704,000
D) $684,000
Answer: C
Diff: 1
Objective: 9.5
IFRS/GAAP: GAAP
23
19) Finney Fabrics frequently factors its accounts receivable. On March 15, 2016, Finney sold without
recourse $400,000 of these receivables to a factor. The factoring agreement requires Finney to be
responsible for any sales returns and cash discounts taken by customers upon payment of the factored
receivables. The factor assessed a finance charge of 5% on the gross amount of the factored receivables
and held back an additional 4% to cover sales discounts, returns, and allowances. During 2016,
customers returned merchandise associated with those receivables with a gross value of $5,000. The
factor collected the remaining amount of the factored receivables, minus the 2% discount on 94% of the
collected receivables. On June 10, the factor returned the balance owed to Finney.
Prepare Finney's journal entry to record

a. the sale of the receivables on March 15, 2016;
b. the receipt of cash on June 10, 2016.
Answer:
a. Cash 364,000
Receivable from Factor ($400,000 × 4%) 16,000
Loss on Sale of Receivables ($400,000 × 5%) 20,000
To record credit sales during the year
b. Total hold back $16,000

Customer returns (3,000)
Sales discounts taken * (7,426)
Hold-back returned $5,574
* ($400,000 - 5,000) × 94% × 2% = $7,426
Cash 5,574
Sales Returns 3,000
Sales Discounts 7,426
Receivable from Factor ($400,000 × 4%) 16,000
Diff: 1
Objective: 9.5
20) When does a company record the transfer of accounts receivable as a sale? As a secured borrowing
(a liability)?
Answer: A company (transferor) records the transfer of accounts receivable to a transferee as a sale
when all of the following conditions are met:
(1) The receivables have been isolated from the selling company.
(2) The factor has the ability to pledge or exchange the receivables.
(3) The transferor does not maintain effective control over the receivables.
If the conditions for a sale are not met, the company records the proceeds from the transfer of accounts
receivable as a secured borrowing with the receivables serving as collateral as if the company pledged
the receivables.
Diff: 1
Objective: 9.5
24
21) What is securitization of receivables? What are advantages and disadvantages of securitization?
Answer: Securitization refers to a financing technique that involves taking many separate, and
oftentimes diverse, financial assets and combining them into a single pool or bundle. Investors then
purchase interests in the pool of assets rather than buying an individual asset or group of assets.
Securitization allows a company to engage in a collateralized borrowing arrangement with a great

number of lenders by issuing debt obligations or equity shares, rather than attempting to sell each asset.
Securitization also allows a company to obtain financing at a lower cost of borrowing. The pooling of
many individual assets diversifies the default risk from each individual asset, thereby enhancing an
investor's ability to predict the investment's future cash flows, lowering risk, and thereby lowering the
required rate of return.
Securitization can also have drawbacks. Potential investors do not always have detailed knowledge on
the original borrowers or their risk of default. Therefore, a company may have to offer the securities at a
lower price. Even when a company can securitize its receivables, there is still the risk of noncollection.
Diff: 1
Objective: 9.5
9.6 Accounting for Short-Term Notes Receivable
1) Notes receivable are classified as current or noncurrent on the balance sheet based on the expected
collection date.
Answer: TRUE
Diff: 1
Objective: 9.6
2) The market rate is the interest rate that the holder of the note will receive.
Answer: FALSE
Diff: 1
Objective: 9.6
3) The holder of a non-interest-bearing note does not recognize any interest revenue over the term of the
note.
Answer: FALSE
Diff: 1
Objective: 9.6
25
4) When the stated rate is equal to the market rate, the present value of future cash flows from a note is
equal to the face value of the note.
Answer: TRUE
Diff: 1
Objective: 9.6
5) The Note Receivable account is always debited for the face value of a note.
Answer: TRUE
Diff: 1
Objective: 9.6
6) Discounting a note receivable is similar to pledging an account receivable.

Answer: FALSE
Diff: 1
Objective: 9.6
7) When the market interest rate on a short-term note receivable is greater than the stated rate, ________.
A) the present value of the note is greater than its stated value
B) the present value of the note is less than its stated value
C) the stated value of the note is greater than its face value
D) the stated value of the note is less than its face value
Answer: B
Diff: 1
Objective: 9.6
8) Discounting a note receivable is most similar to ________.

A) factoring an account receivable
B) pledging an account receivable
C) securitizing an account receivable
D) assigning an account receivable
Answer: A
Diff: 1
Objective: 9.6
26
9) Electroid borrowed $85,000 cash from TechCo by signing a promissory note. TechCo's entry to
record the transaction should include a ________.
A) debit Accounts Receivable for $85,000
B) credit Accounts Receivable for $85,000
C) debit Note Receivable for $85,000
D) credit Note Receivable for $85,000
Answer: C
Diff: 1
Objective: 9.6
10) What type of account is Discount on Note Receivable?

A) revenue
B) contra-revenue
C) asset
D) contra-asset
Answer: D
Diff: 1
Objective: 9.6
11) Wull Associates sold a piece of equipment to Coral Company on April 1, 2016, for $800,000. Wull
agreed to accept a 9-month note with 8% interest (current market rate) due on its maturity date,
December 31, 2016. Wull's journal entry to record the receipt of the note on April 1, 2016, will include a
________.
A) credit to Cash for $800,000
B) debit Cash for $800,000
C) credit Note Receivable for $800,000
D) debit Note Receivable for $800,000
Answer: D
Diff: 1
Objective: 9.6
IFRS/GAAP: GAAP
12) On May 1, 2016, Fitz installed a $475,000 sound system for International Arena. Fitz agreed to accept a
$500,000 six-month, noninterest bearing note due on December 1, 2016. Fitz prepares financial statements
at the end of every calendar year. Fitz's journal entry to record the collection of the note plus accrued
interest on December 1, 2016, will include a ________.
A) credit Interest Revenue for $475,000
B) debit Interest Revenue for $25,000
C) credit Note Receivable for $500,000
D) credit Note Receivable for $475,000
Answer: C
Diff: 1
Objective: 9.6
IFRS/GAAP: GAAP
27
13) On August 1, 2016, TTek installed a $560,000 computer system for Skybox.com. TTek agreed to
accept a $600,000 nine-month, noninterest bearing note due on April 30, 2017. TTek prepares financial
statements at the end of every calendar year.
a. Prepare TTek 's journal entry to record the receipt of the note on August 1, 2016.
b. Prepare the related adjusting entry on August 1, 2016.
c. Prepare TTek 's journal entry to record the receipt of the payment on April 30, 2017.
Answer:
a. Note Receivable 600,000
Discount on Note Receivable 40,000
Sales Revenue 560,000
b. Discount on Note Receivable 30,000

Interest Revenue 30,000
c. Cash 600,000
Note Receivable 600,000
Diff: 1
Objective: 9.6
28
14) On December 31, 2016, Perly Company performed environmental consulting services for Brocade
Corporation. Brocade was short of cash, so Perly agreed to accept a $300,000 noninterest-bearing note
due on December 31, 2018. Brocade is somewhat of a credit risk and Perly determines that 10% is an
appropriate market rate.
a. Prepare the journal entry to record the receipt of the note on December 31, 2016.
b. Prepare the adjusting entry on December 31, 2017.
c. Prepare the journal entry to record the receipt of the payment on December 31, 2018.
Answer:
a. Note Receivable 300,000
Sales Revenue 247,935
Computation of present value of note: PV of $300,000 due in 2 years at 10%
$300,000 × .82645 = $247,935
b. Discount on Note Receivable 24,793

Computation of interest revenue: 10% of 247,935 = $24,793
c. Cash 300,000
Note Receivable 300,000
Computation of interest revenue: 10% of (247,935 + 24,793) = $27,272
Diff: 1
Objective: 9.6
15) How does a note receivable differ from an account receivable?

Answer: A note receivable is a written agreement to receive a certain sum of money on a specific date.
Notes receivable have two attributes that accounts receivable do not have: (1) They are negotiable
instruments, which means that they are legally and readily transferable among parties and may be used
to satisfy debts by the holders of these instruments, and (2) they usually involve interest.
Diff: 1
Objective: 9.6
29
16) What is a non-interest-bearing note? How does accounting for a short-term non-interest-bearing
note differ from a short-term interest-bearing note?
Answer: A non-interest-bearing note is a note that does not specify an interest rate. For a short-term
non-interest-bearing note, the maturity value is listed as the face value, and includes both principal and
implicit interest. Therefore, the note is initially recorded at its maturity value, the total interest to be
earned over the life of the note is recorded as Discount on Note Receivable, and Sales is credited for the
difference. If the fiscal period ends prior to collection of the note, an adjusting entry must be made to
reduce the Discount on Note Receivable and increase Interest Income.
In contrast, for a short-term interest-bearing note, the Notes Receivable account is recorded at the face
value of the note. After issuance, interest income is recorded as earned and is determined by
multiplying the principal by the stated interest rate for the time the note has been outstanding.
Diff: 1
Objective: 9.6
9.7 Disclosure for Accounts Receivable and Notes Receivable
1) Companies that use the aging-of-receivables method must disclose the percentage of uncollectible
amounts for each age categories.
Answer: FALSE
Diff: 1
Objective: 9.7
2) The operating cycle is the length of time from when a product is sold until the cash is collected.
Answer: FALSE
Diff: 1
Objective: 9.7
3) The operating cycle is the length of time from when a product is sold until the cash is collected.
Answer: FALSE
Diff: 1
Objective: 9.7
4) The inventory turnover ratio is equal to 365 divided by the number of days of inventory on hand.
Answer: TRUE
Diff: 1
Objective: 9.7
30
5) The cash operating cycle is equal to (1) days accounts payable outstanding minus (2) days sales
outstanding minus (3) days inventory on hand.
Answer: TRUE
Diff: 1
Objective: 9.7
6) Which of the following statements is true?

A) Companies typically report gross receivables on the balance sheet and disclose net receivables and
the net allowance for uncollectible accounts in the notes to the financial statements.
B) Companies typically report gross receivables and the net allowance for uncollectible accounts on the
balance sheet and disclose net receivables in the notes to the financial statements.
C) Companies typically report net receivables on the balance sheet and disclose gross receivables and
the net allowance for uncollectible accounts in the notes to the financial statements.
D) Companies typically report net receivables and the net allowance for uncollectible accounts on the
balance sheet and disclose gross receivables in the notes to the financial statements.
Answer: C
Diff: 1
Objective: 9.7
7) The length of time it takes a company to generate cash from its operations is called the ________.
A) operating cycle
B) cash cycle
C) financing cycle
D) receivable cycle
Answer: A
Diff: 1
Objective: 9.7
8) Which ratio indicates the effectiveness of a company's credit extension policy?

A) inventory turnover
B) accounts payable turnover
C) days sales outstanding
D) days inventory on hand
Answer: C
Diff: 1
Objective: 9.7
31
9) Accounts receivable turnover measures ________.
A) how long it takes to sell merchandise
B) the relationship between credit sales and cash sales
C) the length of time it takes a company to generate cash from its operations
D) how many times average receivables are collected during the year
Answer: D
Diff: 1
Objective: 9.7
10) The cash operating cycle can be computed as ________.

A) days accounts payable outstanding + days sales outstanding + days inventory on hand
B) days accounts payable outstanding - days sales outstanding - days inventory on hand
C) days accounts payable outstanding + days sales outstanding - days inventory on hand
D) days accounts payable outstanding - days sales outstanding + days inventory on hand
Answer: B
Diff: 1
Objective: 9.7
11) Which ratio indicates the effectiveness of a company's credit extension policy?
A) inventory turnover
B) accounts payable turnover
C) days sales outstanding
D) days inventory on hand
Answer: C
Diff: 1
Objective: 9.7
32
The following company information is available:
Average accounts receivable $200,000

Average inventories 150,000
Average accounts payable 120,000
Net sales 3,000,000
Cost of goods sold 1,200,000
Purchases 1,140,000
12) What is the company's accounts receivable turnover ratio?

A) 50.0
B) 24.3
C) 15.0
D) 6.0
Answer: C
Diff: 1
Objective: 9.7
13) What is the company's days sales outstanding?

A) 24.3
B) 18.3
C) 15.0
D) 14.6
Answer: A
Diff: 1
Objective: 9.7
14) What is the company's inventory turnover ratio?

A) 1.3
B) 8.0
C) 20.0
D) 45.6
Answer: B
Diff: 1
Objective: 9.7
33
15) What is the company's accounts payable turnover ratio?
A) 36.5
B) 25.0
C) 14.6
D) 10.0
Answer: D
Diff: 1
Objective: 9.7
16) What is the company's operating cycle?

A) 24 days
B) 46 days
C) 70 days
D) 365 days
Answer: C
Explanation: C) To determine the Operating Cycle, you first must calculate the following ratios:
A/R Turnover Ratio = = = 15
Days Sales Outstanding = = = 24.33
Inventory Turnover Ratio = = =8
Days Inventory on Hand = = = 45.63
Days Sales O/S 24.33

+ Days Inv. On Hand = + 45.63
Operating Cycle 69.96
Diff: 1
Objective: 9.7
34
The following company information is available:
Days sales outstanding 25

Days sales in inventory 15
Days accounts payable outstanding 35
17) How long is the company's operating cycle?

A) 75 days
B) 60 days
C) 40 days
D) 10 days
Answer: C
Diff: 1
Objective: 9.7
18) How long is the company's cash operating cycle?

A) -5 days
B) +5 days
C) -15 days
D) +40 days
Answer: A
Diff: 1
Objective: 9.7
35
19) Complete the following disclosures of trade accounts receivables from Cheris Corp.'s notes to the
financial statements.
Trade Receivables
Year (Ending 12/31) 2016 2015
Trade Receivables $4,500 e
Allowance a 165
Net Receivables b $3,705
Allowance for Uncollectible Accounts

January 1 c $145
Bad Debt Expense 425 f
Write-off d 290
December 31 $180 g
Answer: Trade Receivables
Year (Ending 12/31) 2015 2016
Trade Receivables $4,500 $3,870
Allowance 180 165
Net Receivables $4,320 $3,705
Allowance for Uncollectible Accounts

January 1 65 $145
Bad Debt Expense 425 310
Write-off 410 290
December 31 $180 165
Diff: 1
Objective: 9.7
20) What disclosures are required concerning accounts receivable?

Answer: The disclosures for receivables include accounting policies and the methodology used to
estimate the allowance for uncollectible accounts, such as a description of the elements that influence
management's judgment and credit risk. Companies also provide a description of the policy for writing
off uncollectible receivables.
Diff: 1
Objective: 9.7
36
21) Vladulac Corporation began 2017 with accounts receivable of $180,000 and an allowance for
uncollectible accounts of $13,000 (credit balance). Bad debt expense for the year was $25,000 and the
ending balance in the allowance for uncollectible accounts account was $16,000. The accounts
receivable turnover ratio for 2017 was 10.0. NOTE: This ratio was calculated using the average of gross
accounts receivable in the denominator (that is, [$180,000 + year-end accounts receivable] divided by 2).
The following additional information is also available:

Inventory turnover ratio 8.0
Average inventory $150,000
Gross profit ratio 40
Required:
a. What was the amount of accounts receivable written off during the year?
b. What was the amount of cash collected from customers during the year? Assume that all sales are
made on a credit basis and that there were no collections of previously written off receivables or sales
returns.
Answer:
a.
$13,000 (beginning allowance) + 25,000 (bad debt expense) - 16,000 (ending allowance) = $22,000 in write
offs
b.
CGS = 8.0 × $150,000 = $1,200,000Sales equals $1,200,000 / (1 - 0.40) = $2,000,000$2,000,000 / 10 = $200,000
= average receivablesTherefore, since beginning receivables are $180,000, ending receivables must be
$220,000$180,000 (beginning balance) + 2,000,000 (sales) - 22,000 (write offs) - 220,000 (ending balance) =
$1,958,000 (cash collections)
Diff: 3
Objective: 9.7
37

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Intermediate Accounting 1st Edition Gordon Test Bank

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Intermediate Accounting 1st Edition

Gordon Test Bank

9.1 Accounting for Cash and Cash Equivalents

2) Cash equivalents may include Treasury bills and certificates of deposit.

8) What is a compensating balance?

9) What is a cash equivalent?

Currency and coins 300

Currency and coins 250

Notes related to these data include:

5) The Sales Discounts Forfeited account is classified as a contra-revenue account.

d. Accounts Receivable 15,520

4) The account Allowance for Uncollectible Accounts is classified as a contra-revenue account.

6) Net realizable value is calculated as ________.

8) What type of account is Allowance for Uncollectible Accounts?

9.4 Uncollectible Accounts Estimates

Beginning balance (January 1) $3,600,000

1) Pledged receivables are collateral for a financing arrangement.

3) Factored receivables have been sold to another company.

4) Factored receivables sold without recourse are classified as a liability.

6) To be recognized as a sale under IFRS, factored receivables do not have to be isolated.

8) Securitization of receivables eliminates the risk of non-collection.

11) In which of the following transactions is a "hold back" feature applicable?

Prepare Finney's journal entry to record

b. Total hold back $16,000

* ($400,000 - 5,000) × 94% × 2% = $7,426

Securitization allows a company to engage in a collateralized borrowing arrangement with a great

9.6 Accounting for Short-Term Notes Receivable

6) Discounting a note receivable is similar to pledging an account receivable.

8) Discounting a note receivable is most similar to ________.

10) What type of account is Discount on Note Receivable?

b. Discount on Note Receivable 30,000

b. Discount on Note Receivable 24,793

15) How does a note receivable differ from an account receivable?

9.7 Disclosure for Accounts Receivable and Notes Receivable

6) Which of the following statements is true?

8) Which ratio indicates the effectiveness of a company's credit extension policy?

10) The cash operating cycle can be computed as ________.

Average accounts receivable $200,000

12) What is the company's accounts receivable turnover ratio?

13) What is the company's days sales outstanding?

14) What is the company's inventory turnover ratio?

16) What is the company's operating cycle?

A/R Turnover Ratio = = = 15

Days Sales Outstanding = = = 24.33

Inventory Turnover Ratio = = =8

Days Inventory on Hand = = = 45.63

Days Sales O/S 24.33

Days sales outstanding 25

17) How long is the company's operating cycle?

18) How long is the company's cash operating cycle?

Allowance for Uncollectible Accounts

Allowance for Uncollectible Accounts

20) What disclosures are required concerning accounts receivable?

The following additional information is also available:

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