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Intermediate Accounting, Vol 1, 4e (Lo/Fisher)
Chapter 5 Cash and Receivables
Learning Objective 1
1) What is NOT included in "cash and cash equivalents"?

A) Canadian cash on hand.
B) Demand deposits.
C) Six-month term deposits.
D) Three-month Treasury bills.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash
equivalents.
2) Define "cash" and explain how funds that are subject tor restrictions should be accounted for in the
accounting records.
Answer: Cash refers to cash on hand and demand deposits; "cash" refers to legal tender: bills and coins
issued by the Bank of Canada (or a foreign government/central bank in the case of foreign currency).
Cash represents funds that are readily accessible to settle debts. Any funds that are subject to restrictions
should be separately reported outside of current assets.
Diff: 1 Type: ES
Skill: Conceptual
equivalents.
3) Explain why the definition of cash and cash equivalents is important for the financial statements. How
would a transfer from one bank account to another be reported in the cash flow statement?
Answer: The definition impacts the cash flow statement. Only changes in cash and cash equivalents
result in cash flows; changes in the composition of cash and cash equivalents does not constitute a cash
flow.
Diff: 2 Type: ES
Skill: Conceptual
equivalents.
1
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4) Which statement about "cash and cash equivalents" is correct?
A) The definition for "cash and cash equivalents" used on the balance sheet differs from the definition for
"cash and cash equivalents" used on the cash flow statement.
B) A change in the composition of "cash and cash equivalents" is considered an operating activity on the
cash flow statement.
C) A change in the composition of "cash and cash equivalents" is not considered a cash flow for purposes
of the cash flow statement.
D) "Cash and cash equivalents" are short term liquid investments that can be converted to cash within a
short time frame.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
equivalents.
5) Which of the following is NOT a reason for preparing a bank reconciliation?

A) It explains differences between cash in the general ledger and cash on the bank statement.
B) It is necessary in order to prevent fraud committed by employees.
C) It is helpful in identifying any errors made by the bank.
D) It is helpful in identifying any bookkeeping errors made in the general ledger.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
equivalents.
6) Which statement is correct about the bank reconciliation?

A) It compares cash in the company's records with those of the bank.
B) It does not identify accounting errors made by the bank.
C) It interferes with other internal controls over cash.
D) It compares cash in the general ledger with the monthly budgets.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
equivalents.
7) What is included in "cash and cash equivalents"?

A) Petty cash.
B) Six-month term deposits in Canadian dollars.
C) Guaranteed Investment Certificate maturing in 100 days.
D) Four-month term deposit in U.S. dollars.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
equivalents.
2
A) Guaranteed Investment Certificate maturing in 181 days.
B) Four-month term deposits.
C) U.S. cash on hand.
D) Guaranteed Investment Certificate maturing in 125 days.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
equivalents.

A) Short term, liquid investments convertible into known amounts of cash.
B) Short term, highly liquid investment convertible into known amounts of cash.
C) Cash restricted for plant expansion.
D) Sinking funds.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
equivalents.
10) What dollar amount will be included in "cash and cash equivalents"?
Treasury bills maturing in 30 days $12,000

Investment in a money market fund 8,000
Cash on hand 1,000
Postage stamps 1,000
A) $9,000
B) $12,000
C) $21,000
D) $22,000
Answer: C
Explanation: C) 12,000 + 8,000 + 1,000 = 21,000
Diff: 2 Type: MC
Skill: Computational
equivalents.
3

Cash restricted for plant expansion 1,000
Three-month term deposits 2,000
A) $9,000
B) $11,000
C) $21,000
D) $22,000
Answer: C
Explanation: C) 11,000 + 8,000 + 2,000 = 21,000
Diff: 2 Type: MC
equivalents.
Investment in shares of a public company $11,000

Cash restricted for plant expansion 1,000
Three-month term deposits 2,000
A) $8,000
B) $10,000
C) $19,000
D) $21,000
Answer: B
Explanation: B) 8,000 + 2,000 = 10,000
Diff: 2 Type: MC
equivalents.
13) What criterion is NOT required for a "cash equivalent"?

A) Convertibility into cash.
B) Long term investment.
C) Insignificant risk of change in value.
D) Highly liquid investment.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
equivalents.
4
14) What amount will be included in "cash and cash equivalents"?
Investment in shares of a public company $12,000

Bonds of a publicly traded company 10,000
Two-month U.S. dollar term deposits 24,000
A) $18,000
B) $22,000
C) $30,000
D) $42,000
Answer: D
Explanation: D) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
equivalents.

U.S. dollar bonds of a publicly traded company 10,000
Treasury bills maturing in 30 days 24,000
A) $36,000
B) $42,000
C) $54,000
D) $64,000
Answer: B
Explanation: B) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
equivalents.
5

U.S. dollar chequing account 18,000
Shares of a U.S. publicly traded company 10,000
A) $36,000
B) $42,000
C) $54,000
D) $64,000
Answer: B
Explanation: B) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
equivalents.

Euro-denominated savings account 18,000
U.S. dollar chequing account 10,000
A) $36,000
B) $42,000
C) $52,000
D) $64,000
Answer: C
Explanation: C) 24,000 + 18,000 + 10,000 = 52,000
Diff: 2 Type: MC
equivalents.
6

Six-month U.S. term deposit 12,000
U.S. dollars on hand 18,000
Bonds of a publicly traded U.S. company 10,000
A) $30,000
B) $36,000
C) $40,000
D) $42,000
Answer: D
Explanation: D) 24,000 + 18,000 = 42,000
Diff: 2 Type: MC
equivalents.

Four-month U.S. term deposit 18,000
U.S. treasury bill maturing in 120 days 24,000
A) $0
B) $12,000
C) $36,000
D) $64,000
Answer: B
Diff: 2 Type: MC
equivalents.
7
Euro treasury bills maturing in 140 days $12,000

U.S. dollars on hand 24,000
A) $12,000
B) $18,000
C) $24,000
D) $54,000
Answer: C
Diff: 2 Type: MC
equivalents.

Six-month U.S. term deposit 18,000
A) $0
B) $12,000
C) $36,000
D) $64,000
Answer: A
Diff: 2 Type: MC
equivalents.
8
22) Which statement about "cash and cash equivalents" is correct?
A) The definition for "cash and cash equivalents" used on the balance sheet differs from the definition for
"cash and cash equivalents" used on the cash flow statement.
B) A change in the composition of "cash and cash equivalents" is considered a financing activity on the
cash flow statement.
C) A change in the composition of "cash and cash equivalents" is considered a cash flow for purposes of
the cash flow statement.
D) The definition for "cash and cash equivalents" used on the balance sheet is the same as the definition
for "cash and cash equivalents" used on the cash flow statement.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
equivalents.
23) Explain why a bank reconciliation is necessary.

Answer:
• A bank reconciliation ties together the amount of cash according to a company's records and the
amount of cash according to the bank that holds its funds.
• The reasons for preparing a bank reconciliation are threefold: to understand why the two sets of
records differ, to identify any bookkeeping errors by either entity; and to contribute to the internal control
over cash.
• From a cash perspective, there will be timing differences between transactions being recorded in the
general ledger for accounting purposes and when those transactions actually clear through the bank.
Bank reconciliations use records from the enterprise and its bank to determine the corrected cash balance
that should be used for financial reporting purposes.
Diff: 1 Type: ES
Skill: Conceptual
equivalents.
24) Identify the two criteria for classifying an investment as a cash equivalent.
Answer: Cash equivalents must be (i) readily convertible to known amounts of cash (convertibility), and
(ii) have insignificant risks of changes in value (substantially risk-free).
Diff: 1 Type: ES
Skill: Conceptual
equivalents.
9
25) Identify if the following investments meet the requirements to be classified as cash and cash
equivalents.
Cash and Readily

cash convertible Risk of change
equivalents to cash? in cash value?
(Yes/No) (Yes/No) (High/Med/Low)
a. Chequing account in U.S. dollars.
b. Investment in a mutual fund that
invests in common shares of public
corporations.
c. Investment in long-term government
bonds.
d. Term deposit maturing 100 days after
the year-end
e. Cash in a sinking fund account for a
future re-purchase of common shares.
Answer:
Cash and Readily
cash convertible Risk of change
equivalents to cash? in cash value?
(Yes/No) (Yes/No) (High/Med/Low)
a. Chequing account in U.S. dollars. Yes Yes Low
b. Investment in a mutual fund that No Yes High
invests in common shares of public
corporations.
c. Investment in long-term government No Yes Moderate
bonds.
d. Term deposit maturing 100 days after No No Low
the year-end
e. Cash in a sinking fund account for a No No None
future re-purchase of common shares.
Diff: 1 Type: ES
Skill: Conceptual
equivalents.
10
26) Identify whether each of the following items should be classified in "cash and cash equivalents" on the
balance sheet. Assume that the reporting entity has operations in Canada.
Cash and Readily Risk of

cash convertible change in
equivalents to cash? cash value?
a. Negative balance in a chequing account
(overdraft).
b. Investment in Treasury bills maturing
70 days after the year-end.
c. 100 ounces of silver.
d. Chequing account in Canadian dollars.
e. Investment in U.S. government
Treasury bills maturing 80 days after
the yearend.
Answer:
Cash and Readily Risk of
cash convertible change in
equivalents to cash? cash value?
a. Negative balance in a chequing account Yes Yes None
(overdraft).
b. Investment in Treasury bills maturing Yes Yes Low
70 days after the year-end.
c. 100 ounces of silver. No Yes High
d. Chequing account in Canadian dollars. Yes/No Yes Depends
e. Investment in U.S. government Yes/No Yes Depends
Treasury bills maturing 80 days after
the yearend.
Diff: 2 Type: ES
Skill: Conceptual
equivalents.
11
27) During May 2021, ABC Company wrote a cheque (#345) to a supplier as a payment on its account.
The cheque was written for the correct amount of $16,900. The May bank statement listed the cheque at
$61,900 and an ending account balance of $(50,500) in overdraft.
Required:
a. Given the above information, prepare the portion of the May cash reconciliation that reconciles the
bank balance to the cash balance to be used in the financial statements.
b. Where on the balance sheet should the cash (or overdraft) balance be shown?
Answer:
a.
ABC Company
Bank Reconciliation
May 31,2018
Balance per bank statement ($50,500)
Cheque #345 incorrectly recorded by bank 61,900
Cheque #345 correct amount (16,900)
Corrected cash balance ($5,500)
b. The overdraft balance should be included in assets as an offset against cash and cash equivalents, not
as a separate liability. Should the overall balance of cash and cash equivalents be negative, the amount
would then be reported as a current liability.
Diff: 1 Type: ES
Skill: Conceptual
equivalents.
28) Pomegranate Company's bank balance on its October 31, 2021 bank statement is $11,500.
Pomegranate's accountant is preparing a bank reconciliation and determined that three cheques issued by
Pomegranate to its suppliers for a total of $6,500 had not yet cleared the bank. Also, a deposit for $700
made by Pomegranate on October 31 did not appear on the bank statement. Bank service charges of $240
appear on the bank statement, but have not yet been recorded in the general ledger.
Given the above information, prepare a bank reconciliation to determine the correct cash balance that
should be reflected in Pomegranate's general ledger at October 31, 2021.
Answer: Pomegranite Company
Bank Reconciliation
October 31, 2018
Balance per bank statement $11,500
Outstanding cheques (6,500)
Outstanding deposit 700
Bank service charges (240)
Corrected cash balance $5,460
Diff: 1 Type: ES
equivalents.
12
1) Which statement about internal controls over cash is correct?

A) A bank reconciliation is the only control required for cash.
B) A bank reconciliation is designed for detection of problems after the fact.
C) A bank reconciliation is a tool to investigate employee fraud.
D) A bank reconciliation is designed to prevent problems from happening.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and
evaluate the adequacy of cash controls in different situations.
2) Which of the following would NOT be an example of segregation of duties?

A) Sales employees have restricted ability to delete or modify accounts receivables.
B) Employees make sales to customers and record the credit sales in the accounts receivables.
C) Customer refunds are recorded on a written credit note.
D) Employees depositing funds to the bank do not prepare the bank reconciliation.
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
3) Which of the following would be an example of segregation of duties?

A) Sales employees have the ability to delete or modify accounts receivables.
B) Employees who make sales to customers record the credit sales in the accounts receivables.
C) Customer refunds are not recorded on a credit note.
D) Employees depositing funds to the bank do not prepare the bank reconciliation.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
4) What is one way to segregate duties to improve controls over cash?

A) Request all customers to pay in cash.
B) Separate sales employees from employees who book the accounting entries.
C) Request all customers to pay by cheques made payable to "CASH."
D) Have the employee who is responsible for making cash deposits to the bank also do the bank
reconciliations.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
13
5) Which statement about internal controls over cash is correct?
A) Internal controls should not be designed to be preventative.
B) A bank reconciliation is designed for prevention of problems before the fact.
C) Controls should restrict sales staff ability to modify or delete accounts receivable.
D) Credit notes should not be issued for customer refunds.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
6) Small Company (SC) is in its fourth year of retail operations. The owner/manager previously employed
a part-time bookkeeper to sign cheques, as well as to prepare journal entries, bank reconciliations, and
monthly financial statements. SC has just hired you as the first full-time accountant to replace the
bookkeeper, and you are preparing the December 31, 2021 financial statements.
Required:
a. Briefly explain the concept of "segregation of duties."
b. Identify an internal control issue relating to SC's cash-handling procedures, and provide your
recommendation(s) to improve SC's internal controls over cash.
Answer:
a. Segregation of duties is intended to ensure that a person in a position to misappropriate assets like cash
is not in a position to cover up the theft.
b. The existing cash-handling procedures are not sufficiently segregated. In fact, they are not segregated
at all. The bookkeeper both handles the cash and prepares the bank reconciliation. To mitigate the risk of
embezzlement, SC should assign someone other than me (the accountant) to prepare the bank
reconciliations.
Diff: 1 Type: ES
Skill: Conceptual
7) Explain why it is important to segregate duties of employees dealing with cash in an organization.
Provide at least three examples of ways which this segregation could be made on the receivables side.
Answer: Segregation of duties prevents any single employee from mishandling cash and/or changing the
accounts receivable records for personal gain. When duties are segregated, fraud requires collusion
among two or more employees, which is much more difficult to execute.
• Restrict the ability of sales staff to modify or delete accounts receivable. Credits or refunds (for
defective items, for example) need to be recorded by credit note.
• Assign employees with no access to accounts receivable the task of recording cash and cheques
received.
• Assign different employees the task of depositing funds to the bank.
• Have accounts receivable staff (separate from the above) record payments against the specific
accounts.
Diff: 2 Type: ES
Skill: Conceptual
14
8) Explain why it is important to segregate duties of employees dealing with cash in an organization.
Provide an example of ways which this segregation could be made on the payable side
Answer: When a company segregates the duties, it prevents any single employee from mishandling cash
and/or changing the accounts receivable records for personal gain. When duties are segregated, fraud
requires collusion among two or more employees, which is much more difficult to execute.
On the payable side, it is important to limit who has access to the accounts payable master file that
contains information on suppliers' names, addresses, and so on. Staff responsible for day-to-day
processing of suppliers' invoices should not have this access; otherwise, they could obtain approval to
pay a particular supplier, then redirect the cheque to a different payee and address.
Diff: 2 Type: ES
Skill: Conceptual
9) Explain some controls that can be used in an organization to safeguard cash and other assets.
Answer:
• Bank reconciliations and separation of duties are important internal controls to reduce the likelihood
of cash misappropriation.
• Managerial and customer monitoring are also alternative ways to reduce the risk of fraud.
• Internal controls for other assets are as important as for cash because people have less aversion to
misappropriating non-cash items.
Diff: 1 Type: ES
Skill: Conceptual
15
1) What are the general recognition criteria for non-cash assets under GAAP?
A) If the item meets the definition of an asset, it must have an indefinite life.
B) If the item meets the definition of an expense, it must be measurable.
C) In order for the item to be an asset, it will have future economic benefits, be under the entity's control,
and result form past transactions.
D) Future transactions can be recorded under GAAP.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the
balance sheet date, and derecognition of trade receivables.
2) The following accounts were abstracted from Almond Co.'s unadjusted trial balance at December 31,
2019:
Debit Credit
Accounts receivable $3,850,000
Allowance for uncollectible accounts 51,000
Net credit sales $5,950,000
The company estimates that 5 percent of the gross accounts receivable will become uncollectible. After
adjustment at December 31, 2019, the allowance for doubtful accounts should have a credit balance of
A) 192,500
B) 243,500
C) 246,500
D) 297,500
Answer: A
Explanation: A) 3,850,000 × 5% = 192,500
Diff: 3 Type: MC
16
3) The following accounts were abstracted from Almond Co.'s unadjusted trial balance at December 31,
2019:
Debit Credit
Net credit sales $2,950,000
Accounts receivable $800,000
Allowance for uncollectible accounts 11,000
The company estimates that 1.5 percent of the net credit sales will become uncollectible. After adjustment
at December 31, 2019, the allowance for doubtful accounts should have a credit balance of
A) 11,000
B) 12,000
C) 44,250
D) 55,250
Answer: D
Explanation: C) 2,950,000 × 1.5% = 44,250; 11,000 - 44,250 = 33,250
Diff: 3 Type: MC
4) Which of the following is one of the general criteria for recognizing an asset?
A) The item must have future economic benefits.
B) The item must have an indefinite life.
C) The item must be tangible.
D) The item must be material.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
5) A $50,000 sale transaction is made with terms of 2/10, net 30. Assuming that the customer takes the
discount, what amount is booked to the "cash discount" account under the gross method of accounting
for cash discounts?
A) $0
B) $1,000 debit
C) $1,000 credit
D) $49,000 debit
Answer: B
Explanation: B) 50,000 × 2% = 1,000 debit
Diff: 2 Type: MC
17
6) Jackie Co.'s allowance for doubtful accounts was $15,000 at the end of 2022 and $205,000 at the end of
2021. For the year ended December 31, 2022, Jackie reported bad debt expense of $48,000 in its income
statement. What amount did Jackie debit to the appropriate account in 2022 to write off actual bad debts?
Answer: $205,000 + $48,000 - $15,000 = $238,000
Diff: 2 Type: ES
7) Which statement about receivables is correct?

A) Receivables are non-monetary items.
B) Monetary items are measured at their present value.
C) Trade receivables generally have payments terms extending beyond 3 months.
D) Trade receivables should generally be recorded at their discounted present value.
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
8) Which statement best describes the gross method of accounting for cash discounts?
A) Records receivables at their present value amount.
B) Records any discounts forfeited as income.
C) Records any discounts taken as a reduction in revenue.
D) Records any discounts taken as an expense.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
9) Which statement best describes the net method of accounting for cash discounts?
A) Records receivables at their face value.
B) Records any discounts forfeited as income.
C) Records any discounts taken as an expense.
D) Records any discounts taken as a reduction in revenue.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
18
10) Which statement is correct?
A) The "net" method for recording cash discounts is conceptually inferior to the "gross" method.
B) Under the "net" method, an entry is needed if the discount is not taken.
C) The "gross" method for recording cash discounts is conceptually superior to the "net" method.
D) The gross method overstates revenue.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
11) A $50,000 sale transaction is made with terms of 2/10, net 30. Assuming that the customer takes the
discount, what amount is booked to the "cash discount" account under the net method of recording a
discount?
A) $0
B) $1,000 debit
C) $1,000 credit
D) $49,000 debit
Answer: A
Explanation: A) discount is booked up front at time of initial sale
Diff: 2 Type: MC
12) A $50,000 sale transaction is made with terms of 2/10, net 30. What amount is debited to the accounts
receivable account when the sale is made under the gross method of accounting for cash discounts?
A) $49,000 credit
B) $49,000 debit
C) $50,000 credit
D) $50,000 debit
Answer: D
Explanation: D) Discount is recorded when cash is received
Diff: 2 Type: MC

A) The "gross" method for recording cash discounts is conceptually better than the "net" method.
B) The net method understates expenses.
C) The gross method overstates revenue.
D) Under the "gross" method, an entry is needed if the discount is taken.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
19
A) A transfer without recourse means that the purchaser can go back to the company for compensation of
bad debts.
B) A transfer without recourse means that the purchaser of the receivables takes the collection risk.
C) A transfer without recourse means that the seller of the receivables takes the collection risk.
D) A transfer with recourse means that the purchaser of the receivables takes the collection risk.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
15) A $100,000 sale transaction is made with terms of 5/10, net 30. What amount is debited to the accounts
receivable account when the sale is made under the gross method of recording a discount?
A) $95,000 credit
B) $95,000 debit
C) $100,000 credit
D) $100,000 debit
Answer: D
Explanation: D) Discount is recorded when cash is received
Diff: 2 Type: MC

A) A transfer with recourse means that the purchaser cannot go back to the company for compensation of
bad debts.
B) A transfer with recourse means that the purchaser of the receivables takes the collection risk.
C) A transfer with recourse means that the seller of the receivables takes the collection risk.
D) A transfer without recourse means that the seller of the receivables takes the collection risk.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual

A) A transfer with recourse means that the purchaser of the receivables takes the collection risk.
B) A transfer without recourse means that the seller of the receivables takes the collection risk.
C) Factoring with recourse reduces a current ratio that is >1.
D) Factoring without recourse creates a liability on the balance sheet.
Answer: C
Diff: 3 Type: MC
Skill: Conceptual
20
18) Which statement is NOT correct?
A) Factoring with recourse creates a liability on the balance sheet.
B) Factoring with recourse reduces a current ratio that is >1.
C) Factoring with recourse negatively impacts working capital.
D) Factoring without recourse reduces a current ratio that is >1.
Answer: C
Diff: 3 Type: MC
Skill: Conceptual

A) Factoring without recourse creates a receivable on the balance sheet.
B) Factoring without recourse reduces a current ratio that is >1.
C) Factoring with recourse negatively impacts working capital.
D) Factoring without recourse creates a liability on the balance sheet.
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
20) Which statement is NOT correct?

A) Factoring with recourse creates a liability on the balance sheet.
B) Factoring with recourse creates a receivable on the balance sheet.
C) Factoring without recourse negatively impacts working capital.
D) Factoring without recourse means that the seller takes the collection risk.
Answer: D
Diff: 3 Type: MC
Skill: Conceptual
21) Philip Corp reported credit sales of $240,000 and write-offs of bad debts of $57,000 for last year.
Accounts receivable had a balance of $1,127,000 at the beginning of the year and $881,000 at the end of the
year. How much cash was collected from customers during the year?
A) $246,000
B) $429,000
C) $486,000
D) $669,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,127,000 + 240,000 – Collections – 57,000 = 881,000 → Collections = 429,000
Diff: 2 Type: MC
21
22) EasyCredit Inc. reported cash sales of $45,000, credit sales of $280,000 and write-offs of bad debts of
$7,000 for last year. Accounts receivable had a balance of $327,000 at the beginning of the year and
$381,000 at the end of the year. How much cash was collected from customers during the year?
A) $54,000
B) $219,000
C) $264,000
D) $334,000
Answer: C
Explanation: C) Open Bal + Credit Sales - Cash Collections – Write-offs = Ending Bal
327,000 + 280,000 – Collections – 7,000 = 381,000 → Collections = 219,000
Cash = Cash from A/R payments + cash sales = 219,000 + 45,000 = 264,000
Diff: 2 Type: MC
23) Maximum Inc. reported credit sales of $880,000, bad debt write-offs of $297,000 and bad debt expense
of $257,000 for last year. Accounts receivable had a balance of $1,367,000 at the beginning of the year and
$1,381,000 at the end of the year. How much cash was collected from customers during the year?
A) $457,000
B) $569,000
C) $714,000
D) $866,000
Answer: B
1,367,000 + 880,000 – Collections – 297,000 = 1,381,000 → Collections = 569,000
Diff: 3 Type: MC
24) Lenient Corp. reported cash sales of $1,145,000, credit sales of $1,880,000, cash returns of $50,000, bad
debt write-offs of $300,000 and bad debt expense of $250,000 for last year. Accounts receivable had a
balance of $3,400,000 at the beginning of the year and $2,350,000 at the end of the year. How much cash
was collected from customers during the year?
A) $2,630,000
B) $2,975,000
C) $3,725,000
D) $3,775,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
3,400,000 + 1,880,000 – Collections – 300,000 = 2,350,000 → Collections = 2,630,000
Cash collected = Cash from A/R + cash sales – cash returns = 2,630,000 + 1,145,000 - 50,000 = 3,725,000
Diff: 3 Type: MC
22
25) Fitness Machines reported credit sales of $880,000 and bad debt expense of $250,000 for last year.
Accounts receivable had a balance of $1,400,000 at the beginning of the year and $1,350,000 at the end of
the year. Assuming there are no write-offs made during the year, how much cash was collected from
customers during the year?
A) $630,000
B) $680,000
C) $930,000
D) $1,180,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Close Bal
$1,400,000 + 880,000 – Collections - 0 = 1,350,000 → Collections = 930,000
Diff: 1 Type: MC
26) Fitness Machines reported cash sales of $50,000, credit sales of $800,000 and bad debt expense of
$150,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year and
$1,250,000 at the end of the year. Assuming there are no write-offs during the year, how much cash was
collected from customers during the year?
A) $400,000
B) $450,000
C) $550,000
D) $600,000
Answer: D
Explanation: D) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,000,000 + 800,000 – Collections - 0 =1,250,000 → Collections = 550,000
Cash = Cash from A/R + cash sales = 550,000 + 50,000 = 600,000
Diff: 2 Type: MC
27) Medical Machines reported credit sales of $800,000, cash returns of $25,000 and bad debt expense of
$150,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year and
$1,250,000 at the end of the year. Assuming there are no write-offs during the year, how much cash was
collected from customers during the year?
A) $375,000
B) $525,000
C) $550,000
D) $650,000
Answer: B
Explanation: B) Open Bal + Credit Sales – Cash Collections – Write-offs = Close Bal
1,000,000 + 800,000 – Collections - 0 = 1,250,000 → Collections = 550,000
Cash = Cash from A/R – cash returns = 550,000 – 25,000 = 525,000
Diff: 2 Type: MC
23
28) Pauline Company estimates the allowance for doubtful accounts by aging its accounts receivable. At
the end of 2021, the balance in the allowance account was $50,000. During 2022, the company wrote off
$5,000 and collected a $3,000 receivable that had been previously written off as uncollectable. At the end
of 2022, the aging schedule indicated that the balance of the allowance for doubtful accounts should be
$64,000. What is the bad debt expense for 2022?
A) $16,000
B) $19,000
C) $66,000
D) $69,000
Answer: A
Explanation: A) 64,000 - (50,000 - 5,000) - 3,000 = 16,000
Diff: 2 Type: MC
29) A $100,000 sale transaction is made with terms of 5/10, net 30. What entry is made to the accounts
receivable account when the sale is made under the net method of recording a discount?
A) $95,000 credit
B) $95,000 debit
C) $100,000 credit
D) $100,000 debit
Answer: B
Explanation: B) discount recorded up front when sale is made
Diff: 2 Type: MC
30) Which statement is correct about recording an allowance for doubtful accounts?
A) Accounts receivable are not adjusted for known uncollectable amounts.
B) Net accounts receivable is recalculated when there are changes recorded in the Allowance for Doubtful
Accounts contra account.
C) Comparability is the reason an allowance for doubtful accounts is needed.
D) An allowance for doubtful accounts does not require estimates or judgments.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
24
31) Which statement is correct about estimating the allowance for doubtful accounts?
A) Under the income statement approach, bad debt expense is based on the accounts receivable amount.
B) Under the income statement approach, bad debt expense is based on the percentage of credit sales.
C) Under the income statement approach, bad debt expense is based on an aging of the accounts
receivable amount.
D) Under the income statement approach, bad debt expense is based on the volume of sales transactions.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
32) Karin-Jones Ltd. reported an opening balance of $1,712,000 in accounts receivable and of $147,000 in
allowance for doubtful accounts for last year. During the year, sales on account were $2,500,000,
collections of accounts receivable were $1,300,000, and bad debt expense was $89,000. At the end of the
year, the company had a credit balance of $172,000 in the allowance for doubtful accounts. What amount
of accounts receivable was written off during the year?
A) $25,000
B) $64,000
C) $83,000
D) $2,912,000
Answer: B
Explanation: B) 147,000 + 89,000 - 172,000 = 64,000
Diff: 2 Type: MC
33) Which statement is NOT correct about estimating the allowance for doubtful accounts under the
balance sheet approach?
A) Accounts receivable are stated at their net realizable value.
B) Accounts receivable are stated at their fair value.
C) Bad debt expense is based on the accounts receivable balance.
D) Bad debt expense is based on an aging of the accounts receivable.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
25
34) Medical Machines reported credit sales of $800,000, cash collections of $550,000 and bad debt write-
offs of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year.
What was the ending balance in the accounts receivable account?
A) $450,000
B) $1,235,000
C) $1,250,000
D) $1,800,000
Answer: B
1,000,000 + 800,000 – 550,000 – 15,000 = 1,235,000
Diff: 2 Type: MC
35) Family Fun reported credit sales of $800,000, cash collections of $550,000 and bad debt expense of
$15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year.
Assuming there are no write-offs made during the year, what was the ending balance in the accounts
receivable account?
A) $450,000
B) $1,235,000
C) $1,250,000
D) $1,800,000
Answer: C
Explanation: C) Open Bal + Credit Sales – Cash Collections – Write-offs = Ending Bal
1,000,000 + 800,000 – 550,000 - 0 = 1,250,000
Diff: 2 Type: MC
36) Family Fun reported cash sales of $250,000, credit sales of $750,000, cash collections from receivables
of $500,000, bad debt write-offs of $25,000 and bad debt expense of $35,000 for last year. Accounts
receivable had a balance of $1,000,000 at the beginning of the year. What was the ending balance in the
accounts receivable account?
A) $1,190,000
B) $1,225,000
C) $1,440,000
D) $1,475,000
Answer: B
1,000,000 +750,000 – 500,000 – 25,000 = 1,225,00
Diff: 3 Type: MC
26
37) Micelle Inc. reported credit sales of $600,000, cash collections of $450,000 and bad debt expense of
$15,000 for last year. Accounts receivable had a balance of $1,000,000 at the end of the year. Assuming
there are no write-offs made during the year, what was the balance in the accounts receivable account at
the beginning of the year?
A) $400,000
B) $850,000
C) $865,000
D) $1,150,000
Answer: B
Open Bal + 600,000 – 450,000 - 0 = 1,000,000 → Open Bal = 850,000
Diff: 2 Type: MC
38) Fruit Valley Inc. reported cash sales of $250,000, credit sales of $850,000, cash collections from
receivables of $500,000, bad debt write-offs of $25,000 and bad debt expense of $35,000 for last year.
Accounts receivable had a balance of $1,000,000 at the end of the year. What was the balance in the
accounts receivable account at the beginning of the year?
A) $425,000
B) $460,000
C) $650,000
D) $675,000
Answer: D
Explanation: D) Open Bal + Credit Sales – Cash Collections – Write-offs = Close Bal
Open Bal + 850,000 – 500,000 – 25,000 = 1,000,000 → Open Bal = 675,000
Diff: 3 Type: MC
39) Micelle Inc. reported credit sales of $600,000 and cash collections of $450,000 for last year. The ending
balance in accounts receivable was $800,000. Bad debt expense is estimated at 1% of credit sales. The
allowance for doubtful accounts had a balance of $80,000 at the beginning of the year. Assuming there are
no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the
end of the year?
A) $6,000
B) $8,000
C) $81,500
D) $86,000
Answer: D
Explanation: D) 80,000 + (600,000 ∗ 0.01) = 86,000
Diff: 2 Type: MC
27
40) Micelle Inc. reported credit sales of $700,000 and cash sales of $100,000 for last year. The ending
balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The
allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. Assuming there are
no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the
end of the year?
A) $7,000
B) $8,000
C) $47,000
D) $150,000
Answer: C
Explanation: C) 40,000 + (700,000 ∗ 0.01) = 47,000
Diff: 2 Type: MC
41) Marvelos Inc. reported credit sales of $1,000,000 and cash sales of $100,000 for last year. The ending
balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts
receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year.
Assuming there are no write-offs made during the year, what was the balance in the allowance for
doubtful accounts at the end of the year?
A) $11,000
B) $15,000
C) $51,000
D) $55,000
Answer: D
Explanation: D) 40,000 + (1,500,000 ∗ 0.01) = 55,000
Diff: 2 Type: MC
42) Sahil Inc. reported credit sales of $600,000 and cash collections of $450,000 for last year. The ending
balance in accounts receivable was $800,000. Bad debt expense is estimated at 1% of credit sales. The
allowance for doubtful accounts had a balance of $80,000 at the beginning of the year. What was the bad
debt expense for the year?
A) $1,500
B) $6,000
C) $8,000
D) $86,000
Answer: B
Explanation: B) 600,000 ∗ 0.01 = 6,000
Diff: 2 Type: MC
28
43) Sabrina Inc. reported credit sales of $700,000 and cash sales of $100,000. The ending balance in
accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The allowance for
doubtful accounts had a balance of $40,000 at the beginning of the year. What was the bad debt expense
for the year?
A) $7,000
B) $8,000
C) $15,000
D) $47,000
Answer: A
Explanation: A) 700,000 ∗ 0.01 = 7,000
Diff: 2 Type: MC
44) Thineesha Corp. reported credit sales of $1,000,000 and cash sales of $100,000 for last year. The ending
balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts
receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year.
What was the bad debt expense for the year?
A) $9,000
B) $10,000
C) $15,000
D) $55,000
Answer: C
Explanation: C) 1,500,000 ∗ 0.01 = 15,000
Diff: 2 Type: MC
45) Marvelos Inc. reported credit sales of $1,000,000, cash sales of $100,000 and bad debt write-offs of
$10,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense was
$15,000. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What
was the balance in the allowance for doubtful accounts at the end of the year?
A) $15,000
B) $45,000
C) $55,000
D) $65,000
Answer: B
Explanation: B) Open Bal + Bad Debt Expense – Write-offs = Ending Bal
40,000 + 15,000 – 10,000 = 45,000
Diff: 3 Type: MC
29
46) Super Corp. reported credit sales of $2,000,000, cash sales of $200,000 and bad debt write-offs of
$250,000. The allowance for doubtful accounts had a balance of $400,000 at the beginning of the year.
What was the balance in the allowance for doubtful accounts at the end of the year?
A) $100,000
B) $300,000
C) $500,000
D) $550,000
Answer: D
Explanation: D) Open Bal + Bad Debt Expense – Write-offs = Ending Bal
400,000 + 250,000 – 100,000 = 550,000
Diff: 3 Type: MC
47) Super Corp. reported credit sales of $2,000,000, cash sales of $200,000 and bad debt write-offs of
2% of credit sales. The allowance for doubtful accounts had a balance of $400,000 at the beginning of the
year. What was the balance in the allowance for doubtful accounts at the end of the year?
A) $40,000
B) $340,000
C) $344,000
D) $440,000
Answer: B
Explanation: B) Open Bal + Bad Debt Expense – Write-offs = Ending Bal
400,000 + (2,000,000 ∗.02) – 100,000 = 340,000
Diff: 3 Type: MC
48) K-Jones Ltd. reported opening balances of $1,712,000 in accounts receivable and $147,000 in the
allowance for doubtful accounts at the beginning of last year. During the year, sales on account totaled
$2,500,000, collections of accounts receivable were $1,300,000, bad debt write-offs were $65,000 and bad
debt expense was $89,000. What was the ending balance in the allowance for doubtful account?
A) $82,000
B) $171,000
C) $326,000
D) $2,847,000
Answer: B
Explanation: B) Open Bal + Bad Debt Exp – Write-offs = Ending Bal
147,000 + 89,000 – 65,000 = 171,000
Diff: 2 Type: MC
30
49) Propel Fly reported opening balances of $1,712,000 in accounts receivable and $147,000 in the
allowance for doubtful accounts at the beginning of last year. During the year, sales on account totaled
$2,500,000, collections of accounts receivable were $1,300,000, bad debt write-offs were $65,000 and bad
debt expense was $89,000. What was the ending balance in accounts receivable?
A) $171,000
B) $2,758,000
C) $2,823,000
D) $2,847,000
Answer: D
Explanation: D) Open Bal + Credit Sales – Collections – Write-offs = Ending Bal
1,712,000 + 2,500,000 – 1,300,000 – 65,000 = 2,847,000
Diff: 2 Type: MC
50) Which statement about using the percentage of credit sales to estimate bad debt expense is NOT
correct?
A) This method has the same results as estimating the bad debt expense by aging the accounts receivable.
B) This method records an adjustment to the allowance account irrespective of the balance in that account
immediately prior to the adjustment.
C) This method focuses on the income statement.
D) This method only indirectly measures accounts receivable at net realizable value.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
51) Which statement about using the aging of accounts receivable to estimate bad debt expense is correct?
A) This method has the same results as estimating the bad debt expense by using the percentage of credit
sales.
B) This method records an adjustment to the allowance account irrespective of the balance in that
account, immediately prior to the adjustment.
C) This method focuses on the income statement.
D) This method focuses on the balance sheet.
Answer: D
Diff: 2 Type: MC
Skill: Conceptual
31
52) Based on the following information for calendar 2021:
Accounts receivable, January 1 $125,000

Credit sales during the year 1,400,000
Allowance for doubtful accounts, January 1 15,000
Cash collected on accounts receivable during the year 1,350,000
If the allowance for doubtful accounts is estimated at 10% of the ending accounts receivable balance, what
is the bad debts expense for 2021?
A) $1,500
B) $2,500
C) $9,500
D) $17,500
Answer: B
Explanation: B) [(125,000 + 1,400,000 - 1,350,000) × 10%] - 15,000 = 2,500
Diff: 3 Type: MC
53) Based on the following information for calendar 2021:
Accounts receivable, January 1 $125,000

Credit sales during the year 1,400,000
Allowance for doubtful accounts, January 1 15,000
Cash collected on accounts receivable during the year 1,350,000
Uncollectible accounts written off during the year 8,000
If bad debts expense is estimated at 1.5% of credit sales, what is the balance in the allowance for doubtful
accounts at year end?
A) $13,000
B) $15,625
C) $28,000
D) $36,000
Answer: C
Explanation: C) 15,000 + (1,400,000 × 1.5%) - 8,000 = 28,000
Diff: 3 Type: MC
32
54) Pauline Company estimates the allowance for doubtful accounts by aging its accounts receivable. At
the end of 2021, the balance in the allowance account was $50,000. During 2022, the company wrote off
$5,000 in bad debts and collected a $3,000 receivable that had been previously written off as uncollectable.
At the end of 2022, the aging schedule indicated that the balance of the allowance for doubtful accounts
should be $64,000. What is the bad debts expense for 2022?
A) $16,000
B) $19,000
C) $66,000
D) $69,000
Answer: A
Explanation: A) 64,000 - (50,000 - 5,000) - 3,000 = 16,000
Diff: 2 Type: MC
55) Explain the differences and relationships among expenditures, assets, and expenses. Use an example
to support your discussion.
Answer: An expenditure is an outlay of cash or incurment of a liability that could result in an expense or
an asset being recorded for accounting purposes.
The expenditure results in an asset if it satisfies the definition and recognition criteria for an asset;
otherwise, the amount must be expensed.
Previously recorded assets turn into expenses as the benefits from the assets are used up. For example, a
payment to purchase a machine would result in an asset (property, plant, and equipment) because the
machine is expected to generate future benefits, it results from a past transaction, it is under the control of
the enterprise, and its future benefits are reasonably estimable. As the equipment is used, depreciation
expense is recorded.
Diff: 2 Type: ES
Skill: Conceptual
56) Royal Inc. offers terms of 4/10, net 60 for its accounts receivable. The company issues an invoice for
$73,000. How should Royal record the invoice if it uses (a) the gross method and (b) the net method?
Answer:
Gross method Net Method
Dr. Accounts receivable 73,000 Dr. Accounts receivable* 70,080
Cr. Sales revenue 73,000 Cr. Sales revenue 70,080
* 73,000 × 96% = 70,080

Diff: 1 Type: ES
33
57) Spiders Geophysics issues an invoice to Huslia Goldmines for $150,000 on August 5, 2021. The invoice
states the payment terms are 5/10, net 30. Huslia pays the invoice on August 14, 2021. How should
Spiders record the invoice and its subsequent collection if it uses (a) the gross method or (b) the net
method?
Answer:
Issue Dr. Accounts receivable 150k Dr. Accounts receivable* 142.5k
invoice Cr. Sales revenue 150k Cr. Sales revenue 142.5k
August 5 150,000 * 95%
Receive Dr. Cash 142.5k Dr. Cash 142.5k

payment Dr. Cash discount [I/S] 7.5
August 14 Cr. Accounts receivable 150 Cr. Accounts receivable 142.5k
Diff: 2 Type: ES
58) Intercoastal Shelving Company made a sale to Superb Knives for $8,800 on December 10, 2019. Since
it was approaching year end, Intercoastal wanted to encourage prompt payment, so it provided generous
discounts for those clients able to pay promptly. Thus Intercoastal offered terms of 5/10, net 20. Superb
paid the invoice on January 20, 2020.
How should Intercoastal record the invoice and its subsequent collection if the company uses (a) the
gross method or (b) the net method?
Answer:
Issue Dr. Accounts receivable 8,800 Dr. Accounts receivable* 8,360
invoice Dec. Cr. Sales revenue 8,800 Cr. Sales revenue 8,360
10 8,700 * 95%
Receive Dr. Cash 8,800 Dr. Cash 8,800

payment Cr. Interest or other revenue 440
Jan. 20 Cr. Accounts receivable 8,800 Cr. Accounts receivable 8,360
Diff: 2 Type: ES
34
59) Explain two problems associated with the direct write-off method.
Answer:
• Poor matching: With the direct write-off method, revenue is recorded in one period while the
associated bad debts expense is recorded in a subsequent period.
• Direct write-off method results in an A/R balance that overstates net realizable value.
• Note: this question has nothing to do with the A/R sub-ledger. The use of a contra account for bad
debts allows for the reconciliation of the sub-ledger with the A/R balance on the general ledger, but a sub-
ledger is used regardless of the method of accounting for bad debts.
Diff: 1 Type: ES
Skill: Conceptual
60) On January 1, 2019, Color Company agreed to sell a diamond to a customer at a special price of
$4,000. In return, the customer signed a non-interest bearing note payable to Color Company. Payment
terms were $800 on January 1, 2019, and $800 each January 1 from 2020 to 2023. Color normally charges
8% interest to its customers.
What amount of revenue and accounts receivable should Color recognize on January 1, 2019?
Answer: Receivable = 2,650 (n 4 i 8 PMT 800 CPT PV = 2,650)
Revenue - 3,450 (2,650 + 800)
JE would be Cash 800

Acct Receivable 2,650
Revenue 3,450
Diff: 1 Type: ES
61) XYZ Company estimates their allowance for doubtful accounts (ADA) by aging their accounts
receivable. At the end of 2021, the balance in the ADA was $165,000. During 2022, XYZ wrote off $16,000
and collected a $14,500 receivable that had been previously written off as uncollectable. At the end of
2022, the aging schedule indicated that the balance in the ADA should be $187,000. How much is the bad
debts expense for 2022?
Answer:
Diff: 1 Type: ES
35
62) Beebo Ltd. provides for doubtful accounts based on 6% of credit sales. The following data are
available for 2021.
Credit sales during 2021 $3,550,000

Allowance for doubtful accounts, Jan 1, 2021 59,000 Cr
Collection of accounts written off in prior years 3,500
Customer accounts written off as uncollectable during 2021 37,000
How much should the balance in the allowance for doubtful accounts be at December 31, 2021?
Answer:
Diff: 1 Type: ES
36
63) At the end of its first year of operations, December 31, 2019, Felicity Ltd.'s accounts show the
following amounts:
Accounts receivable $1,485,000

Allowance for doubtful accounts, before any adjusting or closing
entries 11,000 Cr
Bad debt expense for 2019 prior to any adjusting or closing
entries 48,000 Dr
Customer accounts written off as uncollectable during 2019 37,000
The company estimates that the following amounts of accounts receivable will not be collectible:
Days outstanding 0 - 30 31 - 75 76 - 120 120 + Total

Amount 510,000 444,000 403,000 128,000 1,485,000
% not collectible 5% 9% 15% 28% ---
What should be the amount of bad debt expense for the year ended December 31, 2019?
Answer:
Days outstanding 0 - 30 31 - 75 76 - 120 120 + Total
Amount 510,000 444,000 403,000 128,000 1,485,000
% not collectible 5% 9% 15% 28% ---
Estimated amount uncollectible 25,500 39,960 60,450 35,840 161,750
Estimated ADA based on aging schedule - ADA prior to adjusting/closing + BDE prior to
adjusting/closing = 2019 BDE
161,750 - 11,000 + 48,000 = 198,750
Diff: 2 Type: ES
37
64) Pessimist Inc. reported credit sales of $5,400,000 and $4,800,000 for the years ended December 31, 2020
and 2021, respectively. Information on trade accounts receivable for the company is presented below.
Days outstanding Current 31-60 61-90 91+

Balance in A/R. Dec. 31. 2020 397,000 156,000 47,000 17,000
Balance in A/R. Dec. 31. 2021 392,000 141,000 33,000 26,000
% of AR est. to be uncollectible 0.8% 5.0% 6.0% 9.0%
The balance of the allowance for doubtful accounts as of January 1, 2020 was $15,000. In addition, you
learn that the company wrote off specific accounts of $18,500 in 2020, and the bad debts expense was
$13,000 in 2021.
Required:
a. Determine the bad debts expense for 2020.
b. Determine the amount of receivables written off during 2021.
c. Prepare the journal entry to record the bad debts expense for 2020.
38
Answer:
a. Calculate the bad debts expense for 2020.
Days outstanding Current 31-60 61-90 91+ Total

Balance in A/R. 12/31/2020 397,000 156,000 47,000 17,000
% of AR est. uncollectible 0.8% 5.0% 6.0% 9.0%
Est. uncollect. 12/31/2020 3,176 7,800 2,820 1,530 15,326
Since the 2020 write-offs during the year exceeded the beginning of the year ADA, the ending ADA prior
to adjustment/closing is equal to zero. Also, the bad debts expense prior to adjustment/closing is equal to
the write-offs less the initial balance in the ADA account. So, BDE prior to adjustment = 18,500 - 15,000 =
3,500
Estimated ADA based on aging schedule - ADA prior to adjusting/closing + BDE prior to
adjusting/closing = 2020 BDE
15,326 - 0 + 3,500 = 18,826
b. Calculate the amount of receivables written off during 2021.
Days outstanding Current 31-60 61-90 91+ Total

Balance in A/R. Dec. 31. 2021 392,000 141,000 33,000 26,000
% of AR estim. uncollectible 0.8% 5.0% 6.0% 9.0%
3,136 7,050 1,980 2,340 14,506
Beginning ADA - Ending ADA + BDE = 2021 write-offs

15,326 - 13,000 + 14,506 = 13,820
c. Prepare the journal entry to record the bad debts expense for 2020.
Dr. Bad debts expense 18, 826

Cr. Allowance for doubtful accounts 18, 826
Diff: 2 Type: ES
39
65) Speed Motorcycles sold $550,000 of receivables to a factor to increase the company's liquidity. The
company chose to factor these receivables without recourse. In exchange for these receivables, the factor
paid Speed $485,000 on the date of transfer. Ultimately, the factor collected $525,000 from these
receivables.
Record the entry on Speed's books relating to the $550,000 factoring of accounts receivable.
Answer:
Upon transfer Dr. Cash 485,000
of receivables Dr. Interest expense 65,000
Cr. Accounts receivable 550,000
Note: subsequent collection by factor is irrelevant since Speed sold without recourse.
Diff: 1 Type: ES
66) McGraw Motors both sells and leases vehicles. With sales temporarily slowing due to the economy,
the company factored a significant portion of its lease receivables. The company factored with recourse
receivables with a carrying amount of $22 million in exchange for $21.45 million less a holdback of
$550,000 for potential uncollectable accounts. Due to poor economic conditions, the actual uncollectable
accounts amounted to $900,000.
Record the entries on McGraw's books relating to the $22 million factoring of lease receivables.
Answer:
Upon transfer Dr. Cash 20,900,000
of receivables Dr. Due from factor 550,000
Cr. Short-term debt–asset-backed financing 21,450,000
Completion of Dr. Allowance for doubtful accounts 900,000

collection Cr. Due from factor 550,000
Cr. Cash 350,000
Dr. Short-term debt–asset-backed financing 21,450,000

Dr. Interest expense 550,000
Cr. Accounts receivable 22,000,000
Diff: 2 Type: ES
40
67) Gossamer Furnishings extends generous payment terms to its customers. As a result, it has
accumulated a substantial portfolio of accounts receivable. To improve cash flow, the company decided
to sell $600,000 of these receivables to a factor. The company had previously checked the credit
worthiness of its customers, so it is confident that few accounts will become uncollectable. Therefore,
Gossamer chose to factor these receivables with recourse. In exchange for these receivables, the factor
paid Gossamer 93¢ on each dollar of receivables on the date of transfer. The factor also held 2¢ on each
dollar for potential uncollectable accounts. Ultimately, the factor collected $593,800 from these
receivables.
Record the entries on Gossamer's books relating to the $600,000 factoring of accounts receivable.
Answer:
Upon transfer Dr. Cash (600,000 × 93%) 558,000
of receivables Dr. Due from factor (600,000 × 2%) 12,000
Cr. Short-term debt–asset-backed financing 570,000
Completion Dr. Cash 5,800

of collection Dr. ADA (600,000 - 593,800) 6,200
Cr. Due from factor 12,000
Dr. Short-term debt–asset-backed financing 570,000

Dr. Interest expense 30,000
Cr. Accounts receivable 600,000
Diff: 2 Type: ES
41
68) Johnson Credit Union is a small, regional financial institution with a loyal customer base. Like most
financial institutions, Johnson has a significant portfolio of home mortgages. Because of the nature of its
operations, the risks relating to these mortgages are geographically concentrated. To reduce this risk, the
credit union securitized $25 million of mortgages receivable for proceeds of $21.5 million. Under the
securitization arrangement, investors in the mortgage-backed securities bear the cost of any defaults on
the mortgages. Johnson's only continuing involvement in the mortgages is the administration of the cash
receipts and the transfer of that cash to the investors.
Required:
a. Should Johnson record this securitization as a sale or as a borrowing transaction? Explain.
b. Record the entry in Johnson's books relating to Johnson's securitization of mortgage receivables.
Answer:
a. The securitization transaction transfers the risks and rewards of ownership to the investors in the
mortgage-backed securities because it is the investors who bear the cost of non-payment. Consequently,
the transactions should be recorded as a sale.
b.
Dr. Cash 21,500,000
Dr. Interest expense 3,500,000
Cr. Mortgages receivable 25,000,000
Diff: 1 Type: ES
42
69) The accounting records of 10Com Ltd. show the following for 2021:
Accounts receivable, Jan. 1, 2021 $55,000

Accounts receivable, Dec. 31, 2021 85,000
Allowance for doubtful accounts, Jan. 1, 2021 6,300
Bad debt expense before year end adjusting or closing entries, Dec 31, 2021 3,400 Dr *
Customer accounts written off as uncollectable during 2021 5,550 **
*The credit side of the journal entry (or entries) related to this amount went to allowance for doubtful
accounts.
** Account write-offs were debited to the allowance for doubtful accounts.
More Info
For 2021, cash sales were $970,000, while credit sales were $720,000. Recently, 10Com's management has
become concerned about various estimates used in its accounting system, including those relating to
receivables and uncollectable accounts. The company is considering two alternatives.
For the purpose of comparing these two alternatives, the company has made the following estimates for
each alternative.
• Alternative 1: Bad debts approximating 0.7% of credit sales.
• Alternative 2: Aging of the accounts receivable at the end of the period, where 80% would incur a 2%
loss, while the remaining 20% would incur a 9% loss.
Required:
For each of the two alternatives listed above, calculate the bad debts expense for 2021 and the allowance
for doubtful accounts balance at the end of 2021.
43
Answer: Alternative 1 (% of sales method):
* 5,040 = 720,000 × .007
Alternative 2 (aging method): First calculate the amount of ADA. Of the $85,000 balance of accounts
receivable, management expects 80% to incur a 2% loss and the remaining 20% to incur a 9% loss. Thus,
the balance in ADA should be (85,000 × 80% × 2%) + (85,000 × 20% × 9%) = $2,890. Combined with other
information relating to the ADA account, we can determine the amount of adjustment required to the
ADA account to be $1,260 debit and a corresponding credit to BDE.
Diff: 3 Type: ES
44
70) Eastwick Company is preparing its financial statement for the year ended December 31, 2020. A
summary of Eastwick's accounts receivable sub-ledger shows the following information:
Days outstanding 0-30 31-90 91+ Total

Balance outstanding 12/31/20 $5,500,000 $2,500,000 $250,000 $8,250,000
Estimated default rate 0.6% 2.0% 9.0%
Accounts written off in 2020 $80,000

Collection of accounts written off in other periods 1,000
Allowance for doubtful accounts, 01/01/2020 115,000
Required:
a. Calculate the amount of bad debts expense required for 2020.
b. Present the journal entry to record bad debts expense for 2020.
c. Present the journal entry that was used to record write-offs for 2020.
d. Independent of the information above, suppose Eastwick factored $1,500,000 of receivables without
recourse. In exchange, it received $1,380,000. Present the journal entry to record this transfer of
receivables.
e. Independent of part (d), Eastwick instead factored the $1,500,000 of receivables with recourse and
received $1,430,000 cash. Both Eastwick and the factor anticipate that 2% of these receivables will prove to
be uncollectable, so the factor has held this amount to cover any uncollectable accounts. Should the
amount of uncollectable accounts prove to be more or less than 2%, the difference will be paid
by/refunded to Eastwick. Present the journal entry to record this transfer of receivables.
45
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Intermediate Accounting Vol 1 4Th Edition Lo Test Bank Full Chapter PDF

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Intermediate Accounting Vol 1 4th

Edition Lo Test Bank

1) What is NOT included in "cash and cash equivalents"?

5) Which of the following is NOT a reason for preparing a bank reconciliation?

6) Which statement is correct about the bank reconciliation?

7) What is included in "cash and cash equivalents"?

9) What is included in "cash and cash equivalents"?

Treasury bills maturing in 30 days $12,000

Treasury bills maturing in 30 days $11,000

Investment in shares of a public company $11,000

13) What criterion is NOT required for a "cash equivalent"?

Investment in shares of a public company $12,000

15) What amount will be included in "cash and cash equivalents"?

Treasury bills maturing in 140 days $12,000

Treasury bills maturing in 125 days $12,000

17) What amount will be included in "cash and cash equivalents"?

Treasury bills maturing in 140 days $12,000

Treasury bills maturing in 30 days $24,000

19) What amount will be included in "cash and cash equivalents"?

Treasury bills maturing in 10 days $12,000

Euro treasury bills maturing in 140 days $12,000

21) What amount will be included in "cash and cash equivalents"?

Treasury bills maturing in 101 days $12,000

23) Explain why a bank reconciliation is necessary.

Cash and Readily

Cash and Readily Risk of

1) Which statement about internal controls over cash is correct?

2) Which of the following would NOT be an example of segregation of duties?

3) Which of the following would be an example of segregation of duties?

4) What is one way to segregate duties to improve controls over cash?

7) Which statement about receivables is correct?

13) Which statement is correct?

16) Which statement is correct?

17) Which statement is correct?

19) Which statement is correct?

20) Which statement is NOT correct?

Accounts receivable, January 1 $125,000

53) Based on the following information for calendar 2021:

Accounts receivable, January 1 $125,000

* 73,000 × 96% = 70,080

Receive Dr. Cash 142.5k Dr. Cash 142.5k

Receive Dr. Cash 8,800 Dr. Cash 8,800

JE would be Cash 800

Credit sales during 2021 $3,550,000

Accounts receivable $1,485,000

Days outstanding 0 - 30 31 - 75 76 - 120 120 + Total

Days outstanding Current 31-60 61-90 91+

Days outstanding Current 31-60 61-90 91+ Total

b. Calculate the amount of receivables written off during 2021.

Days outstanding Current 31-60 61-90 91+ Total

Beginning ADA - Ending ADA + BDE = 2021 write-offs

Dr. Bad debts expense 18, 826

Completion of Dr. Allowance for doubtful accounts 900,000

Dr. Short-term debt–asset-backed financing 21,450,000

Completion Dr. Cash 5,800

Dr. Short-term debt–asset-backed financing 570,000

Accounts receivable, Jan. 1, 2021 $55,000

* 5,040 = 720,000 × .007

Days outstanding 0-30 31-90 91+ Total

Accounts written off in 2020 $80,000

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