Financial Accounting An Introduction to Concepts Methods
and Uses 14th Edition Weil
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Chapter 8: Revenue Recognition, Receivables, and Advances from Customers
Student: ___________________________________________________________________________
1. If the firm has received a promise of payment but cannot measure this promise with reasonable reliability, and U.S. GAAP would permit revenue to be recognized, but IFRS would not permit revenue to be recognized.
True False
2. Realization is the presumption that a firm will remain in operation long enough to carry out its current plans, and in the normal course of its operations, realize changes in the fair values of its assets either by using those assets or selling them.
True False
3. Under the accrual method, the timing of revenue recognition is influenced by when the services or product are provided.
True False
4. The method of revenue recognition where the seller collects part of the selling price in cash and at the same time recognizes as expenses each period the same portion of the cost of goods or services sold as the portion of total revenues recognized is called the direct payment method.
True False
5. If an event or transaction leads to the recognition of revenue, firms match the consumption of any assets (the expense), in time, with the revenue recognized.
True False
6. Notes receivable is the amount owed to a seller by customers who have purchased goods and services on credit.
True False
7. The financial statements contain information for analyzing the collectibility of accounts receivable and the adequacy of the expense for uncollectible accounts. Typical ratios used for this analysis include the accounts receivable turnover ratio, days receivables outstanding, and write-off percentage.
True False
8. Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts.
True False
9. The Accounts Receivable, Gross amount less the Allowance for Uncollectibles yields Accounts Receivable, Net, which reflects the amount of cash the firm expects to collect.
True False 10. When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the Allowance for Uncollectibles and crediting Accounts Receivable, Gross. This process is called writing off the account.
True False 11. The write-off of specific customers’ accounts using the allowance method has no effect on the income statement.
True False
12. The write-off of specific customers’ accounts has no effect on Accounts Receivable, Net, because the write-off amount decreases Accounts Receivable, Gross, and its contra account, the Allowance for Uncollectibles, by exactly the same amount.
True False 13. A debit balance in the Allowance for Uncollectibles appears on the balance sheet.
True False 14. U.S. GAAP and IFRS require that firms disclose sufficient information to allow the reader of financial statements to calculate Accounts Receivable, Gross, Allowance for Uncollectibles, and Accounts Receivable, Net.
True False 15. The U.S. Internal Revenue Service requires that firms recognize bad debt expense only when they conclude an account is not collectible.
True False
16. U.S. GAAP permits firms to use the installment method or the cost recovery method only when receivables is/are collectible over an extended period and the seller has no reasonable basis for estimating the amount of cash that it will collect.
True False 17. The cost recovery method matches the costs of generating revenue with cash receipts until the seller recovers all its costs.
True False 18. The percentage-of-completion method provides information about the seller’s performance during the contract period; in contrast, the completed contract method reports all profit only when seller completes the contract.
True False 19. Firms that reduce the price charged to a customerafter the firm has delivered the goods and the customer has found them to be unsatisfactory or damaged issue a sales allowance.
True False
20. Both U.S. GAAP and IFRS do not require the allowance method for uncollectible accounts, which involves estimating the amount of uncollectible accounts receivable associated with each accounting period’s credit sales.
True False 21. The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume of credit business. The firm estimates the appropriate percentage by studying its own experience or by inquiring into the experience of similar firms. Default rates generally fall within the range of .01% to .02% of credit sales.
True False 22. The percentage-of-completion method measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.
True False 23. A common-size income statement expresses each expense and net income as a percentage of
A. assets.
B. revenues.
C. liabilities.
D. expenses.
E. shareholders’ equity.
24. If the firm has received a promise of payment but cannot measure this promise with reasonable reliability,
A. U.S. GAAP would permit revenue to be recognized, but IFRS would not permit revenue to be recognized.
B. U.S. GAAP would not permit revenue to be recognized, but IFRS would permit revenue to be recognized.
C. neither U.S. GAAP nor IFRS would permit revenue to be recognized.
D. U.S. GAAP and IFRS would permit revenue to be recognized.
E. none of the above
25. Which section includes income derived from a firm’s primary business activities as well as from activities peripherally related to operations? (The firm expects these sources of earnings to continue.)
A. income from continuing operations
B. income, gains, and losses from discontinued operations
C. extraordinary gains and losses
D. retained earnings
E. paid-in-capital
26. Operating risks
A. include variability in sales from changing economic conditions (cyclicality risk).
B. include variability in sales from short product life cycles (because of technological change or changes in consumer taste).
C. include variability of earnings that arises when the firm has a high proportion of fixed costs that do not change as sales change.
D. Answers a, b, and c are correct.
E. None of these answer choices is correct.
27. Ulrich Co. sells an asset to a buyer for a total sales price of $6,000 with a payment schedule of $2,000 in year 1, $2,000 in year 2, and $2,000 in year 3. The cost of the asset is $5,000. Under the cost-recovery-first method, what amount of net profit is recognized in year 3?
A. $2,000
B. $1,000
C. $666.67
D. $333.33
E. $0
28. Which of the following is true regarding income recognition?
A. The seller must have substantially performed its obligations to the customer (for example, by transferring ownership of goods to the customer).
B. The seller must have obtained an asset from the customer that it can reliably measure. If the asset is not cash, the seller must be reasonably certain of converting it into cash.
C. The firm recognizes expenses when it consumes assets.
D. If an event or transaction leads to the recognition of revenue, the firm matches the consumption of any assets (the expense), in time, with the revenue recognized.
E. all of the above
29. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example. If Cowden uses the installment method, how much cost is recognized as expense in year 3?
A. $10,000
B. $15,000
C. $20,000
D. $25,000
E. $30,000
30. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example. Under the installment method, how much net profit would Cowden recognize in year 1?
A. $1,667
B. $2,667
C. $3,333
D. $3,667
E. $5,000
31. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example. If Cowden uses the cost-recovery-first method, how much profit is recognized in year 4?
A. $45,000
B. $40,000
C. $30,000
D. $20,000
E. $15,000
32. Fassino’s Wholesale Corporation
Fassino Wholesale Corporation (“Fassino’s”) operates discount retail stores. To shop in a Fassino’s store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Fassino’s for $120, a 20-pack of paper towels for $10.99, and four new tires for $480. The tire purchase includes mounting and aligning by a Fassino’s tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.
Using the Fassino’s Wholesale Corporation example, when should Fassino’s recognize the $120 membership fee as revenue?
A. Fassino’s should recognize all of the membership fee ($120.00) at the time that the annual membership fee is sold to the customer because it is nonrefundable.
B. Fassino’s should recognize all of the membership fee ($120.00) one year from the time that the annual membership fee is sold to the customer because the membership fee has been fully earned.
C. Fassino’s should recognize 1/12th of the membership fee, or $10.00, each month during the annual membership period.
D. Fassino’s should recognize two-thirds of the membership fee, or $90.00, at the time that the annual membership fee is sold to the customer because it is nonrefundable, and the other one-third of the membership fee, or $30.00, at the end of the annual membership period.
E. Fassino’s should recognize one-quarter of the membership fee, or $30.00, at the time that the annual membership fee is sold to the customer because it is nonrefundable, and the other three-quarters of the membership fee, or $90.00, at the end of the annual membership period.
33. Fassino’s Wholesale Corporation
Fassino Wholesale Corporation (“Fassino’s”) operates discount retail stores. To shop in a Fassino’s store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Fassino’s for $120, a 20-pack of paper towels for $10.99, and four new tires for $480. The tire purchase includes mounting and aligning by a Fassino’s tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.
When should Fassino’s recognize revenue from selling the tires plus mounting, alignment, and rotation services?
A. At the time of initial installation, Fassino’s performs its obligation to provide both tires and initial mounting and alignment services. Pete’s should recognize revenue for the portion of the $480 selling price applicable to the sale of tires and installation services at the time of installation.
B. Fassino’s should delay recognition of revenue for the portion of the $480 selling price applicable to the subsequent alignment and rotation services until it performs the required services.
C. Fassino’s should delay recognition of revenue from selling the tires plus mounting, alignment, and rotation services until it performs all of the required services at the end of the three year period.
D. At the time of initial installation, Fassino’s should recognize revenue for all of the $480 selling price applicable to the tires plus mounting, alignment, and rotation services.
E. Both choices a and b are correct.
34. Fassino’s Wholesale Corporation
Fassino Wholesale Corporation (“Fassino’s”) operates discount retail stores. To shop in a Fassino’s store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Fassino’s for $120, a 20-pack of paper towels for $10.99, and four new tires for $480. The tire purchase includes mounting and aligning by a Fassino’s tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.
When should Fassino’s recognize revenue from selling the paper towels?
A. Fassino’s will recognize $10.99 in revenue at the time it pays the paper towel vendor the wholesale price of the paper towels.
B. Fassino’s will recognize $10.99 in revenue at the end of the month of sale.
C. Fassino’s will recognize $10.99 in revenue at the end of the quarter of sale.
D. Fassino’s will recognize $10.99 in revenue at the time of sale.
E. Fassino’s will recognize $10.99 in revenue at the end of the year of sale.
35. The SRI company provides substantial services after the time of product sale and this condition introduces uncertainty. Which of the following is true?
A. Under some circumstances the firm recognizes revenue sometime after the sale.
B. Under some circumstances this uncertainty is sufficient to preclude the firm’s recognizing revenue at the time of sale.
C. The firm always recognizes revenue at the time of sale.
D. Both choices a and b are true.
E. None of the above is true.
36. The percentage-of-completion method
A. is affected by the actual schedule of cash collection.
B. cannot be used if the contract specifies that the contractor will receive the entire contract price only on completing construction.
C. measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.
D. is not a method allowed by U.S. GAAP.
E. none of the above.
37. The method of revenue recognition where the seller has substantial uncertainty about the amount of cash it will collect and matches the costs of generating revenues dollar for dollar with cash receipts until the seller recovers all such costs is called the
A. cash basis method.
B. percentage-of-payment method.
C. installment method.
D. cost-recovery-first method.
E. cost-recovery-last method.
38. U.S. GAAP requires that the completed contract method be used
A. when uncertainty obscures the total costs the contractor will incur in carrying out the project.
B. in situations when a firm has not found a specific buyer while construction progresses.
C. always to recognize income during construction projects.
D. in both circumstances a and b.
E. in none of the above situations.
39. When a firm's construction activities meet the criteria for revenue recognition as construction progresses, the firm usually recognizes revenue during the construction period using the
A. completed contract method.
B. cost recovery first method.
C. percentage-of-completion method.
D. installment method.
E. cost recovery last method.
40. The method of revenue recognition where the seller collects parts of the selling price in cash and at the same time recognizes as expenses each period the same portion of the cost of goods or services sold as the portion of total revenues recognized is called the
A. completed contract method.
B. direct payment method.
C. installment method.
D. cost-recovery-first method.
E. cost-recovery-last method.
41. Firms extending credit to customers should
A. strive for zero uncollectible accounts to eliminate the need for establishing a bad debt expense and maintaining an allowance for uncollectible accounts.
B. grant credit indiscriminately otherwise the firm may be charged with discrimination in the granting of credit and could be found to be in violation of Federal laws.
C. grant credit to a given group of customers whenever the amount collected from the credit sales to that group exceeds the cost of goods sold and the other costs of serving that group.
D. should ignore collection efforts aimed at those customers who have not paid their bills because the cost of staffing and maintaining a collection department are never cost effective.
E. none of the above.
42. When the seller has received cash, but has not earned all of the revenues represented by the cash by providing goods and services, the seller has incurred an obligation to provide goods or services. These liabilities
A. are referred to as deferred performance obligations.
B. may use an account title of Advances from Customers.
C. may use an account title of Deferred Revenues.
D. may use an account title of Unearned Revenues.
E. can be all of the above.
43. The cost recovery method
A. matches the costs of generating revenue with cash receipts until the seller recovers all its costs.
B. is a method by which the seller sets expenses equal to revenue in each period until it recovers all its costs.
C. is a method by which the seller does not recognize gross margin in income until it has recovered all of the costs of the sale.
D. is a method by which the seller reports revenue without any matching expenses in its income statement after cumulative cash receipts equal total costs.
E. all of the above.
44. Conceptual guidance in U.S. GAAP refers to the selling entity having earned the revenues (that is, having completed the earnings process). IFRS refers to
A. transferring the risks and rewards of ownership to customers (in the case of revenues involving goods).
B. having rendered services (in the case of revenues involving services).
C. measuring the costs of any obligations that the seller has not performed at the time it recognizes revenue with reasonable reliability.
D. all of the above.
E. none of the above.
45. When the customer pays with a credit card
A. the retailer receives payment from the credit card issuer promptly, typically within a few days.
B. the retailer treats the transaction like a cash sale.
C. the credit card issuer bears the risk of nonpayment by the customer.
D. the customer compensates the issuer by paying finance charges and other fees.
E. all of the above.
46. Project Paso Vineyards processes grapes into champagne, which it bottles, corks, and places on shelves in underground caverns to age for several years. During the aging process, the winemakers hand-turn the bottles a quarter rotation every few months; also, at fixed intervals, they release yeast gases to preclude unwanted fermentation. Assume that Project Paso contracts to sell a quantity of champagne to a customer for €30 million. Under the terms of the contract, Project Paso will store the champagne in its caverns and perform all necessary functions associated with the aging process (for example, turning the bottles and releasing yeast gases). The selling price includes the costs of producing the champagne and providing services during the aging process. The customer pays Project Paso €15 million at the beginning of the aging and storage process, and agrees to pay the remainder in five years upon delivery of the champagne.When should Project Paso Vineyards recognize revenue from selling the champagne?
A. Project Paso Vineyards should delay revenue recognition until it delivers the champagne to the customer.
B. Project Paso Vineyards should recognize revenue when it sells the champagne to the customer.
C. Project Paso Vineyards should recognize one fifth of the revenue per year after it sells the champagne to the customer.
D. Project Paso Vineyards should recognize one half of the revenue 2 1/2 years after it sells the champagne to the customer.
E. none of the above.
47. The percentage-of-completion method
A. recognizes a portion of the contract price as revenue during each accounting period of construction.
B. bases the amount of revenue, expense, and income on the proportion of total work performed during the accounting period.
C. measures the proportion of total work carried out during the accounting period either from engineers' estimates of the degree of completion or from the ratio of costs incurred to date to the total costs expected for the entire contract.
D. all of the above.
E. none of the above.
48. Rogers Manufacturing sells an old machine to KSS Corp. which is having financial difficulty. Rogers agrees to accept payment over 3 years. The adjusted basis of the machine to the seller is $5,000 and the buyer is expected to make payments of $2,000 per year for 3 years. What amount of net profit is recognized by the seller in year 3 if the seller uses the installment method? (Assume that the buyer makes the payments.)
A. $2,000
B. $1,000
C. $333.33
D. $0
E. $666.67
49. Jaymar Software Corporation sells SPAM BE GONE to customers, who receive the software and have access to postdelivery telephone support and the right to receive certain upgrades and enhancements if and when Jaymar Software develops them. Jaymar Software sells SPAM BE GONE for approximately $100; customers pay cash or with a credit card. When should Jaymar Software recognize revenue from selling SPAM BE GONE?
A. It recognizes revenue from sale of the software at the time of delivery and revenue associated with future obligations over the product’s life cycle.
B. It recognizes revenue from sale of the software over the product’s life cycle and revenue associated with future obligations at the time of delivery.
C. It recognizes revenue from sale of the software and the revenue associated with future obligations over the product’s life cycle.
D. It recognizes revenue from sale of the software and the revenue associated with future obligations at the time of delivery.
E. none of the above.
50. Sao Paulo Trains Inc., incorporated in Brazil, manufactures high-speed trains. In this industry, the time to manufacture products usually exceeds one year. Assume that Sao Paulo Trains recently signed a €8 billion contract to provide 10 new high-speed trains to a customer in the European Union. The customer has paid a deposit of €500 million and will pay the remainder in equal installments over the next four years. When should Sao Paulo Trains recognize the revenue from this contract?
A. at the time Sao Paulo Trains signs the contract and receives €500 million cash from the customer
B. assuming that Sao Paulo Trains can reliably estimate both the revenue from the contract and the costs to complete the contract, it will recognize revenue (as well as the costs associated with delivering on the contract) over the contract life.
C. Sao Paulo Trains will recognize all of the revenue (as well as all of the costs associated with delivering on the contract) at the completion of the contract
D. at the time Sao Paulo Trains signs the contract and receives the cash payments from the customer
E. none of the above
51. Wigs and Torys Plc. is a leading operator of pubs and pub restaurants in the United Kingdom. It operates and franchises about 10 wine restaurants under the name Bottoms Up Bar, primarily in London. Suppose that in contracting with a franchisee of an Bottoms Up Bar wine restaurant, Wigs and Torys agrees to provide services, including site selection, décor design, marketing, advertising, and recruiting; and the franchisee agrees to pay Wigs and Torys £100,000. It is common in the industry to permit the franchisee to pay in equal installments over several years. When should Wigs and Torys recognize revenue from the franchisee contract?
A. at the time Wigs and Torys Plc. signs the contract with the franchisee
B. as the cash is received by Wigs and Torys from the franchisee
C. as the income is earned by Wigs and Torys
D. at the end of the franchise period
E. half should be recognized when Wigs and Torys Plc. signs the contract with the franchisee and the other half after all the installments are received
52. In year 1, Southern Construction agrees to construct a school building for $12,000,000, receiving payments for the work of $6,000,000 in both year 1 and year 2. Southern estimates that the costs will be $4,000,000 in Year 1 and $6,000,000 in Year 2. If Southern uses the percentage-of-completion method (based on total costs), what amount of profit is recognized in each year of the contract?
Year 1 Year 2
A. $0 $2,000,000
B. $2,000,000 $0
C. $1,000,000 $1,000,000
D. $800,000 $1,200,000
E. $2,000,000 $1,000,000
53. In year 1, Northern Construction agrees to build a fire station that will be completed in year 2. Construction starts in year 1. The station will have costs of $2,000,000 in year 1 and $2,000,000 in year 2. Northern receives payment for the station of $5,000,000 in advance, in year 1. If Northern uses the completed contract method, what net profit is recognized by Northern in each year?
Year 1 Year 2
A. $0 $1,000,000
B. $1,000,000 $0
C. $3,000,000 ($2,000,000)
D. $500,000 $500,000
E. $250,000 $750,000
54. (CMA adapted, Dec 92 #18) The mining industry frequently recognizes revenue using the completion of production method. This method is acceptable under the revenue recognition principle because
Sales prices are Assets are Production cost reasonably readily can be readily assured realizable determined
A. Yes Yes No
B. Yes No Yes
C. No Yes No
D. No No Yes
E. No Yes Yes
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated costs for the contract are:
Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows:
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the percentage-of-completion method is:
A. $1,000,000
B. $1,400,000
C. $2,800,000
D. $3,360,000
E. None of the above
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated costs for the contract are:
55. Rock Aerospace CompanyAssume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows:
Year 4 $ 4,200,000
Year 5 $ 7,000,000
Year 6 $16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the cost-recovery-first method is:
A. $1,000,000
B. $1,400,000
C. $2,800,000
D. $3,360,000
E. None of the above
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated costs for the contract are:
Year 4 $ 5,600,000
Year 5 $11,200,000
Year 6 $ 5,600,000
Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows:
Year 4 $ 4,200,000
Year 5 $ 7,000,000
Year 6 $16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the installment method is:
A. $1,000,000
B. $1,400,000
C. $2,800,000
D. $3,360,000
E. None of the above
Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000. Estimated costs for the contract are:
Year 4 $ 5,600,000
Year 5 $11,200,000
Year 6 $ 5,600,000
57. Rock Aerospace Company 58. Rock Aerospace CompanyAssume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows:
Year 4 $ 4,200,000
Year 5
Year 6
$ 7,000,000
$16,800,000
Refer to the Rock Aerospace Company example. Income from the contract for Year 5 under the completed contract method is:
A $1,000,000
B. $1,400,000
C. $2,800,000
D. $3,360,000
E. None of the above
59. Recognizing income after the time of sale is
A. never appropriate.
B. always appropriate.
C. never in accordance with U.S. GAAP.
D. appropriate for some specific circumstances.
E. never in accordance with IFRS.
60. An accounting issue for accounts receivable is measurement of the amount on the balance sheet. With regard to measurement, both U.S. GAAP and IFRS require that sellers report accounts receivable _____.
A. the amount that all customers have agreed to pay
B. at the present value of future cash flows
C. net of the estimated uncollectible amount
D. at the future value of present cash flows
E. plus the estimated uncollectible amount
61. A firm that transfers its receivables in exchange for cash can
A. use its accounts receivable as collateral for a loan from a bank or other financial institution.
B. factor its accounts receivable to a bank or other financial institution in exchange for cash.
C. transfer the accounts receivable to a legally separate entity that issues debt securities to investors.
D. use all of the above.
E. use none of the above.
62. A firm may use its accounts receivable as collateral for a loan from a bank or other financial institution. Which of the following is/are true?
A. The firm physically maintains control of the accounts receivable, collects cash from customers, and repays the loan.
B. If the firm fails to repay the loan, the lender can claim the receivables.
C. If the firm has used its accounts receivable as collateral for a loan, the firm will continue to show those receivables as an asset (and there will also be a loan payable liability).
D. The firm should disclose the lending arrangement in its financial reports.
E. all of the above
63. A firm may factor its accounts receivable to a bank or other financial institution in exchange for cash. Which of the following is/are not true?
A. The lender physically controls the receivables and collects cash from customers.
B. Accounts receivable that the firm has factored do not appear on the balance sheet.
C. The firm has sold the accounts receivable.
D. The firm should disclose the factoring arrangement in its financial reports.
E. None of the above.
64. The firm may transfer the accounts receivable to a legally separate entity that issues debt securities to investors. Which of the following is/are true?
A. The firm remits to investors the cash received from customers as those cash receipts occur.
B. The firm may be obligated to make payments to investors in securities if the customers fail to make sufficient cash payments to pay the principal and interest on the debt securities.
C. The transfer is called securitization, a process that transforms an asset (accounts receivable) into securities held by investors.
D. all of the above
E. none of the above
65. Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S. GAAP and IFRS
A. require that the firm use the allowance method to estimate and recognize the effects of returns.
B. the selling firm debits a revenue contra account for expected returns to reduce current period revenues to the estimated amount that will not be returned.
C. require that the firm measures revenues based on the amount of cash it expects to collect from current period sales.
D. preclude revenue recognition when customers have the right to return goods unless the firm can reasonably estimate the amount of returns.
E. all of the above
66. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by selling accounts receivable to a bank or financing company. This is called
A. assigning accounts receivable.
B. pledging accounts receivable.
C. factoring accounts receivable.
D. transferring accounts receivable.
E. none of the above.
67. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by selling accounts receivable to a bank or financing company. This is called
A. assigning accounts receivable.
B. pledging accounts receivable.
C. factoring accounts receivable.
D. all of the above.
E. none of the above.
68. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by
A. assigning accounts receivable and forwarding amounts collected to the lending institution.
B. pledging its accounts receivable to the lending agency as collateral for a loan.
C. factoring the accounts receivable to a bank or financing company to obtain cash.
D. all of the above.
E. none of the above.
69. When firms that are temporarily short of cash and unable to borrow from usual sources convert accounts receivable into cash by pledging the accounts receivable, they disclose this information
A. on the income statement, only.
B. on the balance sheet, only.
C. on both the income statement and the balance sheet.
D. by a footnote to the financial statements.
E. in managements’ discussion and analysis.
70. Healthy Lawn Maintenance Company
Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.
(Use the Healthy Lawn information to answer this question.) The aggregate effect of these entries during 2013 is as follows:
71. Healthy Lawn Maintenance Company
Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.
Assume that Healthy Lawn Maintenance estimates that it will not collect 2% of total credit sales in a given month. At the end of each month, it makes an adjusting entry. The aggregate effect of these entries during 2013 is as follows:
72. Healthy Lawn Maintenance Company
Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.
If Healthy Lawn Maintenance’s customers remitted $1,900,000 in cash during 2013, it would make the following journal entries with the following aggregated amounts:
73. Healthy Lawn Maintenance Company
Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.
Healthy Lawn Maintenance deems uncollectible any customer account not paid after six months. This means that every accounting period, Healthy Lawn Maintenance ascertains which accounts remained uncollected for six months, and treats these customer accounts as uncollectible by writing them off. If, during 2013, Healthy Lawn Maintenance identified accounts of specific customers totaling $20,000 with unpaid balances for six months and wrote them off, the journal entry would be as follows:
74. Healthy Lawn Maintenance Company
Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month.
The 2013 year-end balance in Accounts Receivable, Gross, for Healthy Lawn Maintenance is $1,085,000 An aging of these accounts receivable shows that the estimated uncollectible amount is $24,200. Before aging the accounts, the Allowance for Uncollectibles has a debit balance of $15,000 from writing off actual accounts during 2013. Healthy Lawn Maintenance would record the following adjusting entry at the end of 2013 to obtain a credit balance in the Allowance for Uncollectibles of $24,200:
75. Recognizing revenue before the seller collects cash requires estimating the amount of uncollectible accounts with reasonable accuracy. Both U.S. GAAP and IFRS require the
A. direct method for uncollectible accounts, only.
B. direct charge off method for uncollectible accounts, only.
C. allowance method for uncollectible accounts, only.
D. allowance method and the direct charge off method for uncollectible accounts.
E. indirect method for uncollectible accounts, only.
76. Allowance for Uncollectibles contra account appears among the _____ on a firm’s balance sheet as a(n) _____.
A. liability; subtraction
B. liability; addition
C. assets; addition
D. assets; subtraction
E. shareholders’ equity; subtraction
77. When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the _____ and crediting _____ This process is called writing off the account.
A. Accounts Receivable, Gross; Allowance for Uncollectibles
B. Accounts Receivable, Net; Allowance for Uncollectibles
C. Allowance for Uncollectibles; Accounts Receivable, Gross
D. Allowance for Uncollectibles; Accounts Receivable, Net
E. Bad Debt Expense; Accounts Receivable, Net
78. There are two approaches that management can use to estimate the amount of credit sales that would prove to be uncollectible, they are the _____. Over time, the two methods, correctly used, will give the same cumulative income and asset totals. U.S. GAAP and IFRS do not require firms to use one or the other, and some firms use both methods.
A. gross amount of sales procedure and the aging-of-accounts-receivable procedure.
B. percentage-of-sales procedure and the aging-of-accounts-receivable procedure.
C. percentage-of-cost of good sold procedure and the amount of accounts-receivable procedure.
D. percentage-of-cost of good sold procedure and the aging-of-notes-receivable procedure.
E. gross amount of sales procedure and the amount of accounts-receivable procedure.
79. The percentage-of-sales procedure arises from the idea that uncollectible amounts will vary with the volume of credit business. The firm estimates the appropriate percentage by studying its own experience or by inquiring into the experience of similar firms. Default rates generally fall within the range of _____of credit sales.
A. .01% to .02%
B. 1% to 2%
C. 10% to 20%
D. 21% to 30%
E. 31% to 40%
80. After the firm estimates the amount of uncollectible accounts associated with the credit sales of each period, it makes an adjusting entry to debit _____ and credit _____.
A. Bad Debt Expense; Accounts Receivable, Net
B. Bad Debt Expense; Accounts Receivable, Gross
C. Allowance for Uncollectibles; Bad Debt Expense
D. Bad Debt Expense; Allowance for Uncollectibles
E. Allowance for Uncollectibles; Accounts Receivable, Gross
81. Under the _____ procedure, the firm estimates and recognizes its bad debt expense; the offsetting credit increases the balance in the Allowance for Uncollectibles. Under the _____ procedure, the firm estimates the ending balance in the Allowance for Uncollectibles account and makes a credit entry to bring the balance to this amount; the offsetting debit is to Bad Debt Expense.
A. aging; percentage-of-sales
B. percentage-of-sales; aging
C. percentage-of-sales; direct charge-off
D. direct charge-off; percentage-of-sales
E. percentage-of-sales; indirect charge-off
82. At the start of 20x4, Colonial Designs’ Allowance for Uncollectibles balance is €120,000. During 20x4, Colonial Designs’ credit sales were €5,000,000; of this amount, it expected 2% will become uncollectible. During 20x4, Colonial Designs wrote off €70,000 of accounts receivable. At the end of 20x4, Colonial Designs estimates, based on an aging of accounts, that the ending balance in the Allowance for Uncollectibles should be €130,000.
83. Which of the following is true regarding the U.S. Internal Revenue Service?
A. The IRS permits firms to use the allowance method to calculate the tax deduction for bad debts.
B. The IRS requires that firms recognize bad debt expense only when they conclude an account is not collectible.
C. The IRS permits firms to use the aging of accounts receivable method to calculate the tax deduction for bad debts.
D. The IRS permits firms to use the percentage of sales to calculate the tax deduction for bad debts.
E. The IRS permits firms to use the cost of goods sold method to calculate the tax deduction for bad debts.
84. The financial statements contain information for analyzing the collectibility of accounts receivable and the adequacy of the expense for uncollectible accounts. Typical ratios used for this analysis include the
A. accounts receivable turnover ratio, only
B. days receivables outstanding, only.
C. write-off percentage, only.
D. accounts receivable turnover ratio, days receivables outstanding, and write-off percentage.
E. accounts receivable turnover ratio and days receivables outstanding, only.
85. The accounts receivable turnover ratio captures the speed of cash collections from credit customers and is calculated as follows:
A. average accounts receivable divided by sales revenue.
B. sales revenue divided by average accounts receivable.
C. sales revenue plus average accounts receivable.
D. sales revenue minus average accounts receivable.
E. sales revenue times average accounts receivable.
86. Ratios used to evaluate the allowance for uncollectibles are
A. Bad Debt Expense to Sales Revenue and the ratio of the Accounts Receivable, Gross to Allowance for Uncollectibles to Accounts.
B. Sales Revenue to Bad Debt Expense and the ratio of the Accounts Receivable, Gross to Allowance for Uncollectibles to Accounts.
C. Sales Revenue to Bad Debt Expense and the ratio of the Allowance for Uncollectibles to Accounts Receivable, Gross.
D. Bad Debt Expense to Sales Revenue and the ratio of the Allowance for Uncollectibles to Accounts Receivable, Gross.
E. none of the above.
87. For U.S. companies, how do U.S. GAAP and income tax reporting compare in their treatment of uncollectible accounts?
A. U.S. GAAP and income tax reporting both require the direct write-off method.
B. U.S. GAAP and income tax reporting both require the allowance method.
C. U.S. GAAP and income tax reporting require different treatments of uncollectible accounts.
D. U.S. GAAP and income tax reporting assume uncollectible accounts are estimated based on past experience for reporting purposes.
E. none of the above.
88. The direct write-off method
A. recognizes losses from uncollectible accounts in the period when a firm decides that specific customers' accounts are uncollectible.
B. does not usually recognize the loss from uncollectible accounts in the period in which the sale occurs and the firm recognizes revenue.
C. provides firms with an opportunity to manage earnings each period by deciding when particular customers' accounts become uncollectible.
D. all of the above.
E. none of the above.
89. The method that recognizes losses from uncollectible accounts in the period when a firm decides that specific customers' accounts are uncollectible is called the
A. direct write-off method.
B. allowance method.
C. percentage of sales method.
D. bad debt determination method.
E. indirect write-off method.
90. Which of the following is/are not a shortcoming of the direct write-off method?
A. It provides firms with an opportunity to manage earnings each period by deciding when particular customers' accounts become uncollectible.
B. It does not usually recognize the loss from uncollectible accounts in the period in which the sale occurs and the firm recognizes revenue.
C. The amount of accounts receivable on the balance sheet does not reflect the amount a firm expects to collect in cash.
D. It is the method required for income tax reporting in the United States.
E. none of the above.
91. The direct write-off method
A. must be used for income tax reporting in the United States.
B. is the method preferred by U.S. GAAP for financial reporting
C. prevents management of earnings by the firm.
D. does not misstate the amount of accounts receivable on the balance sheet.
E. none of the above.
92. An example of a firm's use of a different set of accounting principles for financial reporting and for income tax reporting is
A. the allowance method for financial reporting and the direct write-off method for income tax reporting.
B. the direct write-off method for financial reporting and the allowance method for income tax reporting.
C. the direct write-off method for financial reporting and the percentage of sales method for income tax reporting.
D. the allowance method for financial reporting and the percentage of payables method for income tax reporting.
E. none of the above.
93. The allowance method does not involve
A. estimating the amount of uncollectible accounts that will occur over time in connection with the sales of each period.
B. recognizing the amount of uncollectible accounts that will occur over time in connection with the sales of each period in the period of the sale.
C. matching expenses with associated revenues.
D. the valuation method required for income tax reporting in the United States.
E. none of the above.
94. When using the allowance method
A. the write-off of specific customers' accounts does not affect income.
B. the income effect occurs in the year of sale, when the firm provides for estimated uncollectible accounts.
C. the write-off of specific customers' accounts does not affect (net) accounts receivable.
D. all of the above.
E. none of the above.
95. The allowance method overcomes shortcomings of the direct write-off method because it
A. recognizes the loss from uncollectible accounts in the period in which the sale occurs and the firm recognizes revenue.
B. reduces the opportunity to manage earnings each period by deciding when particular customers' accounts become uncollectible.
C. reflects the amount a firm expects to collect in cash from the accounts receivable on the balance sheet.
D. all of the above.
E. none of the above.
96. The allowance method is used by a firm
A. to estimate for uncollectibles when it knows that at the time of sale, it will experience some reduction in future cash flows and this amount can be estimated with reasonable precision in order to reduce reported earnings in the period of sale to the amount of the expected net cash collections.
B. when the customer has the right to return the product for a refund and the firm can estimate with reasonable precision the amount of returns at the time of sale.
C. when the customer has the right to repairs or replacement under warranty if the purchased product is defective, and the firm can estimate with reasonable precision the amount of warranty costs at the time of sale.
D. all of the above.
E. none of the above.
97. The seller of merchandise often offers a reduction from the invoice price for prompt payment, this is called a
A. sales discount.
B. purchase allowance.
C. incentive discount.
D. prompt payment discount.
E. all of the above.
98. The allowance method for uncollectibles is used by a firm
A. when it knows that at the time of sale, it will experience some reduction in future cash flows.
B. when the firm can estimate with reasonable precision the amount of reduction in future cash flows at the time of sale.
C. to reduce reported earnings in the period of sale to the amount of the expected net cash collections.
D. all of the above.
E. none of the above.
99. In estimating the amount of uncollectible accounts the accountant (1) estimates the amount of outstanding accounts receivable that the firm does not expect to collect and (2) adjusts the balance in the Allowance for Uncollectible Accounts so that, after the entry to recognize estimated uncollectibles, the balance in the account will equal the amount that the firm does not expect to collect. The name of this procedure is/are:
A. the percentage-of-sales.
B. aging-of-accounts-receivable.
C. direct write-off.
D. tax accounting.
E. indirect write-off.
100. Which of the following is/are true?
A. The percentage-of-sales procedure (1) estimates the amount of uncollectible accounts that will likely occur over time in connection with sales of each period and (2) makes an entry debiting Bad Debt expense and crediting Allowance for Uncollectible Accounts.
B. The aging-of-accounts-receivable procedure (1) estimates the amount of outstanding accounts receivable that the firm does not expect to collect and (2) adjusts the balance in the Allowance for Uncollectible Accounts so that, after the entry to recognize estimated uncollectibles, the balance in the account will equal the amount that the firm does not expect to collect.
C. The percentage-of-sales and the aging-of-accounts-receivable procedures should produce a balance in the Allowance for Uncollectible Accounts that is approximately the same at the end of each period.
D. all of the above.
E. none of the above.
101. In estimating the amount of uncollectible accounts the accountant (1) estimates the amount of uncollectible accounts that will likely occur over time in connection with sales of each period and (2) makes an entry debiting Bad Debt expense and crediting Allowance for Uncollectible Accounts. The name of this procedure is/are the
A. percentage-of-sales.
B. aging-of-accounts-receivable.
C. direct write-off.
D. indirect write-off.
E. tax accounting.
102. A debit balance in the allowance account may exist before recognizing estimated uncollectibles for the period because
A. firms sometimes write off specific customers' accounts during an accounting period as the firm identifies the specific customers whose accounts have become uncollectible.
B. firms generally wait until the end of the accounting period to recognize bad debt expense for the period.
C. the account will always have a credit balance after recognizing the provision for estimated uncollectibles for the period.
D. all of the above.
E. none of the above.
103. Sellers of merchandise offer sales discount or cash discounts in order to
A. provide an interest allowance on funds paid before the payment is due.
B. induce prompt payment so that it can reduce bookkeeping costs.
C. induce prompt payment so that it can reduce collection costs.
D. all of the above.
E. none of the above.
104. U.S. GAAP does not allow sellers of merchandise to recognize revenue from sales when the customers have the right to return goods.
A. unless the firm can reasonably estimate the amount of returns.
B. unless the firm uses an allowance method to do so.
C. unless the firm can reasonably estimate the amount of returns and uses an allowance method to do so.
D. none of the above.
E. all of the above.
105. Firms that reduce the price charged to a customer after the firm has delivered the goods and the customer has found them to be unsatisfactory or damaged issue a
A. sales return.
B. sales allowance.
C. sales discount.
D. sales factor.
E. sales price reduction.
106. As long as the amount collected from credit sales to a given group of customers exceeds the cost of goods sold and the other costs of serving that group of customers, including the costs of _____ accounts, the retailer will be better off selling to that group rather than losing the sales.
A. delinquent
B. uncollectible
C. collectible
D. preferred
E. common
107. An accounting issue for accounts receivable is the timing of recognition of the reduction in income caused by the uncollectibility of some accounts. With regard to timing, both U.S. GAAP and IFRS require that a seller recognize an expense for estimated uncollectible accounts receivable in the _____.
A. period when it recognizes the accounts receivable is uncollectable
B. period after it recognizes the related revenue
C. same period when it recognizes the related revenue
D. period before it recognizes the related revenue
E. period after it recognizes the accounts receivable is uncollectable
108. Both U.S. GAAP and IFRS require the allowance method for uncollectible accounts, which involves estimating the amount of uncollectible accounts receivable associated with
A. the cumulative total of all accounting period’s total sales.
B. the cumulative total of all accounting period’s credit sales.
C. each accounting period’s total sales.
D. each accounting period’s credit sales.
E. the cumulative total of all accounting period’s cash sales.
109. Bad Debt Expense is also called
A. the Provision for Bad Debts and the Provision for Uncollectible Accounts.
B. the Provision for Bad Debts, only.
C. the Provision for Uncollectible Accounts, only.
D. the direct write-off method, only.
E. the indirect write-off method, only.
110. Bad Debt Expense is also called the Provision for Bad Debts and the Provision for Uncollectible Accounts. Provision in this context refers to
A. a liability in U.S. GAAP, not an expense; that provision in IFRS refers to an expense whose timing or amount, or both, are uncertain.
B. an expense in U.S. GAAP, not a liability; that provision in IFRS refers to an expense whose timing or amount, or both, are uncertain.
C. an liability in U.S. GAAP, not an expense; that provision in IFRS refers to a liability whose timing or amount, or both, are uncertain.
D. an expense in U.S. GAAP, not a liability; that provision in IFRS refers to a liability whose timing or amount, or both, are uncertain.
E. none of the above.
111. Sales discounts and allowances include:
A. allowances for unsatisfactory merchandise.
B. discounts for prompt payment.
C. allowances for satisfactory merchandise.
D. interest charges for late payment.
E. choices a and b.
112. When customers return goods for cash refunds or, if the customer has not yet paid, for cancellation of the customer’s obligation to pay, the firm records a sales
A. allowance.
B. return.
C. discount.
D. credit.
E. debit.
113. Accrual accounting requires frequent, ongoing changes in estimates. Which of the following is/are true?
A. As time passes and conditions change, new information becomes available that causes management to change the estimates required to apply accounting principles.
B. Firms do not recalculate revenues and expenses of previous periods to incorporate new information involving estimates.
C. Changes in estimates do not always relate to recurring accrual accounting measurements.
D. Examples of changes in estimates include the amount of uncollectible accounts and the useful lives of depreciable assets.
E. all of the above.
114. Using the information in the following tables, determine the amount of revenue and expense reported in years 1-4 and the totals reported for all 4 years under both the percentage-of-completion method and the installment method.
115. Assume that a firm uses the accrual basis of accounting. For each of the following independent cases, indicate the amount of revenue the firm recognizes for the month of August.
a. Collects $2,000 in July for merchandise to be delivered in August.
b. Collects $1,200 in May for subscriptions that will be delivered during the next twelve months (beginning in May).
c. Collects $800 in August for merchandise sold and delivered in July.
d. Collects $2,400 interest on a 6-month certificate of deposit, which matures on August 15th.
e. Sells $3,000 of merchandise on account in August. The firm allows a 2% discount for payment prior to 30 days and customers take the discount.
116. The life of a construction contract is 4 years. The firm used the percentage-of-completion method. Under this method, cash collected and revenues recognized are shown below. Total cost of the project was $800,000. What portion of the total cost was incurred each year?
117. Chambliss Company started business on January 1, Year 7. It recognizes revenue and expense at the time of sale for financial reporting and uses the installment method for income tax reporting. Under the installment method, the firm recognizes revenue when it receives cash, and matches expenses with revenues based on the average cost of goods sold to sales percentage for the year in which the firm made the sale. The income tax rate is 30%. Data for Year 7 and Year 8 as reported to shareholders, appear below:
Required:
a. Compute the amount of net income after taxes for financial reporting for Year 7 and Year 8.
b. Compute the amount of taxable income for Year 7 and Year 8.
118. A construction firm enters a long-term contract to build a bridge. The expected and actual cash receipts and disbursements for the project are as follows:
What is the revenue during each of the following periods under each of the specified methods of revenue recognition?
119. A construction firm enters a long-term contract to build a bridge. The expected and actual cash receipts and disbursements for the project are as follows:
What is the income before taxes during each of the following periods under each of the specified methods of revenue recognition?
120. List three ways a firm may convert accounts receivable into cash and briefly describe the features of each option.
121. Prepare journal entries for the following transactions:
a. On November 1, Year 1, Slotkin Co. received a $1,000 note receivable with a 90-day maturity and a 12% interest rate in exchange for an outstanding account receivable of the same face amount.
b. Assume Slotkin Co. closes its books on a monthly basis. Prepare any adjusting journal entries necessary at November 30, Year 1.
c. Prepare any adjusting journal entries necessary at December 31, Year 1.
122. Briefly explain the difference between a sales allowance and a sales discount.
123. Darling Company ages its accounts receivable to estimate bad debts for financial statement purposes. President Darling is at a meeting with creditors and needs to know his total accounts receivable balance. Unfortunately, Darling picked up the wrong computer report and has, instead, a summary printout of the company's estimated bad debts as follows:
Calculate the accounts receivable balance based on Darling’s bad debt summary.
124. At the end of Year 2, the unadjusted trial balance of Alaska Company includes $1,500,000 of outstanding accounts receivable and an Allowance for Uncollectible Accounts of $14,600. Total sales for the year are $22,200,000 and 85% of the sales were on account. The company estimates that 1.8% of credit sales are uncollectible and no entries have been made during the year to reflect these uncollectibles. Prepare the adjusting entry for the allowance for uncollectible accounts.
125. Breaker Co.'s accounts receivable show the following balances by age:
The credit balance in the allowance for uncollectible accounts is $2,500. Breaker Co. uses the following percentages to compute the estimated amounts of receivables that will eventually prove uncollectible: 0-30 days, 0.7%; 31-60 days, 1.2%; 61-120 days, 11%; and more than 120 days, 65%.
Required: Prepare the adjusting journal entry.
126. Prepare entries to record the following transactions using the direct write-off method for uncollectibles.
a. The firm assumes that approximately 1% of total sales on account will prove uncollectible. Sales for Year 1 are $1,000,000. All sales are on account.
b. On July 7, Year 2, it is determined that an account of $2,000 will not be collected.
c. On August 14, Year 2, it is determined that an account of $3,000 will not be collected.
d. On December 31, Year 2, the company estimates that 2% of total credit sales of $2,000,000 will be uncollectible.
e. On February 1, Year 3, it is determined that accounts of $6,000 will not be collected.
f. On March 2, Year 3, $1,000 is collected on an account that had previously been written off as uncollectible in (e). It is determined that the account was originally written off in error.
127. Prepare entries to record the following transactions using the allowance method for uncollectible accounts.
a. The firm assumes that approximately 1% of total sales on account will prove uncollectible. Sales for Year 1 are $1,000,000. All sales are on account.
b. On July 7, Year 2, it is determined that an account of $2,000 will not be collected.
c. On August 14, Year 2, it is determined that an account of $3,000 will not be collected.
d. On December 31, Year 2, the company estimates that 2% of total credit sales of $2,000,000 will be uncollectible.
e. On February 1, Year 3, it is determined that accounts of $6,000 will not be collected.
f. On March 2, Year 3, $1,000 is collected on an account that had previously been written off as uncollectible in (e). It is determined that the account was originally written off in error.
128. The schedule that follows shows trial balances for Twain Company at the end of Year 1 and Year 2. Note that the two trial balances shown for Year 1 are the Adjusted, Preclosing Trial Balance (after making all adjusting entries) and the final Post-Closing Trial Balance, from which the firm constructs the balance sheet. The trial balance shown for the end of Year 2 is taken before adjusting entries of any kind, although the firm has periodically written off specific customers' Accounts Receivable during the year as those customers' accounts become obviously uncollectible.
Twain Company closes its books annually and makes all of its sales on account. At the end of Year 2, the management of Twain Company, along with the independent auditor, analyzes the currently outstanding Accounts Receivable. The aging schedule classifies accounts as "not yet due," "overdue less than 30 days," "overdue 30 days or more." Twain Company estimates that one-half of one percent of current accounts will become uncollectible, 5 percent of accounts overdue less than 30 days will become uncollectible, and 40 percent of accounts overdue 30 days or more will become uncollectible. From this aging of accounts receivable, the firm estimated that it will not collect $30,000 of the accounts. The auditor will use this information in making adjusting entries for Year 2.
Required:
See the requirements below. If there is insufficient information for a given question, state just that.
a. What was the dollar amount of Accounts Receivable written off during Year 2 as obviously uncollectible?
b. What was the total amount of cash collected from customers during Year 2?
c. What is the dollar amount of net Accounts Receivable shown on the balance sheet at the end of Year 1?
d. What is the dollar amount of the Bad Debt Expense for Year 2?
e. What is the dollar amount of the net Accounts Receivable shown on the balance sheet for the end of Year 2?
129. The sales, all on account, of Marla Company in Year 6, its first year of operations, were $700,000 Collections totaled $500,000. On December 31, Year 6, Marla Company estimated that 2 percent of all sales would probably be uncollectible. On that date, Marla Company wrote off specific accounts in the amount of $8,000.
Marla Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 7 as being uncollectible) on December 31, Year 7, includes the following accounts and balances:
On December 31, Year 7, Marla Company carried out an aging of its accounts receivable balances and estimated that the Year 7 ending balance of accounts receivable contained $9,000 of probable uncollectibles. It made adjusting entries appropriate for this estimate. Some of the $800,000 sales during Year 7 were for cash and some were on account; the omission is purposeful.
Required:
a. What was the balance in the Accounts Receivable account at the end of Year 6? Give the amount and whether debit or credit.
b. What was the balance in the Allowance for Uncollectible Accounts account at the end of Year 6? Give the amount and whether debit or credit.
c. What was bad debt expense for Year 7?
d. What was the amount of specific accounts receivable written off as being uncollectible during Year 7?
e. What were total cash collections in Year 7 from customers (for cash sales and collections from customers who had purchased on account in either Year 6 or Year 7)?
f. What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 7?
130. The sales, all on account, of Clayton Company in Year 5, its first year of operations, were $700,000. Collections totaled $500,000. On December 31, Year 5, Clayton Company estimated that 2 percent of all sales would probably be uncollectible. On that date, Clayton Company wrote off specific accounts in the amount of $6,000.
Clayton Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 6 as being uncollectible) on December 31, Year 6, includes the following accounts and balances:
On December 31, Year 6, Clayton Company carried out an aging of its accounts receivable balances and estimated that the Year 6 ending balance of accounts receivable contained $9,000 of probable uncollectibles. It made adjusting entries appropriate for this estimate. Some of the $800,000 sales during Year 6 were for cash and some were on account; the omission of the amount is purposeful.
Required:
a. What was the balance in the Accounts Receivable account at the end of Year 5? Give the amount and whether debit or credit.
b. What was the balance in the Allowance for Uncollectible Accounts account at the end of Year 5? Give the amount and whether debit or credit.
c. What was bad debt expense [or, the amount of the Revenue Contra for Uncollectibles] for Year 6?
d. What was the amount of specific accounts receivable written off as being uncollectible during Year 6?
e. What were total cash collections in Year 6 from customers (for cash sales and collections from customers who had purchased on account in either Year 5 or Year 6)?
f. What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 6?
g. Consider the account, Allowance for Uncollectible Accounts. Is that account best fully labeled as an Asset account, an Asset Contra account, an Asset Adjunct account, or an Asset Control account?
h. Assume the following facts, independent of the assumptions in the preceding questions. Bobbin can estimate with reasonable precision each of the following: uncollectible accounts on sales, estimated future warranty costs for product warranties offered along with its products, and estimated returns by customers who exercise the option to return goods for a full refund. For which of the following, if any, may Bobbin use an allowance method in measuring periodic income: uncollectible accounts, product warranties, and returns? Indicate none, all, or the specific methods.
131. The sales, all on account, of Hendricks Company in Year 1, its first year of operations, were $800,000. Collections totaled $600,000. On December 31, Year 1, Hendricks Company estimated that 3 percent of all sales would probably be uncollectible. On that date, specific accounts in the amount of $18,000 were written off.
Hendricks Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 2 as being uncollectible) on December 31, Year 2, includes the following accounts and balances:
On December 31, Year 2, Hendricks Company carried out an aging of its accounts receivable balances and estimated that the Year 2 ending balance of accounts receivable contained $26,000 of probable uncollectibles. It made adjusting entries appropriate for this estimate. Some of the $900,000 sales during Year 2 were for cash and some were on account; these data purposefully omit the amounts.
Required:
a. What was the balance in the Accounts Receivable account at the end of Year 1? Give the amount and whether debit or credit.
b. What was the balance in the Allowance for Uncollectible Accounts at the end of Year 1? Give the amount and whether debit or credit.
c. What was bad debt expense (Revenue Contra for Uncollectibles) for Year 2?
d. What was the amount of specific accounts receivable written off as being uncollectible during Year 2?
e. What were total cash collections in Year 2 from customers (for cash sales and collections from customers who had purchased on account in either Year 1 or Year 2)?
f. What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 2?
132. Bealls Department Store reports in millions of dollars on its balance sheet for year-end Year 6 and Year 5 as follows:
It reports charge-offs [synonym for write-offs] of accounts receivable during Year 6 of 4.5 percent of its average gross receivables of $26,000 million and that Bad Debt Expense is 3.5 percent of credit card sales. What were Bealls’ credit card sales for Year 6?
133. How do sellers measure revenue?
134. Describe income recognition after the sale when substantial performance remains.
135. Describe the income recognition principles and how they are applied.
136. Describe the accounts receivable recognition process. 137. Discuss how accounts receivable can be analyzed. 138. Describe the allowance method for uncollectible accounts. 139. Discuss the application of the allowance method for sales returns.