Unit 6 - Cash & Receivables

Question 1

A company has the following cash balances:
Large bank $ 127,000
Small bank $ 17,000
Continental bank $ (42,000)
Petty cash $ 450
3-month treasury bill $ 60,000
CD maturing in 18 months $ 100,000

What is the amount of cash and cash equivalents that should be reported?

Answer 1

$204,450 = $127,000 + $17,000 + $450 + $60,000

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash.
Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days).
The bank overdraft for Continental bank is reported as a current liability. It cannot be offset against the other banks’ cash account. However, the overdraft could be offset if the company had another cash account with Continental bank.

Question 2

A company has the following items at year-end:
• cash in bank: $30,000
• petty cash: $500
• short-term paper with maturity of two months: $7,000
• postdated checks: $2,000
What amount should be reported as cash and cash equivalents in the balance sheet?

Answer 2

$37,500 = $30,000 + $500 + $7,000

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash.
Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months. (Note: 3 months is interpreted to mean 90 days or less.)
Postdated checks are reported as receivables.

Question 3

A company has the following items at year-end:

• cash in bank – checking account of $18,500
• cash on hand of $500
• post-dated checks received totaling $3,500
• certificates of deposit totaling $124,000

How much should be reported as cash in the balance sheet?

Answer 3

$19,000 = $18,500 + $500

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash.
Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days).
Postdated checks are reported as receivables.

Question 4

A company has the following items at year-end:

• cash in bank: $35,000
• petty cash: $300
• short-term paper with maturity of 120 days: $5,500
• postdated checks: $1,400

How much should be reported as cash in the balance sheet?

Answer 4

$35,300 = $35,000 + $300

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash.
Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days).
Postdated checks are reported as receivables.

Question 5

A company has cash in the bank of $20,000, restricted cash in a separate account of $3,000, and a bank overdraft in an account at another bank of $1,000.
How much should the company report in cash?

Answer 5

$20,000

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts.
The bank overdraft is reported as a current liability. It cannot be offset against the other bank’s cash account. However, the overdraft could be offset if the company had it in the same bank where it has the $20,000.
Restricted cash refers to cash that is held by a company for specific reasons and is, therefore, not available for immediate ordinary business use. It appears as a separate item from cash and cash equivalents on the balance sheet. Restricted cash can be classified as a current (short-term) or non-current (long-term) asset depending on when the cash is expected to be used.

Question 6

A company has cash in the bank of $10,000, restricted cash in a separate account of $1,000 deemed immaterial, and a bank overdraft of $3,000 in the same bank that houses the $10,000 in cash.
What amount should this company report as cash in the balance sheet?

Answer 6

$8,000 = $10,000 + $1,000 - $3,000

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts.
The bank overdraft can be offset against the $10,000 since that cash account is in the same bank as the overdraft.
Since the restricted cash is immaterial in amount, it doesn’t need to be segregated from cash.

Question 7

A company has the following items:

Cash $ 10,000
Petty cash $ 100
Short term paper $ 1,500
Postdated customer check $ 2,000
Bank overdraft $ 50

How much should the company report as cash equivalents?

Answer 7

$1,500

Accounting Rule: Cash is coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers’ checks, personal checks, and bank drafts. Petty cash funds and change funds are also cash.
Cash equivalents is treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits with liquidity of less than 3 months (90 days).
Postdated checks are reported as receivables.
Bank overdrafts are reported as a current liability. However, if the overdraft is in the same bank as another account, offsetting can occur.

Question 8

Study and memorize the information in the following table:

Answer 8

Study and memorize the information in the following table:

Question 9

All of the following may be included under the heading of “cash” except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.

Answer 9

b. money market funds.

Question 10

In which account are post-dated checks received classified?
a. receivables.
b. prepaid expenses.
c. cash.
d. payables.

Answer 10

a. receivables.

Accounting Rule: A post-dated check is a check written with a future date. In other words, the date that appears on the check is after the date when the check was written. It is classified as a current receivable.

Question 11

Under which section of the balance sheet is “cash restricted for plant expansion” reported?
a. current assets.
b. noncurrent assets.
c. current liabilities.
d. stockholders’ equity.

Answer 11

b. noncurrent assets.

Accounting Rule: Restricted cash is cash set aside for a particular purpose. In most situations, the fund balance is nonmaterial. When material in amount, restricted cash is segregated from regular cash for reporting purposes.

Question 12

A bank overdraft from a different bank should be
a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.

Answer 12

d. reported as a current liability.

Accounting Rule: A bank overdraft occurs when a company writes a check for more than the amount in its cash account. A company should report a bank overdraft in the current liabilities section of the balance sheet. If material, a company should disclose the item separately, either on the face of the balance sheet or in the related notes. If the bank overdraft is from the same bank the company has other accounts, an offset can occur.

Question 13

A bank overdraft from a separate account of the same bank should be
a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.

Answer 13

c. netted against cash and a net cash amount reported.

Accounting Rule: A bank overdraft occurs when a company writes a check for more than the amount in its cash account. A company should report a bank overdraft in the current liabilities section of the balance sheet. If material, a company should disclose the item separately, either on the face of the balance sheet or in the related notes. If the bank overdraft is from the same bank the company has other accounts, an offset can occur.

Question 14

What is restricted cash segregated on the balance sheet
a. a nonmaterial amount set aside for a specific purpose.
b. a material amount set aside for a specific purpose.
c. a nonmaterial amount set aside for a nonspecific purpose.
d. a material amount set aside for a nonspecific purpose.

Answer 14

b. a material amount set aside for a specific purpose.

Accounting Rule: Restricted cash is cash set aside for a particular purpose. In most situations, the fund balance is nonmaterial. When material in amount, restricted cash is segregated from regular cash for reporting purposes.

Question 15

A company receives a three-year, $20,000, zero-interest-bearing note that has a present value of $16,500.
What is the journal entry to record this transaction?

Answer 15

Debit notes receivable for $20,000; credit cash for $16,500; credit discount on notes receivable for $3,500.

Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

Question 16

A company issues a $7,000, noninterest-bearing note for the sale of inventory. The market rate at the time of the sale is of 8%. The note is due in full at the end of three years. Assuming an annual interest rate of 8% for three years is appropriate, the present value of the principal is $7,000 × 0.79383 = $5,557. Assuming an annual interest rate of 8% for eight years is appropriate, the present value of the principal is $7,000 × 0.78941 = $5,527.
What is the journal entry to record this sale?

Answer 16

Debit notes receivable for $7,000; credit revenue for $5,557; credit discount on notes receivable for $1,443.

Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

Question 17

A company sold goods in exchange for a $5,000, two-year, zero-interest-bearing note. The note is issued to a high-risk customer and the market rate for a note of similar risk is 7%. Assuming an annual interest rate of 7% for two years is appropriate, the present value of the principal is $5,000 × 0.87344 = $4,367.

What is the journal entry to record this sale?

Answer 17

Debit notes receivable for $5,000; credit revenue for $4,367; credit discount on notes receivable for $633.

Accounting Rule: A noninterest-bearing note is a note with no stated interest rate on its face. The interest is implied in the face value of the note. The note is issued for a lessor amount than its face value, and cash or sales revenue is credited for this amount. The face value of the note at maturity includes both principal and interest. Hence, the note receivable is always debited for is face value. Account for problems like this as the present value of a single sum.

Question 18

A company sells two lamps to a customer on account for $2,000. Each lamp sells for $1,000. One month later, the customer returns a lamp.

What is the journal entry to record the return of the lamp?

Answer 18

Debit sales returns and allowances for $1,000; credit accounts receivable for $1,000.

Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement.

Sales XXX
Less: Sales Returns and Allowances (XXX)
Net Sales XXX

Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price.
The journal entry is debit sales returns and allowances; credit accounts receivable.

Question 19

A company has sales of $12,000 and sales returns and allowances of $200.
What should the company report as net sales?

Answer 19

$11,800 = $12,000 - $200

Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement.

Sales XXX
Less: Sales Returns and Allowances (XXX)
Net Sales XXX

Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. The journal entry is debit sales returns and allowances; credit accounts receivable.

Question 20

The sales returns and allowances account is
a. an asset account.
b. a contra asset account.
c. expense account.
d. contra revenue account.

Answer 20

d. contra revenue account.

Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement.

Sales XXX
Less: Sales Returns and Allowances (XXX)
Net Sales XXX

Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. The journal entry is debit sales returns and allowances; credit accounts receivable.

Question 21

The journal entry to record the return of goods from a customer is
a. debit sales revenue.
b. credit sales revenue.
c. debit sales returns and allowances.
d. credit sales returns and allowance.

Answer 21

c. debit sales returns and allowances.

Accounting Rule: Sales returns and allowances is a contra-revenue account. It is deducted from sales in the income statement.

Sales XXX
Less: Sales Returns and Allowances (XXX)
Net Sales XXX

Sales returns refer to actual returns of goods from customers because defective or wrong products were sold. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price. The journal entry is debit sales returns and allowances; credit accounts receivable.

Question 22

A company has the following information for the period just completed:
• gross sales: $200,000
• beginning accounts receivable: $11,000
• long-term notes receivables: $102,000
• ending accounts receivable: $15,000
• net sales: $180,000

What is this company’s accounts receivable turnover?

Answer 22

13.85 times $180,000 / (($11,000 + $15,000) / 2))

Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period.

Question 23

A company has the following financial information:
Year 1 Year 2
Gross sales $ 55,000 $110,000
Sales return and allowances $ 5,000 $ 9,000
Accounts receivable $ 4,000 $ 7,500

What is the accounts receivable turnover for Year 2, rounded to the nearest one decimal place?

Answer 23

17.6 times = ($110,000 - $9,000) / (($4,000 + $7,500)) / 2)

Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period.

Question 24

A company has current year sales of $500,000, net accounts receivable of $35,000, and prior year net accounts receivable of $43,000.
What is the accounts receivable turnover, rounded to the nearest one decimal place?

Answer 24

12.8 times = $500,000 / (($35,000 + $43,000)) / 2)

Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period.

Question 25

A company has the following for the current year:
• sales of $100,000
• sales discounts of $15,000
• sales returns and allowances of $5,000
• accounts receivable of $50,000
• allowance for doubtful accounts of $6,000

For the prior year, the company had accounts receivable of $40,000 and allowance for doubtful accounts of $4,000.

What is the accounts receivable turnover, rounded to the nearest one decimal place?

Answer 25

2.0 times = $100,000 - $15,000 - $5,000 / ((($50,000 - $6,000) + ($40,000 - $4,000)) / 2)

Accounting Rule: The accounts receivable turnover ratio measures the number of times, on average, receivables are collected during the period.

Question 26

A company uses the days outstanding ratio to evaluate its receivable.
What does this ratio represent?

Answer 26

The number of days that a company takes to collect amounts due from customers.

Accounting Rule: The days to collect accounts receivable also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies.

Question 27

A company has net sales of $1,340,000, beginning accounts receivable of $500,000, and ending accounts receivable of $650,000.

How many days does it take the company to collect its accounts receivable, rounded to the nearest one decimal place?

Answer 27

156.6 days = (365 / ($1,340,000 / (($500,000 + $650,000) / 2)))

Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies.

Question 28

A company wants to assess the effectiveness of a company’s credit and collection policies.
What ratio should it use?

Answer 28

Days to collect accounts receivable.

Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies.

Question 29

A company has current year sales of $500,000, net accounts receivable of $35,000, and prior year net accounts receivable of $43,000.
What is the average number of days to collect receivables, rounded to the nearest one decimal place?

Answer 29

28.5 = 365 / ($500,000 / (($35,000 + $43,000) / 2))
Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies.

Question 30

A company has current year sales of $200,000, net accounts receivable of $30,000, and prior year net accounts receivable of $50,000.
What is the average number of days to collect receivables, rounded to the nearest whole number?

Answer 30

73 = 365 / ($200,000 / (($30,000 + $50,000) / 2))
Accounting Rule: The days to collect accounts receivable is also known as the average collection period and measures the number of days on average it takes to collect accounts receivable during the period. Companies frequently use the average collection period, also known as days’ outstanding, to assess the effectiveness of a company’s credit and collection policies.

Question 31

Company A sells goods for $5,000 to Company B with terms 1/10, net 45, and Company A expects that the discount will be taken. Company A uses the net method of accounting.
What amount should Company A record for accounts receivable?

Answer 31

$4,950 = $5,000 - ($5,000 x 1%)

Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% – discount % x invoice amount. The cash discount is handled using one of two methods – gross method and net method.
Under net method, sales are recorded at the net amount i.e., after deducting the amount of discount from the gross price. Accounts receivable is debited and sales account is credited.

Question 32

How is accounts receivable recorded on 6/30 for a company using the net method for the sale of $500 on 6/18, and payment made on 6/30 with payment terms 2/10, net 30?

Answer 32

Credit accounts receivable for $490.

Accounting Rule: 2/10 net 30 is a term-of-art that means customers are eligible to receive a 2% discount if the amount owed is paid within 10 days. In this case, accounts receivable is debited for $490 and sales is credited for $490.
Since the customer failed to make payment within the 10-day discount period, the full amount ($500) is due in 30 days which the customer paid. The journal entry is
Cash 500
Accounts receivable 490
Sales discounts forfeited 10
Sales discounts forfeited is shown in the income statement under the “Other revenue and gains” section.

Question 33

A company made a $25,000 sale on account with the following terms: 1/15, n/30.
How much should be recorded as revenue using the net method?

Answer 33

$24,750 = $25,000 – ($25,000 x 1%)
Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% – discount % x invoice amount. The cash discount is handled using one of two methods – gross method and net method.
Under net method, sales are recorded at the net amount i.e., after deducting the amount of discount from the gross price. Accounts receivable is debited and sales account is credited at the net amount.

Question 34

A company made a $25,000 sale on account with the following terms: 2/10, n/30.

What is the journal entry to record the sale using the net method?

Answer 34

Debit accounts receivable 24,500
Credit sales 24,500
$24,500 = $25,000 – ($25,000 x 2%)

Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% – discount % x invoice amount. The cash discount is handled using one of two methods – gross method and net method.
Under net method, sales are recorded at the net amount i.e., after deducting the amount of discount from the gross price. Accounts receivable is debited and sales account is credited.

Question 35

A company made a $25,000 sale on account with the following terms: 1/15, n/30.

How much should be recorded as revenue using the gross method?

Answer 35

$25,000

Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% – discount % x invoice amount. The cash discount is handled using one of two methods – gross method and net method.
Under gross method, sales are recorded at gross price i.e., without deducting the discount offered. Accounts receivable is debited and sales account is credited at the gross amount.

Question 36

On July 22nd, a company sold $23,500 of inventory items on credit with the terms 2/15, net 30. Full payment was received on August 1st .

What is the journal entry to record payment using the gross method?

Answer 36

On July 22nd, a company sold $23,500 of inventory items on credit with the terms 2/15, net 30. Full payment was received on August 1st .

What is the journal entry to record payment using the gross method?

Debit cash 23,030
Debit sales discount 470
Credit accounts receivable 23,500

Accounting Rule: The cash discount (also known as sales discount) is the relaxation in price that sellers offer to customers to induce them for prompt payments. The formula is 100% – discount % x invoice amount. The cash discount is handled using one of two methods – gross method and net method.
Under gross method, sales are recorded at gross price i.e., without deducting the discount offered. Accounts receivable is debited and sales account is credited at the gross amount.
If the customer makes the payment within the discount period, the seller allows the customer to take the discount according to the terms of sale. On other hand, the customer fails to make the payment within the discount period, then no discount is allowed.

Question 37

Study and memorize the information in the following table:

Answer 37

Study and memorize the information in the following table:

Question 38

A business realizes that collection from a customer will be impossible. The accountant needs to write off the uncollectible account using the allowance method.

What journal entry is used for this purpose?

Answer 38

Debit allowance for doubtful accounts; credit accounts receivable.

Accounting Rule: When using the allowance method to write off an accounts receivable that is deemed uncollectible, allowance for doubtful accounts is debited, and accounts receivable is credited.

Question 39

The December 31, 2019, trial balance for a company reported a $100,000 debit balance in accounts receivable. Management estimates that 10% of accounts receivable may not be collected. Prior to year-end adjustment, there was a $1,000 credit balance in the allowance for doubtful accounts.

What net realizable value of accounts receivable will be reported on this company’s December 31, 2019, balance sheet?

Answer 39

$90,000

Question 40

A company uses the allowance method for uncollectible accounts. On November 10, 2020, the company wrote off a customer’s $4,000 account receivable. The company received payment in full from the customer on December 1, 2020.
What entry or entries does the company record on December 1st?

Answer 40

Debit accounts receivable for $4,000; credit allowance for doubtful accounts for $4,000.
Debit cash for $4,000; credit accounts receivable for $4,000.

Accounting Rule: Under the allowance method, the recovery of a debt previously written off is recorded in two stages. First, a debit to accounts receivable and credit to the allowance for doubtful accounts to reverse the prior write off entry, and then secondly, a debit to cash and a credit to accounts receivable to record the payment.

Question 41

A company has an unadjusted credit balance in the Allowance for Doubtful Accounts of $10,000 and the following aging schedule:

What should the ending balance in the Allowance for Doubtful Accounts be, after all adjusting journal entries are made?

Answer 41

$30,600 = ($220,000 x 1%) + ($54,000 x 30%) + ($25,000 x 25%) + ($17,000 x 35%)

Accounting Rule: An aging schedule is the most commonly used tool for establishing an allowance based on outstanding accounts receivables. It presents a summary of accounts receivable into separate time brackets that rank the receivables based upon the days until due or the days past due. The longer the account balance is overdue, the more likely it will be uncollectible.

Question 42

A company has an unadjusted debit balance in the Allowance for Doubtful Accounts of $10,000 and the following aging schedule:

What amount should be recorded as the Bad Debt expense?

Answer 42

$40,600
The ending balance in the Allowance for Doubtful Accounts is $30,600. The beginning balance is $10,000. An adjustment of $40,600 is needed to get to the ending balance.

Accounting Rule: The journal entry to record uncollectible accounts receivable using the allowance method is debit bad debt expense and credit allowance for doubtful accounts.

Question 43

What is the journal entry for recording bad debt expense under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Answer 43

c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

Accounting Rule: Accounting Rule: The journal entry to record uncollectible accounts receivable using the allowance method is debit bad debt expense and credit allowance for doubtful accounts.

Question 44

What is the journal entry when writing-off an account as uncollectible under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Answer 44

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

Accounting Rule: The journal entry to record the write-off of an uncollectible account using the allowance method is debit allowance for doubtful accounts and credit accounts receivable. The allowance for doubtful accounts is a contra asset account to the accounts receivable account with a credit balance.

Question 45

Which of the following is included in the journal entry to record the collection of accounts receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Answer 45

d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Accounting Rule: Two entries are needed. First, an entry is needed to reverse the write-off of the account receivable and restore it, debit accounts receivable, credit allowance for doubtful accounts. Second, an entry is needed to record collection of the account, debit cash, credit accounts receivable.

Question 46

As of December 31, a company has an uncollectible account of $10,000. The accountant uses the direct write-off method to account for bad debts.
What is the journal entry for the write off of the account?

Answer 46

Debit bad debt expense; credit accounts receivable.

Accounting Rule: The direct write-off method is simple and convenient to apply, debit bad debt expense and credit accounts receivable. However, this method does not provide for the matching of expenses with current revenues and does not report receivables at their net realizable value. Therefore, the direct write-off method is not considered appropriate, except when the amount uncollectible is immaterial.

Question 47

Study and memorize the following journal entries:

To write-of an uncollectible account receivable under the direct write-off method, debit bad debt expense and credit accounts receivable, and under the allowance for doubtful accounts method, debit allowance for doubtful accounts and credit accounts receivable. Under both methods, credit the accounts receivable.

Answer 47

Question 48

As of December 31, a company has an uncollectible account of $10,000. The accountant uses the allowance method to account for bad debts.

What is the journal entry for the write off of the account?

Answer 48

Debit Allowance for doubtful accounts; credit A/R

Accounting Rule: When using the direct write-off method, bad debt expense is debited and accounts receivable is credited.

Question 49

Study and memorize the following journal entry:

The entry to record estimated uncollectible accounts receivable using the allowance method is debit bad debt expense, and credit allowance for doubtful accounts. No entry is made for the direct write-off method.

Answer 49

Question 50

Study and memorize the following journal entries:
The receipt of payment on a previously written-off account receivable using the allowance method requires a debit to accounts receivable and a credit to allowance for doubtful accounts to reverse the prior write-off entry, in addition to a debit to cash and a credit to accounts receivable to record the payment. The debit and credit to accounts receivable are offsetting, so they do not change the value of accounts receivable. Thus, the net effect is a debit to cash and credit to the allowance for doubtful accounts, an increase to two asset accounts.

Answer 50

Question 51

A company has the following account balances as of December 31st
• trade receivables: $100,000
• current notes receivable: $200,000
• other receivables (due in six months): $20,000
• allowance for doubtful accounts: $20,000

What amount is reported as net receivables under current assets on the balance sheet?

Answer 51

$300,000 = $100,000 + $200,000 + $20,000 - $20,000

Accounting Rule: Receivables are reported at their net realizable value, which is the net amount expected to be received in cash.

Question 52

What is “recourse” as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay.
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

Answer 52

a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

Accounting Rule: When accounts/notes receivable are factored (sold), the factoring arrangement can be with recourse or without recourse. If receivables are factored on a with recourse basis, the seller guarantees payment to the factor in the event the debtor does not make payment. When a factor buys receivables without recourse, the factor assumes the collection risk and absorbs any credit losses.

Question 53

Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
c. The factor assumes the collection risk and absorbs any credit losses in collecting the receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

Answer 53

c. The factor assumes the collection risk and absorbs any credit losses in collecting the receivables.

Accounting Rule: Sale without recourse means the purchaser assumes the collection risk and absorbs any credit losses. This is an outright sale of receivables both in form and substance. A loss on the sale is recognized for the excess of the face value of the receivables over the cash proceeds.

Question 54

A company has the following account balances at year-end:

Accounts receivable $90,000
Allowance for doubtful accounts $4,800
Sales discounts $ 3,200

The company should report accounts receivable at a net amount of

Answer 54

$85,200 = $90,000 - $4,800

Accounting Rule: Receivables are reported at their net realizable value, which is the net amount expected to be received in cash. The sales discounts is a contra account to sales and is reported on the income statement.

Question 55

The face value of a two-year note is $5,000. Both the market and stated interest rates are 5%.
What is the present value of this note?

Answer 55

$5,000

Accounting Rule: Companies record short-term notes at face value and long-term notes receivable at the present value of the cash they expect to collect, that is the future cash flows. The present value of the cash expected to be received is equal to the present value of the face amount plus the present value of the interest.
When the interest stated on an interest-bearing note equals the effective (market) rate of interest, the note sells at face value. The stated interest rate, also referred to as the face rate or the coupon rate, is the rate contracted as part of the note. The effective-interest rate, also referred to as the market rate or the effective yield, is the rate used in the market to determine the value of the note - that is, the discount rate used to determine present value.

When the stated rate differs from the market rate, the cash exchanged (present value) differs from the face value of the note. Companies then record this difference, either a discount or a premium, and amortize it over the life of a note to approximate the effective (market) interest rate.

Question 56

A company had the following details related to a three-year note receivable on the date of issue:
• face value of note: $15,000
• present value of the principal: $10,677
• present value of the interest: $3,603

What is the carrying amount of this note at the end of three years?

Answer 56

$15,000

Accounting Rule: The carrying amount of a note receivable at maturity will be its face value. The present value of the cash expected to be received is equal to the present value of the face amount plus the present value of the interest.
A company had the following details related to a three-year note receivable on the date of issue:
• face value of note: $15,000
• present value of the principal: $10,677
• present value of the interest: $3,603

What is the carrying amount of this note at the end of three years?

$15,000

Accounting Rule: The carrying amount of a note receivable at maturity will be its face value. The present value of the cash expected to be received is equal to the present value of the face amount plus the present value of the interest.

Notes receivable are recorded at the present value of the cash they expect to collect, that is the future cash flows. The journal entry to record the issuance of the note is:

Debit Notes Receivable 15,000
Credit Discount on Notes Receivable 720
Credit Cash 14,280

The company will amortize the discount over the term of the note by:
Debiting Discount on Notes Receivable
Crediting Interest Revenue

The company will record payment of the note at maturity by:
Debiting Cash
Crediting Notes Receivable

Question 57

A bank lent a customer $16,529 accepting a 2-year, $20,000 zero-interest bearing note from the customer. The implied interest rate is 10%.

What is the bank’s journal entries for the note, the recognition of interest each year, and the collection of the note at maturity?

Answer 57

Debit Notes Receivable 20,000
Credit Discount on Notes Receivable 3,471
Credit Cash 16,529

Debit Discount on Notes Receivable 1,653
Credit Interest Revenue 1,653
16,529 x 10%

Debit Discount on Notes Receivable 1,818
Credit Interest Revenue 1,818
(16,529 + 1,653) X 10%

Debit Cash 20,000
Credit Notes Receivable 20,000

Accounting Rule: Notes receivable are recorded at the present value of the cash expected to be collected, that is the future cash flows. The discount is amortized over the term of the note using the effective interest method. The carrying amount of a note receivable at maturity will be its face value.