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1

In preparing its August 31, 1990 bank reconciliation, Apex Corp. has the following information available:
Balance per bank statement, 8/31/90 $18,050
Deposit in transit, 8/31/90 3,250
Return of customer's check for insufficient funds, 8/31/90 600
Outstanding checks, 8/31/90 2,750
Bank service charges for August 100
On August 31, 1990, Apex's correct cash balance is
A. $18,550
B. $17,950
C. $17,850
D. $17,550

A. $18,550

Balance per bank statement $18,050
Plus deposit in transit 3,250
Less outstanding checks (2,750)
Equals ending cash balance $18,550

The effects of the bank service charges and the insufficient funds check are already reflected in the balance per bank statement. The bank was the source of that information.

2

Hilltop Co.'s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:
Bank service charge $ 10
Insufficient funds check 650
Checks outstanding 1,500
Deposits in transit 350
Check deposited by Hilltop and cleared by the bank for $125,
but improperly recorded by Hilltop as $152
What is the net cash balance after the reconciliation?

A. $52,363.
B. $53,023.
C. $53,050.
D. $53,077.

C. $53,050.

The reconciling items that need to be adjusted to the bank balance are: checks outstanding (-1,500) and deposit in transit (+350). The net cash after the reconciliation is: Bank balance $54,200 - 1,500 + 350 = $53,050. The bank service charge and insufficient funds are already reflected in the bank balance. The error is on Hilltop's books, not on the bank statement and therefore does not need to be included in the reconciliation.

3

The following information pertains to Tara Co.'s accounts receivable on December 31, 2004

Days outstanding
Amount
Estimated % uncollectible
0-60
$120,000
1%
61-120
90,000
2%
Over 120
100,000
6%
$310,000
========
During 2004, Tara wrote off $7,000 in receivables and recovered $4,000 that had been written off in prior years. Tara's December 31, 2003, allowance for uncollectible accounts was $22,000. Under the aging method, what amount of allowance for uncollectible accounts should Tara report on December 31, 2004?

A. $9,000
B. $10,000
C. $13,000
D. $19,000

A. $9,000

The data on write-offs and recoveries is not relevant. The aging method computes a required ending allowance balance based on the aging schedule. That required ending balance is the sum of the products of the receivables in each age category and the uncollectible percentage: $120,000(.01) + $90,000(.02) + $100,000(.06) = $9,000.
The write-offs and recoveries do affect the preadjustment allowance balance and therefore the amount of uncollectible accounts expense to recognize. In this case, the preadjustment balance is $19,000 ($22,000 - $7,000 + $4,000), which means no uncollectible accounts expense would be recognized in 2004 because the preadjustment balance is more than sufficient (exceeds the $9,000 required balance).

4

Tinsel Co.'s balances in allowance for uncollectible accounts were $70,000 at the beginning of the current year and $55,000 at year end. During the year, receivables of $35,000 were written off as uncollectible. What amount should Tinsel report as uncollectible accounts expense at year end?
A. $15,000
B. $20,000
C. $35,000
D. $50,000

To determine the amount of uncollectible expense (bad debt expense) use T accounts. Solve for ???? = 20,000
Allowance for uncollectible
70,000 Beg balance
Write-offs 35,000 ???? Bad debt expense

55,000 End balance

5



When the allowance method of recognizing bad debt expense is used, the allowance would decrease when a(an)
A. The account previously written off is collected.
B. Account previously written off becomes collectible.
C. Specific uncollectible account is written off.
D. Provision for uncollectible accounts is recorded.

C. Specific uncollectible account is written off.

The allowance account is increased when estimated uncollectible accounts expense is recognized. The allowance records the expected reduction in net accounts receivable until accounts are written off.
Then, when accounts actually become uncollectible and are written off, the allowance is decreased because it is no longer needed. The identity of the specific uncollectible account is known and that account is also decreased.

6

Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, 2004. Additional information is as follows:
Rents receivable - November 30, 2004
$1,060,000
Rents receivable - November 30, 2003
800,000
Uncollectible rents written off during the fiscal year
30,000
Under the accrual basis, Marr should report rental revenue of

A. $1,920,000
B. $1,980,000
C. $2,440,000
D. $2,500,000

D. $2,500,000

The cash basis revenue in the tax return is the amount of rent collected for tax purposes.

beg. rent receivable
+
accrual revenue
-
collections
-
write-offs
=
end. rent receivable
$800,000
+
accrual revenue
-
$2,210,000
-
$30,000
=
$1,060,000
accrual revenue
=
$2,500,000

7

Orr Co. prepared an aging of its accounts receivable at December 31, 2005 and determined that the net realizable value of the receivables was $250,000. Additional information is available as follows:
Allowance for uncollectible accounts at 1/1/05 - credit balance $ 28,000
Accounts written off as uncollectible during 2005 23,000
Accounts receivable at 12/31/05 270,000
Uncollectible accounts recovery during 2005 5,000
For the year ended December 31, 2005, Orr's uncollectible accounts expense would be

A. $23,000
B. $20,000
C. $15,000
D. $10,000

10,000

***Collectable is added back to the allowance number. Because you are reversing a previous write-off.***

Beginning allowance balance + uncollectible accounts expense - write-offs + recoveries = ending allowance balance

$28,000 + uncollectible accounts expense - $23,000 + $5,000 = ($270,000 - $250,000)

Uncollectible accounts expense = $10,000

Under the aging method, the ending allowance balance equals the difference between gross accounts receivable ($270,000) and net realizable value of accounts receivable ($250,000).

Write-offs decrease the allowance balance, and uncollectible accounts expense increases the allowance.

Recoveries also increase the allowance because the amount by which the allowance was decreased when the account was written off is reinstated on recovery

8

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account
A. Decreases both accounts receivable and the allowance for uncollectible accounts.
B. Decreases accounts receivable and increases the allowance for uncollectible accounts.
C. Increases the allowance for uncollectible accounts and decreases net income.
D. Decreases both accounts receivable and net income.

The entry is:
Allowance for uncollectible accounts XXXX
Accounts receivable XXXX
Both accounts are decreased.

The entry identifies the specific accounts receivable written off. That reduction takes the place of the earlier estimate, which created the allowance account in the first place.

9

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000.
What is the total amount of risk of accounting loss related to Butler's trade accounts receivable, and what amount of that risk is off-balance sheet risk?

Risk of accounting loss Off-balance sheet risk
$0 $0
$230,000 $0
$230,000 $20,000
$250,000 $20,000

Risk of accounting loss Off-balance sheet risk
$230,000 $0

This question requires an understanding of two accounting concepts:

1. Risk of accounting loss on accounts receivable (credit risk): loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler's net carrying value of accounts receivable is $230,000 ($250,000 - $20,000), that is the amount of risk of accounting loss.

230,000 total A.R risk. (Acct loss risk)

2. Off-balance sheet risk: This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler's net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.

All accounts are net, therefore all risk shows on the balance sheet.

10

Bee Co. uses the direct write-off method to account for uncollectible accounts receivable.
During an accounting period, Bee's cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:
Accounts written off Increase in accounts receivable balance
Deduction Deduction
Addition Deduction
Deduction Addition
Addition Addition

Accounts written off Increase in accounts receivable balance
Deduction Deduction


Under the direct write-off method, write-offs are credited directly to accounts receivable (AR). No allowance account is used. Under the terms of the question, accounts receivable increased during the year.

Increase in AR = sales - cash collections - write-offs
cash collections = sales - increase in AR - write-offs.

11

The following information relates to Jay Co.'s accounts receivable for 2004:

Accounts receivable, 1/1/04
$ 650,000
Credit sales for 2004
2,700,000
Sales returns for 2004
75,000
Accounts written off during 2004
40,000
Collections from customers during 2004
2,150,000
Estimated future sales returns at 12/31/04
50,000
Estimated uncollectible accounts at 12/31/04
110,000
What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, on December 31, 2004?

A. $1,200,000
B. $1,125,000
C. $1,085,000
D. $925,000

C. $1,085,000

The question is asking for the gross accounts receivable balance, before allowances for future sales returns, allowances, and uncollectible accounts:
AR 1/1 + Credit sales - Sales returns - Write-offs - Collections = AR 12/31
$650,000 + $2,700,000 - $75,000 - $40,000 - $2,150,000 = $1,085,000

12

On the December 31, 2005 balance sheet of Mann Co., the current receivables consisted of the following:
Trade accounts receivable $ 93,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (Nov. 2005) 3,000
Selling price of unsold goods sent by Mann on consignment at 130% of cost (not included in Mann's ending inventory) 26,000
Security deposit on lease of warehouse used for storing some inventories 30,000
Total $150,000
========

On December 31, 2005, the correct total of Mann's current net receivables was
A. $94,000
B. $120,000
C. $124,000
D. $150,000

A. $94,000

Only the first three items are included in net receivables:
Trade accounts receivable $93,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (Nov. 2005) 3,000
Net receivables $94,000

The claim for lost goods is a definite receivable. The firm has a current claim on another entity. The goods on consignment should be included in Mann's inventory at cost, not in accounts receivable at sales value. They have not been sold. The security deposit is not included in current receivables because the firm will likely not receive this deposit back during the next fiscal year.

13

Adam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, 2005. Additional information was as follows:
12/31/04 12/31/05
Accounts receivable $500,000 $650,000
Allowance for uncollectible accounts (30,000) (55,000)

Uncollectible accounts totaling $10,000 were written off during 2005. Under the cash basis of accounting, Adam would have reported 2005 sales of
A. $2,140,000
B. $2,150,000
C. $2,175,000
D. $2,450,000

A. $2,140,000

**The allowance acct info didn't matter and you should've included the S.R into A.R, **

Under the cash basis of accounting, sales equals cash collected from customers. An equation or T account may be used to determine this amount:
AR, beginning + Sales - Write-offs - customer collections = AR, ending
$500,000 $2,300,000 $10,000 ? = $650,000

Solving for the unknown (?) amount, customer collections equals $2,140,000.
This is the amount collected from customers, and is the amount that would be reported as sales under the cash basis method of accounting.

14


Mare Co.'s December 31, 2005, balance sheet reported the following current assets:

Cash
$ 70,000
Accounts receivable
120,000
Inventories
60,000
Total
$250,000
========
An analysis of the accounts disclosed that accounts receivable consisted of the following:

Trade accounts
$ 96,000
Allowance for uncollectible accounts
(2,000)
Selling price of Mare's unsold goods out on consignment, at 130% of cost, not included in Mare's ending inventory
26,000
_________
Total
$120,000
========
On December 31, 2005, the total of Mare's current assets is

A. $224,000
B. $230,000
C. $244,000
D. $270,000

*because the details below are an ANALYSIS OF THE ALREADY EXISTING BALANCE OF TOTAL ASSETS*

You just take the balance of : $250,000
Subtract the selling price of Goods on consignment $26,000

Add back the inventory at cost (Because that should be included in the inventory account) $26,000/1.30

Ending Balance $244,000

The only adjustment needed is to remove the unrecognized gross margin on the unsold inventory out on consignment.

Although the cost of the inventory of $20,000 ($26,000/1.30) is incorrectly classified in accounts receivable, that misclassification does not affect the total for current assets because accounts receivable is part of current assets. Subtracting the $26,000 removes the inventory at selling price. Adding the $26,000/1.30 term adds the cost of the inventory back to current assets. Inventory is reported at cost, not selling price, because the items are unsold. Including them at selling price would imply profit recognition before sale..

15

Marr Co. had the following sales and accounts receivable balances prior to any adjustment at year end:
Credit sales $10,000,000
Accounts receivable 3,000,000
Allowance for uncollectible accounts 50,000
Marr uses 3% of accounts receivable to determine its allowance of uncollectible accounts at year-end. By what amount should Marr adjust its allowance for uncollectible accounts at year-end?

A. $0
B. $40,000
C. $90,000
D. $140,000

* You've misinterpreted what is the final balance suppose to be and what is the adjustment calculation*

B. $40,000

When uncollectible accounts are based on receivables, the adjustment is the amount needed to bring the allowance up to the required amount based on those receivables. With $3,000,000 in receivables, the required ending allowance balance is $90,000 (.03 x $3,000,000). There is $50,000 in the allowance account before adjustment. Therefore, $40,000 must be added. That is the amount debited to bad debt expense, and credited to the allowance account.

16

The following accounts were abstracted from Roxy Co.'s unadjusted trial balance on December 31, 2005:
Debit Credit
Accounts receivable $1,000,000
Allowance for uncollectible accounts 8,000
Net credit sales $3,000,000

Roxy estimates that 3% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2005, the allowance for uncollectible accounts should have a credit balance of
A. $90,000
B. $82,000
C. $38,000
D. $30,000

B. $82,000

This answer is incorrect because it applies the 3% uncollectible rate to sales, rather than to receivables, and then subtracts the beginning debit allowance balance, resulting in $82,000.
The correct answer applies the 3% rate to ending receivables, resulting in $30,000 (.03 x $1,000,000).
The debit beginning balance is not considered because the $30,000 is the required ending balance based on receivables.

D. $30,000

The correct answer, $30,000, is the ending balance in the allowance account and equals: .03($1,000,000) = $30,000. The firm is basing its estimate on receivables. Therefore, the $30,000 is the target ending allowance balance.
The firm will recognize an amount of bad debt expense at the end of 2005 such that, after considering the beginning allowance balance and any write-offs during the year, the ending allowance balance will be $30,000.
The bad debt expense amount recognized will be affected by the $8,000 beginning balance, but the ending allowance balance will not.

17

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?

Accounts receivable Allowance for uncollectible accounts
Increase Decrease
Increase No effect
No effect Decrease
No effect Increase

Accounts receivable Allowance for uncollectible accounts

No effect Decrease

This response is correct with respect to accounts receivable, but the allowance increases rather than decreases. When an account is written off, the allowance is decreased (used up) at that time. When a written off account is subsequently collected, the allowance is increased or reinstated for the reduction that occurred with the write-off.


No effect Increase

The collection reverses the reduction in the allowance account when the specific account was written off. There is no net change in gross accounts receivable because the account was collected. The two journal entries often given for this transaction are: (1) dr. Accounts receivable, cr. Allowance; (2) dr. Cash; cr. Accounts receivable. The first entry reinstates the allowance. The offsetting debits and credits for accounts receivable in both two entries provide an internal record of the transaction.

18

Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year end:
Credit sales $10,000,000
Accounts receivable 3,000,000
Allowance for uncollectible accounts (debit balance) 50,000
Marr uses 3% of accounts receivable to determine its allowance for uncollectible accounts at year end. By what amount should Marr adjust its allowance for uncollectible accounts at year end?

A. $0
B. $40,000
C. $90,000
D. $140,000

*PAY ATTENTION TO DEBIT OR CREDIT BALANCE, DRAW IT OUT IF YOU HAVE TO!*

Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year end:
Credit sales $10,000,000
Accounts receivable 3,000,000
Allowance for uncollectible accounts (debit balance) 50,000
Marr uses 3% of accounts receivable to determine its allowance for uncollectible accounts at year end. By what amount should Marr adjust its allowance for uncollectible accounts at year end?

A. $0
B. $40,000
C. $90,000
D. $140,000

19

Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for 2004 were $1,000,000. During 2004, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 2004. In its December 31, 2004 income statement, what amount should Ward report as uncollectible accounts expense?
A. $23,000
B. $20,000
C. $18,000
D. $17,000

*CREDIT SALES ISN'T LOOKING FOR AN ADJUSTMENT, IT'S LOOKING FOR THE EXPENSE"

D. $17,000

Because the pre-adjustment balance in the allowance account is $3,000 debit, this is the ending allowance balance after recognizing the correct amount of uncollectible accounts expense ($20,000). The question asks for uncollectible accounts expense, not the ending allowance balance.

B. $20,000

The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% x $1,000,000 = $20,000

20

On March 31, 2005, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for uncollectible accounts. An analysis of Vale's trade accounts receivable on that date revealed the following:

Age
Amount
Estimated uncollectible
0 - 30 days
$60,000
5%
31 - 60 days
4,000
10%
Over 60 days
2,000
$1,400
What amount should Vale report as allowance for uncollectible accounts in its March 31, 2005, balance sheet?

A. $4,800
B. $4,000
C. $3,800
D. $3,000

C. $3,800

Incorrect

This answer subtracts the $1,000 balance already in the account from the required ending balance. This result is bad debt expense, not the required ending allowance balance. The question asks for the ending allowance balance, not the necessary change to arrive at that amount.


A. $4,800

Correct

The sum of the products of the AR amounts and uncollectible percentages yield the required ending allowance balance (the third AR category's estimated uncollectible has already been computed): $60,000(5%) + $4,000(10%) + $1,400 = $4,800.

21

For the year ending December 31, 2005, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:
Allowance for uncollectible accounts, 1/1/05 $42,000
Provision for uncollectible accounts during 2005 (2% on credit sales of $2,000,000) 40,000
Uncollectible accounts written off, 11/30/05 46,000
Estimated uncollectible accounts per aging, 12/31/05 52,000
After year-end adjustment, the uncollectible accounts expense for 2005 should be
A. $46,000
B. $48,000
C. $52,000
D. $56,000

So, the "Provision for uncollectible accounts during 2005 (2% on credit sales of $2,000,000) 40,000". Therefore there you do not need an adjustment to increase the uncollectible accounts.

42, stays the number to beat.
Then they wrote off the (46)
write-offs = -$4,000 (debit balance).

The desired ending balance under aging is $52,000.
Therefore, the required increase to the account is $56,000, and this amount is uncollectible accounts expense. The aging method first determines the required ending balance in the allowance account based on the age of receivables, and THEN adjusts the allowance account to that balance.
The $40,000 provision is based on credit sales, and is thus to be ignored in the question.

22

Inge Co. determined that the net value of its accounts receivable on December 31, 2005, based on an aging of the receivables, was $325,000. Additional information is as follows:
Allowance for uncollectible accounts - 1/1/05
$ 30,000
Uncollectible accounts written off during 2005
18,000
Uncollectible accounts recovered during 2005
2,000
Accounts receivable at 12/31/05
350,000
For 2005, what would be Inge's uncollectible accounts expense?

A. $5,000
B. $11,000
C. $15,000
D. $21,000

This blew my mind, but, when they don't give you an % or amount that's written off. you should have the contra account, technically, match the net realizable value difference between the two values.

B. $11,000

This question requires a determination of the pre-adjustment balance in the allowance account, and the ending balance. The difference between these two amounts is the increase in the account needed, which is also the amount recognized as bad debt expense. The aging method first determines the required ending balance in the allowance account, and then places the amount needed to increase the account to this required balance into the allowance account.
The pre-adjustment allowance balance =
Beginning balance - Write-offs + Recoveries =
$30,000 - $18,000 + $2,000 = $14,000

The ending allowance balance =
$350,000 ending gross AR - $325,000 ending net value of AR = $25,000

Therefore, bad debt expense is the amount needed to bring the allowance balance up to the ending balance of $25,000. The increase needed is $11,000 ($25,000 - $14,000).