Chapter 7: Receivables and Investments

Student: ___________________________________________________________________________

1. Which one of the following is not an accurate description of Allowance for Doubtful Accounts?

A. Contra account
B. Balance sheet account
C. Income statement account
D. Current asset account

2. The data presented below is for Tallon, Inc. for 2014.

Credit sales during the year $2,100,000

Accounts receivable - December 31, 2014 295,000
Allowance for doubtful accounts - December 31, 2014 28,000
Bad debt expense for the year 17,000

What amount will Tallon show on its year-end balance sheet for the net realizable value of its accounts
receivable?

A. $295,000
B. $267,000
C. $250,000
D. $ 28,000

3. The data presented below is for Tallon, Inc. for 2014.

Credit sales during the year $2,100,000

Accounts receivable - December 31, 2014 295,000
Allowance for doubtful accounts - December 31, 2014 28,000
Bad debt expense for the year 17,000

What is the effect on liquidity when Tallon records its estimate for bad debt expense using the allowance
method?

A. Liquidity decreases
B. Liquidity increases
C. Liquidity stays the same
D. Liquidity both increases and decreases
4. The following information was presented in the balance sheet of Gloria Company as of December 31,
2014:

Trade accounts receivable, net of allowance for uncollectibles of $100,000

$1,600,000

Which one of the following statements is true?

A. Gloria expects that $1,700,000 of accounts receivable will be collected after year end
B. The balance in the Accounts Receivable account in Gloria’s general ledger is $1,600,000
C. The net realizable value of Gloria’s accounts receivable is $1,600,000
D. Gloria expects to collect only $1,500,000 from its customers

5. On January 15, 2014, the accounts receivable balance was $7,000 and the balance in the allowance for
doubtful accounts was $700. That morning a $200 uncollectible account was written-off. The net
realizable value of accounts receivable immediately after the write-off is:

A. $6,300
B. $6,800
C. $7,200
D. $7,900

6. Which one of the following is an accurate description of Allowance for Doubtful Accounts?

A. Contra account
B. Liability account
C. Revenue account
D. Expense account

7. Which one of the following statements is true?

A. When a company uses a subsidiary ledger, the balance in the control account, Accounts Receivable,
shows only the amount the company expects to collect from the accounts receivable, net of any
expected uncollectible accounts
B. An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers
C. The balance in the control account, Accounts Receivable, should be equal to the sum of the balances
in the subsidiary ledger for accounts receivable.
D. A subsidiary ledger takes the place of the control account for some companies.

8. If a company uses the direct write-off method of accounting for bad debts,

A. It is applying the matching principle

B. It will record bad debt expense only when an account is determined to be uncollectible
C. It will reduce the accounts receivable account at the end of the accounting period for estimated
uncollectible accounts
D. It will report accounts receivable in the balance sheet at their net realizable value
9. Fenchurch Corp. uses the direct write-off method to account for bad debts. What are the effects on the
accounting equation of the entry to record the write-off of a customer's account balance?

A. Assets and liabilities decrease

B. Assets and owners’ equity decrease
C. Owners’ equity decrease and liabilities increase
D. No effect; assets increase and decrease by the same amount

10. If a company uses the allowance method of accounting for bad debts, which one of the following
statements is true?

A. It violates the matching principle

B. It will record bad debts only when an account is determined to be uncollectible
C. It will reduce the accounts receivable at the end of the accounting period for estimated uncollectible
accounts
D. It will report accounts receivable in the balance sheet at their net realizable value

11. Which one of the following statements is true if a company's collection period for accounts receivable is
unacceptably long?

A. The company may need to borrow to acquire operating cash

B. The company may offer trade discounts to lengthen the collection period
C. Cash flows from operations may be higher than expected for the company's sales
D. The company should expand operations with its excess cash

12. If a company uses the allowance method to account for bad debts, when will the company's owners'
equity decrease?

A. At the date a customer's account is written off

B. At the end of the accounting period when an adjusting entry for bad debts is recorded
C. At the date a customer's account is determined to be uncollectible
D. When the accounts receivable amount becomes past due

13. Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching
bad debts expense with revenue on the income statement?

A. The percentage of accounts receivable approach

B. The percentage of net credit sales approach
C. The direct write-off method
D. The uncollectible approach
14. Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net
realizable value of accounts receivable on the balance sheet?

A. The percentage of accounts receivable approach

B. The percentage of net credit sales approach
C. The direct write-off method
D. The uncollectible approach

15. Agee Corp.

The data presented below for Agee Corp. is for the year ended December 31, 2014

Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decemb
er 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated14,000
amount
of
uncollecti
ble
accounts
based on
aging
analysis

See the data for Agee Corp.

If Agee Corp. estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt
expense for 2014?

A. $12,400
B. $13,700
C. $14,000
D. $14,300
16. Agee Corp.

The data presented below for Agee Corp. is for the year ended December 31, 2014

Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decemb
er 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated14,000
amount
of
uncollecti
ble
accounts
based on
aging
analysis

See the data for Agee Corp.

If Agee Corp. estimates its bad debt to be 1% of net credit sales, what will be the balance in the
Allowance for Doubtful Accounts account after the adjustment for bad debts?

A. $12,400
B. $13,700
C. $14,000
D. $15,000
17. Agee Corp.

The data presented below for Agee Corp. is for the year ended December 31, 2014

Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decemb
er 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated14,000
amount
of
uncollecti
ble
accounts
based on
aging
analysis

See the data for Agee Corp.

If Agee Corp. uses the aging of accounts receivable approach to estimate its bad debts, what amount will
be reported as bad debt expense for 2014?

A. $12,700
B. $13,700
C. $14,000
D. $15,300
18. Agee Corp.

The data presented below for Agee Corp. is for the year ended December 31, 2014

Sales $1,400,000
(100% on
credit)
Sales 30,000
returns
Accounts 170,000
Receivabl
e
(Decemb
er 31,
2014)
Allowanc
e for
Doubtful
Accounts
(Before adjustment at December 31, 2014) 1,300
Estimated14,000
amount
of
uncollecti
ble
accounts
based on
aging
analysis

See the data for Agee Corp.

If Agee Corp.uses the aging of accounts receivable approach to estimate its bad debts, what will be the
net realizable value of its accounts receivable after the adjustment for bad debt expense?

A. $140,000
B. $156,000
C. $167,000
D. $184,000

19. Allowance for Doubtful Accounts represents:

A. Cash set aside to make up for bad debt losses

B. The amount of uncollectible accounts written off to date
C. The difference between total sales made on credit and the amount collected from those credit sales
D. The difference between the gross amount of accounts receivable and the net realizable value of
accounts receivable
20. Which of the following statements is true regarding the two allowance methods used to account for bad
debts?

A. The percentage of net credit sales approach takes into account the existing balance in the Allowance
for Doubtful Accounts account.
B. The direct write-off method takes into account the existing balance in the Allowance for Doubtful
Accounts account.
C. The percentage of accounts receivable approach takes into account the existing balance in the
Allowance for Doubtful Accounts account.
D. The direct write-off method does a better job of matching revenues and expenses.

The following data concerns Cubano Corporation for 2014:

Credit sales during the year $1,600,000

Accounts Receivable - December 31, 2014 235,000
Allowance for Doubtful Accounts - December 31, 2014 18,000
Bad debt expense for the year 11,000

What amount will Cubano show on its year-end balance sheet for the net realizable value of its accounts
receivable?

A. $253,000
B. $235,000
C. $224,000
D. $217,000

What are the effects on the accounting equation when a company makes the adjustment to record bad
debt expense using the allowance method?

A. Assets and owners' equity increase

B. Assets and owners' equity decrease
C. Assets increase and owners' equity decreases
D. Assets decrease and owners' equity increases

What are the effects on the accounting equation when a company writes off a bad debt?

A. Assets and stockholders' equity increase

B. Assets and stockholders' equity decrease
C. Assets increase and stockholders' equity decreases
D. No effect on overall assets or equity
Americana Corporation

The data below is for Americana Corporation for 2014.

Accounts receivable - January 1, 2014 $236,000

Credit sales during 2014 820,000
Collections from credit customers during 2014 590,000
Customer accounts written off as uncollectible during 2014 8,000
Allowance for doubtful accounts - January 1, 2014 8,700
Estimated uncollectible accounts based on an aging analysis 9,600

Refer to the data for Americana Corporation.

What is the balance of Accounts Receivable at December 31, 2014?

A. $336,000
B. $448,400
C. $458,000
D. $466,000

Americana Corporation

The data below is for Americana Corporation for 2014.

Accounts receivable - January 1, 2014 $236,000

Credit sales during 2014 820,000
Collections from credit customers during 2014 590,000
Customer accounts written off as uncollectible during 2014 8,000
Allowance for doubtful accounts - January 1, 2014 8,700
Estimated uncollectible accounts based on an aging analysis 9,600

Refer to the data for Americana Corporation.

If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense
for 2014?

A. $8,000
B. $8,100
C. $8,700
D. $8,900
Americana Corporation

The data below is for Americana Corporation for 2014.

Accounts receivable - January 1, 2014 $236,000

Credit sales during 2014 820,000
Collections from credit customers during 2014 590,000
Customer accounts written off as uncollectible during 2014 8,000
Allowance for doubtful accounts - January 1, 2014 8,700
Estimated uncollectible accounts based on an aging analysis 9,600

Refer to the data for Americana Corporation

If the aging approach is used to estimate bad debts, what is the balance in the Allowance for Doubtful
Accounts after the bad debt expense adjustment.

A. $8,000
B. $8,100
C. $8,900
D. $9,600

Hui Corporation

The data below is for Hui Corporation for 2014.

Accounts Receivable - January 1, 2014 $334,000

Credit sales during 2014 850,000
Collections from credit customers during 2014 725,000
Customer accounts written off as uncollectible during 2014 12,000
Allowance for Doubtful Accounts (After write-off of uncollectible accounts) 1,700
Estimated uncollectible accounts based on an aging analysis 13,200

Refer to the data for Hui Corporation.

What is the balance of Accounts Receivable at December 31, 2014?

A. $209,000
B. $225,000
C. $447,000
D. $459,000
Hui Corporation

The data below is for Hui Corporation for 2014.

Accounts Receivable - January 1, 2014 $334,000

Credit sales during 2014 850,000
Collections from credit customers during 2014 725,000
Customer accounts written off as uncollectible during 2014 12,000
Allowance for Doubtful Accounts (After write-off of uncollectible accounts) 1,700
Estimated uncollectible accounts based on an aging analysis 13,200

Refer to the data for Hui Corporation.

If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense
for 2014?

A. $ 2,900
B. $11,500
C. $23,500
D. $26,900

Hui Corporation

The data below is for Hui Corporation for 2014.

Accounts Receivable - January 1, 2014 $334,000

Credit sales during 2014 850,000
Collections from credit customers during 2014 725,000
Customer accounts written off as uncollectible during 2014 12,000
Allowance for Doubtful Accounts (After write-off of uncollectible accounts) 1,700
Estimated uncollectible accounts based on an aging analysis 13,200

Refer to the data for Hui Corporation.

If the aging approach is used to estimate bad debts, what should the balance in the Allowance for
Doubtful Accounts be after the bad debts adjustment?

A. $26,900
B. $14,900
C. $13,200
D. $11,500
Satin Corporation
The data presented below is for Satin Corporation for the year ended December 31, 2014.

Sales (100% on credit) $1,500,000

Sales returns 60,000
Accounts Receivable (December 31, 2014) 250,000
Allowance for Doubtful Accounts (Before adjustment at December 31, 2014) 3,000
Estimated amount of uncollectible accounts based on an aging analysis 31,000

Refer to the data for Satin Corporation

If Satin estimates its bad debts at 2% of net credit sales, what amount will be reported as bad debt
expense for 2014?

A. $25,800
B. $27,000
C. $28,800
D. $30,000

Satin Corporation
The data presented below is for Satin Corporation for the year ended December 31, 2014.

Sales (100% on credit) $1,500,000

Sales returns 60,000
Accounts Receivable (December 31, 2014) 250,000
Allowance for Doubtful Accounts (Before adjustment at December 31, 2014) 3,000
Estimated amount of uncollectible accounts based on an aging analysis 31,000

Refer to information for Satin Corporation

If Satin uses 2% of net credit sales to estimate its bad debts, what will be the balance in the Allowance
for Doubtful Accounts account after the adjustment for bad debts?

A. $33,000
B. $31,800
C. $27,000
D. $25,800
Satin Corporation
The data presented below is for Satin Corporation for the year ended December 31, 2014.

Sales (100% on credit) $1,500,000

Sales returns 60,000
Accounts Receivable (December 31, 2014) 250,000
Allowance for Doubtful Accounts (Before adjustment at December 31, 2014) 3,000
Estimated amount of uncollectible accounts based on an aging analysis 31,000

Refer to the data for Satin Corporation

If Satin uses the aging of accounts receivable approach to estimate its bad debts, what amount will be
reported as bad debt expense for 2014?

A. $28,000
B. $31,000
C. $34,000
D. $50,000

Satin Corporation
The data presented below is for Satin Corporation for the year ended December 31, 2014.

Sales (100% on credit) $1,500,000

Sales returns 60,000
Accounts Receivable (December 31, 2014) 250,000
Allowance for Doubtful Accounts (Before adjustment at December 31, 2014) 3,000
Estimated amount of uncollectible accounts based on an aging analysis 31,000

Refer to the information for Satin Corporation.

If Satin uses the aging of accounts receivable approach to estimate its bad debts, what will be the net
realizable value of its accounts receivable after the adjustment for bad debt expense?

A. $216,000
B. $219,000
C. $222,000
D. $250,000
On January 1, 2014, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius
Company carried balances of $20,000 and $550 respectively. During the year, the company reported
$70,000 of credit sales. There were $400 of receivables written off as uncollectible in 2014. Cash
collections of receivables amounted to $74,700. The company estimates that it will be unable to collect
5% of the year-end accounts receivable balance.

The amount of bad debts expense recognized in the 2014 income statement will be:

A. $545
B. $595
C. $745
D. $795

Assuming a company uses the allowance method, the entry to recognize the write-off of the specific
uncollectible accounts will act to:

A. Increase total assets and total equity

B. Increase total assets and decrease total equity
C. Decrease total assets and total equity
D. Not affect total assets or total equity

The entry required to recognize the bad debts expense for 2014 will act to:

A. Increase total assets and retained earnings

B. Decrease total assets and retained earnings
C. Decrease total assets and increase net income
D. Increase total assets and decrease net income

On January 1, 2014, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius
Company carried balances of $20,000 and $550 respectively. During the year, the company reported
$70,000 of credit sales. There were $400 of receivables written off as uncollectible in 2014. Cash
collections of receivables amounted to $74,700. The company estimates that it will be unable to collect
5% of the year-end accounts receivable balance.

The net realizable value of receivables appearing on the 2014 balance sheet will amount to:

A. $14,105
B. $14,155
C. $14,900
D. $15,450
On November 2, 2014, Quaint General Store concluded that a customer’s $400 account receivable was
uncollectible and that the account should be written off. What effect will this write-off have on Quaint’s
2014 net income and balance sheet totals assuming the allowance method is used to account for bad
debts?

A. Decrease in net income; decrease in total assets

B. Increase in net income; no effect on total assets
C. No effect on net income; decrease in total assets
D. No effect on net income; no effect on total assets

What is the distinguishing characteristic between accounts receivable and notes receivable?

A. Accounts receivable are usually current assets while notes receivable are usually long-term assets
B. Accounts receivable require payment of interest if not paid within the usual credit terms
C. Notes receivable result from credit sale transactions for merchandising companies, while accounts
receivable result from credit sale transactions for service companies
D. Notes receivable result from a written promise to pay within a specified amount of time

Where can the amounts needed to compute the accounts receivable turnover ratio be found?

A. The income statement

B. The balance sheet
C. The statement of cash flows
D. Both (a) and (b).

What should a company do to improve its accounts receivable turnover rate?

A. Lower its selling prices.

B. Increase its sales force.
C. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.
D. Reduce the number of employees working in the credit department.

Spirit Corp. reported net sales (all on credit) of $1,600,000 and cost of goods sold of $1,100,000 for
2014. Its beginning balance of Accounts Receivable was $150,000. The accounts receivable balance
decreased by $10,000 during 2014. Rounded to two decimal places, what is Spirit’s accounts receivable
turnover rate for 2014?

A. 7.59
B. 10.32
C. 10.67
D. 11.03
During 2014, the accounts receivable turnover rate for Cordner Company increased from 10 to 14 times
per year. Which one of the following statements is the most likely explanation for the change?

A. The company's credit department has followed up with customers whose account balances are past
due in order to generate quicker collections.
B. The company has decreased sales to its most credit worthy customers.
C. The company has increased the amount of time customers have to pay their accounts before they are
past due.
D. The company has extended credit to more risky customers in order to increase sales.

Lasiter Corp. reported net credit sales of $2,000,000 and cost of goods sold of $1,400,000 for 2014. On
January 1, 2014, accounts receivable was $250,000. Amounts owed by customers increased by $20,000
during 2014. Rounding to two decimal places, what is Lasiter’s accounts receivable turnover rate for
2014?

A. 8.33
B. 8.00
C. 7.69
D. 7.41

The party to a promissory note that agrees to repay money on the maturity date of the note is called the

A. Lender
B. Maker of the note
C. Payee of the note
D. Recipient of the note

How will the payee of the promissory note record the note on its books?

A. The promissory note will be recorded as an asset

B. The promissory note will be recorded as a liability
C. The promissory note will be recorded as revenue
D. The promissory note will be recorded as an expense

The total amount of interest calculated annually on a $7,000 promissory note payable for 3 years at 12%
that is not compounded is

A. $ 280
B. $ 840
C. $ 2,520
D. $ 8,260
On July 1, 2014, Falcon Company received a $20,000 promissory note from Jordyn Company. The
annual interest rate is 5%. Principal and interest are paid in cash at the maturity date of June 30, 2015.

If Falcon’s fiscal year ends September 30, 2014, an adjusting entry is needed to:

A. Increase interest revenue by $1,000

B. Increase notes receivable by $250
C. Increase interest receivable by $250
D. Increase notes receivable by $1,000

On July 1, 2014, Falcon Company received a $20,000 promissory note for services from Jordyn
Company. The annual interest rate is 5%. Principal and interest are paid in cash at the maturity date of
June 30, 2013.

The effect on Falcon’s financial statements on July 1, 2014 is as follows

A. Assets increase; owners’ equity increases

B. Assets decrease and owners’ equity decreases
C. Assets decrease
D. No net change in assets

Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a
promissory note for payment in the same amount. The note has a term of 90 days and a stated interest
rate of 8%. Utah’s accounting period ends on December 31.
What is the actual maturity date of the note?

A. December 31, 2014

B. January 29, 2015
C. February 28, 2015
D. March 1, 2015

Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a
promissory note for payment in the same amount. The note has a term of 90 days and a stated interest
rate of 8%. Utah’s accounting period ends on December 31.
What amount should Utah recognize as interest revenue on December 31, 2014 (if a 360 day year is
assumed)?

A. $ -0-
B. $ 60
C. $120
D. $180
Utah Co. sold merchandise to Big Sky Corp. on December 1, 2014, for $9,000, and accepted a
promissory note for payment in the same amount. The note has a term of 90 days and a stated interest
rate of 8%. Utah’s accounting period ends on December 31.
What amount should Utah recognize as interest revenue on the maturity date of the note?

A. $ -0-
B. $ 60
C. $120
D. $180

Megan Farms received a promissory note from a customer on March 1, 2014. The face amount of the
note is $8,000; the terms are 90 days and 9% interest.

What is the total amount of interest that Megan Farms will receive when the note is paid?

A. $ 60
B. $ 90
C. $180
D. $720

Megan Farms received a promissory note from a customer on March 1, 2014. The face amount of the
note is $8,000; the terms are 90 days and 9% interest. At the maturity date, the customer pays the amount
due for the note and interest.

What entry is required on the books of Megan Farms on the maturity date assuming none of the interest
had already been recognized?

A. Increase Cash, $8,000, and decrease Notes Receivable $8,000

B. Increase Cash, $8,180, increase Interest Revenue, $180, and decrease Notes Receivable, $8,000
C. Increase Cash $8,720, decrease Notes Receivable $8,000, and increase Interest Revenue, $720
D. No entry is required; the customer pays the amount due to the bank

Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted
a promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest
rate of 7%. Verilux’s accounting period ends on December 31, 2014.

What amount should Verilux recognize as interest revenue on December 31, 2014?

A. $ -0-
B. $ 116.67
C. $ 291.67
D. $ 280.00
Verilux Company sold merchandise to Flight Corp. on November 1, 2014, for $10,000. Verilux accepted
a promissory note from Flight Corp. for $10,000. The note has a term of 5 months and a stated interest
rate of 7%. Verilux’s accounting period ends on December 31, 2014.

What amount should Verilux recognize as interest revenue on the maturity date of the note?

A. $ -0-
B. $ 175.00
C. $ 291.67
D. $ 420.00

Comfort Shoes received a promissory note from a customer on April 1, 2014. The face amount of the
note is $2,000; the terms are 12 months and 8% annual interest.

How much total interest revenue will Comfort Shoes recognize for the year ended December 31, 2014?

A. $ 40
B. $ 107
C. $ 120
D. $ 160

Comfort Shoes received a promissory note from a customer on April 1, 2014. The face amount of the
note is $2,000; the terms are 12 months and 8% annual interest.

At the maturity date, the customer pays for the note and interest. Comfort Shoes made the proper
adjustment at the end of December for interest. The effect of recognizing the transaction on the maturity
date is

A. A decrease to Cash
B. An increase to Notes Receivable
C. An increase to Discount on Notes Receivable
D. A decrease to Notes Receivable

Router Inc. lends $70,000 on a 120-day, 9% promissory note. The total interest that Router will receive
at maturity is

A. $6,300
B. $2,100
C. $525
D. $1,890
Idaho.com accepts VISA for payments of purchases made by students. The credit card drafts are
deposited directly in a bank account. VISA charges a 2% collection fee. Credit card drafts totaling
$12,000 are deposited during September. The effect on the accounting equation to record the sales and
deposits will include

A. An increase in Cash for $12,000

B. An increase to Sales for $11,760
C. An increase to Accounts Receivable for $11,760
D. An increase in Collection Fee Expense for $240

When a company discounts an interest-bearing note at a bank with recourse,

A. The company is assured payment at maturity

B. The company will receive the full amount of the note plus interest
C. The company has a contingent liability from the time the note is discounted until its maturity date
D. The bank assumes the credit risk on non-payment at the maturity date

Discounting a note receivable

A. Requires using an account called discount on notes receivable

B. Is the process of lending money
C. Slows the collection process
D. Is the process of selling a promissory note

When a note receivable has been discounted by a company

A. An account called discount on notes receivable is used

B. It will be shown as an asset of the company
C. It slows the collection process
D. It may be shown as a contingent liability in the footnotes

If Cable Inc. receives $23,825 from credit card collections and has an average rate of 4.7% charged by
the credit card company, its credit card sales during the period were:

A. $111,978
B. $50,691
C. $25,000
D. $22,705

Cushion Sports accepted a credit card account receivable in exchange for $5,000 of services provided to
a customer. The credit card company charges a 5% service charge. Recording the transaction in the
company’s accounting records will have what effect on the accounting equation?

A. Increase assets and equity by $4,750

B. Decrease assets and equity by $250
C. Increase assets by $5,000
D. Increase equity by $5,000
When one company purchases less than 50% of equity securities in a second company, which of the
following statements is true?

A. The purchaser is referred to as the parent.

B. The purchaser is referred to as the subsidiary.
C. The company whose securities are purchased is the subsidiary.
D. The company whose securities are purchased is the investee.

Why do businesses invest in short-term investments?

A. They are trying to gain control over the activities of other companies.
B. They are investing excess cash to meet future business operation or investment needs.
C. They are lending money to companies that cannot obtain bank loans.
D. More than one of the above is correct.

For what reason would a company buy 10% of the common stock of a second company?

A. The company has idle cash and wishes to have a higher return than that available from temporary
money market investments.
B. The company wishes to insure a steady source of goods from the second company.
C. The company wishes to prepare consolidated financial statements.
D. More than one of the above is correct.

A company is referred to as a parent if it owns

A. 33% of the debt securities of a second company

B. 100% of the debt securities of a second company
C. 15% of the equity securities of a second company
D. More than 50% of the equity securities of a second company

The equity method of accounting for an investment is used when a company purchases

A. More than 20% of the debt securities of a second company.

B. 100% of the debt securities of a second company.
C. 15% of the equity securities of a second company.
D. More than 20% of the equity securities of a second company.

Hedron Corp. invested cash in a 6-month certificate of deposit (CD) on November 1, 2014. If Hedron
Corp. has an accounting period that ends on December 31, 2014, when should Hedron recognize interest
revenue from the CD?

A. On December 31, 2014 only

B. On May 1, 2013 only
C. Both December 31, 2014 and May 31, 2013
D. On the date when its income tax return is filed
Tippi Corp. invested cash in a 9-month certificate of deposit (CD) on October 1, 2014. If Tippi has an
accounting period which ends on December 31, 2014, when would it most likely recognize interest
revenue from the CD?

A. On December 31, 2014 only

B. On July 1, 2013 only
C. Both Dec. 31, 2014 and July 1, 2013
D. On October 1, 2014

Wagner’s Bookstore acquires a 6% $12,000 certificate of deposit on September 1. The term of the CD is
six months. At that time, all principal and accrued interest will be paid in cash. Indicate the effect on the
financial statements at December 31.

A. Interest Receivable increases $240, Interest Revenue increases $240

B. Interest Receivable increases $360, Interest Revenue increases $360
C. Interest Receivable increases $480, Interest Revenue increases $480
D. Interest Receivable increases $720, Interest Revenue increases $720

What are the effects on the accounting equation from the purchase of a short-term investment?

A. Assets and stockholders’ equity decrease

B. No effects--assets increase and decrease by the same amount
C. Assets and liabilities decrease
D. Stockholders' equity decreases and liabilities increase

Meta Inc. pays $18,000 to buy stock in another company and an additional $350 in commissions. Three
months later, Meta sells the stock for $19,000. At the time of sale, Meta will recognize a:

A. A $650 loss
B. A $1,000 gain
C. A $350 loss
D. A $650 gain

When are consolidated financial statements prepared?

A. At the option of an investee company

B. At the option of an investor company
C. If one company owns more than 50% of another company
D. Only if one company owns 100% of another company

Significant influence of one company over another has been defined by the accounting profession as the
ownership of what minimum percent of the second company's stock?

A. 30%
B. 50%
C. 100%
D. 20%
On July 1, 2014, Tipper Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually
on June 30. If the accounting year for Tipper ends at December 31, 2014, what will be reported with
respect to the bonds on that date?

A. The carrying value of the bonds will be $108,000.

B. The cash received in interest will be $8,000.
C. Interest income in the amount of $4,000 will be accrued.
D. A loss on the bonds will be reported in the Other Income and Expense section of the 2014 income
statement until the entire amount of interest is paid on June 30, 2015.

On February 1, 2014, Shine Corp. pays $50,000 for shares of Cloud common stock and
another $1,000 in commissions. Assume that Shine sells the Cloud stock on May 20, 2014, for $53,000.
In this case, Shine recognizes

A. An increase in assets and stockholders' equity for $2,000.

B. An decrease in assets and an increase in stockholders' equity for $2,000.
C. An increase and decrease in assets by the same amount.
D. An increase in assets and stockholders' equity for $3,000.

Which of the following statements is true regarding dividend income?

A. Dividend income is accrued at year-end.

B. Dividend income is reported on the income statement.
C. Dividend income appears in the stockholders' equity section of the balance sheet.
D. Dividend income is recognized by companies that own debt securities.

The comparative balance sheets for Spring Co. for 2014 and 2013 indicate that accounts receivable
decreased during 2014. Spring uses the indirect method of preparing the operating activities section of its
statement of cash flows. How will the decrease in accounts receivable be reported on the statement of
cash flows?

A. It will be included in the amount of cash and cash equivalents at the end of 2014.
B. It will be deducted from net income in the operating activities section.
C. It will be added to net income in the operating activities section.
D. It will be reported as a cash outflow in the investing activities section.

The comparative balance sheets of Farmore Corp. for 2014 and 2013 indicate that short-term trade notes
receivable increased from $5,000 in 2013 to $75,000 in 2014. How will this change be reported on
Farmore’s statement of cash flows (Farmore uses the indirect method)?

A. It will be included in the amount of cash and cash equivalents at the end of 2014.
B. It will be reported as a deduction from net income in the operating activities section.
C. It will be reported as a cash outflow in the investing activities section.
D. It will be added to net income in the operating activities section.
What is the impact on the cash flow statement from an increase in notes receivable, assuming the indirect
method is used?

A. A decrease in the cash flow from operating activities

B. An increase in the cash flow from operating activities
C. An increase in the cash flow from financing activities
D. An increase in the cash flow from investing activities

What is the impact on the cash flow statement from a decrease in accounts receivable, assuming the
indirect method is used?

A. A decrease in the cash flow from operating activities

B. An increase in the cash flow from operating activities
C. An increase in the cash flow from financing activities
D. None. A decrease in accounts receivable has an impact only if the direct method is used

Which one of the following is an investing activity on the statement of cash flows?

A. Collection of accounts receivable

B. Purchase of long-term investments
C. Receipt of interest
D. Receipt of dividends

Darling Enterprises’ comparative balance sheets included accounts receivable of $220,300

at December 31, 2013, and $200,900 at December 31, 2014. Sales reported on Darling’s
2014 income statement amounted to $2,350,000. What is the amount of cash collections
that Darling will report in the Operating Activities category of its 2014 statement of
cash flows assuming that the direct method is used?

A. $2,369,400
B. $2,350,000
C. $2,771,200
D. $2,330,600

The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the
maximum amount of write-off in each period.

True False

Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize
bad debts under the allowance method.

True False

The percentage of net credit sales approach for recognizing bad debts considers any existing balance in
Allowance for Doubtful Accounts.

True False
Selling on credit protects a company from the risk that some of its receivables will never be collected.

True False

Accounts receivable are shown on the balance sheet at their net realizable amount.

True False

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the
revenue of the period in which a sale on credit takes place.

True False

One of the problems with the use of the allowance method to account for bad debts is that it often
violates the matching principle.

True False

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts
before those debts actually occur.

True False

Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable
value.

True False

Because the allowance method results in better matching, accounting standards require its use rather than
the direct write-off method, unless bad debts are immaterial.

True False

An aging schedule typically categorizes the various accounts by the length of time each invoice is
outstanding.

True False

The accounts receivable turnover ratio is a measure of how well a company manages its receivables.

True False

The accounts receivable turnover ratio is computed by dividing net income by average accounts
receivable.

True False
Typically, the lower the accounts receivable turnover ratio, the better.

True False

If Apple Company had sales during the year of $10,000,000, an average accounts receivable
of $2,000,000, and net income of $500,000, its accounts receivable turnover ratio would be 0.25.

True False

If accounts receivable turnover is faster, this means that fewer days are required to collect receivables.

True False

The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its
accounts receivable.

True False

A high accounts receivable turnover ratio could mean that the company’s credit policies may be too
stringent.

True False

Twin Cities Corp. had sales during the year of $15,000,000 and an average accounts receivable of
$5,000,000. Its accounts receivable turnover ratio is 0.33 times.

True False

The maker of a note recognizes a note receivable on the balance sheet and interest revenue on its income
statement.

True False

The maker of a note recognizes a note payable on the balance sheet and interest expense on its income
statement.

True False

The payee of a note recognizes a note payable on the balance sheet and interest expense on its income
statement.

True False

The payee of a note recognizes a note receivable on the balance sheet and interest revenue on its income
statement.

True False
When a note is discounted at a bank, it is normally done with recourse.

True False

If a company accepts a major credit card such as VISA from a customer, then the company is responsible
for the amount of the sale in a case of nonpayment from a cardholder.

True False

When a company discounts a promissory note at the bank, it receives cash at the same time it would if it
held the note to maturity.

True False

The alternate term for a credit card draft is an invoice.

True False

Promissory notes are non-negotiable.

True False

A note discounted with recourse means that if the original customer fails to pay the bank the total amount
due on the maturity date of the note, the company that transferred the note to the bank is liable for the full
amount.

True False

Whether investments are reported as current assets or noncurrent assets depends on the company’s
intent.

True False

A subsidiary is a separate legal entity that is owned or controlled by another entity.

True False

Securities issued by corporations as a form of ownership in the business, such as common and preferred
stock, are called equity securities.

True False

When Company A buys stock in Company B, Company A is referred to as the investee.

True False
The equity method of accounting is used if the investor owns at least 20% of the investee and the
investor is able to secure influence over the investee.

True False

Purchases and sales of cash equivalents are reported as investing activities on a statement of cash flows.

True False

Baggs buys $100,000 of Vista Company bonds on January 1, 2014 at face value. The bonds pay 10%
interest semiannually on June 30 and December 31. If Baggs sells the bonds at 99 on July 1, 2014, there
will be a loss reported on the income statement.

True False

Both stock and bond investments have maturity dates.

True False

A company invests excess cash in a certificate of deposit. At the end of an accounting period before the
CD matures, the company will recognize interest expense.

True False
 Chapter 7: Receivables and Investments Key
1. C

2. B

3. A

4. C

5. A

6. A

7. C

8. B

9. B

10. D

11. A

12. B

13. B

14. A

15. B

16. D

17. A

18. B

19. D

20. C

C
C

D
C

FALSE

FALSE

FALSE

FALSE

TRUE
TRUE

FALSE

TRUE

FALSE

TRUE

TRUE

TRUE

FALSE

FALSE

FALSE

TRUE

TRUE

TRUE

FALSE

FALSE

TRUE

FALSE

TRUE

TRUE

FALSE

FALSE

TRUE

FALSE

TRUE

TRUE

TRUE

TRUE

FALSE

TRUE

FALSE

TRUE
FALSE

FALSE

TRUE

FALSE