Answer (D) is correct.
The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. However, it is usually
combined with other measurement bases (attributes). The attribute used to measure a long-term receivable or payable is the present or discounted value of its future cash flows.
Question: 136 Statements of financial position on December 31, Year 1, and December 31, Year 2, are presented below: Dec. 31, Year 1 Dec. 31, Year 2 Assets: Cash $ 50,000 $ 60,000 Accounts receivable 95,000 89,000
Allowance for uncollectible accounts (4,000) (3,000)
Inventory 120,000 140,000
Property, plant, and equipment 295,000 340,000
Accumulated depreciation (102,000) (119,000)
Total Assets $ 454,000 $ 507,000
Liabilities and equity:
Trade accounts payable $ 62,000 $ 49,000
Interest payable 8,000 11,000
Bonds payable 200,000 200,000
Unamortized bond discount (15,000) (10,000)
Equity 199,000 257,000
Total liabilities and equity $ 454,000 $ 507,000
Additional information for Year 2:
1. Sales revenue was $338,000.
2. $3,000 of accounts receivable was written off. Cash collections from customers in Year 2 were
Answer (A) is correct.
Cash collections from customers equals beginning accounts receivable, plus sales revenue, minus accounts written off, minus ending accounts receivable. In Year 2, cash collections from customers were $341,000 ($95,000 + $338,000 – $3,000 – $89,000).
B. $338,000 C. $344,000 D. $335,000
Question: 137 An analysis of an entity’s $150,000 accounts receivable at year end resulted in a $5,000 ending balance for its allowance for uncollectible accounts and a bad debt expense of $2,000. During the past year, recoveries on bad debts previously written off were correctly recorded at $500. If the beginning balance in the allowance for uncollectible accounts was $4,700, what was the amount of accounts receivable written off as uncollectible during the year?
A. $1,200 B. $1,800 C. $2,200
Answer (C) is correct.
Under the allowance method, uncollectible accounts are written off by a debit to the allowance and a credit to accounts receivable. The $500 of recovered bad debts is accounted for by a debit to accounts receivable and a credit to the allowance. The $2,000 bad debt expense is also credited to the allowance. The amount of accounts receivable written off can be calculated as follows:
Beginning allowance $4,700
Bad debt expense 2,000
Recoveries 500
Ending allowance (5,000)
A/R written off $2,200
D. $2,800
Question: 138 The following information applies to Nichola Manufacturing Company, which has a 6-month operating cycle:
Cash sales $100,000
Credit sales during the sixth month with net 30 days terms 150,000
Interest earned and accrued on an investment that matures during month 3
of the next cycle 2,000
The total of Nichola’s trade accounts receivable at the end of the current cycle is
A. $152,000 B. $160,000
Answer (B) is correct.
A receivable classified as current on the statement of financial position is expected to be collected within the current operating cycle or 1 year, whichever is longer. The total of the trade accounts receivable at the end of the current cycle is therefore $160,000 ($150,000 + $10,000).
C. $260,000 D. $262,000
Question: 139 Johnson Company uses the allowance method to account for uncollectible accounts receivable. After recording the estimate of uncollectible accounts expense for the current year, Johnson decided to write off in the current year the $10,000 account of a customer who had filed for bankruptcy. What effect does this write-off have on the company’s current net income and total current assets, respectively?
Net Income
Total Current Assets
A. Decrease Decrease B. No effect Decrease C. Decrease No effect D. No effect No effect Answer (D) is correct.
Johnson uses the allowance method. Thus, when a specific amount is written off, the journal entry is
Allowance for doubtful accounts $10,000
Accounts receivable $10,000
The write-off of a bad debt has no effect on expenses, net income, and total current assets.
Question: 140 Based on the industry average, Davis Corporation estimates that its bad debts should average 3% of credit sales. The balance in the allowance for uncollectible accounts at the beginning of Year 3 was $140,000. During Year 3, credit sales totaled $10,000,000, accounts of $100,000 were deemed to be uncollectible, and payment was received on a $20,000 account that had previously been written off as uncollectible. The entry to record bad debt expense at the end of Year 3 would include a credit to the allowance for
uncollectible accounts of
Answer (A) is correct.
Bad debt expense is based on the income statement approach. It treats bad debt expense as a function of sales on account. Thus, it is projected to be $300,000 ($10,000,000 × 3%). The entry to record bad debt expense is
Bad debt expense $300,000
Allowance for doubtful accounts $300,000
B. $260,000 C. $240,000 D. $160,000
Question: 141 The following information has been compiled by Able Manufacturing Company:
Sale of company products for the period to customers with net 30-day terms amounting to $150,000.
Sale of company products for the period to a customer, supported by a note for $25,000, with special terms of net 180 days.
Balance of trade receivables at the end of the last period was $300,000.
Collections of open trade receivables during the period was $200,000.
Rental income for the period, both earned and accrued but not yet collected, from the Able Employees’ Credit Union for use of company facilities was $2,000. The open trade receivables balance to be shown on the statement of financial position for the period is
A. $250,000
Answer (A) is correct.
The open trade receivables balance is calculated as follows:
Previous ending balance $300,000
Add: sales to customers (terms net 30) 150,000
Minus: collections during period (200,000)
Open trade receivables reported $250,000
B. $252,000 C. $275,000 D. $277,000
Question: 142 The following information relates to Jay Co.’s accounts receivable for the year just ended:
Accounts receivable, 1/1 $ 650,000
Credit sales for the year 2,700,000
Sales returns for the year 75,000
Accounts written off during the year 40,000
Collections from customers during the year 2,150,000
Estimated future sales returns at 12/31 50,000
Estimated uncollectible accounts at 12/31 110,000
What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, at December 31?
A. $1,200,000 B. $1,125,000 C. $1,085,000
Answer (C) is correct.
The ending balance in accounts receivable consists of the $650,000 beginning debit balance, plus debits for $2,700,000 of credit sales, minus credits for $2,150,000 of collections, $40,000 of accounts written off, and $75,000 of sales returns.
Accounts Receivable (in 000s)
1/1 $ 650 $ 75 Sales returns
Credit sales 2,700 2,150 Collections
40 Write-offs
12/31 $1,085
The $110,000 of estimated uncollectible receivables and the $50,000 of estimated sales returns are not relevant because they affect the allowance accounts but not gross accounts receivable.
D. $925,000
Question: 143 A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?
A. $185,000 B. $190,000
Answer (B) is correct.
The company has $200,000 of sales and estimates that 5% of sales will be returned. Thus, the company will recognize $10,000 ($200,000 × 5%) for sales returns (contra revenue) and for a corresponding allowance for sales returns (contra asset). This amount is subtracted from total sales to find net sales revenue of $190,000 ($200,000 – $10,000).
C. $195,000 D. $200,000
Question: 144 An internal auditor is deriving cash flow data based on an incomplete set of facts. Bad debt expense was $2,000. Additional data for this period follows:
Credit sales $100,000
Gross accounts receivable -- beginning balance 5,000
Allowance for bad debts -- beginning balance (500)
Accounts receivable written off 1,000
Increase in net accounts receivable (after subtraction of allowance for bad
debts) 30,000
How much cash was collected this period on credit sales?
A. $64,000 B. $68,000
Answer (B) is correct.
The beginning balance of gross accounts receivable (A/R) was $5,000 (debit). Thus, net beginning A/R was $4,500 ($5,000 – $500 credit in the allowance for bad debts). The allowance was credited for the $2,000 bad debt expense. Accordingly, the ending allowance (credit) was $1,500 ($500 – $1,000 write-off + $2,000). Given a $30,000 increase in net A/R, ending net A/R must have been $34,500 ($4,500 beginning net A/R + $30,000), with ending gross A/R of $36,000 ($34,500 + $1,500). Collections were therefore $68,000 ($5,000 beginning gross A/R – $1,000 write-off + $100,000 credit sales – $36,000 ending gross A/R).
Gross A/R
$ 5,000 Beg. Bal. $ 1,000 Write-off 100,000 Cr. Sales 68,000 Collections
$ 36,000 End. Bal.
C. $68,500 D. $70,000
Question: 145 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 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
Answer (B) is correct.
The entity uses the percentage of accounts receivable method to estimate the allowance. The year-end balance should be $90,000 ($3,000,000 A/R × 3%). Hence, the year-end adjustment is $40,000 ($90,000 – $50,000) unadjusted balance.
C. $90,000 D. $140,000
Question: 146 When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account