Exam #2 (CH5-8)

A company reports the following amounts at the end of the year: Total sales revenue = $450,000; Cash = $42,000; Sales Discount = $14,000; Accounts Receivable = $26,000; Sales Return = $21,000; Operating Expenses = $75,000; Sales Allowances = $32,000. Compute Net Revenues.

• $397,000

• $383,000

• $436,000

• $415,000

Answer explanation

Total Sales Revenue - Sales discount - Sales return - Sales allowances = Net revenues.

Total sales revenue - Contra revenue = Net revenue

A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable

• True

• False

Answer explanation

A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue.

The amounts owed to a company by its customers from the sale of goods or services on account is commonly referred to as:

• Cash

• Accounts Receivable

• Revenue

• Accounts Payable

What is the primary disadvantage of extending credit to customers?

• Lower profitability

• Reduced operating efficiency

• Lower revenues

• Delay or failure to collect cash

When customers purchase goods on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:

• Bad debt

• Sales return

• Sales discount

• Sales allowance

Answer explanation

Sales discount: to encourage customer to pay earlier than the due date.

Sales allowance: A customer keeps a problem item but receives a cut on price.

A company reported the following amounts at the end of the year: total sales revenue = $500,000; sales discounts = $10,000; sales allowances = $15,000; net revenues = $440,000. What amount did the company report for sales returns for the year?

• $415,000

• $25,000

• $35,000

• $475,000

Answer explanation

Sales returns = Total sales revenue - Net revenues - Sales discounts - Sales allowances.

Sales returns = $500,000 - $440,000 - $10,000 - $15,000

A company's adjusting entry for uncollectible accounts at year-end would include a:

• Debit to Bad Debt Expense

• Debit to Allowance for Uncollectible Accounts

• Debit to Accounts Receivable

• Credit to Accounts Receivable

Answer explanation

Year-end adjustment: (Allowance method)

Dr. Bad Debt Expense (+E) (-R) (-NI) (-SE)

Cr. Allowance for Uncollectible Accounts

Write off for uncollectible: (Allowance Method)

Dr. Allowance for Uncollectible Accounts

Cr. Accounting Receivable

The account “Allowance for Uncollectible Accounts” is classified as a(n):

• Liability account in the balance sheet

• Contra revenue to credit sales in the income statement

• Expense in the income statement

• Contra asset to accounts receivable in the balance sheet

At the end of its first year of operations, a company has accounts receivable $250,000. The company expects to collect 90% of these accounts. The company’s year-end adjusting entry for uncollectible accounts would be:

• Debit Bad Debt Expense; Credit Allowance for Uncollectible Accounts for $25,000

• Debit Allowance for Uncollectible Accounts; Credit Bad Debt Expense for $25,000

• Debit Bad Debt Expense; Credit Accounts Receivable for $25,000

• Debit Allowance for Uncollectible Accounts; Credit Accounts Receivable for $25,000

Answer explanation

Using the allowance method, writing off an actual bad debt would include a:

• Debit to Bad Debt Expense

• Debit to Accounts Receivable

• Credit to Accounts Receivable

• Credit to Allowance for Uncollectible Accounts