Chapter 9: Accounting for Receivables

Receivables are frequently classified as

• Accounts receivable, company receivables, and other receivables

• Accounts receivable, notes receivable, and employee receivables

• Accounts receivable and general receivables

• Accounts receivable, notes receivable, and other receivables

The two methods of accounting for uncollectible accounts are the direct write-off method and the

• Accrual Method

• Net Realizable Method

• Bad Debt Method

• Allowance Method

Assume that Gonzalez Company elects to use the percentage-of-sales basis.

It concludes that 1% of net credit sales will become uncollectible.

If net credit sales for 2017 are $800,000, the adjusting entry is:

• $10,000

• $8,000

• $800,000

• $16,000

Answer explanation

Dec. 31 Bad Debt Expense 8,000

Allowance For Doubtful Accounts 8,000

(* $800,000 x 1%)

Net sales for the month are $800,000, and the debts are expectedto be 1,5% of net sales.

The company uses percentage-of-sales basis.

If Allowance for Doubtful Accounts has a credit balance of $15,000 before adjustment,

what is the balance after adjustment?

• $15,000

• $23,000

• $27,000

• $31,000

Answer explanation

• - Net sales times the percentage expected to default equals the amount of bad debt expense for the year ($800,000 x 1,5% = $12,000).

• - Because this adjusting entry credits Allowance for Doubtful Accounts, the balance after adjustment is $27,000 ($15,000 + $12,000)

5. The balance of the allowance for doubtful accounts is

deducted from accounts receivable on the balance sheet.

The statement above is:

• True

• False

One of the following statements about promissory notes is incorrect.

The incorrect statement is:

• The party making promises to pay is called the maker.

• The party to whom payment is to be made is called the payee.

• A promissory note is often required from high-risk customers.

• A promissory note is not a negotiable instrument.

Foti Co. accepts a $1,000, 3-month, 6% promissory note in settlement

of an account with Bartelt Co. The entry to record this transaction is

• Notes Receivable 1,015

  Accounts Receivable 1,015

• Notes Receivable 1,000

  Accounts Receivable 1,000

• Notes Receivable 1,000

  Sales Revenue 1,000

• Notes Receivable 1,030

  Accounts Receivable 1,030

Answer explanation

Notes Receivable is recorded at face value ($1,000).

No interest on the note is recorded until it is earned.

Accounts Receivable is credited because no sales have been made.

The face value of a note refers to the amount

• That can be received if sold to a factor

• Borrowed plus interest received at maturity from the maker

• At which the note receivable is recorded

• Remaining after a service charge has been deducted

The interest on a $10,000, 9%, 90-day note receivable is

• $225

• $900

• $75

• $150

Answer explanation

We can calculate the interest on the $10,000 note receivable.

Interest = $10,000 9% 90/360 = $225.

Accounts and notes receivable are reported in the current assets section of the balance sheet at:

• Cash (net) realizable value

• Net book value

• Lower-of-cost-or-net realizable value

• Invoice cost