Week 7 Class Practice

When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.

• True

• False

A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000.

• True

• False

Answer explanation

Estimated uncollectible accounts = ($40,000 × 5%) + ($5,000 × 20%) = $3,000.

A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low.

• True

• False

Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible.

• True

• False

The direct write-off method violates the concept of timeliness.

• True

• False

Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.

• True

• False

Answer explanation

Accrued interest increases assets and increases revenues.

Dr. Interest Receivable

Cr. Interest Revenue

Which of the following best describes credit sales?

• Cash sales to customers that are new to the company

• Sales with a high risk that the customer will return the product

• Sales to customers using credit cards

• Sales to customers on account

Inventory is usually reported as a long-term asset in the balance sheet.

• True

• False

Answer explanation

Inventory is typically reported as a current asset because companies expect to convert it to cash in the near term.

Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement.

• True

• False

Answer explanation

Cost of goods sold is an expense reported in the income statement and inventory is an asset reported in the balance sheet.

The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting.

• True

• False