Test bank with answers for financial accounting 6e by libby chapter 12

An entry to bad debts expense and the allowance for doubtful accounts is made to write off a customer's account during the year when it is determined to be uncollectable... When a partic

True / False Questions

5 Sales returns and allowances should be included as a selling expense

7 A company is thinking of borrowing money at an 18% annual interest rate in order to pay a

$30,000 invoice within the discount period The invoice terms are 2/10, n/30 They should borrow the money because they will still have a net savings of 19.2%

8 An entry to bad debts expense and the allowance for doubtful accounts is made to write off

a customer's account during the year when it is determined to be uncollectable

9 When a particular account receivable is determined to be uncollectible, the entry to write off the account requires a debit to the allowance for doubtful accounts

12 Accounts Receivables turnover is computed as net credit sales divided by net trade

accounts receivable at the end of the accounting period

13 When a company reports a higher accounts receivable turnover ratio, then the number of days it takes to collect the receivables has also increased

is that accounts receivable represent sales revenue not collected from customers at the

beginning and end of the accounting year

17 The primary purpose of preparing a bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period

Multiple Choice Questions

21 Which of the following statements is true?

A revenue is usually recorded when goods are shipped

B revenue is recorded when cash collection is made

C revenue is usually recorded upon delivery to the customer

D revenue is recorded either when the sale is made, collection occurs and/or delivery is made It is the company's decision

23 Most companies usually recognize revenue as earned and record the revenue when

A the customer's order is received

B the order is shipped

C the order is delivered

D the return period is over

24 When a company ships product to a customer with the terms FOB (free on board)

destination, which of the following is true?

A The seller will pay the shipping charges and title will not be exchanged until goods are

received by the customer

B The buyer will pay the shipping charges and title is exchanged at point of shipment

C The seller will pay the shipping and title is exchanged at point of shipment

D The buyer will pay the shipping and title is exchanged when the goods are received by the customer

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 1

25 On the income statement, the amount of sales returns and allowances is normally

A added into selling expenses

B subtracted from gross margin to determine net sales

C added in the calculation of cost of goods sold

D subtracted from gross sales to determine net sales

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 2

26 Which of the following statements is false?

A Sales returns and allowances is always treated as a contra-revenue

B Sales returns and allowances, sales discounts and credit card discounts are always treated

27 Credit terms of 2/10, n/30 indicate that a

A two percent discount for early payment is available if the invoice is paid before the tenth day of the month following the month to of sale

B two percent discount for early payment is available within ten days of the date of sale

C ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice

D two percent discount for early payment is available if the invoice is paid after the tenth day, but before the thirtieth day of the invoice date

29 A customer purchased $5,000 of goods on credit from Discount Paper Supply on

September 1 The customer received the bill on September 13 and mailed a $5,000 check on September 30 Discount Paper Supply received the check on October 4 In recording this transaction, Discount Paper Supply should credit Sales Revenue for $5,000 on

30 When a credit sale is made with terms of 2/10, net 30 on May 10 and the customer's check

is received on May 19, which of the following is true about the May 19 journal entry?

A The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10

B There will be a debit to sales discounts on May 10

C The debit to cash will be less than the credit to accounts receivable on May 19

D There will be a credit to sales discounts on May 19

A 10% discount if they pay within 2 days

B 2% discount if they pay 10% of the amount due within 30 days

C 10% discount if they pay within 30 days

D 2% discount if they pay within 10 days

A $91,900

33 A company purchased goods on credit with credit terms of 3/15, n/45 Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount This annual rate is approximately

36 Which of the following accounts is not treated as a contra-revenue?

A Sales discounts

B Credit card discounts

C Sales returns and allowances

A Higher selling prices

B Lower product cost as a percentage of sales

C Ability to differentiate their product in consumers' eyes

D Lower cost of goods sold

39 Which of the following is the most likely cause of a decrease in a company's gross profit percentage?

A They discounted their prices

B They reduced product cost as a percentage of sales

C They reduced their operating costs

D They sold fewer products

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 3

40 Which of the following is the most likely cause of an increase in gross profit percentage?

A selling products for higher prices

B selling products with lower margins

C higher product costs

D selling fewer products

42 Dillon Company uses the allowance method to account for bad debts The entry to off a bad account (one that will never be collected) should be:

A decrease the net realizable value of the accounts receivable

B have an effect that is not determinable from the information given

C increase the net realizable value of the accounts receivable

D have no effect on the net realizable value of the accounts receivable

A Bad debt expense

B Allowance for doubtful accounts

C Sales revenue

D Accounts receivable

45 On January 31, 2009, Klein Company wrote off an uncollectible account of $5,000 The allowance method is used The write-off would cause bad debt expense to

C be estimated and recorded in the period in which sales are made so that expenses are

matched with revenues

D be recognized in the period in which the account receivable proves to be uncollectible because that is the only date when the loss will really be known

48 When the allowance method is used, the entry which is appropriate when a particular account is written off as uncollectible should include a

A debit to accounts receivable

B debit to bad debt expense

C debit to allowance for doubtful accounts

D debit to sales revenue

accounting record before and after the write-off was as follows:

50 Woodland Company uses the allowance method to account for bad debts During 2009, a customer became bankrupt and a receivable of $10,000 was deemed uncollectible The entry

to record the uncollectible amount is:

51 At year end, Chief Company has a balance of $10,000 in accounts receivable of which

$1,000 is more than 30 days overdue Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments Chief estimates its bad debts losses at 1%

of current accounts and 10% of accounts over thirty days What adjustment should Chief make to the allowance for doubtful accounts?

52 Which of the following is not an accurate description of allowance for doubtful accounts?

A debit to bad debt expense

B credit to bad debt expense

C debit to accounts receivable

D debit to allowance for doubtful accounts

A a credit to bad debt expense

B a credit to allowance for doubtful accounts

55 When using the allowance method of accounting for bad debts, bad debt expense should

be recorded

A as an adjusting entry at the end of the accounting period

B when a particular account is written off

C whenever the allowance for doubtful accounts has a debit balance

D whenever the allowance for doubtful accounts has a zero balance

Difficulty: Medium

L.O.: 4

56 Bad debt expense should

A appear on the balance sheet as a contra-asset

B appear on the income statement as part of selling expenses

C appear on the income statement as a contra-revenue

D not appear in the financial statements

uncollectible The allowance for doubtful accounts had a $400 debit balance at year-end prior

to adjustment The amount of bad debt expense that should appear in Rosco's income

statement for the year is

58 Which of the following entries will affect both the balance sheet and the income

statement?

A A debit to bad debts expense and a credit to the allowance for doubtful accounts

B A debit to the allowance for doubtful accounts and a credit to accounts receivable

C A debit to accounts receivable and a credit to the allowance for doubtful accounts

D None of the entries affects the balance sheet and income statement

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 4

59 In 2009, Deckers reported an accounts receivables turnover ratio of 6.8 and their

competitor, Timberland's, reported a ratio of 8.4 Which of the following is false?

A Deckers needs to increase their ratio in order to improve collection time

B Deckers needs to focus on improving their credit and collection process

C Deckers has done a better job of collecting their accounts receivables than Timberland's

D Deckers requires more time to collect accounts receivables than Timberland's

A Cause an increase in cash flow from operations

B Cause a decrease in cash flow from operations

C Cause no change in cash flow from operations

D The effect on cash flow cannot be determined with the above information

61 If Worldwide Waffles accounts receivable balance was $1,973 million in 2009 and $1,814 million in 2008, the impact on the statement of cash flows would be

A An increase in cash flow from investing activities

B A decrease in cash flow from operating activities

C An increase in cash flow from operating activities

D A decrease in cash flow from investing activities

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

62 Net income for Trex Outdoors in 2009 was $9,154 (in thousands) There was an addition

to net income on the statement of cash flows for $2,106 (in thousands) for the change in accounts receivable The accounts receivable balance on December 31, 2008 was $20,851 (in thousands) How much was the accounts receivable balance on December 31, 2009?

64 For accounting purposes, cash includes

A notes receivable from employees

B supplies

C balances on deposit in banks

D a note received from a customer in settlement of an overdue account receivable

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 6

65 When a depositor receives a bank statement indicating a "NSF check", he should

A credit the cash account for the amount of the check

B record the amount as an expense of the current period

C credit a special receivable for the amount of the check

D debit sales revenue

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 6

66 A deposit in transit on a bank reconciliation should be

A added to the depositor's book cash balance

B subtracted from the depositor's book cash balance

C added to the bank statement balance

D subtracted from the bank statement balance

67 Linetech Company's bank statement showed an ending balance of $8,000 Items appearing

in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's check erroneously deducted from Linetech's bank account by the bank, $250 The correct cash balance at the end of the month should be reported as

68 Which of the following demonstrates a poor internal control procedure?

A The bookkeeper makes cash deposits and records journal entries related to cash, while the

treasurer prepares the bank reconciliation

B The president, who does no bookkeeping, prepares the bank reconciliation each month

C The treasurer signs all checks after the bookkeeper prepares the supporting documents

D One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger

70 The cash account and the December bank statement of Gomez Company showed the following: Deposits made by Gomez Company during December 2009, $90,000; deposits reflected on the December 2009 bank statement, $88,000; and deposits in transit on

November 30, 2009, $5,000 Therefore, the deposits in transit at the end of December 2009 amounted to

72 Effective control of cash requires that

A one person handle the receipts and disbursements of cash

B cash be deposited monthly in a bank

C there be approval of cash payments

D a reconciliation of the bank balance with the cash balance be prepared twice a year

AACSB Tag: Ethics

Difficulty: Medium

L.O.: 6

73 When preparing the monthly bank reconciliation, the accountant for Fareway Corporation discovered that a check correctly written to one of Fareway's suppliers for $159 had been incorrectly recorded in the books as $195 To correct the error, the accountant prepared an adjusting entry which required a debit to

76 A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card

(VISA) The merchant is charged a 2% fee by the credit card company When recording this sale, the merchant would:

A debit accounts receivable for $2,000

B credit sales revenue for $2,000

C credit sales revenue for $1,800

D credit unearned sales revenue for $2,000

AACSB Tag: Analytic

Difficulty: Medium

L.O.: Sup A

77 Under the installment method, revenue is recognized when the customer

A orders the merchandise

B receives the merchandise

C receives the bill

D makes a cash payment

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: Sup B

78 Under the percentage-of-completion method, revenue is recognized

A when construction begins on the project

B when the project is complete

C throughout the project, based upon the amount of work completed each year

D throughout the project, based upon the amount of cash received from the customer

79 If a company uses the completed-contract method rather than the percentage-of-

completion method, the total net income the company recognizes from the beginning of the project throughout its completion

A will be greater if the completed-contract method is used

B will be greater if the percentage-of-completion method is used

C will be the same for both methods

D will be greater for the completed-contract method only if the project takes longer than five years to complete

AACSB Tag: Analytic

2010:

Items not included in above amounts:

Estimated bad debt loss, 1% of credit sales

Average income tax rate, 35%

Number of shares of common stock outstanding, 10,000

Requirements:

A Based on the above data, prepare a multiple-step income statement (including gross margin, pretax income, and earnings per share)

B 1 How much was the gross margin?

2 What was the gross margin ratio?

3 Explain what these two amounts mean