Question 1

Exhibit 6-1 O'Martin & Lowry, Inc. accepted a $150,000, 8%, 90-day note receivable for services rendered to a client. Thirty days later, O'Martin & Lowry discounted the note at a bank at 10%. Assume interest has not been recognized for the first month.
-Refer to Exhibit 6-1. The entry to record the proceeds from the sale of the note would include a

Accepted Answer

A)  debit to Cash for $150,150 
B)  debit to Cash for $150,450 
C)  credit to Interest Receivable for $1,000 
D)  credit to Interest Expense for $1,000

Question 2

Compensating balance agreements that legally restrict cash should

Accepted Answer

A)  only be described in the footnotes to the financial statements 
B)  be separately reported in the current assets portion of the balance sheet if they are against short-term borrowings 
C)  be separately classified as noncurrent assets on the balance sheet if they are against short-term borrowings 
D)  not be shown on the balance sheet

Question 3

Hunter's, Inc. reported a balance of $141 in its cash account at the end of the month. There were $120 of deposits in transit and $115 of checks outstanding. The bank statement showed a balance of $151, service charges of $7, and the collection of a note plus interest. The note had a face value of $17. How much interest did the bank collect for the company?

Accepted Answer

A)  $ 5 
B)  $15 
C)  $17 
D)  $29

Question 4

On November 1, 2014, Yellow Grove Co. sold $45,000 of goods and accepted a note bearing 8% interest. The note was due in one year.
Required: 
a.Prepare a reversing entry for January 1, 2015.
b.Record the collection of the note on October 31, 2015.

Accepted Answer

The answer of On November 1, 2014, Yellow Grove Co....

Question 5

When a company extends credit to its customers, the company realizes it will not likely collect all of the related accounts receivable. As some accounts may prove to be uncollectible, a company must estimate its bad debt expense.
Required: 
a.What is the purpose of estimating bad debt expense?
b.There are two relationships that can be used to estimate the bad debt expense for a company. Describe the two major relationships that can be used to estimate bad debts expense and the financial statement orientation of each.

Accepted Answer

The answer of When a company extends credit to its...

Question 6

Puzzle Company sold merchandise on credit with a list price of $75,000. Terms were 3/10, n/30. Given the indicated sales discounts methods in the responses, which entry is correct?

Accepted Answer

A)  Gross Price Method 
Accounts Receivable 72,750
Sales 72,750 
B)  Net Price Method 
Accounts Receivable 72,750
Sales 72,750 
C)  Net Price Method 
Accounts Receivable 75,000
Sales 75,000 
D)  Gross Price Method
 Accounts Receivable 72,000
Sales 72,000

Question 7

How does GAAP require receivables to be recorded? What about trade receivables?

Accepted Answer

The answer of How does GAAP require receivables to be...

Question 8

Littlestown Corporation reports the following information:

Required:
Compute the correct amount of cash that will appear as a current asset on Littlestown Corporation's balance sheet.

Accepted Answer

The answer of Littlestown Corporation reports the following information:

...

Question 9

Trainor Company estimates bad debt expense using a percentage of credit sales (5%). The company began its current year with an $8,500 balance in the allowance account. During the current year, $10,500 of accounts receivable were written off, and $1,200 of previously written off accounts were collected. Credit sales for the year were $255,000. The bad debt expense for the year was

Accepted Answer

A)  $10,500 
B)  $ 8,500 
C)  $ 12,750 
D)  $ 11,550

Question 10

Most trade receivables are initially recorded at their

Accepted Answer

A)  maturity values 
B)  discounted values 
C)  present values 
D)  net realizable values

Question 11

When the gross method of recording sales and accounts receivables is used it overstates sales and receivables because of this most companies do not use this method.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 6-1 O'Martin & Lowry, Inc. accepted a $150,000, 8%, 90-day note receivable for services rendered to a client. Thirty days later, O'Martin & Lowry discounted the note at a bank at 10%. Assume interest has not been recognized for the first month.
-Refer to Exhibit 6-1. The entry to record the proceeds from the sale of the note would include a

Accepted Answer

A)  debit to Notes Receivable for $150,000 
B)  debit to Cash for $145,000 
C)  credit to Interest Receivable for $1,000 
D)  credit to Interest Revenue for $1,000

Question 13

When an uncollectible account is written off under the estimated allowance method, it

Accepted Answer

A)  decreases net income 
B)  increases working capital 
C)  increases the accounts receivable net realizable value 
D)  leaves total assets unchanged

Question 14

Splitter Corporation had total sales in the current year of $750,000 and credit sales of $650,000. The Accounts Receivable balance was $450,000 on the balance sheet date and the Allowance for Doubtful Accounts had a credit balance of $10,000 before adjusting entries. Bad debt expense is estimated as 2% of credit sales. The adjusting entry to record estimated bad debt expense would include a

Accepted Answer

A)  $ 3,000 debit to Bad Debt Expense 
B)  $13,000 debit to Bad Debt Expense 
C)  $13,000 credit to Bad Debt Expense 
D)  $ 3,000 credit to Bad Debt Expense

Question 15

Which of the following reconciling items would require an adjusting journal entry on the company's books?

Accepted Answer

A)  outstanding checks 
B)  service charges 
C)  deposits in transit 
D)  cash on hand

Question 16

Companies should use petty cash funds to

Accepted Answer

A)  pay for employee parties and small gifts 
B)  reimburse for all taxi usage or rental cars 
C)  pay for minor business expenses 
D)  keep track of corporate postage stamp usage

Question 17

Short-term noninterest-bearing notes receivable are usually recorded at their

Accepted Answer

A)  present value 
B)  net realizable value 
C)  principal value 
D)  maturity value

Question 18

After the company completes the bank reconciliation, it makes journal entries for adjustments

Accepted Answer

A)  it made to the bank statement balance 
B)  it made to its records 
C)  it made to both the bank statement and its records 
D)  made on the statement of cash flows

Question 19

Under U.S. GAAP, a company can designate a receivable, upon initial recognition, to be recognized at fair value without meeting any criteria. IFRS has established qualifying criteria for fair value designation.
Required:
Describe the IFRS qualifying criteria that must be met to designate a receivable as fair value.

Accepted Answer

The answer of Under U.S. GAAP, a company can designate...

Question 20

Which of the following is not considered cash for financial statement reporting

Accepted Answer

A)  cash, coins, and currency 
B)  travelers checks 
C)  sinking fund 
D)  negotiable instruments

Exam 6: Cash and Receivables