Test Bank Ch6 ACCT

Financial Accounting, 10e (Libby)
Chapter 6 Reporting and Interpreting Sales Revenue, Receivables, and Cash
1) When goods are shipped FOB shipping point, title passes to the buyer on the shipment date.
Answer: TRUE
Explanation: When goods are shipped FOB shipping point, the title passes to the buyer when the
goods are shipped.
Difficulty: 1 Easy
Topic: Shipping terms-FOB
Learning Objective: 06-01 Analyze the impact of credit card sales, sales discounts, sales returns,
and sales of bundled items on the amounts reported as net sales.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) When goods are shipped FOB destination, the revenue from the sale is recognized on the
shipment date.
Answer: FALSE
Explanation: When goods are shipped FOB destination, the revenue is recognized when the
goods are delivered to the buyer.
Difficulty: 1 Easy
Bloom's: Remember
3) Credit card discounts are reported as operating expenses on an income statement.
Answer: FALSE
Explanation: Credit card discounts are deducted from sales to calculate net sales.
Difficulty: 1 Easy
Topic: Sales-Credit card sales
Bloom's: Remember
1
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4) Sales discounts are deducted from sales in the calculation of net sales.
Answer: TRUE
Explanation: Sales discounts are deducted from sales to calculate net sales.
Difficulty: 1 Easy
Topic: Sales-Net sales
Bloom's: Remember
5) Sales returns and allowances is a contra-revenue account.
Answer: TRUE
Explanation: Sales returns and allowances are deducted from sales to calculate net sales. They
are therefore a contra-revenue account.
Difficulty: 1 Easy
Bloom's: Remember
6) Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be
given; if not paid within two days, the full invoice price will be due in thirty days.
Answer: FALSE
Explanation: The "2/10" means that a 2% discount is given if the payment is made within 10
days. The "n/30" means that if the payment is not paid within 10 days, then it is due in 30 days.
Difficulty: 1 Easy
Topic: Sales-Discounts-returns-allowances
Bloom's: Remember
2
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 have a net savings of 19.2%.
Answer: TRUE
Explanation: The annual interest rate associated with the credit terms is 37.2% and is calculated
by multiplying the 20-day interest rate ($600 ÷ $29,400) by the number of 20-day periods during
a year (365 ÷ 20). Borrowing at 18% will save the company 19.2% (37.2% – 18%).
Difficulty: 3 Hard
Bloom's: Apply
AACSB: Knowledge Application
8) Gross profit is calculated as gross sales less cost of sales.
Answer: FALSE
Explanation: The gross profit is calculated as net sales less cost of sales.
Difficulty: 1 Easy
Bloom's: Remember
9) Gross profit decreases when sales discounts increase.
Answer: TRUE
Explanation: Sales discounts reduce net sales and decrease gross profit. More sales discounts
will further decrease gross profit.
Difficulty: 2 Medium
Bloom's: Understand
AACSB: Analytical Thinking
3
10) The journal entry to record bad debt expense is made during the year in which it is
determined that a particular receivable is uncollectible, regardless of the year of sale.
Answer: FALSE
Explanation: Bad debt expense is recorded during the year of sale, not during the year the
receivable is determined to be uncollectible.
Topic: Bad debts-Recording expense-write off-recovery
Learning Objective: 06-02 Estimate, report, and evaluate the effects of uncollectible accounts
receivable (bad debts) on financial statements.
Bloom's: Remember
11) When using an allowance for doubtful accounts and a particular account receivable is
determined to be uncollectible, the journal entry to write off the account reduces net income.
Answer: FALSE
Explanation: The entry to write off an account receivable includes a debit to the allowance for
doubtful accounts and a credit to accounts receivable; this entry does not affect the income
statement.
Bloom's: Understand
12) When a particular account receivable is determined to be uncollectible, the journal entry to
write off the account reduces cash.
Answer: FALSE
Explanation: The entry to write off an account receivable includes a debit to the allowance for
doubtful accounts and a credit to accounts receivable; this entry does not affect cash.
Bloom's: Understand
4
13) The allowance for doubtful accounts is reported as a contra-asset on the balance sheet.
Answer: TRUE
Explanation: Allowance for doubtful accounts is deducted from accounts receivable on the
balance sheet. Therefore, it is a contra-asset account.
Topic: Classifying and reporting receivables
Bloom's: Remember
14) The journal entry to write off an uncollectible account does not change the net realizable
value (book value) of accounts receivable.
Answer: TRUE
Explanation: The journal entry to write off an account receivable includes a debit to allowance
for doubtful accounts and a credit to accounts receivable; this entry reduces both accounts
equally and therefore does not change net realizable value (accounts receivable minus allowance
for doubtful accounts).
Topic: Bad debts-Recording expense-write off-recovery; Classifying and reporting receivables
Bloom's: Analyze
15) When using the allowance method, the year-end journal entry to record bad debt expense
reduces current assets and net income.
Answer: TRUE
Explanation: The journal entry increases the allowance for doubtful accounts balance, which
decreases current assets and the journal entry increases expenses, which decrease net income.
Bloom's: Understand
5
16) When using the allowance method, the year-end journal entry to record bad debt expense
reduces the accounts receivable account and increases net income.
Answer: FALSE
Explanation: The journal entry increases the allowance for doubtful accounts balance, not
accounts receivable. The journal entry also increases expenses, which decrease net income.
Bloom's: Understand
17) When using the percentage of credit sales method, net sales multiplied by a historical
percentage for credit losses equal bad debt expense.
Answer: TRUE
Explanation: The percentage of credit sales method estimates bad debt expense by multiplying
net credit sales times a historical percentage for credit losses.
Topic: Bad debts-Percentage of credit sales
Bloom's: Remember
18) The accounts receivable aging schedule determines the dollar amount of uncollectible
accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the
bad debt expense that is recorded for the year regardless of the existing balance in the allowance
for doubtful accounts.
Answer: FALSE
Explanation: Using the aging method of accounts receivable to calculate the bad debt expense,
the bad debt expense for the year takes into consideration the existing allowance for doubtful
accounts balance.
Topic: Bad debts-Aging of accounts receivable
Bloom's: Understand
6
19) Prior year financial statements are adjusted when it is determined that prior year bad debt
expense was too low.
Answer: FALSE
Explanation: Prior year financial statements are not adjusted; the current and/or future financial
statements will reflect changes in the estimation of the expense.
Bloom's: Remember
20) If the accounts receivable turnover ratio increases, the number of days it takes to collect the
receivables also increases.
Answer: FALSE
Explanation: The higher the receivables turnover ratio, the faster receivables are collected. This
means there are fewer days in the collection period.
Topic: Ratio analysis-Accounts receivable
Learning Objective: 06-03 Analyze and interpret the receivables turnover ratio and the effects of
accounts receivable on cash flows.
Bloom's: Understand
21) When preparing the statement of cash flows, the reason that net sales revenue is adjusted for
the change in accounts receivables is to convert net sales to cash collected from customers, since
accounts receivable represents sales revenue not collected from customers at the beginning and
end of the accounting year.
Answer: TRUE
Explanation: The change in the accounts receivable balance represents the difference between
cash collections and net sales revenue.
Topic: Cash flows-Accounts receivable
Bloom's: Understand
7
22) Cash equivalents such as treasury bills are reported as investments on the balance sheet.
Answer: FALSE
Explanation: Cash and cash equivalents are combined and reported as a single amount on the
balance sheet. Cash equivalents are not reported as an investment on the balance sheet.
Topic: Cash and cash equivalents
Learning Objective: 06-04 Report, control, and safeguard cash.
Bloom's: Understand
23) Cash equivalents on the balance sheet include certificates of deposit with maturities of 90
days or more.
Answer: FALSE
Explanation: Cash equivalents have original maturities of three months or less.
Bloom's: Understand
24) Effective internal control of cash should include the separation of the duties for receiving and
disbursing cash.
Answer: TRUE
Explanation: Separation of the responsibilities for receiving and disbursing cash is a basic
internal control for cash.
Difficulty: 1 Easy
Topic: Cash-Internal control
Bloom's: Remember
8
25) If a check received from a customer has been deposited by the seller and is marked on the
bank statement as a nonsufficient funds (NSF) amount, then it would appear on the seller's bank
reconciliation as a deduction from the ending bank statement balance.
Answer: FALSE
Explanation: The NSF check would be deducted from the book balance, not the bank balance.
Topic: Cash-Bank reconciliation
Bloom's: Understand
26) Deposits in transit are deducted from the bank balance when preparing the bank
reconciliation.
Answer: FALSE
Explanation: Deposits in transit are added to the bank balance when preparing the bank
reconciliation.
Bloom's: Remember
27) An objective of preparing the 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.
Answer: TRUE
Explanation: Preparation of the bank reconciliation is an internal control procedure with the
intent of testing the equality of the bank statement balance with the book balance after the
applicable adjustments have been made to both balances.
Bloom's: Remember
9
28) When completing the bank reconciliation, bank service charges should be deducted from the
company's cash balance.
Answer: TRUE
Explanation: Bank service charges are deducted from the book cash balance because they were
unrecorded prior to receipt of the bank statement.
Bloom's: Remember
29) Which of the following statements is correct?

A) Revenue is recognized at the time of shipment when goods are shipped FOB destination.
B) Sales returns and allowances are reported as operating expenses on an income statement.
C) A seller records revenue when title and risks of ownership transfer to the buyer.
D) Sales discounts are reported as cost of sales on an income statement.
Answer: C
Explanation: Most businesses recognize revenue when the product is delivered and/or service is
provided.
Bloom's: Understand
10
30) Which of the following would be included in Latimer Company's sales in 2019?
A) Goods shipped from a supplier in 2019 with terms of FOB shipping point. Latimer received
the goods in 2019.
B) Goods shipped to customers in 2019 with terms of FOB destination. The customer received
the goods in 2020.
C) Goods shipped to customers in 2018 with terms of FOB destination. The customer received
the goods in 2019.
D) Goods shipped to customers in 2018 with terms of FOB shipping point. The customer
received the goods in 2019.
Answer: C
Explanation: Title passes to the customer when the goods are received if the terms are FOB
destination. Title passes to the customer when the goods are shipped if the terms are FOB
shipping point. Goods shipped from a supplier are purchases and are not sales of Latimer.
Difficulty: 3 Hard
Bloom's: Analyze
31) A company sells a product FOB destination. The product is shipped on December 29, 2018
and the customer receives the shipment on January 3, 2019. Which of the following is true?
A) The sale will be recorded when the customer's credit card information is received.
B) The sale will be recorded when the shipment is received by the customer.
C) The sale will be recorded when the shipment is shipped.
D) The sale will be recorded when it is known there will be no returns or allowances.
Answer: B
Explanation: Shipments FOB destination are recorded as a sale when the goods are delivered to
the customer, which is when the customer receives the goods.
Bloom's: Understand
11
32) Which of the following is not a reason for the Jones Hardware Store to accept credit cards
from customers?
A) Jones can receive its money faster than if it directly extended credit to the customer by an
account receivable.
B) The credit card company offers a discount to Jones so that Jones will have more money
available for operations.
C) Jones will not have to be concerned with nonsufficient funds checks from customers.
D) Jones will not have to have extra office workers to make phone calls to customers requesting
collections on accounts.
Answer: B
Explanation: The credit card charges a discount fee. This discount is deducted from the total
sales revenue, which results in less money available for the company's operation. However, the
fee charged by the credit card company would offset the costs of having an internal department
for collections and of bank fees for NSF checks, and allows the company to receive its money
immediately from the credit card company rather than waiting for customers to pay the company
directly.
Bloom's: Understand
12
33) Newark Company has provided the following information:
• Cash sales, $450,000

• Credit sales, $1,350,000
• Selling and administrative expenses, $330,000
• Sales returns and allowances, $90,000
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
How much are Newark's net sales?

A) $1,634,000.
B) $1,800,000.
C) $1,667,000.
D) $1,745,000.
Answer: C
Explanation: Net sales = $1,667,000 = $450,000 + $1,350,000 − $90,000 − $43,000.
Bloom's: Apply
13

• Net income, $1,030,000
How much is Newark's cost of sales?

A) $307,000.
B) $252,000.
C) $440,000.
D) $340,000.
Answer: A
Explanation: Net sales = $1,667,000 = $450,000 + $1,350,000 − $90,000 − $43,000. Net sales
minus cost of sales equals gross profit, $1,360,000. Therefore, cost of sales equals $1,667,000
minus $1,360,000 = $307,000.
Difficulty: 3 Hard
Bloom's: Apply
14

• Net income, $1,030,000
How much cash was collected from customers?

A) Cash flow increased $1,295,000.
B) Cash flow increased $1,745,000.
C) Cash flow decreased $1,855,000.
D) Cash flow increased $1,405,000.
Answer: B
Explanation: An increase in accounts receivable decreases cash flow from operating activities
and cash collections from customers. Cash sales, $450,000, plus credit sales, $1,350,000, less the
increase in accounts receivable, $55,000 = cash collections from customers, $1,745,000.
Difficulty: 3 Hard
Bloom's: Apply
15
36) Flyer Company has provided the following information prior to any year-end bad debt
adjustment:

• Credit sales, $450,000
• Gross profit, $490,000
• Accounts receivable, $110,000
• Allowance for doubtful accounts credit balance, $1,200
Flyer prepares an aging of accounts receivable and the result shows that 5% of accounts
receivable is estimated to be uncollectible. How much is bad debt expense?
A) $5,500.
B) $6,700.
C) $4,240.
D) $4,300.
Answer: D
Explanation: Under the aging method, the bad debt expense is the amount required to set the
allowance for doubtful accounts to the balance it should be. The balance should be 5% of
accounts of accounts receivable = 5% × $110,000 = $5,500. The allowance for doubtful accounts
credit balance is already $1,200. Therefore, the bad debt expense is $5,500 − $1,200 = $4,300.
Bloom's: Apply
16
adjustment:

Flyer prepares an aging of accounts receivable and the result shows that 5% of accounts
receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful
accounts after bad debt expense is recorded?
A) $5,500.
B) $6,700.
C) $4,240.
D) $4,300.
Answer: A
Explanation: The allowance for doubtful accounts balance = 5% of accounts of accounts
receivable = 5% × $110,000 = $5,500.
Bloom's: Apply
17
adjustment:

Flyer estimates bad debt expense assuming that 1.5% of credit sales have historically been
uncollectible. How much is Flyer's bad debt expense?
A) $7,950.
B) $6,750.
C) $5,550.
D) $7,800.
Answer: B
Explanation: Bad debt expense = $6,750 = 1.5% × $450,000.
Bloom's: Apply
18
adjustment:

Flyer estimates bad debt expense assuming that 1.5% of credit sales have historically been
uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense
is recorded?
A) $7,950.
B) $6,750.
C) $5,550.
D) $7,800.
Answer: A
Explanation: The allowance for doubtful accounts, $7,950 = Bad debt expense, (1.5% ×
$450,000) plus the allowance for doubtful accounts credit balance, $1,200.
Bloom's: Apply
40) Which of the following is correct when bad debt expense is recorded at year-end?
A) Current assets will increase.
B) Gross profit will decrease.
C) Income from operations will decrease.
D) Current liabilities will decrease.
Answer: C
Explanation: Bad debt expense is an operating expense. An increase in operating expenses
decreases income from operations.
Bloom's: Analyze
19
41) Which of the following statements is false?
A) The journal entry to record bad debt expense decreases current assets.
B) The journal entry to record bad debt expense decreases retained earnings.
C) The journal entry to write off an uncollectible account receivable decreases operating income.
D) The journal entry to write off an uncollectible account receivable does not affect current
assets.
Answer: C
Explanation: The journal entry to write off an uncollectible account receivable decreases both
the accounts receivable and the allowance for uncollectible accounts balances. There is no effect
on operating income.
Bloom's: Apply
20
42) Which of the following journal entries correctly records bad debt expense?
A)
Bad debt expense xxx
Accounts receivable xxx
B)
Allowance for doubtful accounts xxx
C)
D)
Answer: D
Explanation: The journal entry to record bad debt expense involves a debit to bad debt expense
and a credit to allowance for doubtful accounts.
Difficulty: 1 Easy
Bloom's: Analyze
21
43) Which of the following journal entries correctly records the write off of an uncollectible
account receivable when using the allowance method?
A)
Uncollectible sales xxx
B)
C)
D)
Answer: B
Explanation: The journal entry to write off an account receivable requires a debit to allowance
for doubtful accounts and a credit to accounts receivable.
Bloom's: Analyze
22
44) The CHS Company has provided the following information:
• Accounts receivable written-off as uncollectible during the year amounted to $11,500.

• The accounts receivable balance at the beginning of the year was $150,000.
• The accounts receivable balance at the end of the year was $210,000.
• The allowance for doubtful accounts balance at the beginning of the year was $14,000.
• The allowance for doubtful accounts balance at the end of the year after the recording of bad
debt expense was $12,900.
• Credit sales during the year totaled $900,000.
How much was CHS Company's bad debt expense?

A) $11,500.
B) $12,900.
C) $10,400.
D) $14,000.
Answer: C
Explanation: Ending allowance for doubtful accounts, $12,900 = Beginning allowance for
doubtful accounts, $14,000 − Accounts receivable write-offs, $11,500 + Bad debt expense,
$10,400.
Difficulty: 3 Hard
Bloom's: Apply
23
45) The CHS Company has provided the following information:
• Accounts receivable written-off as uncollectible during the year amounted to $11,500.

• The accounts receivable balance at the beginning of the year was $150,000.
• The accounts receivable balance at the end of the year was $210,000.
• The allowance for doubtful accounts balance at the beginning of the year was $14,000.
• The allowance for doubtful accounts balance at the end of the year after the recording of bad
debt expense was $12,900.
• Credit sales during the year totaled $900,000.
How much cash was received from collections of accounts receivable?

A) $888,500.
B) $828,500.
C) $690,000.
D) $701,500.
Answer: B
Explanation: Ending accounts receivable, $210,000 = Beginning accounts receivable, $150,000
− Accounts receivable write-offs, $11,500 + Credit sales, $900,000 − Cash collections,
$828,500.
Difficulty: 3 Hard
Bloom's: Apply
24
46) Superior Company has provided you with the following information before any year-end
adjustments:
Net credit sales are $120,000.

Historical percentage of credit losses is 2%.
Allowance for doubtful accounts has a credit balance of $300.
Accounts receivables ending balance is $47,000.
What is the estimated bad debt expense using the percentage of credit sales method?
A) $2,100.
B) $2,400.
C) $940.
D) $2,700.
Answer: B
Explanation: $2,400 = (2% × $120,000)
Difficulty: 1 Easy
Bloom's: Remember

A) The journal entry to record bad debt expense requires a debit to bad debt expense and a credit
to accounts receivable.
B) The journal entry to record bad debt expense requires a debit to bad debt expense and a credit
to allowance for doubtful accounts.
C) The journal entry to record the write off of an uncollectible account receivable requires a
debit to bad debt expense and a credit to accounts receivable.
D) The journal entry to record the write off of an uncollectible account receivable requires a
debit to bad debt expense and a credit to allowance for doubtful accounts.
Answer: B
Explanation: The journal entry to record bad debt expense requires a debit to bad debt expense
and a credit to allowance for doubtful accounts.
Bloom's: Remember
25
48) Clark Company estimated the net realizable value of its accounts receivable as of December
31, 2019, to be $165,000, based on an aging schedule of accounts receivable. Clark has also
provided the following information:
• The accounts receivable balance on December 31, 2019 was $175,000.

• Uncollectible accounts receivable written off during 2019 totaled $12,000.
• The allowance for doubtful accounts balance on January 1, 2019 was $15,000.
How much is Clark's 2019 bad debt expense?

A) $10,000.
B) $7,000.
C) $13,000.
D) $3,000.
Answer: B
Explanation: The December 31, 2019 balance in allowance for doubtful accounts, $10,000,
equals the accounts receivable balance on December 31, 2019, $175,000, minus the December
31, 2019 net realizable value of accounts receivable, $165,000. The December 31, 2019 balance
in allowance for doubtful accounts, $10,000 equals the balance in allowance for doubtful
accounts on January 1, 2019, $15,000 minus accounts receivable write offs during 2019,
$12,000, plus the 2019 bad debt expense, $7,000.
Difficulty: 3 Hard
Bloom's: Apply
49) What would be incorrect about reporting accounts receivable in the balance sheet?
A) Presenting accounts receivable net of allowance for doubtful accounts.
B) Presenting accounts receivable at estimated net realizable value.
C) Presenting accounts receivable less bad debt expense and write-offs.
D) Presenting accounts receivable at gross amount, less allowance for doubtful accounts.
Answer: C
Explanation: Bad debts and write-offs, if material, are reported on a schedule included in Form
10-K for public companies but not on the balance sheet.
Bloom's: Remember
26
50) Which of the following statements correctly describes the effect of recording the collection
of a $10,000 account receivable for which a 2% sales discount was recorded at the time of
collection?
A) Current assets will remain the same.
B) Gross profit will decrease $200.
C) Accounts receivable will decrease $9,800.
D) Net sales will increase $9,800.
Answer: B
Explanation: The $200 sales discount ($10,000 × 2%) reduces net sales and therefore gross
profit. Assets increase by $9,800 for the cash received and decrease by $10,000 to remove the
account receivable.
Topic: Recording discounts and returns - Chapter supp
Learning Objective: 06-(S): Recording Discounts and Returns.
Bloom's: Understand
27
51) Which of the following journal entries correctly records the collection of an account
receivable for which a 1% sales discount was recorded at the time of collection?
A)
Cash xxx
Sales discounts xxx
B)
Cash xxx
C)
Cash xxx
Sales discounts xxx
D)
Cash xxx
Gross profit xxx
Answer: A
Explanation: The journal entry involves a debit to both cash and sales discounts and a credit to
accounts receivable.
Bloom's: Apply
28
52) Which of the following correctly describes the effect of a journal entry involving the
recording of a sales return?
A) Gross profit decreases.
B) Net sales increases.
C) Current assets remain the same.
D) Net income increases.
Answer: A
Explanation: The journal entry involves a debit to sales returns and allowances, which reduces
net sales, which will reduce gross profit and net income.
Bloom's: Analyze
53) Which of the following correctly describes the effect of a sales discount?
A) Gross profit increases.
B) Net sales increases.
C) Current assets remain the same.
D) Net income decreases.
Answer: D
Explanation: Sales discounts reduce net sales, which will reduce gross profit and net income.
Bloom's: Understand
29
54) Which of the following does not correctly describe the effect of a credit card discount?
A) Net sales decrease and gross profit decreases.
B) Net sales decrease and net income decreases.
C) Operating expenses remain the same and net income decreases.
D) Neither operating expenses nor net income is affected
Answer: D
Explanation: The credit card discount account is a contra-revenue account, which reduces net
sales, gross profit, and therefore net income.
Bloom's: Understand
55) Which of the following does not correctly describe the effect of a journal entry involving the
recording of a credit card discount?
A) Net sales decrease and net income decreases.
B) Net sales decrease, operating expenses increase, and net income remains the same.
C) Operating expenses remain the same and net income decreases.
D) Net sales decrease and gross profit decreases.
Answer: B
Explanation: The journal entry includes a debit to credit card discount, which is a contra-
revenue account, and therefore net sales, gross profit, and net income all decrease.
Bloom's: Understand
30
56) Which of the following correctly describes credit terms of 2/10, n/30?
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 the sale.
B) A two percent discount for early payment is available if the invoice is paid within ten days of
the date of sale.
C) A ten percent discount for early payment is available if the invoice is paid within two days of
the date of the invoice.
D) A 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.
Answer: B
Explanation: The credit term 2/10 implies that a 2% discount is available within ten days of the
date of sale and the term n/30 implies that the full sales price is due within 30 days of the sale.
Bloom's: Understand
57) A customer purchased and received $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. On which of the
following dates should Discount Paper Supply record sales revenue?
A) September 1
B) September 13
C) September 30
D) October 4
Answer: A
Explanation: Sales revenue should be recorded on the date of sale. The goods were purchased
and received on the same day so there is no issue with FOB destination or shipping point and the
date of sale is September 1.
Bloom's: Understand
31
58) When a credit sale is made with terms of 2/10, n/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.
Answer: C
Explanation: The customer paid within the discount period so the discount is recognized on May
19. The discount reduces the cash received so the debit to cash is less than the credit to accounts
receivable.
Bloom's: Understand
59) A company had the following partial list of account balances at year-end:
Sales Returns and Allowances $ 1,000

Accounts Receivable 38,000
Sales Discounts 2,100
Sales Revenue 95,000
Allowance for Doubtful Accounts 1,200
How much is net sales revenue?

A) $91,900.
B) $90,700.
C) $89,900.
D) $88,600.
Answer: A
Explanation: Net sales revenue, $91,900, equals sales revenue, $95,000 minus sales discounts,
$2,100, and minus sales returns and allowances, $1,000.
Bloom's: Apply
32
60) 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. Which of the following is the annual interest rate (rounded)? (Use 365 days a year)
A) 56%.
B) 38%.
C) 25%.
D) 18%.
Answer: B
Explanation: 30-day interest rate (0.031) = Amount saved ($3) ÷ Amount paid ($97). Annual
interest rate (38%) = 30-day interest rate (0.031) × (365 ÷ 30).
Difficulty: 3 Hard
Bloom's: Apply
61) When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What
percent (rounded) would this savings amount to on an annual basis?
A) 18.2%.
B) 20.0%.
C) 29.2%.
D) 36.5%.
Answer: C
Explanation: 25-day interest rate (0.02) = Amount saved ($2) ÷ Amount paid ($98). Annual
interest rate (29.2%) = 25-day interest rate (0.02) × (365 ÷ 25).
Difficulty: 3 Hard
Bloom's: Apply
33
62) Which of the following accounts is not a contra-revenue account?
A) Sales discounts
B) Credit card discounts
C) Sales returns and allowances
D) Allowance for doubtful accounts
Answer: D
Explanation: Allowance for doubtful accounts is a contra-asset account.
Difficulty: 1 Easy
Bloom's: Remember
34
63) Dillon Company uses the allowance method to account for bad debts. The entry to write off a
bad account (one that will never be collected) should be:
A)
Debit Credit
Bad debt expense Accounts receivable
B)
Debit Credit
Bad debt expense Allowance for doubtful accounts
C)
Debit Credit
Sales revenue Accounts receivable
D)
Debit Credit
Allowance for doubtful accounts Accounts receivable
Answer: D
Explanation: Writing off an uncollectible account using the allowance method involves a debit
to allowance for doubtful accounts and a credit to accounts receivable.
Bloom's: Remember
35
64) When using the allowance method for accounting for bad debts, accounts receivable is
reported on the balance sheet at the expected net realizable value. When a particular receivable
from a customer ultimately is determined to be uncollectible and is written off, the recording of
this event will:
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.
Answer: D
Explanation: Writing-off an uncollectible account involves a debit to allowance for doubtful
accounts (a contra-asset account) and a credit to accounts receivable (an asset account).
Therefore, the net realizable value (accounts receivable minus allowance for doubtful accounts)
does not change.
Bloom's: Remember
36
65) Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful
accounts of $21,500 just prior to writing off as worthless a customer's $5,000 account receivable.
The net realizable value of Oakwood's accounts receivable as shown by the accounting records
before and after the write off was as follows:
A)
Before After
$750,000 $745,000
B)
Before After
$721,500 $733,500
C)
Before After
$728,500 $723,500
D)
Before After
$728,500 $728,500
Answer: D
Explanation: Writing-off an uncollectible account involves a debit to allowance for doubtful
Therefore, the net realizable value (accounts receivable minus allowance for doubtful accounts)
does not change; it is $728,500 both before and after the write off.
Bloom's: Apply
37
66) Woodland Company uses the allowance method to account for bad debts. During the current
year, a customer declared bankruptcy and a receivable of $10,000 was deemed uncollectible.
Which of the following journal entries records Woodland's uncollectible account write-off?
A)
Allowance for doubtful accounts 10,000
Accounts receivable 10,000
B)
Bad debt expense 10,000
C)
D)
Loss on receivables 10,000
Answer: A
Explanation: Writing off an uncollectible account involves a debit to allowance for doubtful
Bloom's: Understand
38
67) 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. Using the aging of accounts receivable
method, Chief estimates that 1% of current accounts and 10% of accounts over thirty days are
uncollectible. What is the amount of bad debt expense?
A) $90.
B) $190.
C) $290.
D) $100.
Answer: A
Explanation: Allowance for doubtful accounts desired balance, $190 = ($1,000 × 0.10) +
($9,000 × 0.01). Bad debt expense, $90 = Allowance for doubtful accounts desired balance, $190
− Allowance for doubtful accounts current balance = $100.
Difficulty: 3 Hard
Bloom's: Apply
68) Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works
prepared an aging of accounts receivable and estimated that $5,000 of the $98,000 accounts
receivable balance would be uncollectible. The allowance for doubtful accounts had a $400 debit
balance at year-end prior to adjustment. What is the amount of bad debt expense?
A) $5,000.
B) $5,400.
C) $4,600.
D) $400.
Answer: B
Explanation: Bad debt expense, $5,400 = Allowance for doubtful accounts desired credit
balance, $5,000 + Allowance for doubtful accounts current debit balance, $400.
Bloom's: Apply
39
69) Which of the following statements does not correctly describe the allowance for doubtful
accounts balance?
A) It is reported on the balance sheet as a component of current assets.
B) It is a contra-asset account.
C) It is reported on the balance sheet as a component of stockholders' equity.
D) It is created as a result of the adjusting entry to record bad debt expense.
Answer: C
Explanation: Allowance for doubtful accounts is a contra-asset account and does not affect
stockholders' equity.
Bloom's: Understand
70) The Roscoe Company's March 31 bank statement balance was $70,000. As of March 31,
outstanding checks total $22,000 and deposits in transit total $15,000. Assuming there are no
other reconciling items, what was the March 31 cash balance on Roscoe's books?
A) $63,000.
B) $77,000.
C) $70,000.
D) $107,000.
Answer: A
Explanation: Book cash balance, $63,000 = Bank balance, $70,000 − Outstanding checks,
$22,000 + Deposits in transit, $15,000.
Bloom's: Apply
40
71) The Tanner Company's April 30 pre-reconciliation cash balance on its books was $35,000.
While preparing the April 30 bank reconciliation, Tanner determined that outstanding checks
total $11,000, deposits in transit total $7,000, and bank service charges are $50. Assuming there
are no other reconciling items, what was Tanner's April 30 cash balance per the bank statement?
A) $31,000.
B) $30,950.
C) $38,950.
D) $39,000.
Answer: C
Explanation: Bank cash balance, $38,950 = Corrected book balance, ($35,000 − $50) +
Outstanding checks, $11,000 − Deposits in transit, $7,000.
Difficulty: 3 Hard
Bloom's: Apply
72) The Conner Company's August 31 pre-reconciliation cash balance on its books was $90,000.
As of August 31, outstanding checks total $44,000 and deposits in transit total $30,000.
Assuming there are no other reconciling items, what was the August 31 cash balance on Conner's
bank statement?
A) $76,000.
B) $90,000.
C) $13,000.
D) $104,000.
Answer: D
Explanation: Bank cash balance, $104,000 = Book balance, $90,000 + Outstanding checks,
$44,000 − Deposits in transit, $30,000.
Bloom's: Apply
41
73) Which of the following statements pertaining to bank reconciliations is false?
A) Outstanding checks are deducted from the bank cash balance.
B) Deposits in transit are added to the bank cash balance.
C) Bank service charges are deducted from the bank cash balance.
D) Non-sufficient funds checks identified in the bank statement are deducted from the book cash
balance.
Answer: C
Explanation: Bank service charges are deducted from the book cash balance, not the bank cash
balance.
Bloom's: Understand
74) When a depositor receives a bank statement indicating that there was a "NSF check," the
depositor should do which of the following?
A) Reduce the cash account per the books for the amount of the "NSF check."
B) Reduce the cash account per the bank statement for the amount of the "NSF check."
C) Debit allowance for doubtful accounts for the amount of the check.
D) Increase the sales returns and allowances account.
Answer: A
Explanation: NSF checks are deducted from the book cash balance when preparing a bank
reconciliation.
Bloom's: Remember
42
75) A deposit in transit in a bank reconciliation should be:
A) Added to the depositor's book cash balance.
B) Subtracted to the depositor's book cash balance.
C) Added to the bank statement balance.
D) Subtracted from the bank statement balance.
Answer: C
Explanation: Deposits in transit represent deposits recorded on the books, which have not yet
been recorded on the bank statement. They are therefore added to the bank statement balance.
Bloom's: Remember
76) CHS Company has just finished preparing its bank reconciliation. If CHS did everything
correctly, which items would have been included as an addition to the company's cash account?
A) Deposits in transit.
B) Interest received.
C) Outstanding checks.
D) ATM and check printing fees.
Answer: B
Explanation: The bank paid interest on the company's account and increased the company's
account by this amount. However, the interest was not directly deposited by the company, so it
has not yet been recorded in the company's books. In order to reconcile the cash account, the
interest needs to be added to the book side of the reconciliation schedule.
Difficulty: 1 Easy
Bloom's: Remember
43
77) Dally Company has just finished preparing its bank reconciliation. If everything was done
correctly, which of the following items would be reported as a deduction from the company's
ending balance per the bank?
A) Deposits in transit.
B) Service Fees.
C) Outstanding checks.
D) NSF checks.
Answer: C
Explanation: The checks written by the company have been recorded and are already deducted
from the books. However, since some checks have not yet cleared the bank, the bank has no
knowledge of these amounts. In order to reconcile the cash account to the bank statement, the
outstanding checks need to be deducted from the bank side of the reconciliation schedule.
Difficulty: 1 Easy
Bloom's: Remember
78) 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 $250 check erroneously deducted from Linetech's
bank account by the bank. What is the correct cash balance at the end of the month?
A) $10,600.
B) $8,750.
C) $8,500.
D) $8,250.
Answer: B
Explanation: Book cash balance, $8,750 = Bank balance, $8,000 – Outstanding checks, $500 +
Deposits in transit, $1,000 + Bank error, $250.
Bloom's: Apply
44
79) 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.
Answer: A
Explanation: The bookkeeper's cash recordkeeping and cash handling responsibilities need to be
separated.
Bloom's: Remember
80) The cash records and the bank statement of Frankel Company showed the following at the
end of February: Outstanding checks as of the beginning of February, $8,000; checks written by
Frankel Company according to its books during February, $50,000; and checks cleared by the
bank during February, $54,000. What was the amount of the outstanding checks at the end of
February?
A) $2,000.
B) $4,000.
C) $6,000.
D) $8,000.
Answer: B
Explanation: Outstanding checks at the end of February, $4,000 = Outstanding checks at the
beginning of February, $8,000 + Checks written per the books during February, $50,000 −
Checks clearing the bank during February, $54,000.
Difficulty: 3 Hard
Bloom's: Apply
45
81) The cash account and the December bank statement of Gomez Company showed the
following: deposits made by Gomez Company during December, $90,000; deposits reflected on
the December bank statement, $88,000; and deposits in transit on November 30, $5,000. What
was the amount of deposits in transit at the end of December?
A) $10,000.
B) $7,000.
C) $5,000.
D) $2,000.
Answer: B
Explanation: Deposits in transit at the end of December, $7,000 = Deposits made per the books
during December, $90,000 − [Deposits per the December bank statement, $88,000 − November
30 deposits in transit, $5,000].
Difficulty: 3 Hard
Bloom's: Apply
82) When preparing the monthly bank reconciliation, the accountant for Farris Corporation
discovered that a check correctly written to one of Farris' suppliers for $159 had been incorrectly
recorded in the books as $195. Which of the following statements is correct with respect to the
bank reconciliation process?
A) The cash balance per the books will be decreased.
B) The cash balance per the bank statement will be increased.
C) The cash balance per the bank statement will be decreased.
D) The cash balance per the books will be increased.
Answer: D
Explanation: The error incorrectly decreases the cash balance per the books. To correct the
books, the difference [$195 − $159] is added back to the book balance.
Bloom's: Analyze
46
83) When preparing a bank reconciliation, which of the following would be deducted from the
company's cash balance?
A) Interest income paid by the bank.
B) The dollar amount of deposits in transit.
C) The dollar amount of outstanding checks.
D) The bank service charges included on the bank statement.
Answer: D
Explanation: The bank service charges are recorded on the bank statement and need to be
deducted from the book balance.
Difficulty: 1 Easy
Bloom's: Remember
84) Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following
journal entry descriptions correctly describes the cash collection?
A) Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is
within the discount period.
B) Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is
credited for $200 if the collection is within the discount period.
C) Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is
credited for $200 if the collection is after the discount period.
D) Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is
after the discount period.
Answer: D
Explanation: When the payment is received after the discount period, a sales discount is not
recorded and cash is debited and accounts receivable is credited for the selling price.
Bloom's: Apply
47
85) Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following
journal entry descriptions correctly describes the cash collection?
A) Cash is debited for $25,500 and accounts receivable is credited for $25,500 if the collection is
within the discount period.
B) Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is
credited for $30,000 if the collection is within the discount period.
C) Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts
is credited for $900 if the collection is within the discount period.
D) Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is
after the discount period.
Answer: B
Explanation: When the payment is received within the discount period, a sales discount of $900
is recorded via a debit, cash is debited for $29,100, which is the selling price less the discount
[$30,000 − $900], and accounts receivable is credited for the selling price of $30,000.
Bloom's: Apply
86) Which of the following does not correctly describe the following journal entry?
Cash xxx
Credit card discount xxx
A) Current assets decrease.

B) Gross profit decreases.
C) Net sales decreases.
D) Net income is not affected.
Answer: D
Explanation: The debit to the credit card discount account is a contra-revenue account, which
reduces both gross profit and net income.
Bloom's: Understand
48
87) Which of the following correctly describes the following journal entry?
Cash xxx
Sales discounts xxx
A) The gross profit does not change.

B) Net income decreases.
C) Current assets increase.
D) Net sales increases.
Answer: B
Explanation: The debit to the sales discount account is a contra-revenue account, which reduces
gross profit, net sales, and net income.
Bloom's: Understand
88) Which of the following does not correctly describe the following journal entry?
Sales returns and allowances xxx

A) Current assets decrease.

B) Gross profit decreases.
C) Net sales decreases.
D) Operating expenses increase.
Answer: D
Explanation: The debit to the sales returns and allowances account is a contra-revenue account,
which reduces both gross profit and net sales. Accounts receivable decreases, which results in a
decrease in current assets. Sales returns and allowances is not an operating expense.
Bloom's: Understand
49
89) The Ward Company has provided the following information:
• Net sales totaled $750,000.

• Beginning net accounts receivable was $65,000.
• Ending net accounts receivable was $85,000.
What was Ward's receivables turnover ratio?

A) 10.0
B) 8.8
C) 11.5
D) 5.0
Answer: A
Explanation: Receivable turnover ratio, 10.0 = Net sales, $750,000 ÷ Average accounts
receivable, $75,000.* *Where Average net accounts receivable are equal to $75,000, based on
[beginning net accounts receivable, $65,000 + ending net accounts receivable, $85,000] ÷ 2.
Difficulty: 1 Easy
Bloom's: Apply
50
90) The Ward Company has provided the following information:
• Net sales totaled $750,000.

What was Ward's average collection period? (Use 365 days a year)
A) 73.0 days.
B) 41.8 days.
C) 31.6 days.
D) 36.5 days.
Answer: D
Explanation: Receivables turnover ratio = 10.0 = Net sales, $750,000 ÷ Average net accounts
receivable, $75,000.* *Where Average accounts receivable are equal to $75,000 based on
[beginning net accounts receivable ($65,000) + ending net accounts receivable ($85,000)] ÷ 2.
Average collection period = 36.5 days = 365 ÷ receivables turnover, 10.0.
Bloom's: Apply
51
91) The Rye Corporation has provided the following information:
• Total sales were $1,200,000.

• Sales returns and allowances totaled $100,000.
What was Rye's receivables turnover ratio?

A) 21.8
B) 18.5
C) 10.0
D) 20.0
Answer: D
Explanation: Receivables turnover ratio = 20.0 = Net sales, [$1,200,000 − $100,000] ÷
Average net accounts receivable, $55,000.* *Where Average net accounts receivable
equal $55,000 based on [beginning net accounts receivable, $45,000 + ending net
accounts receivable, $65,000] ÷ 2.
Bloom's: Apply
52
92) The Rye Corporation has provided the following information:
• Total sales were $1,200,000.

• Sales returns and allowances totaled $100,000.
What was Rye's average collection period? (Use 365 days a year)
A) 16.73 days.
B) 19.75 days.
C) 36.50 days.
D) 18.25 days.
Answer: D
Explanation: Receivables turnover ratio = 20.0 = Net sales, [$1,200,000 − $100,000] ÷
Average net accounts receivable, $55,000.* *Where Average net accounts receivable
equal $55,000 based on [beginning net accounts receivable ($45,000) + ending net
accounts receivable ($65,000)] ÷ 2.
Average collection period = (18.25 days) = 365 ÷ Receivables turnover, 20.0.

Bloom's: Apply
93) Which of the following transactions will result in a decrease in the receivables turnover
ratio?
A) The journal entry to record bad debt expense.
B) Writing off an uncollectible account receivable.
C) Selling inventory on account.
D) Collecting an account receivable.
Answer: C
Explanation: Selling inventory on account results in an increase in both net sales (numerator)
and average net receivables (denominator). However, the increase in the denominator is greater
relative to the increase in the numerator. Therefore, the receivables turnover ratio decreases.
Difficulty: 3 Hard
Bloom's: Analyze
53
94) Which of the following transactions will result in an increase in the receivables turnover
ratio?
A) The journal entry to record bad debt expense.
B) Writing off an uncollectible account receivable.
C) Selling inventory on account.
D) Purchasing inventory on account.
Answer: A
Explanation: The journal entry to record bad debt expense involves a credit to allowance for
doubtful accounts, which decreases net accounts receivable and therefore increases the
receivables turnover ratio.
Difficulty: 3 Hard
Bloom's: Analyze

A) A decrease in the accounts receivable balance means that credit sales exceeded cash
collections from customers.
B) The accounts receivable balance increases when cash collected from customers exceeds credit
sales.
C) A decrease in accounts receivable is deducted from net income when determining cash flow
from operating activities.
D) An increase in accounts receivable is deducted from net income when determining cash flow
from operating activities.
Answer: D
Explanation: An increase in accounts receivable is deducted from net income when determining
cash flow from operating activities.
Bloom's: Understand
54
96) Which of the following does not correctly describe the effect of recording a credit sale of
inventory for a profit?
A) Sales are recorded when title and risks of ownership are transferred to the buyer.
B) Current assets increase.
C) Gross profit increases.
D) Operating expenses increase.
Answer: D
Explanation: Cost of goods sold (cost of sales) increases, not operating expenses. Cost of goods
sold is not an operating expense.
Bloom's: Understand
97) The Soft Company has provided the following information after year-end adjustments:
• Allowance for doubtful accounts was $11,000 at the beginning of the year and $30,000 at the
end of the year.
• Accounts receivable were $80,000 at the beginning of the year and $420,000 at the end of the
year.
• Accounts written off as uncollectible totaled $20,000.
• Net sales totaled $2,700,000.
• Sales discounts were $100,000.
What was the amount of Soft's bad debt expense for the year?
A) $39,000.
B) $1,000.
C) $19,000.
D) $20,000.
Answer: A
Explanation: Beginning balance in allowance for doubtful accounts, $11,000 + Bad debt
expense, (X) − Write offs of uncollectible accounts, $20,000 − Ending balance in
allowance for doubtful accounts, $30,000.
Bloom's: Apply
55
98) The Tanner Company has provided the following information after year-end adjustments:
• Allowance for doubtful accounts increased $19,000.

• Accounts receivable increased $390,000 during the year.
• Accounts written off as uncollectible totaled $20,000.
• Sales totaled $2,500,000.
• Sales discounts were $100,000.
What was the amount of Tanner's net sales?

A) $1,990,000.
B) $2,380,000.
C) $2,400,000.
D) $2,420,000.
Answer: C
Explanation: Net Sales = $2,400,000 = Sales, $2,500,000 − Sales discounts, $100,000.
Difficulty: 1 Easy
Bloom's: Remember
99) Redwing Company sold inventory costing $500 to a customer on account for $700. Which of
the following correctly describes the collection of $686 cash when the customer takes advantage
of a sales discount?
A) Operating expenses increase $14.
B) Accounts receivable decreases $686.
C) Current assets decrease $14.
D) Gross profit is not affected.
Answer: C
Explanation: Cash increases $686 and accounts receivable decreases $700.
Difficulty: 3 Hard
Bloom's: Analyze
56
100) Redwing Company sold inventory costing $500 to a customer on account for $700. Which
of the following does not correctly describe the collection of $686 cash when the customer takes
advantage of a sales discount?
A) Gross profit decreases $14.
B) Accounts receivable decrease $700.
C) Net sales decrease $14.
D) Net income is not affected.
Answer: D
Explanation: The sales discount decreases net sales, gross profit, and net income.
Difficulty: 3 Hard
Bloom's: Analyze
101) Sabre Company sold inventory costing $600 to a customer on account for $900 with terms
of 3/15, n/30. Which of the following is not correct?
A) Gross profit increases $300 on the date of sale.
B) Total current assets are not affected on the date of cash collection if the customer pays 30
days after the date of sale.
C) Total current assets increase $27 on the date of cash collection if the customer pays within 15
days of the date of sale.
D) Gross profit and net sales both decrease $27 on the date of cash collection if the customer
pays within 15 days of the date of sale.
Answer: C
Explanation: Cash increases $873 and accounts receivable decrease $900. Therefore, total
current assets decrease $27.
Difficulty: 3 Hard
Bloom's: Analyze
57
102) One of Hawk Company's customers returned a product that cost Hawk $300, which was
sold on account for $450. Which of the following does not correctly describe the effect of the
return on the financial statements?
A) Gross profit decreases $150.
B) Total current assets decrease $150.
C) Sales returns and allowances increase $450.
D) Operating expenses increase $150.
Answer: D
Explanation: Sales returns are a contra-revenue account; they are not operating expenses.
Bloom's: Apply
103) One of Trent Company's customers returned products that had been sold on account for
$800. Which of the following correctly describes the effect on the financial statements of the
return?
A) A contra-revenue account decreases $800.
B) Accounts receivable decrease $800.
C) Sales returns and allowances decrease $800.
D) Net sales increase $800.
Answer: B
Explanation: Accounts receivable decrease $800. The contra-revenue account, sales returns and
allowances, increases, and net sales decrease.
Bloom's: Understand
58
104) Which of the following transactions does not affect gross profit?
A) A customer returning merchandise that was sold for a profit.
B) The collection of cash on an account receivable, which was paid for by the customer within
the discount period.
C) The journal entry to record bad debt expense.
D) Accepting a credit card for a sale and paying a service fee to the credit card company.
Answer: C
Explanation: Bad debt expense is an operating (selling) expense, which does not affect gross
profit.
Topic: Sales-Net sales; Bad debts-Recording expense-write off-recovery
and sales of bundled items on the amounts reported as net sales.; 06-02 Estimate, report, and
evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.
Bloom's: Analyze
105) Which of the following is not a component of the gross profit calculation?
A) Cost of sales.
B) Sales returns and allowances.
C) Allowance for doubtful accounts.
D) Credit card discounts.
Answer: C
Explanation: Allowance for doubtful accounts is a contra-asset account on the balance sheet.
Difficulty: 1 Easy
Bloom's: Remember
59
106) The following data were taken from the records of Lilo Corporation for the year ended
December 31, 2019 before any adjustment for bad debt expense:
Sales of merchandise for cash $150,000

Sales of merchandise on credit 800,000
Sales returns and allowances 10,000
Sales salaries expense 80,000
Cost of sales 610,000
Administrative expenses 90,000
The following items have not been included in above amounts:

Estimated bad debt expense is 1% of credit sales.
The income tax rate is 35%.
10,000 of shares of common stock are outstanding.
A. Calculate the bad debt expense.

B. Prepare a multiple-step income statement (including gross profit, income before income taxes,
and earnings per share).
60
Answer:
A. Bad debt expense = $8,000 = 1% × $800,000.
B. Multiple-step income statement:
Lilo Corporation
Income Statement
For the Year Ended December 31, 2019
Sales revenues ($150,000 +
$800,000) $950,000
Less: Sales returns and
allowances 10,000
Net sales 940,000
Less: Cost of sales 610,000
Gross profit 330,000
Operating expenses:
Selling expenses
Sales salaries expense $80,000
Total selling expenses 88,000
Administrative expenses 90,000
Total operating expenses 178,000
Income before income taxes 152,000
Income tax expense ($152,000 ×
35%) 53,200
Net Income $98,800
Earnings Per Share ($98,800 ÷
10,000) $9.88
Topic: Bad debts-Percentage of credit sales; Sales-Net sales
and sales of bundled items on the amounts reported as net sales.; 06-02 Estimate, report, and
Bloom's: Apply
61
107) A portion of the income statement for Oscar Company is shown below. Provide the missing
account titles and amounts.
A. ________ $350,000
Sales returns and allowances B. ________
C. ________ $348,000
D. ________ ________
Gross profit $90,000
Answer: A. Sales revenue

B. $350,000 - $348,000 = $2,000
C. Net sales
D. Cost of sales; $348,000 - $90,000 = $258,000
Difficulty: 1 Easy
Bloom's: Remember
108) A portion of the income statement for Lone Star Company is shown below. Provide the
missing account titles and amounts.
A. ________ $380,000
Sales discounts 20,000
Net sales B. ________
Cost of sales $100,000
C. ________ D. ________
Answer: A. Sales revenue

B. $380,000 - $20,000 = $360,000
C. Gross profit
D. $360,000 - $100,000 = $260,000
Difficulty: 1 Easy
Bloom's: Remember
62
109) Indicate whether each of the accounts listed below normally will have a debit balance or a
credit balance. Record your answer to the left of each account by entering either Dr or Cr.
____ 1. Allowance for doubtful accounts
____ 2. Bad debt expense
____ 3. Sales returns and allowances
____ 4. Credit card discounts
____ 5. Sales discounts
____ 6. Notes receivable
____ 7. Sales revenue
____ 8. Nontrade receivables
Answer: 1. Cr; 2. Dr; 3. Dr; 4. Dr; 5. Dr; 6. Dr; 7. Cr; 8. Dr

Difficulty: 1 Easy
Topic: Bad debts-Recording expense-writeoff-recovery; Recording discounts and returns-
Chapter supp; Sales-Net sales
Learning Objective: 06-(S): Recording Discounts and Returns.; 06-01 Analyze the impact of
credit card sales, sales discounts, sales returns, and sales of bundled items on the amounts
reported as net sales.; 06-02 Estimate, report, and evaluate the effects of uncollectible accounts
Bloom's: Remember
110) Hickory Corporation recorded sales revenue during the year of $350,000 of which $100,000
was on credit. The company has experienced an average bad debt loss rate of 2% of credit sales.
Prepare the adjusting journal entry at the end of the year to record bad debt expense.
Answer:
Bad debt expense ($100,000 × 2%) 2,000
Difficulty: 1 Easy
Bloom's: Apply
63
111) Prior to the year-end adjustment to record bad debt expense for 2019 the general ledger of
Stickler Company included the following accounts and balances:
Allowance for Doubtful

Accounts $1,000 credit balance
Bad Debt Expense 0
Accounts Receivable 200,000
Cash collections on accounts receivable during 2019 amounted to $450,000. Sales revenue
during 2019 amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of
these credit sales made in 2019 would ultimately become uncollectible.
A. Calculate the bad debt expense for 2019.

B. Determine the adjusted 2019 year-end balance of the allowance for doubtful accounts.
C. Determine the net realizable value of accounts receivable for the December 31, 2019 balance
sheet.
Answer:
A. Bad debt expense, $12,000 = [($800,000 × 75%) × 2%].
B. Allowance for doubtful accounts, $13,000 = ($1,000 + $12,000).
C. Net realizable value, $187,000 = Accounts receivable, $200,000 less allowance for doubtful
accounts, $13,000.
Topic: Bad debts-Percentage of credit sales; Classifying and reporting receivables
Bloom's: Apply
64
112) On December 31, 2019, Colonial Corporation had the following account balances related to
credit sales and receivables prior to recording adjusting entries:
Accounts receivable $25,000

Allowance for doubtful
accounts 200 credit balance
Sales revenue (all credit
sales) 400,000
Required:
Prepare the necessary year-end adjusting entry related to uncollectible accounts for each of the
following independent assumptions:
A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables
outstanding at year-end will be uncollectible.
B. Assume the same information presented in part A above except that, prior to adjustment, the
allowance for doubtful accounts had a debit balance of $200 rather than a credit balance of $200.
C. It is estimated that a provision for bad debts is required for 1% of credit sales for the year.
Answer:
A. Bad debt expense 1,950
($2,150 — $200)
B. Bad debt expense 2,350
($2,150 + $200)
C. Bad debt expense 4,000
(1% × $400,000)
Topic: Bad debts-Aging of accounts receivable; Bad debts-Percentage of credit sales
Bloom's: Apply
65
113) On January 1, American Company's allowance for doubtful accounts had a credit balance of
$3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2,
prior to any credit sales, a $500 account from National Company was deemed to be uncollectible
and written off.
A. Compute the net realizable value of American's receivables on January 1.

B. Prepare the journal entry American would record on January 2 related to the write-off of
National's account.
C. Compute the net realizable value of American's receivables on January 2, immediately
following the write-off of National's account.
Answer:
A. Net realizable value = $72,000 = Accounts receivable, $75,000
Less Allowance for doubtful accounts, $3,000.
B.
Allowance for doubtful accounts 500
Accounts receivable–National Company 500
C. Net realizable value = $72,000 = Accounts receivable, $74,500

Less Allowance for doubtful accounts, $2,500.
Difficulty: 1 Easy
Bloom's: Apply
66
114) Cyclone Inc. reported the following figures from its financial statements for the years 2018
through 2020:
2020 2019 2018

Net revenues $717,422 $1,110,178 $591,786
Gross profit 560,421 960,434 498,605
Net income (net loss) (92,788) 70,776 47,811
Cash flow from
operations 106,850 509,707 204,496
Accounts receivable 68,648 90,561 56,454
Describe how the change in accounts receivable will affect the calculation of cash flow from
operating activities for 2020 and 2019.
Answer: In 2020, accounts receivable decreased $21,913 [$90,561 - $68,648]. This results in an
increase in cash flow from operating activities during 2020. In 2019, accounts receivable
increased $34,107 [$90,561 - $56,454]. This results in a decrease in cash flow from operating
activities for 2019.
Bloom's: Apply
67
115) Cyclone Inc. reported the following figures from its financial statements for the years 2018
through 2020:
2020 2019 2018

Net credit sales $717,422 $1,110,178 $591,786
Gross profit 560,421 960,434 498,605
Net income (net loss) (92,788) 70,776 47,811
Cash flow from
operating activities 106,850 509,707 204,496
Accounts receivable 68,648 90,562 56,454
A. Calculate the accounts receivable turnover for 2020 and 2019.

B. Calculate the average collection period for 2020 and 2019.
Answer:
A. 2020 = 9.01 = Net sales $717,422 ÷ Average accounts receivable $79,605.
[Average accounts receivable = [($68,648 + $90,562) ÷ 2] = $79,605].
2019 = 15.1 = Net sales $1,110,178 ÷ $73,508).
[Average accounts receivable = [($90,562 + $56,454) ÷ 2] = $73,508].
B. 2020 = 40.51 days = 365 ÷ Accounts receivable turnover = 365 ÷ 9.01
2019 = 24.17 days = 365 ÷ Accounts receivable turnover = 365 ÷ 15.1
Bloom's: Apply
68
116) Matrix Corp. reported the following figures from its financial statements for the years 2018
through 2020.
2020 2019 2018

Net credit sales $812,720 $1,264,380 $573,255
Accounts
receivable 68,648 90,562 56,454
A. Calculate for 2020:

1. Accounts receivable turnover
2. Average collection period
B. Calculate for 2019:
1. Accounts receivable turnover
2. Average collection period
C. Interpret the receivables turnover and the average collection period, in general. Comment on
the change in the ratio results from 2019 to 2020. Then discuss how the trend in sales from 2018
to 2019 and 2020 may have affected the change in the ratios from 2019 to 2020.
69
Answer:
A. 1. 2020 Accounts receivable turnover 10.21 = Net sales ÷ Average accounts receivable =
$812,720 ÷ $79,605. [Average accounts receivable = [($68,648 + $90,562) ÷ 2] = $79,605].
2. 2020 average collection period = 35.75 days = 365 ÷ 10.21 Accounts receivable turnover.
B. 1. 2019 Accounts receivable turnover = 17.20 = Net sales ÷ average accounts receivable =
$1,264,380 ÷ $73,508. [Average accounts receivable = [($90,562 + $56,454) ÷ 2] = $73,508].
2. 2019 average collection period = 21.22 days = 365 ÷ 17.20 Accounts receivable turnover.
C. The accounts receivable turnover reflects how many times the average accounts receivable are
collected during the period. From one period to another, a higher ratio indicates that receivables
are collected more often during the period. The average collection period ratio converts the
turnover into a specific number of days it took for the company to collect its receivables. A
higher turnover ratio will convert to a faster collection period.
For Matrix Corp., the turnover declined from 2019 to 2020 and this was more specifically
indicated by a slower collection period. The difference in days is large, going from 21 days to 36
days. There may have been customers who experienced financial difficulty from 2019 to 2020.
Noticing the sales decline from 2019 to 2020, there may have been a problem within Matrix
where great inefficiencies in the sales and collections departments have occurred. However,
when including 2018 sales in the analysis, sales more than doubled from 2018 to 2019 and then
declined to what might have been a more normal level in 2020. So there might not have been
inefficiencies from 2019 to 2020. Rather, there may have been some very large sales in 2019
where the credit terms were extremely stringent and Matrix insisted on collection in a very short
period of time. These may have been special situations where the sales would not be recurring.
Overall, more information would be needed to determine why sales increased and then decreased
so greatly and also to determine prior years' ratios to see if 2020 results are actually in line with
normal sales and collections.
Difficulty: 3 Hard
Bloom's: Apply; Evaluate
AACSB: Analytical Thinking; Communication; Knowledge Application
70
117) A recent annual report for Kirova Company contained the following data:
(in millions)
2019 2018
Accounts receivable $2,026 $1,866
Less: Allowance for doubtful
accounts 50 52
Net accounts receivable 1,976 1,814
Net sales (all are on credit) 18,158
A. Calculate the accounts receivable turnover ratio.

B. Calculate the average days sales in receivables for 2019 (rounded to the nearest day).
C. Explain the meaning of each number.
Answer:
A. Accounts receivable turnover ratio = 9.6 = Net sales ÷ Average net accounts receivable =
$18,158 ÷ $1,895. [Average accounts receivable = [($1,976 + $1,814) ÷ 2] = $1,895]
B. Average days sales in receivables = 38 days = 365 days ÷ Accounts receivable turnover of 9.6
C. The accounts receivable turnover ratio indicates the number of times on average that the
receivables are collected while the average days sales in receivables shows the length of time in
days it takes the company to collect its receivables from the credit customers. The higher the
turnover ratio, the fewer days it takes to collect receivables, thereby increasing liquidity of the
receivables.
Bloom's: Apply
71
118) During 2019, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it
estimates a 1 percent bad debt loss rate on credit sales. At the beginning of the year, the balance
in net accounts receivable was $150,000. At the end of the year, but before the bad debt expense
adjustment was recorded and before any bad debts had been written off, the balance in net
accounts receivable was $125,000.
A. Assume that on December 31, 2019, the appropriate bad debt expense adjustment was
recorded for the year 2019 and accounts receivable totaling $16,000 was written off for the year.
What was the accounts receivables turnover ratio for the year?
B. Assume that on December 31, 2019, the appropriate bad debt expense adjustment was
recorded for the year 2019 and accounts receivable totaling $12,000 was written off for the year.
What was the accounts receivables turnover ratio for the year?
C. Explain why the answers to parts A and B differ or do not differ.
Answer:
A. Accounts receivables turnover, 15.7 = Net sales, $2,000,000 ÷ Average net accounts
receivable of $127,500 [($150,000 + $105,000*) ÷ 2]. *Bad debt expense = $20,000 which
reduces net accounts receivable at end of year = $125,000 - $20,000 = $105,000. Accounts
receivable written off do not affect net accounts receivable.
B. Accounts receivables turnover, 15.7 = Net sales, $2,000,000 ÷ Average net accounts
receivable of $127,500 [($150,000 + $105,000*) ÷ 2]. *Bad debt expense = $20,000 which
reduces net accounts receivable at end of year = $125,000 - $20,000 = $105,000. Accounts
receivable written off do not affect net accounts receivable.
C. The ratio stayed the same because only the adjusting entry affects the balance of net accounts
receivable while the actual write off of customer accounts simply offsets the asset against the
contra-asset account. Therefore, the net accounts receivable do not change.
Difficulty: 3 Hard
Bloom's: Apply
72
119) Select the appropriate answer choice A through G (listed below) to correspond with the
following numbered items on a bank reconciliation. There may be more than one letter selection
for the numbered item.
1. Balance per bank statement, June 30 $XXX

Plus (1) _____
Minus (2) _____
Correct cash balance, June 30 $XXX
2. Balance per company books, June 30 $XXX
Plus (3) _____
Minus (4) _____
Correct cash balance, June 30 $XXX
Items:
A. Checks written during June that had not cleared the bank by June 30.
B. Bank service charges for June, which were not known until the June 30th bank statement
arrived.
C. Deposit made on June 30 that did not reach the bank until July 1.
D. Upon reviewing the company's cash receipts book after June 30, it was discovered the
accounting clerk had neglected to post one receipt to the cash account.
E. The bank statement reported a "NSF check" during June.
F. The bank incorrectly deducted the check of another company to the bank account during June.
G. The company was paid interest on its account by the bank.
Answer:
(1.) C and F;
(2.) A;
(3.) D and G;
(4.) B and E.
Bloom's: Remember
73
120) Why is the reconciliation of a company's cash account to the bank statement so important
for effective internal control for cash?
Answer: The reconciliation of the cash account is very important in determining the correct, up-
to-date balance for cash to be presented on the company's balance sheet. It is also a good tool for
detecting errors in the cash account.
Bloom's: Understand
AACSB: Communication
74
121) Illinois Company prepared the following bank reconciliation at May 31:
Balance per bank $1,250 Balance per books $1,365

Additions: Additions:
Deposits in transit 240 Interest Received from bank 100
Check incorrectly
charged to our bank balance 75
Deductions: Deductions:
Outstanding checks (235) NSF check (Nelson) (100)
Bank service charges (35)
Correct cash balance $1,330 Correct cash balance $1,330
Required:
Prepare the necessary journal entries for Illinois Company required by the May 31 bank
reconciliation.
Answer:
1. Cash 100
Interest revenue 100
2. Accounts receivable, Nelson 100
Cash 100
3. Bank service charge expense 35
Cash 35
OR
Accounts receivable, Nelson 100
Bank service charge expense 35
Cash 35
Interest revenue 100
Bloom's: Apply
75
122) Chicago Company has hired you to reconcile its bank statement and cash account. At June
30, 2019, the Cash account on the books showed the following:
Cash account
Date Explanation Debits Credits Balance
June 1 Balance $5,600
June 1-30 Deposits $32,000 37,600
June 1-30 Checks $29,700 7,900
June 30 Balance 7,900
The June bank statement, just received, showed the following:

June 1, balance $5,600
Deposits made in June 29,000
Interest paid by the bank in June 120
Checks paid in June (27,500)
Bank service charge for June (50)
NSF Charged (Brad Jolie, check returned
for nonsufficient funds) (150)
June 30, balance $7,020
There were neither outstanding checks nor deposits in transit at May 31, 2019.
A. Prepare the bank reconciliation at June 30, 2019.

B. Prepare the adjusting journal entries needed as a result of preparing the bank reconciliation.
76
Answer:
A.
Chicago Company
Bank Reconciliation
June 30, 2019
Balance per
Books: $7,900 Balance per bank statement: $7,020
Interest paid by Deposits in transit
bank 120 ($32,000 — $29,000) 3,000
Bank service Outstanding checks
charge (50) ($29,700 — 27,500) (2,200)
NSF check of B.
Jolie (150)
Correct cash
balance: $7,820 Correct cash balance: $7,820
B.
Cash 120
Interest income 120
Bank service charge expense 50
Cash 50
Accounts receivable, Brad Jolie 150
Cash 150
Bloom's: Apply
77
123) A comparison of the balance in Cottonwood Company's cash account per its books as of
April 30, 2019 and the bank statement dated April 30, 2019 revealed the following information:
Code Item
A. Ending Cash balance per books (unadjusted) $5,520
Ending balance per bank statement (as of April 30,
B. 2019) 5,170
Customer's NSF check returned by bank
C. Shown on the April bank statement 300
D. Outstanding checks at the end of April 870
E. Deposit in transit at the end of April 1,100
Error made by Cottonwood in recording a check
paid to a supplier during April-$550 was credited to
Cash when the proper amount was $500; the bank
properly recorded the check as $500 when it cleared
F. the bank 50
G. Bank service charge for April 20
H. Interest paid by bank 150
Prepare a complete bank reconciliation using the format below. In each section of the bank
reconciliation indicate the proper handling of each of the items shown above by listing the
appropriate item code letter and the respective amount.
Cottonwood Company
Bank Reconciliation
April 30, 2019
Bank Statement Balance:
Book Balance of Cash: $ $
(Item code) (Amount) (Item code) (Amount)
Correct cash balance: $ Correct cash balance: $
78
Answer:
Book Balance of Cash: Bank Statement Balance:
$5,520 A $5,170 B
F 50 E 1,100
H 150
C (300) D (870)
G (20)
Correct cash balance: Correct cash balance:
$5,400 $5,400
Bloom's: Apply
79
124) Burke Company has just received its June 30 bank statement from Urban Bank. The bank
statement and the cash account per the books, summarized below, are to be reconciled for the
month of June.
Cash Account per

Bank Statement Books
Balance, Balance,
June 1 $5,200 June 1 $5,500
Cash
Deposits 9,200 receipts 9,000
Interest paid Checks
by bank 240 written (7,700)
Checks
cleared (7,475)
Bank
service
charge (20)
NSF check
(Jimmy
Dean) (100)
Balance, Balance,
June 30 $7,045 June 30 $6,800
Other Data:
May June
Deposit in transit at month end $600 $400
Outstanding checks at month end 300 525
A. Prepare the June 30 bank reconciliation.

B. Prepare the journal entries that should be made in the accounts of Burke Company as a result
of the bank reconciliation.
80
Answer:
A.
Book Balance of Cash: Bank Statement Balance:
$6,800 $7,045
Interest paid 240 Deposit in transit 400
Bank service Outstanding
charge (20) checks (525)
NSF check, Jimmy
Dean (100)
Correct cash balance: Correct cash balance:
$6,920 $6,920
B.
1. Cash 240
Interest income 240
2. Bank service charge expense 20
Cash 20
3. Accounts receivable, Jimmy Dean 100
Cash 100
Bloom's: Apply
125) A. What are "cash equivalents"?

B. Specifically where would cash equivalents appear on the financial statements?
Answer:
A. Cash equivalents are short-term investments that can be readily converted into cash and
whose value is unlikely to change. They normally have maturities of three months or less.
B. Cash equivalents usually appear on the balance sheet as the first listed current asset and are
usually combined with cash held in bank accounts for balance sheet presentation.
Bloom's: Understand
81
126) You are the new manager of West Coast Company. The company distributes goods
throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most
customers pay within two weeks. You notice that one employee is responsible for opening all
incoming payments, recording them in the accounting records, and depositing all receipts in the
bank daily. When asked why this one person performed all of these duties, you were told that it
was more efficient for one person to handle cash and to keep track of things. If any cash was
missing, responsibility could be easily determined.
Do you agree with this arrangement? What changes would you make, and why?
Answer: Answers may vary. This is definitely not a good system. One person should not be
responsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties of
handling cash and accounting for cash should definitely be separated. This person could be
stealing from the firm; since he/she is the only one handling the receipt of cash, the theft could
easily be concealed. For example, when a customer pays cash on account, the employee could
debit sales returns and allowances instead of the cash account. To prevent such an occurrence,
different employees should have the responsibility of receiving cash, accounting for cash, and
depositing cash in the bank on a daily basis.
Bloom's: Evaluate
AACSB: Analytical Thinking, Communication
82
127) Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time of
the sale, Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for
$10,000. Terms were 2/10, n/30.
Prepare the journal entries Asia Company would record for each of the following independent
situations:
A. Euro paid the balance due, less the discount, on May 10.
B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the
discount, on May 10.
C. Euro paid its bill on May 30 (there were no sales returns).
Answer:
A. May 10 Cash 9,800
Sales discounts 200
B. May 4 Sales returns and allowances 5,000
May 10 Cash 4,900
Sales discounts 100
C. May 30 Cash 10,000
Topic: Recording discounts and returns-Chapter supp
Bloom's: Apply
83
128) On July 10, 2019, Rex Company sold merchandise at an invoice price of $5,000 with terms
of 2/10, n/30.
Prepare the journal entries required below by indicating the account code of the appropriate
account for each debit and credit and enter the dollar amounts for each item.
Account Code
A Cash
B Accounts receivable
C Sales revenue
D Sales discounts
Transaction Debits Credits

Code Amount Code Amount
Sale on July 10, 2019
Assumption A: Collection of the account on
August 9, 2019.
Assumption B: Collection of the account on July
18, 2019.
Answer:
Transaction Debits Credits
Code Amount Code Amount
Sale on July 10, 2019. B $5,000 C $5,000
Assumption A: Collection of the account on
August 9, 2019. A $5,000 B $5,000
Assumption B: Collection of the account A $4,900
on July 18, 2019. D 100 B $5,000
Bloom's: Apply
84
129) On June 1, 2019, Concorde Company sold merchandise on credit at an invoice price of
$1,000; terms 2/10, n/30.
Prepare the journal entries to record the following:

A. To record the sale.
B. Assumption A: To record collection on June 28, 2019.
C. Assumption B: To record collection on June 9, 2019.
Answer:
A. June 1 Accounts receivable 1,000
Sales revenue 1,000
B. June 28 Cash 1,000
C. June 9 Cash 980
Sales discount 20
Bloom's: Apply
85
130) Determine the effect of the following transactions on the financial statement components
identified. Code your answers as follows:
A: If the transaction results in an increase in the financial statement component.
B: If the transaction results in a decrease in the financial statement component.
C. If the transaction does not affect the financial statement component.
Transaction 1: The adjusting entry to record bad debt expense was made.
Gross profit _____
Current assets _____
Stockholders' equity _____
Transaction 2: An account receivable was collected for which the customer took advantage of a
2% discount and remitted the payment less the discount.
Net sales _____
Gross Profit _____
Current assets _____
Answer: Transaction 1: The adjusting entry to record bad debt expense was made.
Gross profit C
Current assets B
Stockholders' equity B
Transaction 2: An account receivable was collected for which the customer took advantage of a
2% discount and remitted the payment less the discount.
Net sales B
Gross Profit B
Current assets B
Topic: Bad debts-Recording expense-writeoff-recovery; Recording discounts and returns-
Chapter supp
Learning Objective: 06-(S): Recording Discounts and Returns.; 06-02 Estimate, report, and
Bloom's: Apply
86
131) On January 2, 2019, Boulder Pointe Air Conditioning and Heating sold and installed an
HVAC system to DeMille Co. for $2,750. The selling price is allocated as follows: (1) 90% for
the HVAC unit and (2) 10% for an ongoing 4-year service contract for the HVAC unit.
A. Determine each of the following related to this sale:

1. Identify the contract between the company and the customer.
2. Identify the performance obligations of Boulder Pointe.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
B. What amount of revenue should Boulder Pointe recognize for the year ended December 31,
2019?
Answer:
A.
1. A bundled HVAC system and an ongoing service contract.
2. #1 installation of an HVAC unit, #2 service for a 4-year period
3. $2,750 total
4. #1 HVAC system $2,475 ($2,750 x 90%), #2 service for 4-year period $275 ($2,750 x 10%)
B. Boulder Pointe should recognize $2,475 revenue for the HVAC system which has been
installed and $68.75 ($275 ÷ 4) of revenue for providing 1/4 of the service. Total revenue =
$2,543.75.
Difficulty: 3 Hard
Bloom's: Apply
87
132) Lumberjack, Inc. manufactures and sells skis and snowboards and uses the allowance
method to account for its receivables. Lumberjack sold $16,000 of skis to North Slope Co. in
January. In March, North Slope encountered financial difficulties due to a much lower than
average snowfall and decreased tourism at its ski resort. North Slope declared bankruptcy in June
at which time Lumberjack, Inc. wrote off the $16,000 account receivable. November and
December brought record snowfall and North Slope was able to pay the $16,000 owed to
Lumberjack on December 15. Prepare the entries on Lumberjacks' books to account for the sale,
write-off, and recovery of North Slope's account receivable.
Answer: January
Sales revenue 16,000
June
December 15
Cash 16,000
Topic: Bad debts - Recording expense-write off-recovery
Bloom's: Apply
88
133) Josephine sells organic, GMO-free pecans in the United States, Canada, and Europe.
Recently Josephine made the following two sales. Prepare the entries required on Josephine's
books to record these sales.
February
Sold 3,500 pounds of pecans on account to Tinder, a German company. Tinder agreed to pay
€14,000. On the sale date, each Euro was worth US$1.35.
March
Sold 4,000 pounds of pecans on account to Charlie Co., an English company. Charlie agreed to
pay £24,800. On the sale date, each British pound was worth US$.98.
Answer: February
Accounts receivable 18,900 (€14,000 x $1.35)
March
Accounts receivable 24,304 (£24,800 x $.98)
Bloom's: Apply
89

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Financial Accounting, 10e (Libby)

Chapter 6 Reporting and Interpreting Sales Revenue, Receivables, and Cash

3) Credit card discounts are reported as operating expenses on an income statement.

5) Sales returns and allowances is a contra-revenue account.

8) Gross profit is calculated as gross sales less cost of sales.

9) Gross profit decreases when sales discounts increase.

29) Which of the following statements is correct?

• Cash sales, $450,000

How much are Newark's net sales?

• Cash sales, $450,000

How much is Newark's cost of sales?

• Cash sales, $450,000

How much cash was collected from customers?

• Cash sales, $150,000

• Cash sales, $150,000

• Cash sales, $150,000

• Cash sales, $150,000

• Accounts receivable written-off as uncollectible during the year amounted to $11,500.

How much was CHS Company's bad debt expense?

• Accounts receivable written-off as uncollectible during the year amounted to $11,500.

How much cash was received from collections of accounts receivable?

Net credit sales are $120,000.

47) Which of the following statements is correct?

• The accounts receivable balance on December 31, 2019 was $175,000.

How much is Clark's 2019 bad debt expense?

Sales Returns and Allowances $ 1,000

How much is net sales revenue?

A) Current assets decrease.

A) The gross profit does not change.

Sales returns and allowances xxx

A) Current assets decrease.

• Net sales totaled $750,000.

What was Ward's receivables turnover ratio?

• Net sales totaled $750,000.

• Total sales were $1,200,000.

What was Rye's receivables turnover ratio?

• Total sales were $1,200,000.

Average collection period = (18.25 days) = 365 ÷ Receivables turnover, 20.0.

95) Which of the following statements is correct?

• Allowance for doubtful accounts increased $19,000.

What was the amount of Tanner's net sales?

Sales of merchandise for cash $150,000

The following items have not been included in above amounts:

A. Calculate the bad debt expense.

Answer: A. Sales revenue

Answer: A. Sales revenue

Answer: 1. Cr; 2. Dr; 3. Dr; 4. Dr; 5. Dr; 6. Dr; 7. Cr; 8. Dr

Allowance for Doubtful

A. Calculate the bad debt expense for 2019.

Accounts receivable $25,000

A. Compute the net realizable value of American's receivables on January 1.

C. Net realizable value = $72,000 = Accounts receivable, $74,500

2020 2019 2018

2020 2019 2018

A. Calculate the accounts receivable turnover for 2020 and 2019.

2020 2019 2018

A. Calculate for 2020:

A. Calculate the accounts receivable turnover ratio.

1. Balance per bank statement, June 30 $XXX

Balance per bank $1,250 Balance per books $1,365

The June bank statement, just received, showed the following:

A. Prepare the bank reconciliation at June 30, 2019.

Cash Account per

A. Prepare the June 30 bank reconciliation.