Financial Accounting, 1e Chapter 7: Cash and Receivables Test Item File

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1 Financial Accounting, 1e Chapter 7: Cash and Receivables Test Item File Credit sales are the most desirable form of sales. LO: 7-0 EOC Ref: Introduction The most common credit cards issued by financial institutions are Discover and American Express. LO: 7-0 EOC Ref: Introduction The most common types of financial institution credit cards are MasterCard and Visa. LO: 7-0 EOC Ref: Introduction MasterCard and Visa sales are treated like cash sales. LO: 7-0 EOC Ref: Introduction

2 7.0-5 Most financial institutions charge the retailer a service fee that enables the retailer to accept the credit cards as payment on merchandise. LO: 7-0 EOC Ref: Introduction From the retailer s perspective, debit cards are nearly identical to credit cards and have the same benefits and drawbacks. LO: 7-0 EOC Ref: Introduction The processing of credit card and debit card transactions is generally done: A. at the retail site. B. at the financial institution of the retailer. C. by third parties hired to do the processing. D. over the internet. Answer: C LO: 7-0 EOC Ref: Introduction Proceeds from credit card and debit card transactions are generally deposited into a business s bank account within: A. one to three days. B. three to five days. C. a week. D. a month. Answer: A LO: 7-0 EOC Ref: Introduction

3 7.0-9 A retailer has 4% credit/debit card service fees deducted from the proceeds from each sale. The retailer has $1,200 in sales for the day. The journal entry to record these sales would be: A. debit cash for $1,200 and credit sales for $1,200. B. debit sales for $1,200 and credit cash for $1,200. C. debit cash for $1,152, service fee expense for $48; and credit sales for $1,200. D. debit cash for $1,152 and credit sales for $1,152. Answer: C Calculation: $1,200 x.04 = $48 in service fee expense LO: 7-0 EOC Ref: Introduction A retailer has 3% credit/debit card service fees deducted from the proceeds from each sale. The retailer has $1,700 in sales for the day. The journal entry to record these sales would be: A. debit sales for $1,700 and credit cash for $1,700. B. debit cash for $1,700 and credit sales for $1,700. C. debit cash for $1,649, service fee expense for $51; and credit sales for $1,200. D. debit cash for $1,700; and credit sales for $1,649, service fees expense for $51. Answer: C Calculation: $1,700 x.03 = $51 in service fee expense LO: 7-0 EOC Ref: Introduction

4 A retailer has 5% credit/debit card service fees deducted from the business s bank account on a monthly basis. The retailer has $43,500 in sales for the month. The journal entry to record these sales would be: A. debit sales for $43,500 and credit cash for $43,500. B. debit cash for $43,500 and credit sales for $43,500. C. debit cash for $41,325, service fee expense for $2,175; and credit sales for $43,500. D. debit cash for $43,500; and credit sales for $41,325, service fees expense for $2,175. Calculation: No service fee at the time of sale. The bank will withdraw $2,175 in fees at the end of the month. $43,500 * 5% = $2,175 LO: 7-0 EOC Ref: Introduction Toy Company has 4% credit/debit card service fees deducted monthly by the bank from Toy Company s bank account. Toy Company has $75,000 in sales for the month. At what amount will Toy Company record this month s sales? A. $78,000 B. $75,000 C. $72,000 D. $ 3,000 LO: 7-0 EOC Ref: Introduction When companies extend credit to customers, A. losing sales generally increases. B. not collecting money from customers decreases. C. not collecting money from customers increases. D. the business stays the same. Answer: C LO: 7-0 EOC Ref: Introduction

5 7.1-1 Cash is one of the least vulnerable assets that a business has. EOC Ref: Introduction The cash register provides control over the cash receipts for a retail business. EOC Ref: Introduction Cash receipts should never be deposited more than once a business day. EOC Ref: Introduction Separation of duties is essential for internal control over cash receipts and cash payments. EOC Ref: Introduction Streamlined payment procedures now involve the use of electronic data interchange and electronic funds transfer between and among suppliers and merchandisers. EOC Ref: Introduction

6 7.1-6 Bank reconciliation is an important part of internal control that should be performed daily. EOC Ref: S In a bank reconciliation, the bank balance and the book balance must be adjusted to be reconciled. EOC Ref: S Differences between when a company records a transaction and when the bank records the same transaction are called timing differences. EOC Ref: S If possible, the bank reconciler should have no other duties relating to cash transactions in the business. EOC Ref: S Today, very few businesses receive their bank statements online. EOC Ref: S7-1

7 After the mailroom employee open the cash receipts, the checks then go to the: A. bank. B. Controller. C. Treasurer. D. accounting department. Answer: C EOC Ref: Exhibit After the mailroom employee open the cash receipts, the remittance advices go to the: A. Controller. B. accounting department. C. Treasurer. D. bank. EOC Ref: Exhibit The verifies the amount of the deposit and the total amount posted to the cash account. A. bank B. accounting department C. Treasurer D. Controller Answer: D EOC Ref: Exhibit 6-4

8 The process of acquiring merchandise from a supplier begins with the: A. check for payment. B. receiving report. C. purchase order. D. invoice. Answer: C EOC Ref: Exhibit Once the merchandise is received from the supplier, the company: A. issues an invoice. B. issues a check. C. issues a purchase order. D. completes a receiving report. Answer: D EOC Ref: Exhibit Before signing the check, the usually assumes responsibility for the custody of cash. A. Controller B. purchasing agent C. Treasurer D. manager Answer: C EOC Ref: Exhibit 6-5

9 To prevent a second payment for an invoice, the check signer should the documents relating to the transaction. A. deface B. sign C. file D. throw away Answer: A EOC Ref: Exhibit A bank statement shows the: A. ending book balance as of a specific date. B. ending bank balance as of a specific date. C. reconciled balance as of a specific date. D. book errors as of a specific date. EOC Ref: S Deposits in transit are: A. subtracted from the book balance. B. added to the book balance. C. subtracted from the bank balance. D. added to the bank balance. Answer: D EOC Ref: S7-2

10 The bank recorded a $56 deposit as $65. This bank error would be corrected by: A. subtracting $9 from the bank balance. B. adding $9 to the bank balance. C. adding $9 to the book balance. D. subtracting $9 from the book balance. Answer: A Calculations: $65 - $56 = $9 EOC Ref: S Outstanding checks are: A. added to the book balance. B. added to the bank balance. C. subtracted from the book balance. D. subtracted from the bank balance. Answer: D EOC Ref: S PNC Bank collected a $450 note from a customer for ABC Company. When doing the bank reconciliation, ABC should: A. add $450 to the bank balance. B. subtract $450 from the bank balance. C. add $450 to their book balance. D. subtract $450 from their book balance. Answer: C EOC Ref: S7-2

11 Isaiah Company deposited $1,000 into their bank, but the bank statement does not show the deposit. This $1,000 is an example of a(n): A. outstanding check. B. bank error. C. bank collection. D. deposit in transit. Answer: D EOC Ref: S Meranda Company has a checking account that earns interest. The current bank statement shows interest earned of $ This amount should be: A. added to Meranda s book balance. B. subtracted from Meranda s book balance. C. ignored, as the bank has added it to Meranda s book balance. D. subtracted from the bank statement. Answer: A EOC Ref: S NSF check amounts are: A. added to the bank balance. B. subtracted from the bank balance. C. added to the book balance. D. subtracted from the book balance. Answer: D EOC Ref: S7-2

12 Rick Company deposited a check for $675, but it was recorded on their books as a check for $576. This error of $99 would be: A. added to the bank balance. B. added to Rick s book balance. C. subtracted from the bank balance. D. subtracted from Rick s book balance. EOC Ref: S Casey Company s bank statement shows a bank balance of $43,267. The statement shows a bank service charge of $50. Casey s book balance shows outstanding checks of $5,288 and deposits in transit of $9,325. The bank side reconciliation would show cash of: A. $43,267. B. $43,217. C. $39,230. D. $47,304. Answer: D Calculation: $43,267 + $9,325 - $5,288 = $47,304 EOC Ref: S Casey Company s bank statement shows a bank balance of $43,267. The statement shows a bank service charge of $50 and a bank collection of $760 in Casey Company s behalf. Casey s book balance should be adjusted by a total of: A. +$810. B. +$760. C. +$710. D. -$710. Answer: C Calculation: $760 - $50 - $710 EOC Ref: S7-3

13 Prepare a bank reconciliation for Brandon Company for July 31, 2011 from the following information: Answer: Bank Balance, July 31, 2011 $36,739 Checkbook Balance, July 31, ,444 Bank collection of note receivable 1, interest Bank service charge 35 Deposits in transit 2,400 Outstanding checks 1,245 NSF check from customer 330 Correction of book error (check #456 written for $160, recorded at $610) BANK Brandon Company Bank Reconciliation July 31, 2011 BOOK Balance, July 31 $36,739 Balance, July 31 $36,444 Add: Add: A. Deposits in transit 2,400 A. Collection of note + 1,365 interest B. Correction of book error 450 Less: A. Outstanding checks 1,245 Less: A. Bank service charge 35 B. NSF check from customer 330 Adjusted bank balance $37,894 Adjusted book balance $37,894 EOC Ref: S7-4

14 Prepare a bank reconciliation for Cindy Company for July 31, 2011 from the following information: Bank Balance, July 31, 2011 $ 29,542 Checkbook Balance, July 31, ,344 Bank collection of note receivable 1, interest Bank service charge 75 Deposits in transit 3,145 Outstanding checks 2,685 NSF check from customer 770 Correction of book error (check #456 written for $280, recorded at $28) Answer: BANK Cindy Company Bank Reconciliation July 31, 2011 BOOK Balance, July 31 $29,542 Balance, July 31 $29,344 Add: Add: A. Deposits in transit 3,145 A. Collection of note + interest 1,755 Less: A. Outstanding checks 2,685 Less: A. Bank service charge 75 B. NSF check from 770 customer C. Correction of book error 252 Adjusted bank balance $30,002 Adjusted book balance $30,002 EOC Ref: S7-4

15 Record the necessary journal entries from the following bank reconciliation information for July 31, 2011: Bank Balance, July 31, 2011 $36,739 Checkbook Balance, July 31, ,444 Bank collection of note receivable 1, interest Bank service charge 35 Deposits in transit 2,400 Outstanding checks 1,245 NSF check from customer 330 Correction of book error (check #456 written for $160, recorded at $610) gas expense Answer: Date Description Post Ref. Debit Credit 7/31 Cash 1,365 Note Receivable 1,200 Interest Revenue 165 Record collection of note and interest by bank 7/31 Miscellaneous Expense 35 Cash 35 To record bank service charge 7/31 Cash 450 Gas Expense 450 To correct recording of Check #456 7/31 Accounts Receivable 330 Cash 330 Record NSF check returned by bank Difficulty: 3 EOC Ref: S7-4

16 Record the necessary journal entries from the following bank reconciliation information for July 31, Bank Balance, July 31, 2011 $ 28,542 Checkbook Balance, July 31, ,344 Bank collection of note receivable 1, interest Bank service charge 75 Deposits in transit 3,145 Outstanding checks 2,685 NSF check from customer 770 Correction of book error (check #456 written for $280, recorded at $28) maintenance expense Answer: Date Description Post Ref. Debit Credit 7/31 Cash 1,755 Note Receivable 1,545 Interest Revenue 210 Record collection of note plus interest by bank 7/31 Miscellaneous Expense 75 Cash 75 To record bank service charge 7/31 Maintenance Expense 252 Cash 252 Correct recording of check #456 7/31 Accounts Receivable 770 Cash 770 Record NSF check returned by bank Difficulty: 3 EOC Ref: S7-4

17 Record the necessary journal entries from the following bank reconciliation information for September 30, Bank Balance, September 30, 2011 $ 35,688 Checkbook Balance, September 30, ,576 Bank collection of note receivable 1, interest Bank service charge 40 Deposits in transit 25 Outstanding checks 1,688 NSF check from customer (C. Cook) 2,319 Correction of book error (check #1245 written for 9 $354, recorded at $345) wages expense Answer: Date Description Post Ref. Debit Credit 9/30 Cash 1,115 Note Receivable 1,000 Interest Revenue 115 Record collection of note plus interest by bank 9/30 Miscellaneous Expense 40 Cash 40 To record bank service charge 9/30 Wages Expense 9 Cash 9 Correct recording of check #456 9/30 Accounts Receivable C. Cook 2,319 Cash 2,319 Record NSF check returned by bank Difficulty: 3 EOC Ref: S Cash is listed first on the balance sheet because it is the least liquid asset. LO: 7-2 EOC Ref: S7-5

18 7.2-2 Each cash account is listed separately on the balance sheet. LO: 7-2 EOC Ref: S Cash equivalents may include money orders and traveler s checks. LO: 7-2 EOC Ref: S Ninety-day U.S. Treasury notes are considered cash equivalents. LO: 7-2 EOC Ref: S Cash consists of anything that a bank will take as a deposit. LO: 7-2 EOC Ref: S Which of the following would NOT be considered cash? A. Currency B. Money market funds C. Money orders D. Checking accounts LO: 7-2 EOC Ref: S7-5

19 7.2-7 Which of the following would NOT be considered a 90-day cash equivalent? A. Time deposits B. Coin C. Treasury notes D. Certificates of deposits LO: 7-2 EOC Ref: S Cash equivalents are: A. very liquid, and carry high risk. B. not liquid, and carry little risk. C. very liquid, and carry little risk. D. not liquid, and carry high risk. Answer: C LO: 7-2 EOC Ref: S U. S. Treasury notes must mature within days of the balance sheet date in order to be considered cash equivalents. A. 60 B. 90 C. 120 D. 180 LO: 7-2 EOC Ref: S7-5

20 Which of the following would be considered a cash equivalent? A. Currency B. Time deposits C. Checks D. Money orders LO: 7-2 EOC Ref: S Accounts receivable are more formal and usually longer in terms than notes receivable. LO: 7-3 EOC Ref: S Notes receivable generally include a charge for interest. LO: 7-3 EOC Ref: S A company may have receivables such as loans to employees and interest receivable. LO: 7-3 EOC Ref: S Accounts receivable are classified as current assets. LO: 7-3 EOC Ref: S7-6

21 7.3-5 There are two methods for accounting for uncollectible receivables. LO: 7-3 EOC Ref: S Receivables of a company CANNOT be long-term assets. LO: 7-3 EOC Ref: S Which is NOT a benefit to extending credit to customers? A. Bad debt expenses B. Increased revenues C. Increased profits D. Wider range of customers Answer: A LO: 7-3 EOC Ref: S When a customer fails to pay on their account, it creates a(n): A. bad debt expense. B. uncollectible account. C. account receivable. D. decrease in revenue. Answer: A LO: 7-3 EOC Ref: S7-6

22 7.3-9 A customer s written promise to pay an amount of money to a business with interest is a(n) of the business. A. account receivable B. account payable C. note receivable D. note payable Answer: C LO: 7-3 EOC Ref: S Which of the following would indicate poor internal control over accounts receivable? A. The person handling cash receipts passes the receipts to someone who enters them into accounts receivable. B. The same person handling cash receipts also records the accounts receivable transactions. C. The mailroom employees open the mail and give the cash receipts to another employee. D. The person who handles accounts receivable would not write off accounts as uncollectible. LO: 7-3 EOC Ref: S The simplest way to account for an uncollectible account is to use the allowance method. EOC Ref: S When writing off an account using the direct write-off method, the journal entry would include a debit to uncollectible accounts expense. EOC Ref: S7-7

23 7.4-3 GAAP generally allows the direct write-off method for accounting for bad debts. EOC Ref: S The direct write-off method always adheres to the matching principle. EOC Ref: S The materiality principle allows companies with low amounts of uncollectible accounts to use the direct write-off method. EOC Ref: S The allowance method of accounting for bad debts is required by GAAP because of the materiality principle. EOC Ref: S The contra-account allowance for doubtful accounts is credited when journal entries are written for estimates of bad debts. EOC Ref: S7-7

24 7.4-8 The percentage of sales method is the only method allowed by GAAP to estimate the amount of uncollectible accounts. EOC Ref: S The net realizable value of accounts receivable is computed by subtracting the allowance for doubtful accounts from the amount in the accounts receivable control account. EOC Ref: S When using the aging method, the amount calculated to be the uncollectible accounts is the amount used for the adjusting entry at the end of the period. EOC Ref: S The period end adjusting entry for uncollectible accounts expense under the direct write-off method is: A. uncollectible accounts expense, debit; allowance for uncollectible accounts, credit. B. not required. C. cash, debit; accounts receivable/customer name, credit. D. uncollectible accounts expense, debit; accounts receivable/customer name, credit. EOC Ref: S7-7

25 The journal entry to write off a customer s account under the direct write-off method is: A. uncollectible accounts expense, debit; allowance for uncollectible accounts, credit. B. not required. C. cash, debit; accounts receivable/customer name, credit. D. uncollectible accounts expense, debit; accounts receivable/customer name, credit. Answer: D EOC Ref: S Under the direct write-off method, to record the receipt of cash after an account has previously being written off, you would first: A. debit cash and credit the customer s account. B. reinstate the customer s account. C. debit allowance for doubtful accounts. D. debit uncollectible accounts expense. EOC Ref: S The period end adjusting entry for uncollectible accounts expense under the allowance method is: A. uncollectible accounts expense, debit; allowance for uncollectible accounts, credit. B. not required. C. cash, debit; accounts receivable/customer name, credit. D. uncollectible accounts expense, debit; accounts receivable/customer name, credit. Answer: A EOC Ref: S7-8

26 The journal entry to write off a customer s account under the allowance method is: A. uncollectible accounts expense, debit; allowance for uncollectible accounts, credit. B. not required. C. allowance for uncollectible accounts, debit; accounts receivable/customer name, credit. D. uncollectible accounts expense, debit; accounts receivable/customer name, credit. Answer: C EOC Ref: S Under the allowance method, to record the receipt of cash after an account has previously being written off, you would first: A. debit cash and credit the customer s account. B. reinstate the customer s account. C. debit allowance for doubtful accounts. D. debit uncollectible accounts expense. EOC Ref: S A company has $235,000 in credit sales. The company uses the allowance method of determining uncollectible accounts expense. The allowance for doubtful accounts now has a $7,250 credit balance. If the company uses the allowance method based on 7% of credit sales, what will be the amount of the journal entry credited to allowance for uncollectible accounts? A. $16,450 B. $23,700 C. $ 7,250 D. $ 9,200 Answer: A Calculation: Sales $235,000 x.07 = $16,450 EOC Ref: S7-8

27 A company has $317,000 in credit sales. The company uses the allowance method of determining uncollectible accounts expense. The allowance for doubtful accounts now has an $8,150 debit balance. If the company uses the allowance method based on 6% of credit sales, what will be the amount of the journal entry credited to allowance for uncollectible accounts? A. $ 8,150 B. $27,170 C. $10,870 D. $19,020 Answer: D Calculation: $317,000 x.06 = $19,020 EOC Ref: S Margaret is a customer of Tammy Company. Her current balance due is $1,560. It has been determined that she will default on her bill. If the company uses the direct write-off method, what accounts will be used to write off the $1,560? A. No entry will be necessary. B. Debit accounts receivable/margaret; credit uncollectible accounts expense. C. Debit uncollectible accounts expense; credit accounts receivable/margaret. D. Debit uncollectible accounts expense; credit allowance for doubtful accounts. Answer: C EOC Ref: S Margaret is a customer of Tammy Company. The company wrote off her account of $1,200 on August 15. On October 12, she sent in a payment of $560. What will Tammy Company record first to reinstate her account? A. Debit cash; credit accounts receivable/margaret. B. Debit uncollectible accounts expense; credit accounts receivable/margaret. C. Debit allowance for doubtful accounts; credit accounts receivable/margaret. D. Debit accounts receivable/margaret; credit allowance for doubtful accounts. Answer: D EOC Ref: S7-7

28 Brandon Company completed an aging of their accounts receivable and came up with an estimated amount of $6,342. The credit sales for the period are $85,000. The balance in the allowance for doubtful accounts is a debit of $817. If Brandon uses 5% of credit sales as their estimating uncollectible accounts, how much will the credit be to the allowance for doubtful accounts if Brandon uses the percent of credit sales as its method of estimating uncollectible accounts? A. $7,159 B. $5,525 C. $5,067 D. $4,250 Answer: D Calculation: $85,000 x.05 = $4,250 Difficulty: 3 EOC Ref: S Brandon Company completed an aging of their accounts receivable and came up with an estimated amount of $6,342. The credit sales for the period are $85,000. The balance in the allowance for doubtful accounts is a debit of $817. If Brandon uses 5% of credit sales as their estimating uncollectible accounts, how much will the credit be to the allowance for doubtful accounts if Brandon uses the estimate of aging receivables as its method of estimating uncollectible accounts? A. $7,159 B. $5,525 C. $5,067 D. $4,250 Answer: A Calculation: $6,342 + $817 = $7,159 Difficulty: 3 EOC Ref: S7-10

29 Taylor Company has given you the following information from its aging of accounts receivable. Using this information, determine the amount of the journal entry to record the allowance for doubtful accounts. Current $24,400 2% uncollectible days 7,350 8% uncollectible days 3,380 15% uncollectible 91 and up 1,220 30% uncollectible Current amount in the allowance for doubtful accounts is a $958 credit. A. $2,457 B. $1,949 C. $ 991 D. $ 541 Answer: C Calculation: ($24,400 x.02) + ($7,350 x.08) + ($3,380 x.15) + ($1,220 x.30) - $958 = $991 EOC Ref: S7-10

30 Journalize the following transactions for Allan Company using the direct write-off method: April 21 Sold $560 of merchandise on account to Bill Smith. May 16 Received $125 from Bill Smith on his account. June 30 Bill Smith filed bankruptcy and his account was written off. Sept 18 Received a payment from Bill Smith for $50. Answer: Date Description P.R. Debit Credit April 21 Accounts Receivable Bill Smith 560 Sales 560 To record credit sale May 16 Cash 125 Accounts Receivable Bill Smith 125 Receipt of cash on account June 30 Uncollectible Accounts Expense 435 Accounts Receivable Bill Smith 435 To write off Bill Smith s account Sept 18 Accounts Receivable Bill Smith 435 Uncollectible Accounts Expense 435 To reinstate Bill Smith s account Sept 18 Cash 50 Accounts Receivable Bill Smith 50 Receipt of cash on account EOC Ref: S7-10

31 Journalize the following transactions for Cara Company using the direct write-off method: April 11 Sold $950 of merchandise on account to Tim Bell. May 23 Received $400 from Tim Bell on his account. Oct 15 Tim Bell has missed 5 payments and his account was written off.. Dec 19 Received a payment from Tim Bell for $125. Answer: Date Description P.R. Debit Credit April 11 Accounts Receivable Tim Bell 950 Sales 950 To record credit sale May 23 Cash 400 Accounts Receivable Tim Bell 400 Receipt of cash on account Oct 15 Uncollectible Accounts Expense 550 Accounts Receivable Tim Bell 550 To write off Bill Smith s account Dec 19 Accounts Receivable Tim Bell 550 Uncollectible Accounts Expense 550 To reinstate Bill Smith s account Dec 19 Cash 125 Accounts Receivable Tim Bell 125 Receipt of cash on account EOC Ref: S The percent-of-sales method is called the: A. balance sheet approach. B. income statement approach. C. allowance approach. D. direct write-off approach. EOC Ref: Decision Guidelines H1

32 The aging method is called the: A. balance sheet approach. B. income statement approach. C. allowance approach. D. direct write-off approach. Answer: A EOC Ref: Decision Guidelines Which method does NOT use an allowance for uncollectible accounts? A. Balance sheet approach. B. Income statement approach. C. Allowance approach. D. Direct write-off approach. Answer: D EOC Ref: Decision Guidelines H Accounts receivable are reported at current market value in the current assets sections of the balance sheet. LO: 7-5 EOC Ref: Figure Accounts receivable may be reported net of allowance for doubtful accounts. LO: 7-5 EOC Ref: Figure 7-20

33 7.6-1 A promissory note is a verbal promise to pay a specified amount of money on a particular future date. EOC Ref: S The business or person that signs the note and promises to pay the required amount is called the payee. EOC Ref: S The amount loaned out by the payee is called the maturity value. EOC Ref: S The maturity value of the sum of the principal plus the interest due at maturity. EOC Ref: S Interest is an expense to the debtor and income to the creditor. EOC Ref: S7-13

34 7.6-6 Interest rates are almost always stated for a period of one month. EOC Ref: S A 4-month promissory note dated on July 17 will be due on November 17. EOC Ref: S A 77-day note dated March 3, 2010 will be due on May 20. Calculation: 28 days in March, 30 in April, 19 days in May EOC Ref: S The payee of a note is also called the creditor. EOC Ref: S When counting the days of a note, remember to count the day the note was issued. EOC Ref: S7-13

35 Using a 360-day year, the maturity value of a 90-day note for $3,500 at 8% annual interest is: A. $3,780. B. $3,710. C. $3,570. D. $3,500. Answer: C Calculation: [$3,500 x.08 x (90/360)] + $3,500 = $3,570 EOC Ref: S Using a 360-day year, the maturity value of a 69-day note for $1,500 at 7% annual interest is (rounded to the nearest cent): A. $1, B. $1,584,88. C. $1, D. $ Answer: C Calculation: [$1,500 x.07 x (69/360)] + $1,500 = $1, EOC Ref: S Using a 365-day year, the maturity value of a 180-day note for $2,700 at 9% annual interest is (rounded to the nearest cent): A. $2, B. $2, C. $2, D. $ Answer: C Calculation: [$2,700 x.09 x (180/365)] + $2,700 = $2, EOC Ref: S7-14

36 A 135-day note issued on May 17 will mature on: A. September 28. B. September 29. C. September 30. D. October 1. Calculation: 14 days left in May, 30 in June, 31 in July, 31 in August and 29 in September will give you 135 days. EOC Ref: S An 83-day note issued on November 13, 2011 will mature on: A. February 2, B. February 3, C. February 4, D. February 5, Answer: C Calculation: 17 days left in November, 31 in December, 31 in January and 4 in February will give you 83 days. EOC Ref: S On September 1, 2012, Kelly Company lent $2,400 to Tim on a 6-month 8% promissory note. The journal entry to record the note for Kelly would be: A. debit note receivable/tim, $2,400; credit cash, $2,400. B. debit note receivable/tim, $2,496; credit cash, $2,496 C. debit note receivable/tim, $96; credit interest income, $96 D. debit cash, $2,400; credit note payable/tim, $2,400 Answer: A EOC Ref: S7-15

37 On September 1, 2012, Kelly Company lent $2,400 to Tim on a 6-month 8% promissory note. The amount of interest to be accrued on December 31 will be: A. $192. B. $128. C. $ 96. D. $ 64. Answer: D Calculation: $2,400 x.08 x (4/12) = $64 EOC Ref: S On March 1, 2012, Kelly Company lent $3,500 to Tim on a 1-year 6% promissory note. The amount of interest to be accrued on December 31 will be: A. $ B. $ C. $ D. $ Calculation: $3,500 x.06 x (10/12) = $ EOC Ref: S On April 9, Joe paid $3,568 to Mike Company to fulfill his promissory note agreement. Of the $3,568, $400 is interest. The journal entry Mike Company will record is: A. debit cash, $3,568; credit note receivable/joe, $3,568. B. debit cash, $3,568; credit note receivable/joe, $3,168; credit interest income, $400. C. debit note receivable/joe, $3,568; credit cash $3,168; credit interest income, $400. D. debit note receivable/joe, $3,568; credit cash $3,568. Calculations: $3,168 + $400 = $3,568 EOC Ref: S7-15

38 On April 23, Lauren paid $4,750 to Ryan Company to fulfill her promissory note agreement. Of the $4,750, $750 is interest. The journal entry Ryan Company will record is: A. debit cash, $4,750; credit note receivable/lauren, $4,750. B. debit cash, $4,750; credit note receivable/lauren, $4,000; credit interest income, $750. C. debit note receivable/lauren, $4,750; credit cash $4,700; credit interest income $750. D. debit note receivable/lauren, $4,750; credit cash $4,750. Calculations: $4,000 + $750 = $4,750(total cash received) EOC Ref: S Isaiah Company converted a $4,000 account receivable from Mark to a 75-day, 8% note receivable. The maturity value (assume a 360-day year) that will be due from Mark in 75 days (round to nearest dollar) is: A. $4,000. B. $4,067. C. $4,320. D. some other number. Calculation: [$4,000 x.08 x (75/360)] + $4,000 = $4,067. Difficulty: 3 EOC Ref: S7-15

39 Andy Corporation lent $25,000 to Casey Corporation for 75 days at 7% interest on November 22, How much interest will have accrued to Andy Corporation on December 31, 2010, assuming a 360-day year? A. $ B. $ C. $ D. Some other number Calculation: $25,000 x.07 x (39/360) = $189.58(rounded to nearest cents) 8 days in November and 31 days in December EOC Ref: S A note is signed on April 15, 2011 at 9% for 216 days. The maturity date will be: A. November 15. B. November 16. C. November 17. D. November 18. Answer: C Calculation: 15 days remaining in April, 31 in May, 30 in June, 31 in July and August, 30 in September, 31 in October and 17 in November. EOC Ref: S Using a 365-day year, the maturity value of a 55-day, 7% note for $23,000 rounded to the nearest cent is: A. $23, B. $23, C. $23, D. $24, Calculation: [$23,000 x.07 x (55/365)] + $23,000 = $23, EOC Ref: S7-15

40 Journalize the following transactions for Tammy Company. Sept 1 Sold $3,500 of merchandise to Jim on account. Oct 1 Exchanged Jim s account receivable for a 4-month, 8% note for $3,500. Dec 31 Recorded accrued interest on Jim s note Feb 1 Jim paid off his note with interest (round to nearest dollar). Answer: Date Description P.R. Debit Credit Sept 1 Accounts Receivable Jim 3,500 Sales 3,500 To record sale on account Oct 1 Notes Receivable Jim 3,500 Accounts Receivable Jim 3,500 To exchange A/R with N/R Dec 31 Interest Receivable 70 Interest Income 70 To record 3 months accrued interest Feb 1 Cash 3,593 Notes Receivable Jim 3,500 Interest Receivable 70 Interest Income 23 To record payment of note Calculation: $3,500 x.08 x (3/12) = $70; $3,500 x.08 x (1/12) = $23 Difficulty: 3 EOC Ref: S7-15

41 Journalize the following transactions for Ryan Company. July 1 Sold $5,300 of merchandise to Rick on account. Nov 1 Exchanged Rick s account receivable for an 8-month, 6% note for $5,300. Dec 31 Recorded accrued interest on Jim s note (round to nearest dollar). July 1 Rick paid off his note with interest (round to nearest dollar). Answer: Date Description P.R. Debit Credit July 1 Accounts Receivable Rick 5,300 Sales 5,300 To record sale on account Nov 1 Notes Receivable Rick 5,300 Accounts Receivable Rick 5,300 To exchange A/R with N/R Dec 31 Interest Receivable 53 Interest Income 53 To record 3 months accrued interest July 1 Cash 5,512 Notes Receivable Rick 5,300 Interest Receivable 53 Interest Income 159 To record payment of note Calculation: $5,300 x.06 x (2/12) = $53; $5,300 x.06 x (8/12) = $212; $212 - $53 = $159 Difficulty: 3 EOC Ref: S Another name for the quick ratio is the acid-test ratio. LO: 7-7 EOC Ref: S7-16

42 7.7-2 The formula for the quick ratio is quick assets divided by non-current assets. LO: 7-7 EOC Ref: S Accounts receivable turnover measures the ability to collect cash from a company s credit customers. LO: 7-7 EOC Ref: S The account receivable turnover is computed by taking the average net accounts receivable and dividing by the net credit sales. LO: 7-7 EOC Ref: S Mike Company has cash of $56,000; net accounts receivable of $67,000; short-term investments of $12,000 and inventory of $40,000. It also has $45,000 in current liabilities and $75,000 in long-term liabilities. The quick ratio for Mike Company is: A B C D Answer: C Calculation: ($56,000 + $67,000 + $12,000)/$45,000 = 3 LO: 7-7 EOC Ref: S7-16

43 7.7-6 Nick Company has cash of $33,000; net accounts receivable of $41,000; short-term investments of $15,000 and inventory of $25,000. It also has $30,000 in current liabilities and $50,000 in long-term liabilities. The quick ratio for Nick Company is: A B C D Calculation: ($33,000 + $41,000 + $15,000)/$30,000 = 2.97 LO: 7-7 EOC Ref: S Rick Company has cash of $143,000; net accounts receivable of $89,000; short-term investments of $35,000 and prepaid expenses of $40,000. It also has $50,000 in current liabilities and $80,000 in longterm liabilities. The quick ratio for Rick Company is: A B C D Answer: C Calculation: ($143,000 + $89,000 + $35,000)/$50,000 = 5.34 LO: 7-7 EOC Ref: S7-16

44 7.7-8 Meranda Corporation reported cash sales of $235,000; net credit sales of $515,000; beginning net accounts receivable of $212,000 and ending net accounts receivable of $224,000. Meranda s accounts receivable turnover is: A B C D Calculation: $515,000/[($212,000 + $224,000)/2] = 2.36 LO: 7-7 EOC Ref: S Tammy Corporation reported cash sales of $118,000; net credit sales of $343,000; beginning net accounts receivable of $89,000 and ending net accounts receivable of $111,000. Tammy s accounts receivable turnover is: A B C D Answer: C Calculation: $343,000/[($89,000 + $111,000)/2] = 3.43 LO: 7-7 EOC Ref: S A company with an accounts receivable turnover of would be collecting its receivables about: A. once a week. B. once a month. C. once a quarter. D. once a year. LO: 7-7 EOC Ref: S7-17

45 A company with a quick ratio of 1.23 means that the company: A. has $1.00 in quick assets for every $1.23 in current liabilities. B. has $1.23 in quick assets for every $1.00 in current liabilities. C. could not pay off all of its current liabilities using quick assets. D. would have to use inventory to help pay off its current liabilities. LO: 7-7 EOC Ref: S According to the text, Wal-Mart operates on a quick ratio of less than 0.20 because it collects cash: A. quickly and has a large amount of receivables. B. slowly and has almost no receivables. C. slowly and has a large amount of receivables. D. quickly and has almost no receivables. Answer: D LO: 7-7 EOC Ref: S A safe quick ratio would be: A B C D Answer: D LO: 7-7 EOC Ref: S7-16

46 If a company has 90-credit terms, you would expect its accounts receivable turnover to be: A. 12. B. 4. C. 2. D. 1. LO: 7-7 EOC Ref: S A petty cash fund may be established for minor expenditures, such as postage. LO: 7-8 EOC Ref: S7A A petty cash fund is established by making a check payable to cash, cashing the check, and placing the funds in a safe, locked location. LO: 7-8 EOC Ref: S7A The journal entry to record the set-up of a petty cash fund is to debit Petty Cash and to credit Cash. LO: 7-8 EOC Ref: S7A-1

47 7.8-4 The total of cash in the petty cash box plus the amount of the petty cash ticket receipts should total the beginning amount of the petty cash fund. LO: 7-8 EOC Ref: S7A A company has a petty cash fund of $350. At the end of the month, $7.89 remains in the fund along with $ in various receipts. The journal entry to replenish the fund would show a debit(s) to: A. various expenses for $ and cash short of $1.55. B. various expenses for $ and cash over of $1.55. C. cash for $ D. cash for $ Answer: A Calculation: $350 - $ $7.89 = $1.55 short LO: 7-8 EOC Ref: S7A Isaiah Enterprises has a petty cash fund of $275. At the end of the month, $14.37 remains in the fund along with $ in various receipts. The journal entry to replenish the fund would be: A. debit various expenses, $269.43; debit cash short for $8.80 and credit cash for $ B. debit various expenses, $269.43; credit cash over for $8.80 and credit cash for $ C. debit petty cash for $ and credit cash for $ D. debit various expenses, $ and credit cash for $ Calculation: $ $ $14.37 = -$8.80 (amount over) LO: 7-8 Difficulty: 3 EOC Ref: S7A-1

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