This is “End-of-Chapter Exercises”, section 7.7 from the book Business Accounting (v. 2.0).
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Which of the following would not be used to help a company determine the net realizable value of its accounts receivable?
Which accounting principle guides the timing of the reporting of bad debt expense?
SunFun Company manufactures lawn furniture that is sold to retail stores. During October, Year One, SunFun sold furniture to Home Place on account in the amount of $40,000. At the end of Year One, the balance was still outstanding. In March, Year Two, SunFun decided to write off this particular account as it did not appear that the balance would ever be collected. Choose the correct journal entry for this write off.
A company is preparing to produce a set of financial statements. The balance sheet being created shows a total for assets of $800,000 and a total for liabilities of $600,000. Just prior to the end of the year, one account receivable is determined to be uncollectible and is written off. Another receivable for $5,000 is collected. No other event or adjustment is made. What should the company now report as the total of its assets after recording these final two events?
Gladson Corporation reports bad debt expense using the percentage of sales method. At the end of the year, Gladson has $450,000 in accounts receivable and a $4,000 credit in its allowance for doubtful accounts before any entry is made for bad debts. Sales for the year were $1.9 million. The percentage that Gladson has historically used to calculate bad debts is 1 percent of sales. Which of the following is true?
On the first day of Year Two, the Raleigh Corporation holds accounts receivable of $500,000 and an allowance for doubtful accounts of $25,000 for a net realizable value of $475,000. During the year, credit sales were $520,000, and cash collections amounted to $440,000. In addition, $28,000 in receivables were written off as uncollectible. If 8 percent of sales is estimated as uncollectible each year, what is the net accounts receivable balance reported at the end of Year Two on Raleigh’s balance sheet?
On the first day of Year Two, the Richmond Corporation holds accounts receivable of $400,000 and an allowance for doubtful accounts of $23,000 for a net realizable value of $377,000. During the year, credit sales were $450,000 and cash collections amounted to $380,000. In addition, $25,000 in receivables were written off as uncollectible. If 6 percent of ending accounts receivable is estimated as uncollectible, what bad debt expense is reported for Year Two on Richmond’s income statement?
In Year One, the Simon Company wrote off a $14,000 receivable as uncollectible. However, on May 17, Year Two, the customer returned and paid Simon the entire amount. Which of the following is correct as a result of this payment?
A company ends Year Three with accounts receivable of $300,000, an allowance for doubtful accounts of $15,000, sales of $900,000, and bad debt expense of $27,000. In Year Four, sales of $1 million more are made. Cash collections are $800,000, and an additional $13,000 in receivables are written off as uncollectible. The company always estimates that 5 percent of its ending accounts receivable will prove to be bad. On December 31, Year Four, company officials find another $6,000 in receivables that might well be uncollectible. However, after further review, these receivables were not written off at this time. By how much did that decision not to write off these accounts change reported net income for Year Four?
A company ends Year Three with accounts receivable of $300,000, an allowance for doubtful accounts of $15,000, sales of $900,000, and bad debt expense of $27,000. In Year Four, sales of $1 million more are made. Cash collections are $800,000 and an additional $13,000 in receivables are written off as uncollectible. The company always estimates that 3 percent of its sales each year will eventually prove to be bad. On December 31, Year Four, company officials find another $6,000 in receivables that might well be uncollectible. However, after further review, these receivables were not written off at this time. By how much did that decision not to write off these accounts change reported net income for Year Four?
A U.S. company (with the U.S. dollar as its functional currency) buys inventory and immediately sells it to a customer in France on November 28, Year One, for 10,000 euros. The inventory had cost 6,000 euros several days before, an amount which had been paid on the day of purchase. This merchandise is sold on account with the money to be paid by the customer on January 19, Year Two. On November 28, Year One, 1 euro was worth $2.00 whereas on December 31, Year One, 1 euro is worth $1.90. What is the impact on net income of the change in the exchange rate?
On December 1, Year One, a company sells a service for 10,000 scoobies (the currency of the country where the sale was made) to be collected in six months. On that same day, the company pays 10,000 scoobies in cash for some inventory. This inventory was still held at year-end. On December 1, Year One, one scoobie is worth $0.61. By December 31, Year One, one scoobie is worth $0.73. The company is located in Ohio and is preparing to produce financial statements for Year One in terms of U.S. dollars. Which of the following will be reported on its balance sheet?
The New Orleans Company has more current assets than current liabilities. Near the end of the current year, the company pays off its rent payable for $5,000. What is the impact of this payment on the company current ratio?
Darlene Corporation has $300,000 in assets, 30 percent of which are current, and $100,000 in liabilities, 40 percent of which are current. Which of the following is true?
Fifer Inc. began the current year with $450,000 in accounts receivable and ended the year with $590,000 in accounts receivable and $4 million in sales. Last year Fifer’s age of ending receivables was forty-six days and its receivables turnover was six times. Which of the following is not true?
Company A made sales this year of $400,000 and has ending accounts receivable of $120,000. Company Z made sales this year of $900,000 and has ending accounts receivable of $280,000. Which of the following is true?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own a chain of ice cream shops throughout Florida. One day, while sitting in a restaurant waiting for a pizza, your roommate poses this question: “This year, my parents began to furnish ice cream for a number of local restaurants. It was an easy way for them to expand their business. But, for the first time, they were making sales on credit. This seems to have caused some confusion when they started to produce financial statements. In the past, all sales were made for cash. However, this year they made $300,000 in sales to these restaurants on credit and they are still owed $90,000. I know they are worried about some of those accounts proving to be bad because of the economic times. In fact, one restaurant that owed them $2,000 filed for bankruptcy last fall and they didn’t get a penny of what they were owed. How in the world do they report money that they have not received yet and might never receive?” How would you respond?
Your uncle and two friends started a small office supply store several years ago. The company has expanded and now has several large locations. All sales to other companies are made on credit. Your uncle knows that you are taking a financial accounting class and asks you the following question: “When we sell on credit, we give customers 30 days to pay. We monitor our customers very carefully and, consequently, we have very few bad debts. Our accountant came to us last week and said that our average customer used to pay us in 22 days but recently that has changed to 27 days. How did he figure that out? And, so what? As long as we get paid, why should I care? All I want is to make sure we get our money. But, if we do need to get paid faster, what am I supposed to do? The customers are still paying within the 30 days that we allow them so why should this make any difference?” How would you respond?
Nuance Company had net credit sales for the year of $500,000. Nuance estimates that 2 percent of its net credit sales will never be collected.
Assume that Nuance in number 1 used the percentage of receivables method to estimate uncollectible accounts instead of the percentage of sales method. Nuance assumes that 5 percent of accounts receivable will never be collected.
Ray’s GamePlace sells all the hottest gear and video games. On January 1, Year Three, Ray’s had the following account balances:
The Lawndale Company starts the current year with the following T-account balances:
Allowance for doubtful accounts = $15,000 credit
During the year, the following events take place:
A $2,000 receivable written off above is collected (amount is not included in the $680,000 figure).
Company officials believe that 5 percent of the ending accounts receivable will eventually prove to be uncollectible.
Medwear Corporation is a multinational dealer of uniforms for medical personnel. Medwear is headquartered in the United States and uses U.S. dollars as its functional currency. On March 17, Medwear sells a large quantity of uniforms to a hospital in Brussels, Belgium for exactly 267,000 euros to be paid in 45 days. On the date of the sale, the exchange rate was $1.32 for every euro.
The Boezi Corporation is beginning to report its financial statements at the end of Year Six. Preliminary information indicates that the company holds $90,000 in current assets and $210,000 in noncurrent assets. The company also plans to report current liabilities of $40,000 and noncurrent liabilities of $160,000. However, at the very end of the year, two final transactions take place. First, a $12,000 payment is made on an account payable. Second, a $21,000 collection is received from an account receivable.
In Chapter 4 "How Does an Organization Accumulate and Organize the Information Necessary to Create Financial Statements?", Heather Miller started her own business, Sew Cool. The financial statements for December are shown next.
Based on the financial statements determine the following:
This problem will carry through over several chapters to enable students to build their accounting skills using knowledge gained in previous chapters.
In Chapter 5 "Why Is Financial Information Adjusted Prior to the Production of Financial Statements?", Leon Jackson started Webworks, a Web site design and maintenance firm. At that time, an adjusted trial balance was prepared for June.
Here are Webworks financial statements as of June 30.
The following events occur during July:
Webworks pays taxes of $300 in cash.
Leon now believes that the company may not be able to collect all of its accounts receivable. A local CPA helps Leon determine that similar businesses report an allowance for bad debt at an average of 10 percent of their accounts receivable. Webworks will use this same approach.
Assume that you take a job as a summer employee for an investment advisory service. One of the partners for that firm is currently looking at the possibility of investing in eBay Inc. The partner is a bit concerned about the impact of the recession on this company, especially its accounts receivable. The partner asks you to look at the 2010 financial statements for eBay Inc. by following this path: