Chapter 05 Receivables and Sales Chapter 5 Receivables and Sales Chapter Quiz Questions The following multiplechoice questions are 10 unique quiz questions that correspond to the 10 questions at the end of each chapter. Each question covers the same learning objective but with a little different twist. The correct answer is highlighted in bold for each item. LO51 1. Which of the following transactions would result in an account receivable? a. Providing services to customers on account. b. Paying for supplies previously purchased on account. c. Receiving a loan from the bank. d. Purchasing supplies on account. LO52 2. On August 4, Sanders provides services to Frederickson for $5,000, terms 3/10, n/30. Frederickson pays for the services on August 12. What amount would Sanders record as revenue on August 4? a. $4,850 b. $5,000 c. $5,150 d. $5,300 LO52 3. Refer to the information in the previous question. What is the amount of net revenues (total revenue minus sales discounts) as of August 12? a. $4,850 b. $5,000 c. $5,150 d. $5,300 LO53 4. Suppose the balance of the allowance for uncollectible accounts at the end of the current year is $800 (debit) before any adjustment. The company estimates future uncollectible accounts to be $5,600. At what amount would bad debt expense be reported in the current year’s income statement? a. $800 b. $4,800 c. $5,600 d. $6,400 51 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales 52 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales LO53 5. Suppose the balance of the allowance for uncollectible accounts at the end of the current year is $800 (credit) before any adjustment entry. The company estimates future uncollectible accounts to be $5,600. At what amount would bad debt expense be reported in the current year’s income statement? a. $800 b. $4,800 c. $5,600 d. $6,400 LO54 6. Nija Incorporated reports the following aging schedule of its accounts receivable with the estimated percent uncollectible. What is the total estimate of uncollectible accounts using the aging method? Estimated Age Group Amount Receivable Percent Uncollectible 060 days $40,000 1% 6190 days 15,000 20% More than 90 days past due 5,000 60% Total $60,000 a. $400 b. $3,000 c. $3,400 d. $6,400 LO55 7. The effect of writing off a specific account receivable is: a. A reduction in the allowance for uncollectible accounts. b. An increase in the amount of accounts receivable. c. An increase in the amount of bad debt expense. d. An increase in the allowance for uncollectible accounts. LO56 8. Under the direct writeoff method, bad debt expense is reported: a. When an account receivable is estimated to be uncollectible. b. When an account receivable is initially recorded. c. When an account receivable is proven uncollectible. d. When the allowance for uncollectible accounts is established. 53 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales LO57 9. At the beginning of the year, Dawnetta Fashions has total accounts receivable of $300,000. By the end of the year, Dawnetta reports total credit sales of $1,500,000 and total accounts receivable of $200,000. What is the receivables turnover ratio for Dawnetta Fashions? a. 1.5 b. 5.0 c. 6.0 d. 7.5 LO58 10. On September 1, Bates Supplies borrows $30,000 from Vines Incorporated by signing an 8% note due in 12 months. Calculate the amount of interest revenue Vines will record on December 31, four months after the note is issued. a. $0 b. $800 c. $1,600 d. $2,400 54 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales Review Problem #1 Mercy Care normally charges $200 for an annual physical exam. Currently, the company is offering a $50 discount to expectant mothers. In addition, Mercy offers terms 2/10, n/30 to all customers receiving services on account. The following events occur. June 16 Mary, an expectant mother, calls to set up an appointment. June 21 Mary visits Mercy and receives a physical exam for the discounted price. June 27 Mary pays for her physical exam. Required: 1. On what date should Mercy record patient revenue? 2. Record service revenue for Mercy. 3. Mercy receives Mary’s payment in full on June 27 (within the discount period). Record the cash collection for Mercy. 4. Calculate the balance of accounts receivable and net revenue after the cash payment is received. Solution: 1. June 21 – the date the service is provided. 2. June 21 Debit Credit Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 150 (Provide services on account) ($150 = $200 less $50 trade discount) 3. June 27 Debit Credit Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Sales Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . 150 (Receive cash on account less sales discount) ($3 = $150 × 2%) 4. Accounts Receivable Credit sale from #2 150 Cash collection from #3 Ending balance 150 0 55 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales Patient revenue (from #2) $150 Less: Sales discount (from #3) (3) Net revenue $147 Problem #2 At the beginning of the year, Compassion Clinic’s allowance for uncollectible accounts has a balance of $60,000 credit. Required: 1. Record the writeoff of $50,000 of accounts receivable during the year. 2. Estimate the allowance for future uncollectible accounts using the following ages and estimated percentage uncollectibles at the end of the year. 3. Use a Taccount to determine the yearend adjustment to the allowance account. 4. Record the yearend adjusting entry for bad debts expense. 5. Prepare a partial balance sheet showing accounts receivable and the allowance for uncollectible accounts. Solution: 1. Debit Credit Allowance for Uncollectible Accounts . . . . . . . . 50,000 Accounts Receivable. . . . . . . . . . . . . . . . . . 50,000 2. Age Group Amount Receivable Estimated Percent Uncollectible Estimated Amount Uncollectible Not yet due $400,000 5% $20,000 145 days past due 100,000 15% 15,000 More than 45 days past due 25,000 40% 10,000 Total $525,000 $45,000 3. Allowance for Uncollectible Accounts 60,000 Beginning balance 50,000 Writeoffs 10,000 Balance before adjustment ? Yearend adjustment 45,000 Estimated ending balance 56 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales 4. December 31 Debit Credit Bad Debt Expense . . . . . . . . . . . . . . . . . .. . . . . . . 35,000 Allowance for Uncollectible Accounts. . . . 35,000* * Notice from #3 that the balance of the allowance account before adjustment is $10,000 credit. Based on the estimated allowance of $45,000 credit from #2, we need a credit adjustment of $35,000. 5.
Compassion Clinic Partial Balance Sheet December 31
Assets Current assets: Accounts receivable $525,000 Less: Allowance for uncollectible accounts (45,000) Net accounts receivable $480,000
What amount would Sanders record as revenue on August 4?

Don't forget about the age old question of for the year, sealy incorporated reports net sales of $50,000, cost of goods sold of $40,000, and an average inventory balance of $5,000. what is sealy’s gross profit ratio?
57 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales Problem #3 Northwest Hospital has a policy of loaning any employee up to $5,000 for a period of up to 12 months at a fixed interest rate of 12%. Clark Lewis has worked for Northwest for more than 10 years and wishes to take his family on a winter vacation to the Pacific Coast. On November 1, 2018, he borrows $5,000 from Northwest by issuing a note to be repaid in six months. Required: 1. Record the acceptance of the note receivable by Northwest Hospital. 2. Record Northwest Hospital’s yearend adjusting entry to accrue interest revenue. 3. Record the collection of the note with interest from Clark Lewis on May 1, 2019. Solution: 1. November 1, 2018 Debit Credit Notes Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 (Accept note receivable and pay cash) 2. December 31, 2018 Debit Credit Interest Receivable. . . . . . . . . . . . . . . . . . . . . . . . . 100 Interest Revenue (2 months’ interest). . . . . . 100 (Accrue interest revenue) (Interest revenue = $5,000 × 12% × 2/12) 3. May 1, 2019 Debit Credit Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,300 Notes Receivable. . . . . . . . . . . . . . . . . . . . . . . 5,000 Interest Receivable. . . . . . . . . . . . . . . . . . . . . 100 Interest Revenue (4 months’ interest). . . . . . 200 (Collect note receivable and interest) (Interest revenue = $5,000 × 12% × 4/12) 58 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales Key Points LO51 Recognize accounts receivable. Companies record an asset (accounts receivable) and revenue when they sell products and services to their customers on account, expecting payment in the future. LO52 Calculate net revenues using discounts, returns, and allowances. Sales discounts, returns, and allowances are contra revenue accounts. We subtract the balances in these accounts from total revenues when calculating net revenues. LO53 Record an allowance for future uncollectible accounts. We recognize accounts receivable as assets in the balance sheet and record them at their net realizable values, that is, the amount of cash we expect to collect. Under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year. Estimated uncollectible accounts reduce assets and increase expenses. Adjusting for estimates of future uncollectible accounts matches expenses (bad debts) in the same period as the revenues (credit sales) they help to generate. Recording an allowance for uncollectible accounts correctly reports accounts receivable at their net realizable value. LO55 Apply the procedure to write off accounts receivable as uncollectible. Writing off a customer’s account as uncollectible reduces the balance of accounts receivable but also reduces the contra asset—allowance for uncollectible accounts. The net effect is that there is no change in the net receivable (accounts receivable less the allowance) or in total assets. We recorded the decrease to assets as a result of the bad debt when we established the allowance for uncollectible accounts in a prior year. The yearend adjustment for future uncollectible accounts is affected by the current balance of Allowance for Uncollectible Accounts before adjustment. The current balance before adjustment equals the estimate of uncollectible accounts at the beginning of the year (or end of last year) less actual writeoffs in the current year. LO57 Account for notes receivable and interest revenue. 59 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 05 Receivables and Sales Notes receivable are similar to accounts receivable except that notes receivable are formal credit arrangements made with a written debt instrument, or note. We calculate interest as the face value of the note multiplied by the stated annual interest rate multiplied by the appropriate fraction of the year that the note is outstanding. We record interest earned on notes receivable but not yet collected by the end of the year as interest receivable and interest revenue. Common Mistakes
Common Mistake
Students sometimes misclassify contra revenue accounts—sales returns and sales allowances—as expenses. Like expenses, contra revenues have normal debit balances and reduce the reported amount of net income. However, contra revenues represent reductions of revenues, whereas expenses represent the separate costs of generating revenues.
What is the amount of net revenues (total revenue minus sales discounts) as of August 12?

Don't forget about the age old question of What is the allocation of an asset’s cost to an expense over time?
Common Mistake
Because Allowance for Uncollectible Accounts has a normal credit balance, students sometimes misclassify this account as a liability, which also has a normal credit balance. Instead, a contra asset represents a reduction in a related asset.
Common Mistake
Students often mistakenly record bad debt expense when they write off an uncollectible account. The bad debt expense was recorded in a prior year at the time of estimating uncollectible accounts.
Common Mistake
Some students erroneously think firms should reduce total assets and record bad debt expense at the time the bad debt actually occurs. However, companies anticipate future bad debts and establish an allowance for those estimates.
At what amount would bad debt expense be reported in the current year’s income statement?

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510 © 2016 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.