Learning Objective 9-1: Chapter 9 Receivables

Horngren's Accounting, 10e, Global Edition (Nobles/Mattison/Matsumura)
Chapter 9 Receivables
Learning Objective 9-1
1) The receivables of an organization can be categorized into accounts receivable, notes receivable, and
other receivables.
Answer: TRUE
Diff: 1
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AACSB: Concept
AICPA Functional: Measurement
2) A company will have receivables whenever it sells goods or services on credit.

Answer: TRUE
Diff: 1
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AACSB: Concept
3) The two major types of receivables are interest receivable and taxes receivable.
Answer: FALSE
Diff: 1
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AACSB: Concept
4) A receivable can be described as a monetary claim against a business or an individual.

Answer: TRUE
Diff: 1
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AACSB: Concept
5) A debtor is a party to the transaction who will receive the cash for the transaction at a later date.
Answer: FALSE
Diff: 1
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AACSB: Concept
6) Accounts receivable are also known as trade receivables.

Answer: TRUE
Diff: 1
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AACSB: Concept
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7) The collection period of accounts receivable is usually long therefore it is classified as a long-term asset
in the balance sheet.
Answer: FALSE
Diff: 1
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AACSB: Concept
8) Notes receivable represents an undertaking by a debtor to pay a fixed amount along with interest at a
certain future date.
Answer: TRUE
Diff: 1
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AACSB: Concept
9) The terms of payment for a note receivable are longer than that of an account receivable.
Answer: TRUE
Diff: 1
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AACSB: Concept
10) Dividends receivable, interest receivable, and taxes receivable are commonly categorized as other
receivables.
Answer: TRUE
Diff: 1
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AACSB: Concept
11) In order to exercise effective internal control over receivables the credit department must have access
cash.
Answer: FALSE
Diff: 1
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AACSB: Concept
12) Businesses must maintain a single account receivable account for all customers.
Answer: FALSE
Diff: 1
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AACSB: Concept
2
13) Individual customer accounts of accounts receivable are known as subsidiary accounts.
Answer: TRUE
Diff: 1
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AACSB: Concept
14) Sales through credit cards and debit cards are journalized in the same way as credit sales are
journalized.
Answer: FALSE
Diff: 1
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AACSB: Concept
15) Sales through credit cards or debit cards transfer the risk of collection of receivables from the seller to
the card issuer.
Answer: TRUE
Diff: 1
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AACSB: Concept
16) Factoring is one of the options available to a business to reduce the risk of uncollectible accounts
receivable.
Answer: TRUE
Diff: 1
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AACSB: Concept
17) When a business pledges its accounts receivable, it transfers the right to collect cash from customers to
the bank.
Answer: FALSE
Diff: 1
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AACSB: Concept
18) When a business accepts payment through credit cards or debit cards, it has to pay a fee to the credit
card or debit card processor.
Answer: TRUE
Diff: 1
LO: 9-1
AACSB: Concept
3
19) Which of the following is included in the category of other receivables?
A) interest receivable
B) accounts receivable
C) notes receivable
D) investments
Answer: A
Diff: 1
LO: 9-1
AACSB: Concept
20) Which of the following statements is true?

A) Accounts receivable are more liquid than cash.
B) Notes receivable are always due in 30 days.
C) Notes receivable are longer in term than accounts receivable.
D) Accounts receivable are liabilities.
Answer: C
Diff: 2
LO: 9-1
AACSB: Concept
21) Which of the following is an example of exercise of internal control over receivables?
A) separate cash collection and credit allowance duties
B) extend credit only to customers who are most likely to pay
C) pursue collection from customers to maximize cash flow
D) ensure quick recovery of accounts receivable
Answer: A
Diff: 2
LO: 9-1
AACSB: Concept
22) Which of the following is a disadvantage of accepting credit cards or debit cards for a business?
A) It will have to bear the responsibility of collecting money from the customer.
B) It will have to bear the risk of nonpayment.
C) It will have to pay a certain amount as processing fee.
D) It will have to check the credit ratings of customers.
Answer: C
Diff: 1
LO: 9-1
AACSB: Concept
4
23) Tom's Fit Inc. a readymade garment seller accepts payment through credit cards. During the month of
August, the card sales amounted to $12,000. The processor charges a 3% fee. Assume that the processor
nets the deposits. Provide the journal entry for card sales revenue.
Answer:
Cash 11,640
Credit Card Expense 360
Sales Revenue 12,000
Diff: 2
LO: 9-1
AACSB: Concept
24) Tom's Fit Inc. a readymade garment seller accepts payment through credit cards. During the month of
August, the card sales amounted to $12,000. The processor charges a 3% fee. Assuming that the credit
card processor uses the gross method, provide the journal entries for the receipt of funds and the
collection of fees at the end of the period.
Answer:
Cash 12,000
Sales Revenue 12,000
Credit Card Expense 360

Cash 360
Diff: 2
LO: 9-1
AACSB: Concept
1) The direct write-off method of accounting for uncollectible receivables is primarily used by small, non-
public companies.
Answer: TRUE
Diff: 1
LO: 9-2
AACSB: Concept
2) The expense associated with the cost of uncollectible accounts receivable is known as bad debts
expense.
Answer: TRUE
Diff: 1
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AACSB: Concept
5
3) Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts
receivable.
Answer: FALSE
Diff: 1
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AACSB: Concept
4) The direct write-off method is only acceptable for companies that have very few uncollectible
receivables.
Answer: TRUE
Diff: 1
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AACSB: Concept
5) The direct write-off method for uncollectible accounts violates the matching principle.
Answer: TRUE
Diff: 1
LO: 9-2
AACSB: Concept
6) The following information is from the records of Armadillo Camera Shop:
Accounts receivable, December 31, 2014 $80,000 (debit)

Net credit sales for 2014 165,000
Accounts written off as uncollectible during 2014 15,000
Cash sales during 2014 40,000
The company uses the direct write-off method for bad debts. What is the amount of bad debts expense?
A) $80,000
B) $40,000
C) $16,800
D) $15,000
Answer: D
Diff: 2
LO: 9-2
AACSB: Concept
6
7) For a company with significant uncollectible receivables, the direct write-off method is unsuitable
because:
A) it overstates liabilities on the balance sheet.
B) it violates the matching principle.
C) direct write-offs would be immaterial.
D) it is not allowed for tax reasons.
Answer: B
Diff: 1
LO: 9-2
AACSB: Concept
8) Under the direct write-off method, the entry to write off an uncollectible account will include:
A) a debit to Bad Debts Expense account.
B) a debit to the customer's Account Receivable.
C) a credit to the Allowance for Bad Debts.
D) No entry is made to write off uncollectible accounts.
Answer: A
Diff: 1
LO: 9-2
AACSB: Application
9) Under the direct write-off method, which of the following is included in the entry to write off an
uncollectible account?
A) a credit to the Allowance for Bad Debts
B) a credit to the customer's Account Receivable
C) a debit to Allowance for Uncollectible Accounts
D) No entry is made to write off uncollectible accounts.
Answer: B
Diff: 1
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AACSB: Application
10) When a company is using the direct write-off method, and an account is written off, the journal entry
consists of a:
A) debit to Accounts Receivable and a credit to Cash.
B) credit to Accounts Receivable and a debit to Bad Debts Expense.
C) debit to the Allowance for Bad Debts and a credit to Accounts Receivable.
D) credit Accounts Receivable and a debit to Interest Expense.
Answer: B
Diff: 1
LO: 9-2
AACSB: Application
7
11) Charles and Charms, a merchandiser, has an account receivable for $125 which they now decided to
be uncollectible. The merchandiser uses the direct write-off method. Which of the following entries is
required to record the write-off?
A)
Bad Debts Expense 125
Accounts Receivable 125
B)
Cash 125
C)
Allowance for Bad Debts 125
D)
Answer: A
Diff: 2
LO: 9-2
AACSB: Application
8
12) On January 1, Davidson Services has the following balances:
Davidson has the following transactions during January: Credit sales of $100,000, collections of credit
sales of $85,000, and write-offs of $15,000. Davidson uses the direct write-off method. At the end of
January, the balance in Accounts Receivable is:
A) $16,000.
B) $24,000.
C) $68,000.
D) $28,000.
Answer: B
Explanation: B)
Diff: 2
LO: 9-2
AACSB: Application
9
13) On January 1, Davidson Services has the following balances:
Davidson has the following transactions during January: Credit sales of $100,000, collections of credit
sales of $85,000, and write-offs of $15,000. Davidson uses the direct write-off method. At the end of
January, the balance in Bad Debts Expense is:
A) $16,000.
B) $17,000.
C) $12,000.
D) $15,000.
Answer: D
Explanation: D)
Diff: 1
LO: 9-2
AACSB: Application
14) Which of the following statements is true of the direct write-off method?
A) GAAP requires public companies to follow the direct write-off method.
B) It provides better matching of revenues with expenses.
C) It results in more accurate net income than any other method.
D) It is only suitable for small companies that have very few uncollectible receivables.
Answer: D
Diff: 1
LO: 9-2
AACSB: Concept
10
15) A company with significant amounts of accounts receivable, experiences uncollectible accounts from
time to time. If the company uses the direct write-off method, the effect of writing off of an uncollectible
receivable will be a(n):
A) reduction in net income.
B) nil on net income.
C) increase in total assets.
D) generation of positive cash flow.
Answer: A
Diff: 2
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AACSB: Concept
16) Give the journal entry to record an uncollectible account receivable using the direct write-off method.
Answer:
Bad Debts Expense XX
Accounts Receivable XX
Diff: 1
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AACSB: Application
17) Sun Inc. had completely written off the account of one of its old customers, Brad, in 2014 for $500. On
January 21, 2015, Brad unexpectedly repaid his debt in full. The company uses the direct write-off method
to account for uncollectible receivables. Journalize the entries required for Sun Inc. on January 21, 2015.
Answer:
Accounts Receivable-Brad 500
Cash 500
Diff: 1
LO: 9-2
AACSB: Application
1) The allowance method violates the matching principle.

Answer: FALSE
Diff: 1
LO: 9-3
AACSB: Concept
11
2) A method of accounting for uncollectible receivables in which the company estimates bad debts
expense instead of waiting to see which customers the company will not collect from is known as the
allowance method.
Answer: TRUE
Diff: 1
LO: 9-3
AACSB: Concept
3) Under both the allowance method and the direct-write off method of accounting for uncollectible
accounts, the amount of bad debts expense is to be estimated at the end of each accounting period.
Answer: FALSE
Diff: 1
LO: 9-3
AACSB: Concept
4) The Allowance for Bad Debts can be calculated as a specific percentage of credit sales and is a contra
account to Accounts Receivable.
Answer: TRUE
Diff: 1
LO: 9-3
AACSB: Concept
5) The net realizable value of Accounts Receivable is calculated by subtracting Bad Debts Expense from
Accounts Receivable.
Answer: FALSE
Diff: 1
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AACSB: Concept
6) The percent-of-sales method computes bad debts expense as a percentage of net cash sales.
Answer: FALSE
Diff: 1
LO: 9-3
AACSB: Concept
7) The percent-of-sales method to compute uncollectible accounts is also known as the balance sheet
approach.
Answer: FALSE
Diff: 1
LO: 9-3
AACSB: Concept
12
8) The percent-of-receivables method computes bad debts expense as a percentage of accounts receivable.
Answer: FALSE
Diff: 1
LO: 9-3
AACSB: Concept
9) The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts.

Answer: TRUE
Diff: 2
LO: 9-3
AACSB: Concept
10) Which of the following are the two methods of accounting for uncollectible receivables?
A) direct write-off method and liability method
B) asset method and sales method
C) allowance method and liability method
D) allowance method and direct write-off method
Answer: D
Diff: 1
LO: 9-3
AACSB: Concept
11) Which of the following are two methods of estimating uncollectible receivables?
A) allowance method and amortization method
B) aging-of-accounts-receivable method and percent-of-sales method
C) gross-up method and direct write-off method
D) direct write-off method and percent-of-completion method
Answer: B
Diff: 1
LO: 9-3
AACSB: Concept
12) The entry to write off an account receivable under the allowance method will:
A) reduce net income.
B) have no effect on net income.
C) increase total assets.
D) increase net income.
Answer: B
Diff: 2
LO: 9-3
AACSB: Concept
13
13) The following information is from the records of Armadillo Camera Shop:
Accounts receivable, December 31, 2015 $20,000 (debit)

Allowance for Bad Debts, December 31, 2015
prior to adjustment 600 (debit)
Accounts written off as uncollectible during 2015 350
Bad debts expense is estimated by the aging-of-accounts-receivables method. Management estimates that
$2,850 of accounts receivable will be uncollectible. Calculate the amount of net accounts receivable after
the adjustment for bad debts.
A) $17,750
B) $17,150
C) $16,550
D) $13,000
Answer: B
Explanation: B) $20,000 - $2,850 = $17,150
Diff: 2
LO: 9-3
AACSB: Application
14) GAAP requires most companies to use the:

A) direct write-off method to evaluate bad debts.
B) allowance method to evaluate bad debts.
C) amortization method to evaluate bad debts.
D) 360-day method to evaluate bad debts.
Answer: B
Diff: 1
LO: 9-3
AACSB: Concept
14
15) The Allowance for Bad Debts account has a credit balance of $2,000. The company's management
estimates that 2% of net credit sales will be uncollectible for the year 2015. Net credit sales for the year
amounted to $250,000. What will be the amount of Bad Debts Expense reported on the income statement
for 2015?
A) $5,000
B) $3,075
C) $2,875
D) $2,675
Answer: A
Explanation: A)
$250,000 × 0.02 = $5,000

Diff: 1
LO: 9-3
AACSB: Application
16) The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad
debt expense. The company's management estimates that 2% of net credit sales will be uncollectible for
the year 2015. Net credit sales for the year amounted to $250,000. What will be the balance of the
Allowance for Bad Debts reported on the balance sheet at December 31, 2015?
A) $7,275
B) $3,075
C) $7,000
D) $5,285
Answer: C
Explanation: C)
Diff: 2
LO: 9-3
AACSB: Application
15
17) The Allowance for Bad Debts has a credit balance of $9,000 before the adjusting entry for bad debt
expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging
method, the company's management estimates that uncollectible accounts will be $15,000. What will be
the amount of bad debts expense reported on the income statement?
A) $24,000
B) $6,000
C) $15,000
D) $9,000
Answer: B
Explanation: B)
*$15,000 - $9000 = $6,000

Diff: 2
LO: 9-3
AACSB: Application
debt expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging
the balance of the Allowance for Bad Debts reported on the balance sheet?
A) $15,000
B) $14,900
C) $15,900
D) $14,100
Answer: A
Explanation: A)
Diff: 2
LO: 9-3
AACSB: Application
16
19) The Allowance for Bad Debts account has a debit balance of $9,000 before the adjusting entry for bad
debt expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging
the amount of Bad debts expense reported on the income statement?
A) $4,000
B) $24,000
C) $6,000
D) $15,000
Answer: B
Explanation: B)
$15,000 + $9,000 = $24,000

Diff: 2
LO: 9-3
AACSB: Application
20) The Allowance for Bad Debts account has a debit balance of $6,000 before the adjusting entry for bad
debt expense. After analyzing the accounts in the accounts receivable subsidiary ledger, the company's
management estimates that uncollectible accounts will be $10,000. What will be the amount of the
adjustment in the Allowance for Bad Debts account?
A) $15,250
B) $10,000
C) $14,900
D) $16,000
Answer: D
Explanation: D)
Diff: 2
LO: 9-3
AACSB: Application
17
21) The following information is from the 2015 records of Armand Camera Shop:
Accounts Receivable, December 31, 2015 $40,000 (debit)

prior to adjustment 1,500 (debit)
Bad debts expense is estimated by the percent-of-sales method. The management estimates that 3% of net
credit sales will be uncollectible. Calculate the amount of bad debts expense for 2015.
A) $5,250
B) $3,450
C) $2,250
D) $2,850
Answer: A
Explanation: A)
Calculations: $175,000 × .03 = $5,250

Diff: 1
LO: 9-3
AACSB: Application
18

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $5,000 of
accounts receivable will be uncollectible. Calculate the amount of bad debts expense for 2015.
A) $7,000
B) $6,500
C) $6,450
D) $5,250
Answer: B
Explanation: B)
Diff: 2
LO: 9-3
AACSB: Application
19

Bad debts expense is estimated by the percent-of-sales method. Management estimates that 3% of net
credit sales will be uncollectible. The balance of the Allowance for Bad Debts after adjustment will be:
A) $7,000.
B) $3,450.
C) $2,850.
D) $3,750.
Answer: D
Explanation: D)
Diff: 2
LO: 9-3
AACSB: Application
20

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $5,000 of
accounts receivable will be uncollectible. Calculate the Allowance for Bad Debts after the adjustment for
bad debt expense at December 31, 2015.
A) $5,250
B) $6,500
C) $7,000
D) $5,000
Answer: D
Explanation: D)
Diff: 1
LO: 9-3
AACSB: Application
25) Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and
collections of credit sales of $36,000. One account for $650 was written off. The company decided to use
the percent-of-sales method to account for bad debts expense, and decided to use a factor of 2% for their
year-end adjustment of bad debts expense. At the end of the year, what is the ending balance in Accounts
Receivable?
A) $4,000
B) $3,600
C) $3,350
D) $3,200
Answer: C
Explanation: C) Accounts Receivable = $40,000 - $36,000 - $650 = $3,350
Diff: 1
LO: 9-3
AACSB: Application
21
year-end adjustment of bad debts expense. The ending balance in Allowance for Bad Debts account
would be:
A) $150.
B) $800.
C) $250.
D) $1,450.
Answer: A
Explanation: A)
Diff: 2
LO: 9-3
AACSB: Application
year-end adjustment of bad debts expense. At the end of the year, the balance of bad debts expense
would be:
A) $150.
B) $800.
C) $250.
D) $1,450.
Answer: B
Explanation: B) Bad debts expense = ($40,000 × .02) = $800
Diff: 2
LO: 9-3
AACSB: Application
22
the aging-of-receivables method to account for bad debts expense, and estimated $500 as uncollectible at
year end. Therefore, the ending balance in the Allowance for Bad Debts would be:
A) $150.
B) $800.
C) $200.
D) $500.
Answer: D
Diff: 2
LO: 9-3
AACSB: Application
29) A newly created design business called Smart Art is just finishing up its first year of operations.
During the year, there were credit sales of $40,000 and collections of credit sales of $36,000. One account
for $650 was written off. Smart Art uses the aging method to account for uncollectible account expense. It
has estimated $200 as uncollectible at year-end. At the end of the year, what is the ending balance in the
Bad Debts Expense account?
A) $1,150
B) $800
C) $200
D) $850
Answer: D
Explanation: D) Bad Debts Expense = $200 + $650 = $850
Diff: 2
LO: 9-3
AACSB: Application
23
30) At the beginning of 2015, Peter Dots has the following ledger balances:
During the year, credit sales amounted to $800,000. Cash collected on credit sales amounted to $760,000,
and $18,000 has been written off. At the end of the year, the company adjusted for bad debts expense
using the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance
of Accounts Receivable would be:
A) $40,000.
B) $62,000.
C) $80,000.
D) $18,000.
Answer: B
Explanation: B)
Diff: 2
LO: 9-3
AACSB: Application
24
During the year, credit sales amounted to $800,000. Cash collected on credit sales amounted to $760,000
and $18,000 has been written off. At the end of the year, company adjusted for bad debts expense using
the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance in the
Allowance for Bad Debts would be:
A) $5,000.
B) $6,500.
C) $6,400.
D) $7,000.
Answer: D
Explanation: D)
Diff: 2
LO: 9-3
AACSB: Application
25
the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance in Bad
Debts Expense would be:
A) $20,000.
B) $40,000.
C) $28,000.
D) $27,000.
Answer: A
Explanation: A)
Diff: 2
LO: 9-3
AACSB: Application
the aging method. The amount estimated as uncollectible was $25,000. The ending balance in the
Allowance for Bad Debts would be:
A) $38.000.
B) $18,000.
C) $25,000.
D) $30,000.
Answer: C
Diff: 2
LO: 9-3
AACSB: Application
26
the aging method. The amount estimated as uncollectible was $25,000. The ending balance in Bad Debts
Expense would be:
A) $38,000.
B) $25,000.
C) $13,000.
D) $7,000.
Answer: A
Explanation: A)
Calculations: $25,000 + $18,000 - $5,000 = $38,000.

Diff: 3
LO: 9-3
AACSB: Application
35) Accounts receivable has a balance of $30,000 and the Allowance for Bad Debts has a credit balance of
$3,000. The allowance method is used. What is the net realizable value before and after a $2,000 Account
Receivable is written off?
A) $27,000; $27,000
B) $14,300; $14,300
C) $16,000; $15,940
D) $16,000; $16,000
Answer: A
Explanation: A) Before After
write-off write-off
Accounts Receivable $30,000 $28,000
Less: Allowance for Bad Debts -3,000 -1,000
Net Realizable Value $27,000 $27,000
Diff: 2
LO: 9-3
AACSB: Application
27
36) Accounts receivable has a balance of $5,000 and the Allowance for Bad Debts has a credit balance of
$440. The allowance method is used. What is the net realizable value after a $160 account receivable is
written off?
A) $4,400
B) $4,720
C) $4,560
D) $5,000
Answer: C
Explanation: C) After
write-off
Accounts Receivable $4,840
Less: Allowance for Bad Debts 280
Net Realizable Value $4,560
Diff: 1
LO: 9-3
AACSB: Application
37) On January 1st, 2015, Everlight Corp. has the following balances:
During the year, Everlight has $150,000 of credit sales, collections of credit sales of $140,000, and write-
offs of $3,000. It records bad debts expense at the end of the year using the aging-of-receivables method.
At the end of the year, aging analysis produces a figure of $1,900, being the estimate of uncollectible
accounts. Before the year-end entry to adjust the bad debts expense is made, the balance in the Allowance
for Bad Debts expense would be:
A) debit of $1,800.
B) credit of $4,200.
C) zero balance.
D) debit of $3,000.
Answer: A
Explanation: A)
$3,000 - $1,200 = $1,800

Diff: 2
LO: 9-3
AACSB: Application
28
38) A company reports net accounts receivable of $150,000 on its December 31, 2015 balance sheet. The
Allowance for Bad Debts has a credit balance of $15,000. What is the balance in Accounts Receivable?
A) $155,000
B) $150,000
C) $165,000
D) $135,000
Answer: C
Explanation: C) $150,000 + $15,000 = $165,000
Diff: 1
LO: 9-3
AACSB: Application
39) On January 16, Whole Circle sold goods worth $5,000 to Smith on account. It could not collect cash
from the customer, and finally decided to write off the account. Give journal entry to record the write-off
assuming that the company uses the allowance method.
Answer:
Allowance for Bad Debts 5,000
Accounts Receivable—Smith 5,000
Diff: 1
LO: 9-3
AACSB: Application
40) On January 16, 2015, Whole Circle had sold goods worth $5,000 to Smith on account. It could not
collect cash from the customer, and finally decided to write off the account on December 31, 2015.
However, in November 4, 2016, Smith approached the company to make payment, and made payment.
Journalize the transactions on December 31, 2015 and November 4, 2016. (Whole Circle uses the
allowance method.)
Answer: December 31, 2015:
November 4, 2016:
Cash 5,000
Diff: 2
LO: 9-3
AACSB: Application
29
the percent-of-sales method to account for bad debts expense, and use a factor of 2% for their year-end
adjustment of bad debts expense. Prepare the entry to record the bad debt expense.
Answer:
Diff: 1
LO: 9-3
AACSB: Application
the aging method to account for bad debts expense. It has calculated an amount of $200 as their estimate
of uncollectible amounts at year-end. Prepare the journal entry required to record Bad debts expense at
the end of the year.
Answer:
Explanation: Calculations: $200 + $650 = $850

Diff: 2
LO: 9-3
AACSB: Application
debt expense. The company's management estimates that 2% of net credit sales will be uncollectible for
the year 2015. Net credit sales for the year amounted to $250,000. Give journal entry to record the bad
debts expense at December 31, 2015.
Answer:
Bad Debts Expense 5,000
Diff: 1
LO: 9-3
AACSB: Application
30
1) The interest period extends from the original date of the note to the maturity date.
Answer: TRUE
Diff: 1
LO: 9-4
AACSB: Concept
2) The maturity value of a note is the sum of the principal minus interest due at maturity.
Answer: FALSE
Diff: 1
LO: 9-4
AACSB: Concept
3) If the maker of the note fails to repay the borrowed amount on the maturity date, the note is said to be
dishonored.
Answer: TRUE
Diff: 1
LO: 9-4
AACSB: Concept
4) Interest rates are generally stated on a monthly basis.

Answer: FALSE
Diff: 1
LO: 9-4
AACSB: Concept
5) While counting the date of maturity of a note, the date of issue of the note should be omitted.
Answer: TRUE
Diff: 1
LO: 9-4
AACSB: Concept
6) The entity that signs the promissory note and promises to pay the required amount is the:
A) maker of the note.
B) banker of the note.
C) holder of the note.
D) payee of the note.
Answer: A
Diff: 2
LO: 9-4
AACSB: Concept
31
7) The entity to whom the promise of future payment is made for a promissory note is the:
A) maker of the note.
B) endorser of the note.
C) banker of the note.
D) payee of the note.
Answer: D
Diff: 2
LO: 9-4
AACSB: Concept
8) Which of the following exists if the maker of a promissory note fails to pay the note on the due date?
A) a discounted note
B) a depreciated note
C) an amortized note
D) a dishonored note
Answer: D
Diff: 1
LO: 9-4
AACSB: Concept
9) The maturity date for a six-month note issued on January 15 would be:
A) July 15.
B) July 14.
C) July 16.
D) July 10.
Answer: A
Diff: 1
LO: 9-4
AACSB: Concept
10) What is the maturity value of a 3-month, 10% note for $40,000?
A) $42,000
B) $44,000
C) $41,000
D) $40,000
Answer: C
Explanation: C) ($40,000 × 10%) × 3/12 = $1,000
$40,000+ $1,000 = $41,000
Diff: 2
LO: 9-4
AACSB: Application
32
11) A company issues a 60-day, 12% note for $15,000. What is the principal amount of the note?
A) $16,800
B) $15,000
C) $14,700
D) $15,300
Answer: B
Diff: 1
LO: 9-4
AACSB: Concept
12) Calculate the interest on a 90-day, 9% note for $36,000. (Use a 360-day year to compute interest.)
A) $720
B) $810
C) $880
D) $460
Answer: B
Explanation: B) ($36,000 × 9%) × 90/360 = $810
Diff: 2
LO: 9-4
AACSB: Application
13) The maturity value of a note is the:

A) principal amount minus interest due.
B) principal amount plus interest due.
C) face amount of the note.
D) principal amount times the interest rate.
Answer: B
Diff: 1
LO: 9-4
AACSB: Concept
14) On October 1, 2015, Ealys Jewellers accepted a 4-month, 12% note for $6,000 in settlement of an
overdue account receivable. The company closes its accounts at the year end. Calculate and record the
accrued interest on the note at December 31, 2015.
A) $180
B) $160
C) $240
D) $140
Answer: A
Explanation: A) ($6,000 × 12%) × 3/12 = $180
Diff: 2
LO: 9-4
AACSB: Application
33
15) On January 1, Ajax Corp accepted a one-year note for $50,000 at 5% from one of its customers. When
the note matured on December 31, the customer was unable to pay, and the company recorded the
dishonor. The amount of the debit in the dishonor entry would be:
A) $47,500.
B) $2,500.
C) $50,000.
D) $52,500.
Answer: D
Explanation: D) $50,000 × 5% = $2,500
Total amount = $50,000 + $2,500 = $52,500
Diff: 2
LO: 9-4
AACSB: Application
16) Which of the following would be included in the entry by the payee to record a dishonored note
receivable?
A) a debit to Accounts Receivable
B) a debit to Interest Revenue
C) a debit to Notes Receivable
D) a credit to Interest Expense
Answer: A
Diff: 2
LO: 9-4
AACSB: Concept
17) On April 1, 2015, Banne Services has received a 6-month note for $10,000 at 8%. Calculate the amount
of interest receivable on maturity.
A) $320
B) $460
C) $800
D) $400
Answer: D
Explanation: D) ($10,000 × 8%) × 6/12 = $400
Diff: 1
LO: 9-4
AACSB: Application
34
18) On October 1, 2015, Android Inc. made a loan to one of its customers. The customer signed a 4-month
note for $100,000 at 15%. How much interest revenue did the company record in the year 2015?
A) $1,500
B) $1,250
C) $5,000
D) $3,750
Answer: D
Explanation: D) ($100,000 × 15%) × 3/12 = $3,750
Diff: 2
LO: 9-4
AACSB: Application
note for $100,000 at 15%. How much interest revenue did the company record in the year 2016 for this
note?
A) $2,150
B) $3,750
C) $1,250
D) $5,000
Answer: C
Explanation: C) ($100,000 × 15%) × 1/12 = $1,250
Diff: 2
LO: 9-4
AACSB: Application
note for $100,000 at 15%. Calculate the total interest earned on the note.
A) $5,000
B) $3,750
C) $1,250
D) $15,000
Answer: A
Explanation: A) ($100,000 × 15%) × 4/12 = $5,000
Diff: 1
LO: 9-4
AACSB: Application
35
note for $100,000 at 15%. Calculate the maturity value of the note.
A) $105,000
B) $75,000
C) $25,000
D) $95,000
Answer: A
Explanation: A) $100,000 + [($100,000 × 15%) × 4/12] = $105,000
Diff: 2
LO: 9-4
AACSB: Application
22) On December 1, 2015, Parsons Inc. sold machinery to a customer for $20,000. The customer could not
pay at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 9% interest. How
much interest revenue was earned during the year 2015?
A) $180
B) $150
C) $200
D) $900
Answer: B
Explanation: B) ($20,000 × 9%) × 1/12 =$150
Diff: 2
LO: 9-4
AACSB: Application
much interest revenue was earned during the year 2016?
A) $900
B) $1,800
C) $1,600
D) $1,200
Answer: D
Explanation: D) ($20,000 × 9%) × 8/12 = $1,200
Diff: 2
LO: 9-4
AACSB: Application
36
much interest revenue was earned for the entire term of the note?
A) $1,350
B) $1,200
C) $150
D) $1,800
Answer: A
Explanation: A) ($20,000 × 9%) × 9/12 = $1,350
Diff: 2
LO: 9-4
AACSB: Application
pay at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 9% interest. What
was the total amount of cash collected by Parsons on the maturity of the note?
A) $21,800
B) $21,350
C) $18,650
D) $21,200
Answer: B
Explanation: B) $20,000 + [(20,000 × 9%) × 9/12] = $21,350
Diff: 2
LO: 9-4
AACSB: Application
26) A six-month note receivable for $4,000 at 12%, dated September 1, 2015, has accrued interest revenue
of ________ on December 31, 2015.
A) $480
B) $240
C) $160
D) $80
Answer: C
Explanation: C) ($4,000 × 12%) × 4/12 = $160
Diff: 2
LO: 9-4
AACSB: Application
37
27) On November 1, 2015, Ealys Jewellers accepted a 3-month, 15% note for $6,000 in settlement of an
overdue account receivable. Give the journal entry to record the accrued interest at the year end.
Answer:
Interest Receivable 150
Interest Revenue 150
Explanation: Calculations: ($6,000 × 15%) × 2/12 = $150

Diff: 2
LO: 9-4
AACSB: Application
28) On October 1, 2015, Allen Jewelry Company accepted a 4-month, 10% note for $2,400 in settlement of
an overdue account receivable. Interest revenue was accrued through December 31, 2015. Allen receives
the maturity value of the note on the due date. Give journal entry to record the collection of funds.
Answer:
Cash 2,480
Note Receivable 2,400
Interest Receivable 60
Interest Revenue 20
Explanation:
($2,400 × 10%) × 3/12 = $60
($2,400 × 10%) × 1/12 = $20
Diff: 3
LO: 9-4
AACSB: Application
29) On January 1, Ajax Corp accepted a one-year note for $5,000 at 4% from one of its customers. When
the note matured on December 31, the customer was unable to pay, and the company treated it as a
dishonored note. Provide the journal entry for the dishonor of the note in the books of the company.
Answer:
Accounts Receivable 5,200
Notes Receivable 5,000
Interest Revenue 200
Explanation:
Calculations: $5,000 × 4% = $200
Diff: 2
LO: 9-4
AACSB: Application
38
30) On December 1, 2015, Parsons Inc. sold machinery to a customer for $2,000. Parsons regularly sells
machinery. The customer could not pay at the time of sale, but agreed to pay 9 months later, and signed a
9-month note at 12% interest. Give journal entry to record the revenue at the time of sale. Ignore the entry
for cost of goods sold.
Answer:
Sales Revenue 2,000
Diff: 1
LO: 9-4
AACSB: Application
31) On July 1, 2015, Ealys Jewellers accepted a 3-month, 15% note for $6,000 in settlement of an overdue
account receivable. Provide the journal entry to record the acceptance of the note.
Answer:
Accounts Receivable 6,000
Diff: 2
LO: 9-4
AACSB: Application
32) Give journal entry to record the dishonor of a note receivable at the maturity date.
Answer:
Accounts Receivable
Notes Receivable
Interest Revenue
Diff: 2
LO: 9-4
AACSB: Application
1) The acid-test ratio is also known as the quick ratio.

Answer: TRUE
Diff: 1
LO: 9-5
AACSB: Concept
39
2) The higher the quick ratio, the lower the business's ability to pay its current liabilities.
Answer: FALSE
Diff: 1
LO: 9-5
AACSB: Concept
3) The amount of Accounts Receivable is generally reported at its gross amount on the balance sheet.
Answer: FALSE
Diff: 1
LO: 9-5
AACSB: Concept
4) The acid-test ratio is a more stringent measure of liquidity than the cash ratio.
Answer: FALSE
Diff: 1
LO: 9-5
AACSB: Concept
5) Days' sales in receivables is also known as the collection period.

Answer: TRUE
Diff: 1
LO: 9-5
AACSB: Concept
6) An acid-test ratio of 1.0 is considered safer than a ratio of 0.50.

Answer: TRUE
Diff: 1
LO: 9-5
AACSB: Concept
7) The days' sales in receivables ratio indicates the number of days it takes to collect the average level of
accounts receivable.
Answer: TRUE
Diff: 1
LO: 9-5
AACSB: Concept
40
8) The accounts receivable turnover ratio indicates whether a company could pay all its current liabilities
if they were become due immediately.
Answer: FALSE
Diff: 1
LO: 9-5
AACSB: Concept
9) The number of times a company collects the average accounts receivable balance in a year is known as
the accounts receivable turnover ratio.
Answer: TRUE
Diff: 1
LO: 9-5
AACSB: Concept
10) Barker Sales has a days' sales in receivables figure of 35 and Xanadu Company has a days' sales in
receivables of 25. This would suggest that Xanadu is having greater difficulty collecting their accounts
receivable than Barker.
Answer: FALSE
Diff: 3
LO: 9-5
AACSB: Application
11) The accounts receivable turnover ratio of a merchandiser is 9.8 times. Calculate the days' sales in
receivables for the merchandiser. (Round to the nearest day.)
A) 33 days
B) 37 days
C) 28 days
D) 40 days
Answer: B
Explanation: B) Days' sales in receivables = 365/9.8 = 37 days (rounded)
Diff: 2
LO: 9-5
AACSB: Application
41
12) Which of the following is true of the proper balance sheet treatment of the Allowance for Bad Debts
with a credit balance?
A) It is reported as a current liability.
B) It is reported as an operating expense.
C) It is reported as a separate, independent line item under current assets.
D) It is shown as a contra account related to accounts receivable.
Answer: D
Diff: 1
LO: 9-5
AACSB: Application
13) A company has net credit sales of $95,000, beginning net accounts receivable of $20,000 and ending
net accounts receivable of $18,000. Calculate the days' sales in receivables.
A) 60 days
B) 48 days
C) 58 days
D) 73 days
Answer: D
Explanation: D) Accounts Receivable Turnover Ratio = [$95,000/(($20,000 + $18,000)/2)] = 5
Days' sales in receivables = 365/5 = 73 days
Diff: 2
LO: 9-5
AACSB: Application
14) Which of the following is included in the numerator of the acid-test ratio?
A) Cash including cash equivalents, inventory, short-term investments, net current receivables
B) Accounts receivable and inventory
C) Cash including cash equivalents, short-term investments, net current receivables
D) Total current assets
Answer: C
Diff: 2
LO: 9-5
AACSB: Concept
15) Which of the following is included in the denominator of the acid-test ratio?
A) Current liabilities less accounts payable
B) Total liabilities
C) Total current liabilities
D) Total current assets
Answer: C
Diff: 2
LO: 9-5
AACSB: Concept
42
16) From the following details, calculate the acid-test ratio. (Round to two decimal places.)
Cash $120,000
Short-term investments 150,000
Net current receivables 280,000
Inventory 290,000
Total current liabilities 790,000
A) 0.91
B) 0.94
C) 1.06
D) 0.70
Answer: D
Explanation: D) Acid-test ratio = ($120,000 + $150,000 + $280,000)/$790,000 = 0.7 (rounded)
Diff: 2
LO: 9-5
AACSB: Application
17) What is the acid-test ratio for a merchandiser having the following balances? (Round to two decimal
places.)
Cash $20,000
Short-term investments 40,000
Net current receivables 50,000
Merchandise Inventory 90,000
Total current liabilities 275,000
A) 0.93
B) 0.40
C) 0.64
D) 1.76
Answer: B
Explanation: B) Acid-test ratio = ($20,000 + $40,000 + $50,000)/$275,000 = 0.40
Diff: 2
LO: 9-5
AACSB: Application
43
18) Which of the following describes the key significance of the acid-test ratio?
A) It measures a company's ability to pay its current liabilities if they are due immediately.
B) It measures the ability of the company to earn profits out of the sales made by it.
C) It reflects how much long-term debt a company has.
D) It indicates how much cash could be realized by selling the inventory.
Answer: A
Diff: 2
LO: 9-5
AACSB: Concept
19) Which of the following is true of days' sales in receivables?

A) It measures how many days it takes to order and receive inventory.
B) It measures how many days it takes to collect the average level of accounts receivable.
C) It measures how many days it takes to sell inventory.
D) It measures how slowly the inventory is depreciated.
Answer: B
Diff: 1
LO: 9-5
AACSB: Concept
20) A company has net credit sales of $1,012,500, beginning net accounts receivable of $250,000 and
ending net accounts receivable of $200,000. What is the days' sales in accounts receivable? (Round to
nearest whole day.)
A) 81 days
B) 99 days
C) 93 days
D) 90 days
Answer: A
Explanation: A) Accounts receivable turnover ratio = [$1,012,500/(($250,000 + $200,000)/2)] = 4.5
Days' sales in receivables = 365/4.5 = 81.11 = 81 days (rounded)
Diff: 2
LO: 9-5
AACSB: Application
21) The accounts receivable turnover ratio measures:

A) how well a company can pay its current liabilities with its current assets.
B) how many days it takes, on average, to collect receivables.
C) how many days it takes, on average, to sell the inventory.
D) the times a company collects accounts receivable in a year.
Answer: D
Diff: 1
LO: 9-5
AACSB: Concept
44
22) Martin Sales provides the following information:
Net credit sales: $750,000
Beginning net accounts receivable: $40,000
Ending net accounts receivable: $20,000
Calculate the accounts receivable turnover ratio. (Round to the nearest whole number.)
A) 24 times
B) 25 times
C) 27 times
D) 22 times
Answer: B
Explanation: B) Accounts receivable turnover ratio = [$750,000/(($40,000 + $20,000)/2)] = 25 times
Diff: 2
LO: 9-5
AACSB: Application
45

Learning Objective 9-1: Chapter 9 Receivables

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Horngren's Accounting, 10e, Global Edition (Nobles/Mattison/Matsumura)

Learning Objective 9-1

2) A company will have receivables whenever it sells goods or services on credit.

4) A receivable can be described as a monetary claim against a business or an individual.

6) Accounts receivable are also known as trade receivables.

20) Which of the following statements is true?

Credit Card Expense 360

Learning Objective 9-2

6) The following information is from the records of Armadillo Camera Shop:

Accounts receivable, December 31, 2014 $80,000 (debit)

Learning Objective 9-3

1) The allowance method violates the matching principle.

9) The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts.

Accounts receivable, December 31, 2015 $20,000 (debit)

14) GAAP requires most companies to use the:

$250,000 × 0.02 = $5,000

*$15,000 - $9000 = $6,000

$15,000 + $9,000 = $24,000

Accounts Receivable, December 31, 2015 $40,000 (debit)

Calculations: $175,000 × .03 = $5,250

Accounts Receivable, December 31, 2015 $40,000 (debit)

Accounts Receivable, December 31, 2015 $40,000 (debit)

Accounts Receivable, December 31, 2015 $40,000 (debit)

Calculations: $25,000 + $18,000 - $5,000 = $38,000.

$3,000 - $1,200 = $1,800

Explanation: Calculations: $200 + $650 = $850

4) Interest rates are generally stated on a monthly basis.

13) The maturity value of a note is the:

Explanation: Calculations: ($6,000 × 15%) × 2/12 = $150

Learning Objective 9-5

1) The acid-test ratio is also known as the quick ratio.

5) Days' sales in receivables is also known as the collection period.

6) An acid-test ratio of 1.0 is considered safer than a ratio of 0.50.

19) Which of the following is true of days' sales in receivables?

21) The accounts receivable turnover ratio measures:

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