question

Net realizable value equals the sales price minus reasonable further costs to both make the item ready to sell and to sell it

answer

TRUE

question

Under the sales revenue approach to estimating uncollectible accounts receivable a percentage of gross uncollectible accounts receivable is determined to establish the bad debts expense

answer

FALSE

question

The net realizable value of accounts receivable is decreased when a bad debt is written off

answer

FALSE

question

An aging of accounts receivable is a determination of how long each receivable has been on the books

answer

TRUE

question

A change in the percentage rate used to estimate bad debts expense will have a negligible impact on reported earnings

answer

FALSE

question

IN U.K. financial reports, receivables are called "creditors"

answer

FALSE

question

Receivables that result from transactions other than trade receivables, if material, are seperately disclosed on the balance sheet

answer

TRUE

question

Generally accepted accounting principles require that accounts receivable be carried on the balance sheet at their net realizable value as opposed to their face value

answer

TRUE

question

When establishing credit policies, companies choose what they believe is a profit minimizing balance between the expected cost of credit sales and benefits of increased credit sales

answer

FALSE

question

Under the sales revenue approach, no bad debt expense is recorded when a specific account (known to be uncollectible) is written off

answer

TRUE

question

The gross accounts receivable approach is consistent with the accrual accounting philosophy of recording estimated bad debt expense when the sale was made

answer

FALSE, the sales revenue approach is consistent with this philosophy

question

When sales returns occur, they are debited to the sales account

answer

FALSE

question

The sales returns and allowances account is a contra-asset account

answer

FALSE

question

Ignoring estimated future returns and allowances violates the matching concept

answer

TRUE

question

Ignoring estimated future returns and allowances has a trivial effect on income when the amount of actual returns and allowances does not vary greatly from year to year

answer

TRUE

question

In practice, no end-of-period accrual for estimated future returns and allowances is typically made as these items are very difficult to accurately estimate

answer

FALSE

question

Many receivables recognition irregularities can be discovered by tracking the relationship between changes in sales and changes in receivables

answer

TRUE

question

In a bill and hold sale, the company recognizes revenue and the associated account receivable, but does not ship the product to the customer until later

answer

TRUE

question

When receivables growth exceeds sales growth, this could be an indication of aggressive revenue recognition policies

answer

TRUE

question

When accounts receivables growth exceeds sales growth, this usually indicates an aggressive revenue recognition policy or some other accounting irregularity

answer

FALSE

question

While collectibility of receivables requires forecasts that could be wrong, as a consequence of typical auditing procedures extreme overstatement of net receivables is rare

answer

TRUE

question

Shipments to a company's distributors should normally be treated as sales when they occur

answer

FALSE

question

Bill and hold sales should never be booked as revenue before shipment occurs

answer

FALSE

question

Interest must be accounted for on all long-term notes receivable whether the interest rate is stated or not

answer

TRUE

question

Interest must be imputed when the stated rate is lower than the prevailing borrowing rate at the time of the transaction

answer

TRUE

question

Interest must be imputed whenever the stated rate is different than the prime rate of interest at the time of the transaction

answer

FALSE

question

For long-term credit sales transactions utilizing notes receivable, interest income is recorded each period over the note's term to maturity using the prevailing borrowing rate

answer

TRUE

question

When a company factors its receivables to a bank with recourse, the bank cannot require the company to pay them if a customer proves uncollectible

answer

FALSE

question

When a company accepts credit cards (e.g., VISA or MasterCard) it engages in a form of factoring

answer

TRUE

question

Factoring can either be with, or without, recourse

answer

TRUE

question

When a company sells its accounts receivable to a factor with recourse, it usually maintains an allowance for uncollectible accounts

answer

TRUE

question

In a transaction where the transferor surrenders control over its receivables, the transaction is treated as a collateralized borrowing and any gain or loss is recognized in earnings.

answer

FALSE

question

In a transaction where the transferor surrenders control over its receivables, the transaction is treated as a sale and any gain or loss is recognized in earnings

answer

TRUE

question

Accelerating cash collection on notes receivable by assigning or selling them is referred to as discounting

answer

TRUE

question

The only condition required for control over receivables to be surrendered is that the transferred assets should be beyond the reach of the transferor and its creditors

answer

FALSE

question

Securitization occurs when receivables are bundled together and sold or transferred to another organization which issues securities that are not collateralized by the transferred receivables

answer

FALSE

question

A qualifying special purpose entity is a trust or corporation that is legally distinct from the transferor and is created solely for the purpose of undertaking the securitization transactions

answer

TRUE

question

Securitizations are carefully designed to enable the transferor to consolidate the special purpose entity

answer

FALSE

question

To be a qualifying special purpose entity, a trust must hold only rigidly defined types of assets

answer

TRUE

question

Because the QSPE's credit rating is based on the quality of the transferred receivables, it will be the same as the rating of the transferor's general debt

answer

FALSE

question

Qualifying special purpose entities are consolidated under International Financial Reporting Standards

answer

TRUE

question

The off-balance sheet treatment of qualifying special purpose entities applies only when financial assets are transferred

answer

TRUE

question

When firms sell receivables, the receivables number reported in the ending balance sheet only includes the remaining receivables and will overstate the true growth in receivables over the period

answer

FALSE

question

Statement readers must scrutinize footnotes and the financing activities section of the cash flow statement for evidence of dispositions of receivables that may be masking overly aggressive revenue recognition policies or bad receivables management

answer

TRUE

question

A restructuring of debt constitutes a troubled debt restructuring if the creditor, for legal or economic reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would otherwise not consider

answer

TRUE

question

A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms where the original loan is cancelled and a new loan agreement is signed

answer

FALSE

question

In a troubled debt restructuring there is a lack of symmetry in the financial reporting of the borrower and lender

answer

TRUE

question

In a troubled debt restructuring, GAAP restructuring gains and losses are equal to real economic gains and losses for the companies involved

answer

FALSE

question

Lenders are willing to restructure a customer's loan to help the customer resolve present financial difficulties and stay in business and because lenders often receive more through restructuring than they would get from foreclosure

answer

TRUE

question

International financial reporting standards allow firms to voluntarily opt to measure financial assets and financial liabilities at fair market value

answer

TRUE

question

Net realizable value of receivables is gross receivables minus

answer

a. bad debt expense and sales returns b. bad debt expense and estimated returns and allowances C. ESTIMATED UNCOLLECTIBLES, RETURNS AND ALLOWANCES d. proven uncollectibles and estimated returns and allowances

question

The matching principle requires that bad debts be treated as an expense in the year

answer

A. THE SALE IS MADE b. the customer files bankruptcy c. in which the debt becomes six months past due d. a court declares it to be uncollectible

question

The allowance for uncollectibles account is

answer

a. added to gross accounts receivable b. added to net accounts receivable C. SUBTRACTED FROM GROSS ACCOUNTS RECEIVABLE d. subtracted from net accounts receivable

question

If Edsel uses the sales revenue approach for estimating bad debt expense, the income statement should show an expense of

answer

a. $10,000 B. $12,000 c. $14,000 d. $20,000 Sales $600,000 * expense rate (2%) = $12,000

question

If Edsel uses the gross accounts receivable approach fro estimating bad debt expense, the income statement will show an expense of

answer

A. $2,100 b. $3,600 c. $5,100 d. $8,500 A/R $180,000 rate 2% = $3,600 = allowance balance $1,500 = $2,100

question

If Edsel uses the sales revenue approach for estimating bad debt expense, the allowance for uncollectible account after the proper adjustments to the accounts are recorded, should show a balance of

answer

a. $11,500 B. $13,500 c. $15,500 d. $21,500

question

If Edsel uses the gross accounts receivable approach for estimating bad debt expense, the allowance for uncollectibles account after the proper adjustments to the accounts are recorded, should show a balance of

answer

a. $2,600 B. $3,600 c. $5,600 d. $6,200 A/R $180,000 rate 2% = $3,600

question

When a specific account receivable is written off, the entry

answer

a. increases net income b. decreases net income c. can either decrease or increase net income D. HAS NO EFFECT ON INCOME

question

Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the

answer

a. direct write-off method b. percent of sales method only. c. percent of gross receivables method only D. PERCENT OF SALES OR THE PERCENT OF GROSS RECEIVABLES METHOD

question

Echo Company's 2008 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2008, the company's sales (all on credit) amounted to $857,250. Per Echo's 2008 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses". If Echo's beginning balance in the allowance for uncollectibles was $17,600, the ending balance in this account must be

answer

a. $15,000 B. $21,350 c. $36,350 d. the required "allowance for uncollectibles" balance cannot be determined from the data given Beginning A/R + credit sales - cash collections - write offs = Ending A/R = 72,500 + 857,250 -873,500 - X (writeoffs) = 41,250. X = 15,000. Beginning allowance for uncollectibles + bad debt expense - write offs = ending allowance for uncollectibles = 17,600 + 18,750 - 15,000 = 21,350

question

Sales returns and allowances account is

answer

a. a contra asset account B. A CONTRA REVENUE ACCOUNT c. on the balance sheet d. on the statement of shareholders' equity

question

Smith company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 2008, Smith reported sales of $276,344,000. The company did, however, have two returns in 2008 related to the wrong product model being shipped. Smith's journal entry to record a $37,500 return from Foxtrot medical would be

answer

A. b. c. d.

question

Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales presents a red flag?

answer

a. the firm adopts new credit terms that lengthen the payment terms to the industry average B. THE FIRM ADOPTS AN AGGRESSIVE REVENUE RECOGNITION POLICY c. the firm develops an attractive credit policy for first time buyers d. the firm changes its timing of revenue recognition to a more conservative approach

question

Which one of the following is an example of an aggressive revenue recognition policy?

answer

a. a firm recognizes revenue at time of collection b. a firm recognizes revenue at the expiration of the return period C. A FIRM WITH A LIBERAL RETURN POLICY RECOGNIZES REVENUE AT SHIPMENT d. a firm with a liberal return policy recognizes revenue at shipment with a corresponding allowance for returns and allowances

question

Notes receivable are recorded in the accounts at

answer

a. fair market value B. PRESENT VALUE c. maturity value d. net realizable value

question

Non-interest bearing notes are initially recorded at

answer

a. historical cost b. maturity value because they bear no interest C. PRESENT VALUE, BASED ON THE PREVAILING INTEREST FOR LOANS OF THIS TYPE d. future value, based on th eprevailing interest for loans of this type

question

What amount will Palmer use to record the sale to Perez?

answer

a. $90,000 b. $90,595 C. $100,000 d. $110,381

question

What amount will Palmer use to record the sale to Berg?

answer

a. $90,000 B. $90,595 c. $100,000 d. $110,382

question

At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Perez note?

answer

a. B. c. d. Principal $100,000 rate 10% 3/12 = $2,500

question

At the end of the first quarter, which one of the following entries will be made to record the interest earned by Palmer on the Berg note?

answer

a. b. C. d. Principal $90,595 rate 10% 3/12 = $2,264

question

What amount will Jensen recognize as interest income during 2008?

answer

A. $4,356 b. $4,704 c. $5,111 d. $0 Interest = carrying value at beginning of year implicit interest rate - $54,447 .08 = $4,356

question

What amount will Jensen recognize as interest income during 2009?

answer

a. $4,356 B. $4,704 c. $5,111 d. $0 Interest = carrying value at beginning of ear implicit interest rate = $58,803 .08 = $4,704

question

What will be the balance in the Notes Receivable -- Lewisburg Fabricators account at the end of 2009?

answer

a. $54,447 b. $58,802 C. $63,507 d. $80,000 Note balance at the end of 2009= original note balance +2008 interest + 2009 interest = 54,447 + 4,356 + 4,704 = 64,507

question

Accounting for long-term credit sales transactions utilizing notes receivable

answer

a. ignores interest unless an interest rate is specified in the note b. makes it difficult to assess the degree to which a company's overall earnings are due to profitable credit sales versus profitable customer financing C. ACHIEVES A CLEAR SEPERATION BETWEEN INCOME FROM CREDIT SALES AND INTEREST EARNED d. is controversial because it necessitates use of an assumed interest rate

question

The sale of receivables to a third party is called

answer

A. FACTORING b. collateralizing c. discounting d. securitization

question

With a loan collateralized by receivables,

answer

a. the bank makes the loan without recourse b. the bank has recourse against the accounts receivable customers c. a company receives cash and is not responsible for repaying the loan D. A COMPANY RECEIVES CASH AND IS RESPONSIBLE FOR REPAYING THE LOAN

question

Assuming that the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make?

answer

a. b. C. d.

question

Assuming that the transaction was a factoring arrangement with recourse and included a holdback of $9,000, which one of the following entries will Ritter make to record this transaction?

answer

a. B. c. d.

question

Assuming that the transaction was a collateralized loan, which one of the following entries will Ritter make to record this transaction?

answer

a. b. C. d.

question

On August 1, 2008, Jones discounted the note under the arrangement with National Bank. How much were the proceeds of the discounted rate?

answer

a. $38,267 B. $39,867 c. $40,000 d. $41,600 maturity value = principle + interest = 40,000 + (40,000 8% 6/12) = 41,600. Proceeds = maturity value - discount = 41,600 - (41,600 .1 5/12 = 1,733) = 39,867

question

If the note were discounted on August 1 under the terms of agreement with National Bank, which one of the following entries would Jones record?

answer

a. b. C. d.

question

If a note receivable is discounted with recourse and the customer defaults at final payment, the seller

answer

a. has no obligation to the bank B. MUST REPAY THE FULL AMOUNT OF THE NOTE PLUS INTEREST TO THE BANK c. must refund the proceeds of the discounting to the bank d. must repay the principal only to the bank

question

According to SFAS No. 140, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the

answer

a. transfer was with or without recourse b. transferor collects payments directly from the customer C. TRANSFEROR SURRENDERS CONTROL OVER THE RECEIVABLE d. customer ultimately defaults

question

When receivables are bundled together and transferred to another organization which issues securities collateralized by the transferred receivables, the arrangement is

answer

a. collateralization b. discounting c. factoring D. SECURITIZATION

question

Reasons why companies might accelerate cash collections include the following except:

answer

a. the company may have an immediate need for cash but be short of it B. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES PERMIT "OFF-BALANCE SHEET" treatment of factored receivables and collateralized borrowings, thus enabling management to "window dress" the company's financial position c. there may be an imbalance between the credit terms of the company's suppliers and the time required to collect customer receivables d. competitive conditions require credit sales but the company is unwilling to bear the cost of processing and collecting receivables

question

Jones Co. sells on credit and maintains an allowance for doubtful accounts equal to 2% of the company's $3,450,000 receivables balance. Due to cash shortfall, Jones sells $275,000 of its receivables with recourse to Ninth national bank, and the bank withholds $12,000 from the factoring proceeds to cover possible noncollections. If the noncollections eventually amount to $15,000, the entry on Jones' books when notified of this fact would be:

answer

a. b. c. D.

question

Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrwoings using receivables, the critical issue

answer

a. is whether the terms regarding the transfer were initiated by the transferor or transferee B. IS WHETHER THE TRANSFEROR SURRENDERS CONTROL OVER THE RECEIVABLES c. comes down to how clearly the rights, etc. being retained are specified in the transfer agreement d. is whether any gain or loss related to the transfer is recognized in earnings

question

If a transfer of receivables is really a borrowing but is erroneously treated as a sale

answer

A. THEN BOTH ASSETS AND LIABILITIES ARE UNDERSTATED b. then both assets and liabilities are overstated c. then both assets and equity are understated d. then ratios like debt-to-equity are consequently distorted by the overstatements

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