Test Bank Ch07(1)

Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition

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Contents

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CHAPTER 7

CASH AND RECEIVABLES

TRUE-FALSE—Conceptual

    1.  Savings accounts are usually classified as cash on the balance sheet.

    2.  Certificates of deposit are usually classified as cash on the balance sheet.

    3.  Companies include postdated checks and petty cash funds as cash.

    4.  Cash equivalents are investments with original maturities of six months or less.

    5.  Bank overdrafts are always offset against the cash account in the balance sheet.

    6.  Short-term, highly liquid investments may be included with cash on the balance sheet.

    7.  All claims held against customers and others for money, goods, or services are reported as current assets.

    8.  Trade receivables include notes receivable and advances to officers and employees.

    9.  Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

  10.  In the gross method, sales discounts are reported as a deduction from sales.

  11.  The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible.

  12.  The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable.

  13.  The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet.

  14.  Companies value and report short-term receivables at net realizable value¾the net amount they expect to receive in cash.

  15.  The percentage-of-sales and percentage-of-receivables approaches are used for impairment measurement and reporting.

  16.  Companies record and report long-term notes receivable at the present value of the cash they expect to collect.

  17.  When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

  18.  The FASB believes that historical cost for financial instruments provides more relevant and understandable information than fair value.

  19.  Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been.

  20.  When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

  21.  For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay.

  22.  The accounts receivable turnover ratio is computed by dividing net sales by the ending net receivables.

  23.  U.S.GAAP permits the reversal of impairment losses recorded on receivables.

  24.  For a loan receivable, impairment loss is calculated as the difference between the investment in the loan and the expected future cash flows discounted at the loan’s historical effective interest rate.

  25.  Companies must measure the loss on impairment at an undiscounted amount, not at a present-value amount, when it records the loss.

MULTIPLE CHOICE—Conceptual

  26.     Which of the following is not considered cash for financial reporting purposes?
a.   Petty cash funds and change funds
b.   Money orders, certified checks, and personal checks
c.   Coin, currency, and available funds
d.   Postdated checks and I. O. U.'s

  27.     Which of the following is considered cash?
a.   Certificates of deposit (CDs)
b.   Money market checking accounts
c.   Money market savings certificates
d.   Postdated checks

  28.     Travel advances should be reported as
a.   supplies.
b.   cash because they represent the equivalent of money.
c.   investments.
d.   none of these answers are correct.

P29.     Which of the following items should not be included in the Cash caption on the balance sheet?
a.   Coins and currency in the cash register
b.   Checks from other parties presently in the cash register
c.   Amounts on deposit in checking account at the bank
d.   Postage stamps on hand
  30.     All of the following may be included under the heading of "cash" except
a.   currency.
b.   money market funds.
c.   checking account balance.
d.   savings account balance.

  31.     In which account are post-dated checks received classified?
a.   Receivables.
b.   Prepaid expenses.
c.   Cash.
d.   Payables.

  32.     In which account are postage stamps classified?
a.   Cash.
b.   Office supplies.
c.   Receivables.
d.   Inventory.

  33.     What is a compensating balance?
a.   Savings account balances.
b.   Margin accounts held with brokers.
c.   Temporary investments serving as collateral for outstanding loans.
d.   Minimum deposits required to be maintained in connection with a borrowing arrangement.

  34.     Under which section of the balance sheet is "cash restricted for plant expansion" reported?
a.   Current assets.
b.   Non-current assets.
c.   Current liabilities.
d.   Stockholders' equity.

S35.     A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and
a.   is acceptable as a means to pay current liabilities.
b.   has a current market value that is greater than its original cost
c.   bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
d.   is so near its maturity that it presents insignificant risk of changes in interest rates.

  36.     Bank overdrafts, if material, should be
a.   reported as a deduction from the current asset section.
b.   reported as a deduction from cash.
c.   netted against cash and a net cash amount reported.
d.   reported as a current liability.

  37.     Deposits held as compensating balances
a.   usually do not earn interest.
b.   if legally restricted and held against short-term credit may be included as cash.
c.   if legally restricted and held against long-term credit may be included among current assets.
d.   none of these answers are correct.


  38.     When a company has cash available in another account in the same bank at which an overdraft has occurred, the company will:
a.   offset the overdraft against cash account.
b.   report the same in the notes to financial statement.
c.   report the bank overdraft amount as account payable.
d.   classify the bank overdraft as compensating balance.

  39.     Which of the following statements is correct regarding receivables?
a.   Receivables are written promises of the purchaser to pay for goods or services.
b.   Receivables are claims held against customers and others for money, goods, or services.
c.   Receivables are non-financial assets.
d.   Receivables that are expected to be collected within a year are classified as noncurrent.

  40.     The category "trade receivables" includes
a.   advances to officers and employees.
b.   income tax refunds receivable.
c.   claims against insurance companies for casualties sustained.
d.   none of these answer choices are correct.

  41.     Which of the following should be recorded in Accounts Receivable?
a.   Receivables from officers
b.   Receivables from subsidiaries
c.   Dividends receivable
d.   None of these answer choices are correct.

S42.     What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?
a.   As offsets to capital.
b.   By means of footnotes only.
c.   As assets but separately from other receivables.
d.   As trade notes and accounts receivable if they otherwise qualify as current assets.

S43.     When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n)
a.   trade discount.
b.   nominal discount.
c.   enhancement discount.
d.   cash discount.

P44.     Trade discounts are
a.   not recorded in the accounts; rather they are a means of computing a price.
b.   used to avoid frequent changes in catalogues.
c.   used to quote different prices for different quantities purchased.
d.   all of the above.


  45.     If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
a.   a deduction from sales in the income statement.
b.   an item of "other expense" in the income statement.
c.   a deduction from accounts receivable in determining the net realizable value of accounts receivable.
d.   sales discounts forfeited in the cost of goods sold section of the income statement.

  46.     Why do companies provide trade discounts?
a.   To avoid frequent changes in catalogs.
b.   To induce prompt payment.
c.   To easily alter prices for different customers.
d.   To avoid frequent changes in catalogs and to easily alter prices for different customers.

  47.     The accounting for cash discounts and trade discounts are
a.   the same.
b.   always recorded net.
c.   not the same.
d.   tied to the timing of cash collections on the account.

  48.     Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct?
a.   Net approach.
b.   Gross approach.
c.   Allowance approach.
d.   All three approaches are theoretically correct.

  49.     All of the following are problems associated with the valuation of accounts receivable except
a.   uncollectible accounts.
b.   returns.
c.   cash discounts under the net method.
d.   allowances granted.

  50.     Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a.   Allowance method is used for tax purposes.
b.   Estimates are used.
c.   Determining worthless accounts under direct write-off method is difficult to do.
d.   Improved matching of bad debt expense with revenue.

  51.     Which of the following concepts relates to using the allowance method in accounting for accounts receivable?
a.   Bad debt expense is an estimate that is based on historical and prospective information.
b.   Bad debt expense is based on the actual amounts determined to be uncollectible.
c.   Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
d.   Bad debt expense is management's determination of which accounts will be sent to the attorney for collection.


  52.     How can accounting for bad debts be used for earnings management?
a.   Determining which accounts to write-off.
b.   Changing the percentage of sales recorded as bad debt expense.
c.   Using an aging of the accounts receivable balance to determine bad debt expense.
d.   Reversing previous write-offs.

  53.     What is the normal journal entry for recording bad debt expense under the allowance method?
a.   Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b.   Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c.   Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d.   Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

  54.     What is the normal journal entry when writing-off an account as uncollectible under the allowance method?
a.   Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b.   Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c.   Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d.   Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

  55.     Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method?
a.   Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b.   Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c.   Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d.   Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

  56.     Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because
a.   most short-term receivables are not interest-bearing.
b.   the allowance for uncollectible accounts includes a discount element.
c.   the amount of the discount is not material.
d.   most receivables can be sold to a bank or factor.

  57.     Which of the following methods of determining bad debt expense does not properly match expense and revenue?
a.   Charging bad debts with a percentage of sales under the allowance method.
b.   Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.
c.   Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
d.   Charging bad debts as accounts are written off as uncollectible.

  58.     Which of the following methods of determining annual bad debt expense best achieves the matching concept?
a.   Percentage of sales
b.   Percentage of ending accounts receivable
c.   Percentage of average accounts receivable
d.   Direct write-off


  59.     Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?
a.   A percentage of sales adjusted for the balance in the allowance
b.   A percentage of sales not adjusted for the balance in the allowance
c.   A percentage of accounts receivable not adjusted for the balance in the allowance
d.   An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

  60.     The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach
a.   gives a reasonably correct statement of receivables in the balance sheet.
b.   best relates bad debt expense to the period of sale.
c.   is the only generally accepted method for valuing accounts receivable.
d.   makes estimates of uncollectible accounts unnecessary.

  61.     At the beginning of 2013, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2013 year-end statement of financial position and $1,000 as sales revenue for 2013. What effect did this accounting for the note have on Gannon's net earnings for 2013, 2014, 2015, and its retained earnings at the end of 2015, respectively?
a.   Overstate, overstate, understate, zero
b.   Overstate, understate, understate, understate
c.   Overstate, overstate, overstate, overstate
d.   None of these answer choices are correct.

  62.     What is imputed interest?
a.   Interest based on the stated interest rate.
b.   Interest based on the implicit interest rate.
c.   Interest based on the average interest rate.
d.   Interest based on the coupon rate.

  63.     Antique Company has notes receivable that have a fair value of $920,000 and a carrying amount of $710,000. Antique decides on December 31, 2014, to use the fair value option for these recently-acquired receivables. The adjusting entry to record this change will include a:
a.   debit to Unrealized Holding Gain or Loss¾Income for $210,000.
b.   credit to Notes Receivable for $210,000.
c.   credit to Unrealized Holding Gain or Loss¾Income for $210,000.
d.   debit to Notes Receivable for $920,000.

  64.     Which of the following statements is not true of fair value option?
a.   Receivables are recorded at fair value in the financial statements.
b.   Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income.
c.   The International Accounting Standards Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost.
d.   An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue.


  65.     Why would a company sell receivables to another company?
a.   To improve the quality of its credit granting process.
b.   To limit its legal liability.
c.   To accelerate access to amounts collected.
d.   To comply with customer agreements.

  66.     When should a transfer of receivables be recorded as a sale?
a.   The transferred assets are isolated from the transferor.
b.   The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity.
c.   The transferee has the right to pledge or exchange the transferred assets.
d.   All of these answers are correct.

  67.     What is "recourse" as it relates to selling receivables?
a.   The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
b.   The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
c.   The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale.
d.   The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

  68.     Which of the following is true when accounts receivable are factored without recourse?
a.   The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.
b.   The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
c.   The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.
d.   The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

S69.     Which of the following statements is incorrect regarding the classification of accounts and notes receivable?
a.   Segregation of the different types of receivables is required if they are material.
b.   Disclose any loss contingencies that exist on the receivables.
c.   Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.
d.   Valuation accounts should be ap­propriately offset against the proper receivable accounts.

S70.     Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale?
a.   The transferor is obligated to make a genuine effort to identify those receiv­ables that are uncollectible.
b.   The transferor surrenders control of the future economic benefits of the receivables.
c.   The transferee cannot require the transferor to repurchase the receivables.
d.   The transferor's obligation under the recourse provisions can be reasonably estimated.


P71.     The accounts receivable turnover ratio measures the
a.   number of times the average balance of accounts receivable is collected during the period.
b.   percentage of accounts receivable turned over to a collection agency during the period.
c.   percentage of accounts receivable arising during certain seasons.
d.   number of times the average balance of inventory is sold during the period.

  72.     The accounts receivable turnover ratio is computed by dividing
a.   gross sales by ending net receivables.
b.   gross sales by average net receivables.
c.   net sales by ending net receivables.
d.   net sales by average net receivables.

  73.     Which of the following items should be included in accounts receivable reported on the balance sheet?
a.   Notes receivable.
b.   Interest receivable.
c.   Allowance for doubtful accounts.
d.   Advances to related parties and officers.

  74.     How is days to collect accounts receivable determined?
a.   365 days divided by accounts receivable turnover.
b.   Net sales divided by 365.
c.   Net sales divided by average net trade receivables.
d.   Accounts receivable turnover divided by 365 days.

  75.     What is a possible reason for accounts receivable turnover to increase from one year to the next year
a.   Decreased credit sales during a recession.
b.   Write-off uncollectible receivables.
c.   Granting credit to customers with lower credit quality.
d.   Improved collection process.

  76.     Which of the following is a general rule of classifying receivables?
a.   Disclose any loss contingencies that exists on the receivables.
b.   Indicate the receivables classified as current and noncurrent.
c.   Disclose any receivables designated or pledged as collateral.
d.   All of these answers are correct.

*77.     Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a.   Bank service charge.
b.   Deposit in transit.
c.   Bank interest.
d.   Chargeback for NSF check.

*78.     Which of the following statements is false?
a.   The imprest petty cash system in effect adheres to the rule of disbursement by check.
b.   Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end.
c.   The Petty Cash account is debited when the fund is replenished.
d.   All of these answers are false.


*79.     A Cash Over and Short account
a.   is not generally accepted.
b.   is debited when the petty cash fund proves out over.
c.   is debited when the petty cash fund proves out short.
d.   is a contra account to Cash.

*80.     The journal entries for a bank reconciliation
a.   are taken from the "balance per bank" section only.
b.   may include a debit to Office Expense for bank service charges.
c.   may include a credit to Accounts Receivable for an NSF check.
d.   may include a debit to Accounts Payable for an NSF check.

*81.     When preparing a bank reconciliation, bank credits are
a.   added to the bank statement balance.
b.   deducted from the bank statement balance.
c.   added to the balance per books.
d.   deducted from the balance per books.