47. Laredo Company got a long term contract to provide services for the El Dorado government. In 20X3, the 5 year contract is set for 100 million dollars cash. Services are to be provided evenly over 20X3 through 20X7.
a. In 20X3 Laredo should recognize no revenue.
b. In 20X3 Laredo should recognize 100 million in revenue.
c. In 20X4 Laredo should recognize no revenue.
d. In 20X4 Laredo should recognize 20 million in revenue.
e. In 20X7 Laredo should recognize 100 million in revenue.
L.O.: 1 Type: Easy Solution: d
48. In order for revenue to be recognized
a. Goods or services must be delivered.
b. Cash or an asset virtually assured of being converted into cash must be received.
c. Goods or services must be delivered and cash or an asset virtually assured of being converted into cash must be received.
d. Cash must be received.
e. Goods or services must be delivered and cash must be received.
L.O.: 1 Type: Easy Solution: c
49. Why is the timing of revenue recogintion important?
a. The cash flow statement depends on proper timing.
b. Net income depends on proper timing.
c. Assets will be in error without proper timing of revenue.
d. Timing of revenue must be known in order to expense costs in advance of sales.
e. Investors need to know when gains and losses are taken.
L.O.: 1 Type: Easy Solution: b
50. Assume the periodic inventory system. Westside Company sold inventory to Eastside Company for $6,000 cash. The journal entry to be made by Westside Company is:
a. Cost of Goods Sold 6,000
Sales 6,000
b. Cash 6,000
Inventory 6,000
c. Accounts Receivable 6,000
Sales 6,000
d. Cash 6,000
Sales 6,000
e. Cash 6,000
Accounts Payable 6,000
L.O.: 2 Type: Easy Solution: d
51. Assume the periodic inventory system. Northside Company sold inventory to Southside Company for $6,000 for an item from Southside to be delivered at the end of the month. The journal entry to be made by Northside Company is:
a. Cost of Goods Sold 6,000
Sales 6,000
b. Cash 6,000
Inventory 6,000
c. Accounts Receivable 6,000
Sales 6,000
d. Cash 6,000
Sales 6,000
e. Cash 6,000
Accounts Payable 6,000
L.O.: 2 Type: Easy Solution: c
52. Northern Company gave inventory to Southern Company to settle short-term credit for $6,000. The journal entry to be made by Northern Company is:
a. Accounts Payable 6,000
Sales 6,000
b. Cash 6,000
Sales 6,000
c. Accounts Receivable 6,000
Sales 6,000
d. Sales 6,000
Accounts Payable 6,000
e. Accounts Payable 6,000
Inventory 6,000
L.O.: 2 Type: Easy Solution: e
53. Assume the periodic inventory system. Frank Company gave a 4% trade discount to Gene Company when it sold inventory for cash that normally sells for $12,000. The journal entry to be made by Frank Company is:
a. Cash 11,520
Sales 11,520
b. Cash 11,520
Trade Discount 480
Sales 12,000
c. Cash 11,520
Trade Discount Receivable 480
Sales 12,000
d. Cash 12,000
Trade Discount 480
Sales 11,520
e. Cash 12,000
Trade Discount Payable 480
Sales 11,520
L.O.: 3 Type: Moderate Solution: a
54. Assume the periodic inventory system. Laredo Company sold inventory on account for $800 on March 8, 20X4, with terms of 2/10, n/30. On March 16, 20X4, the appropriate payment was received from the customer. The journal entry to record the March 16 transaction on Laredo’s books is:
a. Cash 800
Accounts Receivable 800
b. Cash 784
Cash Discount on Sales 16
Accounts Receivable 800
c. Cash 784
Sales 16
Accounts Receivable 800
d. Cash 800
Cash Discount on Sales 16
Accounts Receivable 784
e. Cash 800
Sales 16
Accounts Receivable 784
L.O.: 3 Type: Easy Solution: b
55. The difference between gross sales and net sales may include
a. bad debts expense
b. sales returns
c. trade discounts
d. cost of goods sold
e. purchase returns
L.O.: 3 Type: Easy Solution: b
56. Trade discounts:
a. apply one or more reductions to the gross selling price for a particular class of customers in accordance with a company's management policies
b. are offered in order to be competitive
c. are offered to encourage certain customer behavior (to encourage early orders)
d. are not detailed on the income statement (gross sales revenue is shown net of trade discounts)
e. All of the above statements are true regarding trade discounts.
L.O.: 3 Type: Moderate Solution: e
57. Assume the periodic inventory system. Rigo Company sold inventory on account for $800. A week later, the inventory was returned and a full credit was given to the customer. Rigo’s journal entry to record the return of the inventory would be:
a. Cash 800
Accounts Receivable 800
b. Sales 800
Accounts Receivable 800
c. Sales Discounts 800
Accounts Receivable 800
d. Sales Returns & Allowances 800
Sales 800
e. Sales Returns & Allowances 800
Accounts Receivable 800
L.O.: 3 Type: Moderate Solution: e
58. Assume the periodic inventory system. Riverside Company sold inventory on account for $450. A week later, the inventory was returned and a cash refund was given to the customer. Reiverside’s journal entry to record the return of the inventory would be:
a. Cash 450
Accounts Receivable 450
b. Sales 450
Accounts Receivable 450
c. Sales Discounts 450
Cash 450
d. Sales Returns & Allowances 450
Sales 450
e. Sales Returns & Allowances 450
Cash 450
L.O.: 3 Type: Moderate Solution: e
59. Troy Company just purchased merchandise costing $700, which has payment terms of 2/10, n/45. Troy Company is uncertain whether to take advantage of the discount. What is the effective annual interest rate associated with this discount, assuming a 365-day year?
a. 2.0%
b. 3.0%
c. 16.2%
d. 20.9%
e. 21.3%
L.O.: 3 Type: Difficult Solution: e
60. Unruh Company can borrow money from the local bank at 14%. The company just acquired inventory costing $2,900, which has terms of 2/10, n/30. Assuming a 365-day year, which of the following statements is true?
a. Do not pay within the discount period since the effective rate of the discount is 37.2%, while the cost to borrow money is 14%.
b. Pay within the discount period since the effective rate of the discount is 37.2%, while the cost to borrow money is 14%
c. Do not pay within the discount period since the effective rate of the discount is 24%, while the cost to borrow money is 14%.
d. Pay within the discount period since the effective rate of the discount is 24%, while the cost to borrow money is 14%.
e. Do not pay within the discount period since the 2% discount is less than the 14% cost to borrow money.
L.O.: 3 Type: Difficult Solution: b
61. Which of the following statements is true?
a. Trade discounts and sales returns and allowances are listed on the income statement as deductions from gross sales.
b. Reports to shareholders often omit the details of revenue and show only net revenue.
c. Cash discounts are listed on the income statement as an expense of doing business.
d. "Turnover" is commonly used in the United States to refer to net sales revenue.
e. Cash discounts must appear on cash flow statements.
L.O.: 3 Type: Difficult Solution: b
62. Fryes Company accepts bank cards, which charge a fee of 4% on sales. The company had gross sales of $60,000, of which 25% were cash sales and the remainder were credit sales which are solely attributable to bank cards. The journal entry for Fryes Company is:
a. Cash 58,200
Sales 58,200
b. Cash 15,000
Accounts Receivable 43,200
Sales 58,200
c. Cash 57,600
Cash discounts for Bank Cards 2,400
Sales 60,000
d. Cash 58,200
Cash Discounts for Bank Cards 1,800
Sales 60,000
e. Cash 15,000
Accounts Receivable 43,200
Cash Discounts on Bank Cards 1,800
Sales 60,000
L.O.: 3 Type: Moderate Solution: d
63. Clavier Company sold inventory to a customer for $400. The customer used a VISA bank card, which charges Clavier a 3% fee. What asset results from this sale?
a. Accounts Receivable of $388
b. Cash of $400
c. Cash of $388
d. Sales of $388
e. Sales of $400
L.O.: 3 Type: Moderate Solution: c
64. Viking Inc. wishes to borrow $70,000 at 12% interest from the local bank. However, the bank requires a compensating balance of 9%. The effective interest rate that the Viking Inc will pay on the loan is:
a. 10.1%
b. 11.0%
c. 13.2%
d. 16.4%
e. 21.0%
L.O.: 4 Type: Moderate Solution: c
65. Which of the following is not a procedure used to safeguard cash?
a. The serial numbers on the money are recorded and maintained.
b. The individuals who receive cash do not also disburse cash.
c. The individuals who handle cash do not have access to the accounting records.
d. Cash receipts are immediately recorded and deposited and are not used directly to make payments.
e. Disbursements are made by serially numbered checks, and only upon proper authorization by someone other than the person writing the check.
L.O.: 4 Type: Easy Solution: a
66. Which of the following statements is false?
a. Accepting credit will increase administrative costs.
b. Accepting credit will result in losses due to uncollectible accounts.
c. Many small retailers are unwilling to accept any level of credit risk.
d. Credit sales normally will cause an increase in sales revenue.
e. Credit risks can vary greatly among industries.
L.O.: 4 Type: Difficult Solution: c
67. Rainbo Company is considering whether to accept credit sales. The company has determined that by allowing credit sales, the additional revenue from the credit sales would be $60,000. Cash sales will be unaffected. The company has a gross profit percentage of 30%. The additional administrative cost associated with allowing credit sales is $10,000. The company expects bad debts to be 8% of credit sales. Which of the following statements is true with respect to the decision to allow credit?
a. The company should allow credit sales because the company's gross profit will increase by $18,000 while the costs of credit will be $14,800.
b. The company should not allow credit sales because the company's revenue will increase by $60,000 while the costs of credit will be $14,800.
c. The company should not grant credit sales because the company's profit will increase by $60,000 while the costs of allowing credit will be $14,800.
d. The company should allow credit sales because the company's revenue will increase by $60,000 while the credit costs are $11,440.
e. The company should allow credit sales because the company's profit will increase by $18,000 while the credit costs will be $11,440.
L.O.: 4 Type: Difficult Solution: a
68. Admire Company generated $100,000 in credit sales during 20X4. In February 20X5, Admire realized that $13,500 of the accounts receivable generated from the 20X4 credit sales were uncollectible. Admire seldom experiences bad debts losses; therefore, it used the specific write-off method. Using the matching principle, what is the effect on 20X5 and 20X4 net income as a result of the write-off?
a. 20X5 net income is understated by $13,500, while 20X4 net income is overstated by $13,500.
b. 20X5 net income is overstated by $13,500, while 20X4 net income is understated by $13,500.
c. 20X5 net income is neither overstated nor understated, but 20X4 net income is understated by $13,500.
d. 20X5 net income is overstated by $13,500, but 20X4 net income is neither overstated nor understated.
e. There is no effect on either year's net income as revenues and expenses are properly matched.
L.O.: 5 Type: Difficult Solution: a
Table 6-1
Cottonwood Company has a December 31 year-end. On November 28, 20X4, the company sold inventory for $750 on account with the terms 2/10, n/30. On February 28, 20X5, the company recognized the account as uncollectible.
69. Referring to Table 6-1, if Cottonwood Company uses the specific write-off method, what can be said with respect to the matching principle.
a. The matching principle is not violated using the specific write-off method.
b. 20X4 sales are overstated by $750, and 20X5 sales are understated by $750.
c. 20X4 sales are understated by $750, and 20X5 sales are overstated by $750.
d. 20X4 sales are overstated by $750, and 20X5 sales are overstated by $750.
e. 20X4 sales are understated by $750, and 20X5 sales are understated by $750.
L.O.: 5 Type: Difficult Solution: b
70. Referring to Table 6-1, what is the journal entry for Cottonwood Company on February 28, 20X5, if the company uses the specific write-off method?
a. Accounts Receivable 750
Bad Debts Expense 750
b. Allowance for Uncollectible Accounts 750
Accounts Receivable 750
c. Bad Debts Expense 750
Allowance for Uncollectible Accounts 750
d. Accounts Receivable 750
Allowance for Uncollectible Accounts 750
e. Bad Debts Expense 750
Accounts Receivable 750
L.O.: 5 Type: Moderate Solution: e
71. Which of the following is not an attribute of the Allowance for Uncollectible Accounts?
a. The balance in the account increases when an uncollectible account is written off.
b. It is on the asset side of the balance sheet.
c. It is a contra account.
d. The balance in the account increases when the adjusting entry for bad debts expense is recorded.
e. It normally has a credit balance.
L.O.: 5 Type: Easy Solution: a
Table 6-2
Burnett Company has sales of $900,000, of which 25% are cash sales and the remainder are on credit. As of year-end, but before the bad debts adjustment, the Allowance for Uncollectible Accounts has a credit balance of $300, and accounts receivable has a debit balance of $60,000.
72. Referring to Table 6-2, if bad debts are estimated to be 1.5% of credit sales, what journal entry will Burnett Company need to prepare in order to estimate bad debts?
a. Allowance for Uncollectible Accounts 10,125
Accounts Receivable 10,125
b. Bad Debts Expense 9,525
Allowance for Uncollectible Accounts 9,525
c. Bad Debts Expense 10,425
Allowance for Uncollectible Accounts 10,425
d. Bad Debts Expense 10,125
Allowance for Uncollectible Accounts 10,125
e. Bad Debts Expense 13,500
Accounts Receivable 13,500