231

Chapter 8

MULTIPLE CHOICE

1. Among the assets listed below, which is considered the most liquid?
a. Short-term investments
b. Accounts receivable
c. Merchandise inventory
d. Prepaid expenses
ANS: A DIF: 1 REF: p. 324-325 OBJ: 1

2. Which of the following items is not included in cash?

a. A bank certificate of deposit for 1 year
b. A savings account at a bank
c. A checking account balance
d. Undeposited checks from customers
ANS: A DIF: 1 REF: p. 324-325 OBJ: 1

3. All of the following are considered to be cash equivalents except

a. corporate commercial paper due in 90 days after purchase.
b. U.S. Treasury bills with an original maturity of 6 months.
c. a money market account with a stock brokerage firm.
d. a certificate of deposit with a term of 75 days when acquired.
ANS: B DIF: 1 REF: p. 324-325 OBJ: 1

4. How are cash equivalents reported or disclosed in the financial statements?

a. They appear only on the statement of cash flows.
b. They are included with short-term investments under current assets on the balance sheet.
c. They are included with cash under current assets on the balance sheet.
d. They are disclosed only in a note to the balance sheet.
ANS: C DIF: 1 REF: p. 324-325 OBJ: 1

5. What is the impact on the cash flow statement from a decrease in accounts receivable, assuming the indirect
method is used?
a. A decrease in the cash flow from operating activities
b. An increase in the cash flow from operating activities
c. An increase in the cash flow from financing activities
d. None--a decrease in accounts receivable has an impact only if the direct method is used
ANS: B DIF: 2 REF: p. 355-356 OBJ: 8

6. Businesses may invest in short-term investments because they are

a. trying to gain control over the activities of other companies.
b. speculating in the appreciation in the value of the securities.
c. investing excess cash until it is needed later for business operations or investments.
d. lending money to companies which cannot obtain bank loans.
ANS: C DIF: 1 REF: p. 333-335 OBJ: 3
 Cash, Investments, and Receivables 232

7. What are the effects on the accounting equation from the sale of a certificate of deposit held as a short-term
investment?
a. Assets and owners' equity decrease.
b. No effects--assets increase and decrease by the same amount.
c. Assets and liabilities decrease.
d. Owners' equity decreases and liabilities increase.
ANS: B DIF: 1 REF: p. 333-335 OBJ: 3

8. Beimesche Corp. invested cash in a 9-month certificate of deposit (CD) on October 1, 2004. If Beimesche has
an accounting period which ends on December 31, 2004, when would it most likely recognize interest
revenue from the CD?
a. On December 31, 2004, only
b. On July 1, 2005, only
c. On December 31, 2004, and July 1, 2005
d. Daily
ANS: C DIF: 1 REF: p. 333-335 OBJ: 3

9. All of the following are cash equivalents except

a. a 30-day certificate of deposit3.
b. a 60-day Corporate commercial paper.
c. a 90-day U.S. Treasury bill.
d. a 180-day note issued by a local or state government.
ANS: D DIF: 1 REF: p. 324-325 OBJ: 1

10. Which of the following could never be included in cash equivalents?

a. Common stock issued by a corporation
b. Money market funds
c. Corporate commercial paper
d. U.S. Treasury bills
ANS: A DIF: 1 REF: p. 324-325 OBJ: 1

11. Under current accounting standards, investments in stocks and bonds which a company purchases with the
intention to hold indefinitely would be referred to as
a. investment securities.
b. trading securities.
c. held-to-maturity securities.
d. available-for-sale securities.
ANS: D DIF: 2 REF: p. 336 OBJ: 3

12. Under current accounting standards, investments in stocks and bonds which a company purchases principally
for the purpose of selling in the near future
a. must be classified as noncurrent assets.
b. are referred to as trading securities.
c. both (a) and (b).
d. none of the above.
ANS: B DIF: 1 REF: p. 336 OBJ: 3
 Cash, Investments, and Receivables 233

13. Effective cash management and control includes all of the following except
a. the use of a petty cash fund.
b. bank reconciliations.
c. short-term investments of excess cash.
d. the purchase of stocks and bonds.
ANS: D DIF: 1 REF: p. 325-333 OBJ: 2

14. Checks returned by a bank because customers did not have sufficient funds in their account are called
a. canceled checks.
b. NSF checks.
c. certified checks.
d. outstanding checks.
ANS: B DIF: 1 REF: p. 328 OBJ: 2

15. Which of the following items would not be described on a bank statement for a checking account?
a. Service charges
b. Interest earned
c. Outstanding checks
d. Deposits
ANS: C DIF: 2 REF: p. 328-331 OBJ: 2

16. Which of the following procedures would not be performed in preparing a bank reconciliation of a checking
account?
a. Tracing deposits listed on the bank statement to the books to identify deposits in transit.
b. Arranging canceled checks in numerical order and tracing them to the books to identify
outstanding checks.
c. Identifying items added or credited on the bank statement which have not been recorded as
cash receipts by the company.
d. Preparing journal entries to reverse the transactions recorded for checks which are still
outstanding.
ANS: D DIF: 2 REF: p. 328-331 OBJ: 2

17. Which of the following items that are included on a company's bank reconciliation does not require a journal
entry by the company to update its cash receipts and payments?
a. Interest earned on the checking account
b. Outstanding checks
c. Service charges
d. NSF checks
ANS: B DIF: 1 REF: p. 328 OBJ: 2

Exhibit 7-1
The set of items below was identified in preparing a bank reconciliation for Austin Corp. as of Juy 31, 2004.
For each item, identify how it would be treated on the bank reconciliation.
 Cash, Investments, and Receivables 234

18. Refer to Exhibit 7-1. Deposits in transit are

a. added to company's cash balance.
b. deducted from company's cash balance.
c. added to bank statement balance.
d. deducted from bank statement balance.
ANS: C DIF: 1 REF: p. 328-331 OBJ: 2

19. Refer to Exhibit 7-1. Customer's NSF checks are

a. added to company's cash balance.
b. deducted from company's cash balance.
c. added to bank statement balance.
d. deducted from bank statement balance.
ANS: B DIF: 1 REF: p. 328-331 OBJ: 2

20. Refer to Exhibit 7-1. Interest earned on checking the account is

a. added to company's cash balance.
b. deducted from company's cash balance.
c. added to bank statement balance.
d. deducted from bank statement balance.
ANS: A DIF: 1 REF: p. 328-331 OBJ: 2

21. Refer to Exhibit 7-1. Outstanding checks are

a. added to company's cash balance.
b. deducted from company's cash balance.
c. added to bank statement balance.
d. deducted from bank statement balance.
ANS: D DIF: 1 REF: p. 328-331 OBJ: 2

22. Refer to Exhibit 7-1. Bank service charges are

a. added to company's cash balance.
b. deducted from company's cash balance.
c. added to bank statement balance.
d. deducted from bank statement balance.
ANS: B DIF: 1 REF: p. 328-331 OBJ: 2

23. Refer to Exhibit 7-1. An error was made in recording a check received by the company; the company
recorded the receipt as $729; the correct amount of the check was $279.
a. Add to company's cash balance
b. Deduct from company's cash balance
c. Add to bank statement balance
d. Deduct from bank statement balance
ANS: B DIF: 1 REF: p. 328-331 OBJ: 2
 Cash, Investments, and Receivables 235

Exhibit 7-2
Use the data presented below which Seaside Company identified in preparing a bank reconciliation on
August 31, 2004, to answer the questions that follow.

Bank statement balance $24,500

Seaside's book balance (before adjustments) ?
Outstanding checks 2,700
NSF checks 400
Service charges 200
Deposits in transit 800
Interest earned on checking account 100

24. Refer to Exhibit 7-2. What is the adjusted cash balance on August 31, 2004?
a. $22,600
b. $23,100
c. $24,000
d. $26,400
ANS: A DIF: 3 REF: p. 328-331 OBJ: 2

25. Refer to Exhibit 7-2. What is Seaside's book balance (before adjustments)?
a. $22,600
b. $23,100
c. $24,000
d. $26,400
ANS: B DIF: 3 REF: p. 328-331 OBJ: 2

26. Refer to Exhibit 7-2. What is the net amount of the increase or decrease in Seaside’s cash balance which must
be recorded as a result of the adjustments identified by the bank reconciliation?
a. $1,900 increase
b. $500 increase
c. $500 decrease
d. $2,400 decrease
ANS: C DIF: 3 REF: p. 328-331 OBJ: 2

27. The accountant for Larizza Corp. was preparing a bank reconciliation as of February 28, 2004. The following
items were identified:

Larizza's book balance $35,900

Error by Larizza in recording a customer's check; the amount was recorded in cash receipts as $110; the
correct amount of $101 was recorded by the bank as a deposit

Outstanding checks $12,050

Interest earned on checking account 75
Customer's NSF check returned by the bank 325
 Cash, Investments, and Receivables 236

Larizza's adjusted cash balance at February 28, 2004 is

a. $23,591.
b. $35,641.
c. $35,659.
d. $47,691.
ANS: B DIF: 3 REF: p. 328-331 OBJ: 2

28. Which of the following procedures is incorrect for setting up and maintaining a petty cash fund?
a. A check is prepared for a fixed amount; when the check is cashed, the money is entrusted
to a petty cash custodian.
b. A journal entry is recorded to establish the fund.
c. When appropriate documentation is presented, cash payments are made from the fund; the
documentation is retained by the petty cash custodian.
d. When the petty cash fund is replenished, an entry is recorded to recognize an increase in
the petty cash account.
ANS: D DIF: 2 REF: p. 331-333 OBJ: 2

29. The Galleria maintains a petty cash fund of $250. On August 15, 2004, a surprise audit was conducted of the
petty cash fund. The amount of cash on hand was $77.75. Receipts for disbursements of petty cash totaled
$132.25. Which of the following is not a possible explanation of the discrepancy between the $250 fixed
amount for the fund and the $210 total of cash and receipts?
a. The petty cash custodian "borrowed" $40 from the fund.
b. It is not possible for discrepancies to happen if there are effective internal controls.
c. An error was made in making change.
d. An error was made in adding up the total of the disbursements.
ANS: B DIF: 2 REF: p. 331-333 OBJ: 2

30. Village, Inc. established a petty cash fund for $300. On December 31, 2004, the fund was replenished for
$125. The amount of cash on hand was $175. All disbursements were for expenses. What are the effects on
the accounting equation of the transaction to replenish the petty cash fund on December 31, 2004?
a. No effect--assets increase and decrease $125.
b. Assets and owners' equity decrease $125.
c. Assets decrease $300, owners' equity decreases $125, and liabilities increase $175.
d. Assets and owners' equity decrease $175.
ANS: B DIF: 2 REF: p. 331-333 OBJ: 2

31. What is the distinguishing characteristic between accounts receivable and notes receivable?
a. Accounts receivable are usually current assets while notes receivable as usually long-term
assets.
b. Accounts receivable require payment of interest if not paid within the usual credit terms.
c. Notes receivable result from credit sale transactions for merchandising companies, while
accounts receivable result from credit sale transactions for service companies.
d. Notes receivable result from a written promise to pay within a specified amount of time.
ANS: D DIF: 2 REF: p. 343-352 OBJ: 4, 5
 Cash, Investments, and Receivables 237

32. Which of the following statements is false?

a. When a company uses a subsidiary ledger, the balance in the control account, Accounts
Receivable, shows only the amount the company expects to collect from the accounts
receivable.
b. The mechanism used to maintain detailed information about the balance owed by each
customer is called a subsidiary ledger.
c. The balance in the control account, Accounts Receivable, should be equal to the sum of
the balances in the subsidiary ledger for accounts receivable.
d. Another common subsidiary ledger used by companies is one for Accounts Payable.
ANS: A DIF: 1 REF: p. 343-344 OBJ: 4

33. The following information was presented on the balance sheet of The Music Doctor as of December 30, 2004:

Trade accounts receivable (less allowance for doubtful

accounts of $802,000) $11,660,000

Which of the following statements is false?

a. The Music Doctor expects that $802,000 of accounts receivable will not be collected.
b. The balance in the Accounts Receivable account in The Music Doctor's general ledger is
$12,462,000.
c. The net realizable value of The Music Doctor's accounts receivable is $11,660,000.
d. The Music Doctor expects to collect only $10,758,000 from its customers.
ANS: D DIF: 3 REF: p. 344-349 OBJ: 4

34. If a company uses the direct write-off method of accounting for bad debts,
a. it is applying the matching principle.
b. it will record bad debts only when an account is determined to be uncollectible.
c. it will reduce the asset, accounts receivable, at the end of the accounting period for
estimated uncollectible accounts.
d. it will report accounts receivable on the balance sheet at their net realizable value.
ANS: B DIF: 2 REF: p. 344-345 OBJ: 4

35. Glenwood Tours uses the direct write-off method to account for bad debts. What are the effects on the
accounting equation of the entry to record the write-off of a customer's account balance?
a. Assets and liabilities decrease.
b. Assets and owners' equity decrease.
c. Owners' equity decreases and liabilities increase.
d. No effect--assets increase and decrease by the same amount.
ANS: B DIF: 2 REF: p. 344-346 OBJ: 4

36. If a company uses the allowance method of accounting for bad debts, which of the following statements is
false?
a. It is applying the matching principle.
b. It will record bad debts only when an account is determined to be uncollectible.
c. It will reduce the asset, accounts receivable, at the end of the accounting period for
estimated uncollectible accounts.
d. It will report accounts receivable on the balance sheet at their net realizable value.
ANS: B DIF: 2 REF: p. 345-349 OBJ: 4
 Cash, Investments, and Receivables 238

37. Vail Corp. uses the allowance method to account for bad debts. What are the effects on the accounting
equation of the entry to record the write-off of a customer's account balance?
a. Assets and liabilities decrease.
b. Assets and owners' equity decrease.
c. Owners' equity decreases and liabilities increase.
d. No effect--assets increase and decrease by the same amount.
ANS: D DIF: 2 REF: p. 346-349 OBJ: 4

38. If a company uses the allowance method to account for bad debts, when will the company's owners' equity
decrease?
a. At the date a customer's account is written off
b. At the end of the accounting period when an adjusting entry for bad debts is recorded
c. At the date a customer's account is determined to be uncollectible
d. When the accounts receivable amount becomes past due
ANS: B DIF: 2 REF: p. 345-346 OBJ: 4

39. Which of the two approaches for the allowance method of accounting for bad debts emphasizes matching bad
debts expense with revenue on the income statement?
a. The percentage of accounts receivable approach
b. The percentage of net credit sales approach
c. Aging of accounts receivable schedule
d. Fair value accounting
ANS: B DIF: 2 REF: p. 346-349 OBJ: 4

Exhibit 7-3
Use the data presented below for Woodmoor Corp. for the year ended December 31, 2004 to answer the
questions that follow.

Sales (100% on credit) $950,000

Sales Returns and Allowances 21,000
Accounts Receivable (December 31, 2004) 114,000
Allowance for Doubtful Accounts (before adjustment at December 31,
2004; credit balance) 1,000
Estimated amount of uncollectible accounts based on an aging analysis 9,000

40. Refer to Exhibit 7-3. If Woodmoor estimates its bad debts at 2% of net credit sales, what amount will be
reported as bad debt expense for 2004?
a. $18,580
b. $18,820
c. $19,000
d. $19,420
ANS: A DIF: 2 REF: p. 346-347 OBJ: 4
 Cash, Investments, and Receivables 239

41. Refer to Exhibit 7-3. If Woodmoor uses the percentage of net credit sales method to estimate its bad debts,
what will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?
a. $18,580
b. $19,000
c. $19,580
d. $20,000
ANS: C DIF: 2 REF: p. 346-347 OBJ: 4

42. Refer to Exhibit 7-3. If Woodmoor uses an aging of accounts receivable approach to estimate its bad debts,
what amount will be reported as bad debt expense for 2004?
a. $2,280
b. $8,000
c. $9,000
d. $10,000
ANS: B DIF: 2 REF: p. 347-349 OBJ: 4

43. Refer to Exhibit 7-3. If Woodmoor uses an aging of accounts receivable approach to estimate its bad debts,
what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense?
a. $104,000
b. $105,000
c. $106,000
d. $113,000
ANS: B DIF: 3 REF: p. 347-349 OBJ: 4

Exhibit 7-4
Use the data presented below for Palmer Lake, Inc. for 2004 to answer the questions that follow.

Accounts Receivable (January 1, 2004) $236,000

Credit sales during 2004 720,000
Collections from credit customers during 2004 590,000
Customer accounts written off as uncollectible during 2004 8,000
Allowance for Doubtful Accounts (credit balance; after write-off of
uncollectible accounts) 700
Estimated uncollectible accounts based on an aging analysis 9,600

44. Refer to Exhibit 7-4. What is the balance of Accounts Receivable at December 31, 2004?
a. $236,000
b. $348,400
c. $358,000
d. $366,000
ANS: C DIF: 2 REF: p. 347-349 OBJ: 4
 Cash, Investments, and Receivables 240

45. Refer to Exhibit 7-4. If the aging approach is used to estimate bad debts, what amount should be recorded as
bad debt expense for 2004?
a. $8,000
b. $8,100
c. $8,700
d. $8,900
ANS: D DIF: 2 REF: p. 347-349 OBJ: 4

46. Refer to Exhibit 7-4. If the aging approach is used to estimate bad debts, find the balance in the Allowance for
Doubtful Accounts after the bad debt expense adjustment.
a. $8,000
b. $8,100
c. $8,900
d. $9,600
ANS: D DIF: 2 REF: p. 347-349 OBJ: 4

Exhibit 7-5
Use the data presented below for Automated, Inc. for 2004 to answer the questions that follow.

Credit sales during the year $2,400,000

Accounts receivable (12/31/04) 352,000
Allowance for doubtful accounts (12/31/04) 27,000
Bad debt expense for the year 18,000

47. Refer to Exhibit 7-5. What amount will Automated show on its year-end balance sheet for the net realizable
value of its accounts receivable?
a. $307,000
b. $325,000
c. $334,000
d. $379,000
ANS: B DIF: 2 REF: p. 348 OBJ: 4

48. Refer to Exhibit 7-5. What are the effects on the accounting equation when Automated makes an entry to
record bad debt expense using the allowance method?
a. Assets and owners' equity increase.
b. Assets and owners' equity decrease.
c. Assets increase and owners' equity decreases.
d. Assets decrease and owners' equity increases.
ANS: B DIF: 1 REF: p. 348 OBJ: 4

49. Divine Corp. reported net sales (all on credit) of $1,600,000 and cost of goods sold of $1,100,000 for 2004.
Its beginning balance of Accounts Receivable was $150,000. The accounts receivable balance decreased by
$10,000 during 2004. What is Divine's accounts receivable turnover ratio for 2004? (Round your answer to
two decimal places.)
a. 7.59
b. 10.32
c. 10.67
d. 11.03
ANS: D DIF: 3 REF: p. 350 OBJ: 4
 Cash, Investments, and Receivables 241

50. During 2004, the accounts receivable turnover rate for Sonoma Company decreased from 10 to 9 times per
year. The company makes credit sales only with credit terms of 2/10, n/30. Which of the following statements
is the least likely explanation for the decrease?
a. The company's credit department has failed to follow up with customers whose account
balances are past due.
b. The company has decreased sales to its most credit worthy customers.
c. The company has increased the amount of time customers have to pay their accounts
before they are past due.
d. The company has extended credit to more risky customers in order to increase sales.
ANS: C DIF: 2 REF: p. 350 OBJ: 4

51. The party to a promissory note that agrees to repay money at the maturity date of the note is called the
a. lender.
b. maker of the note.
c. payee of the note.
d. recipient of the note.
ANS: B DIF: 1 REF: p. 350 OBJ: 5

52. The payee of the promissory note will record the note as
a. an asset.
b. a liability.
c. a revenue.
d. an expense.
ANS: A DIF: 1 REF: p. 350-352 OBJ: 5

53. A promissory note in which interest is implicitly included in the amount stated on the note is called
a. an "interest-bearing" note.
b. a "non-interest-bearing" note.
c. a "short-term" note.
d. a "long-term" note.
ANS: B DIF: 1 REF: p. 352-353 OBJ: 6

54. Another name for interest on a "non-interest-bearing" promissory note is

a. discount.
b. preferred interest.
c. prepaid interest.
d. unearned interest.
ANS: A DIF: 1 REF: p. 352-353 OBJ: 6

55. The maturity value of an "interest-bearing" promissory note is the same as the
a. fair value of the note.
b. market value of the note.
c. principal of the note.
d. total of the interest due and the principal of the note.
ANS: D DIF: 2 REF: p. 350-352 OBJ: 5
 Cash, Investments, and Receivables 242

Exhibit 7-6
Use the information presented below to answer the questions that follow.

Divine Design Company sold merchandise to Cheyenne Corp. on December 1, 2004, for $9,000. Divine
Design accepted a promissory note from Cheyenne Corp. for $9,000. The note has a term of 120 days and a
stated interest rate of 6%. Divine Design's accounting period ends on December 31, 2004. The year 2005 is
not a leap-year.

56. Refer to Exhibit 7-6. What is the maturity date of the note?
a. December 31, 2004
b. March 1, 2005
c. March 31, 2005
d. April 1, 2005
ANS: C DIF: 2 REF: p. 350-352 OBJ: 5

57. Refer to Exhibit 7-6. What amount should Divine Design recognize as interest revenue on December 31,
2004?
a. $0
b. $45
c. $135
d. $180
ANS: B DIF: 2 REF: p. 350-352 OBJ: 5

58. Refer to Exhibit 7-6. What amount should Divine Design recognize as interest revenue on the maturity date of
the note?
a. $-0-
b. $ 45
c. $135
d. $180
ANS: C DIF: 2 REF: p. 350-352 OBJ: 5

59. The maturity value of a "non-interest-bearing" promissory note is the same as the
a. fair value of the note.
b. market value of the note.
c. principal of the note.
d. total of the interest due and the principal of the note.
ANS: C DIF: 2 REF: p. 352-353 OBJ: 6

Exhibit 7-7
Use the information presented below to answer the questions that follow.

Soft-Side Beds Co. received a non-interest-bearing note from Beds R Us Co. on October 1, 2004. The amount
of the note due at the maturity date is $6,200. The note was accepted by Soft-Side Beds for merchandise sold
to Beds R Us with a selling price of $6,000. The note is due in 3 months.
 Cash, Investments, and Receivables 243

60. Refer to Exhibit 7-7. The difference of $200 between the amount of the note ($6,200) and the sales price of
the merchandise ($6,000)
a. is the interest explicitly included in the amount of the note.
b. will be recorded in a contra account, Discount on Notes Receivable, by Soft Side Beds Co.
c. will be recorded as interest revenue on October 1, 2004.
d. is an error made in preparing the note.
ANS: B DIF: 2 REF: p. 352-353 OBJ: 6

61. Refer to Exhibit 7-7. When the note is received on October 1, 2004, the entry to record the transaction by Soft
Side Beds Co. will include
a. a credit to Sales for $6,200.
b. a debit to Notes Receivable for $6,200.
c. a credit to Interest Revenue for $200.
d. a debit to Discount on Notes Receivable for $200.
ANS: B DIF: 2 REF: p. 352-353 OBJ: 6

62. Refer to Exhibit 7-7. When the note is collected on the maturity date, the entry to record the transaction by
Soft Side Beds Co. will include
a. a credit to Cash for $6,000.
b. a credit to Notes Receivable for $6,000.
c. a debit to Discount on Notes Receivable for $200.
d. a debit to Interest Revenue for $200.
ANS: C DIF: 2 REF: p. 352-353 OBJ: 6

63. The Book Mark accepts VISA and MasterCard for payments of purchases made by students. The credit card
drafts are deposited directly in a bank account. If a 3% collection fee is charged by VISA and MasterCard,
and credit card drafts totaling $12,000 are deposited, the entry to record the sales and deposits will include
a. a debit to Cash for $12,000.
b. a credit to Sales for $11,640.
c. a debit to Accounts Receivable for $11,640.
d. a debit to Collection Fee Expense for $360.
ANS: D DIF: 2 REF: p. 353-355 OBJ: 7

Exhibit 7-8
Use the information for the Peanut Gallery to answer the questions that follow.

The Peanut Gallery received a promissory note from a customer on March 1, 2004. The face amount of the
note is $8,000; the terms are 90 days and 9% interest.

64. Refer to Exhibit 7-8. What is the total amount of interest that Peanut Gallery will receive when the note is
paid?
a. $60
b. $90
c. $180
d. $720
ANS: C DIF: 2 REF: p. 350-352 OBJ: 5
 Cash, Investments, and Receivables 244

65. Refer to Exhibit 7-8. At the maturity date, the customer pays the amount due for the note and interest. What
entry is required on the books of the Peanut Gallery on the maturity date assuming none of the interest had
already been recognized?
a. Debit Cash $8,000 and credit Notes Receivable $8,000
b. Debit Cash $8,180, and credit Notes Receivable $8,000, and credit Interest Revenue $180
c. Debit Cash $8,720, and credit Notes Receivable $8,000, and credit Interest Revenue $720
d. No entry is required; the customer pays the amount due to the bank
ANS: B DIF: 2 REF: p. 350-352 OBJ: 5

66. When a company discounts an interest-bearing note at a bank with recourse,

a. the company is assured payment at maturity.
b. the company will receive the full amount of the note plus interest.
c. the company has a contingent liability from the time the note is discounted until its
maturity date.
d. the bank assumes the credit risk on non-payment at the maturity date.
ANS: C DIF: 2 REF: p. 355 OBJ: 7

67. Which of the following items is reported as an investing activity on a statement of cash flows?
a. A purchase of a security classified as available for sale
b. An increase in accounts receivable
c. A decrease in notes receivable for sales to customers
d. The purchase of debt securities which are included in cash equivalents
ANS: A DIF: 1 REF: p. 356 OBJ: 8

68. The comparative balance sheets for Witt Co. for 2003 and 2004 indicate that accounts receivable decreased
during 2004. Witt uses the indirect method of preparing the operating activities section of its statement of
cash flows. How will the decrease in accounts receivable be reported on the statement of cash flows?
a. It will be included in the amount of cash and cash equivalents at the end of 2004.
b. It will be deducted from net income in the operating activities section.
c. It will be added to net income in the operating activities section.
d. It will be reported as a cash outflow in the investing activities section.
ANS: C DIF: 1 REF: p. 356 OBJ: 8

69. The comparative balance sheets of K & A Mechanical Corp. for 2003 and 2004 indicate that short-term notes
receivable (trade receivable) increased from $8,000 in 2003 to $12,000 in 2004. How will this change be
reported on the statement of cash flows?
a. It will be included in the amount of cash and cash equivalents at the end of 2004.
b. It will be reported as a deduction from net income in the operating activities section.
c. It will be reported as a cash outflow in the investing activities section.
d. It will be added to net income in the operating activities section.
ANS: B DIF: 1 REF: p. 356 OBJ: 8
 Cash, Investments, and Receivables 245

70. A petty cash fund of $300 is established on January 1, 2004. At the end of January, the cash in the petty cash
fund is $126 and receipts supporting payments from the fund total $171. The journal entry at the end of
January to replenish the fund is
a. Miscellaneous Expenses 171
Cash 171
b. Miscellaneous Expenses 297
Cash Over and Short 3
Cash 300
c. Miscellaneous Expenses 174
Cash Over and Short 4
Cash 170
d. Miscellaneous Expenses 171
Cash Over and Short 3
Cash 174
ANS: D DIF: 2 REF: p. 331-333 OBJ: 2

71. Which of the following statements is false if a company's collection period for accounts receivable is
unacceptably long?
a. The company may need to borrow to meet its payroll.
b. The company may offer cash discounts to lengthen the collection period.
c. Cash flow from operations may be lower than expected for the firm's sales.
d. The company may discount its notes receivable to increase its cash flow.
ANS: B DIF: 1 REF: p. 353-355 OBJ: 7

72. During a bank reconciliation, a debit memorandum on the bank statement would require it to be
a. added to the book balance.
b. added to the bank balance.
c. subtracted from the book balance.
d. subtracted from the bank balance.
ANS: C DIF: 2 REF: p. 328-331 OBJ: 2

73. In a bank reconciliation, it was discovered that a cash receipt from a customer for $140 had been mistakenly
recorded in the ledger as $410. Which of the following is the correcting journal entry to fix this mistake in the
ledger?
a. Cash 270
Accounts Receivable 270
b. Accounts Receivable 270
Cash 270
c. Accounts Receivable 410
Cash 410
d. Cash 140
Accounts Receivable 140

ANS: B DIF: 2 REF: p. 328-331 OBJ: 2

 Cash, Investments, and Receivables 246

74. The total amount of the accounts receivable for Horseman’s Headquarters is $100,000. The customers take
advantage of sales discounts of $11,000 and sales of $4,000 will be returned. It is estimated that
approximately 1% of net accounts receivable will be uncollectible. The net realizable value of the accounts
receivable is
a. $83,300.
b. $84,150.
c. $85,000.
d. $88,100.
ANS: B DIF: 3 REF: p. 344-349 OBJ: 4

75. Which of the following statements is true?

a. Liquidity and profitability are synonymous terms.
b. Liquidity deals with a company's ability to pay its debts as they come due.
c. Liquidity is the ability of the company to generate cash from operating activities.
d. Cash and cash equivalents are the only assets considered liquid.
ANS: B DIF: 1 REF: p. 324 OBJ: 1

76. Which of the following combination of financial statements would provide the most in-depth information to
help understand a company's liquidity?
a. Income statement and statement of cash flows
b. Balance sheet and statement of cash flows
c. Balance sheet and income statement
d. Statement of retained earnings and statement of cash flows
ANS: B DIF: 3 REF: p. 324-325 OBJ: 1

77. Which of the following statements is true?

a. Good cash management practices dictate that a company maintain as large a balance as
possible in the Cash account.
b. Sound internal control practice dictates that all disbursements be made by check.
c. In an effective system of internal control, the person handling the cash should also prepare
the bank reconciliation.
d. Cash Over and Short is added to all the other sources of cash on the balance sheet.
ANS: B DIF: 2 REF: p. 325-333 OBJ: 2

78. If the balance on the bank statement does not equal the balance in the cash account, then it can be assumed
that
a. the company has no errors in their records concerning the cash account.
b. the bank has made errors in preparing the statement.
c. the company has made errors in their records concerning the cash account.
d. there will be items reconciling the difference.
ANS: D DIF: 2 REF: p. 325-331 OBJ: 2

79. Which of the following items would not be a reconciling item?

a. Canceled checks
b. Outstanding checks
c. NSF checks
d. Deposit in transit
ANS: A DIF: 2 REF: p. 325-331 OBJ: 2
 Cash, Investments, and Receivables 247

80. The treasurer for Islamorado Fish Corp. was preparing a bank reconciliation as of September 30, 2004. The
following items were identified:

Islamorado Fish's book balance $28,300

Deposits in transit $3,400
Outstanding checks 2,200
Interest earned on checking account 100
Customer's NSF check returned by the bank 400

Islamorado Fish's adjusted cash balance at September 30, 2004 is

a. $28,000.
b. $29,500.
c. $30,100.
d. $33,100.
ANS: A DIF: 3 REF: p. 328-331 OBJ: 2

81. The treasurer for Grizzly Corp. was preparing a bank reconciliation as of June 30, 2004. The following items
were identified:

Grizzly's bank balance $14,300

Deposits in transit 1,000
Outstanding checks 1,300
Bank service charges 50
Customer's NSF check returned by the bank 150

Grizzly's adjusted cash balance at June 30, 2004 is

a. $13,800.
b. $14,100.
c. $14,000.
d. $14,300.
ANS: C DIF: 3 REF: p. 328-331 OBJ: 2

Exhibit 7-9
Use the data presented below which Telpen Corp. identified in preparing a bank reconciliation on October
31, 2004, to answer the questions that follow.

Bank statement balance $30,700

Telpen's book balance (before adjustments) ?
Outstanding checks 4,200
NSF checks 400
Service charges 300
Deposits in transit 3,100
Interest earned on checking account 100

82. Refer to Exhibit 7-9. What is the adjusted cash balance on October 31, 2004?
a. $29,600
b. $30,100
c. $30,200
d. $30,700
ANS: A DIF: 3 REF: p. 328-331 OBJ: 2
 Cash, Investments, and Receivables 248

83. Refer to Exhibit 7-9. What is Telpen's book balance (before adjustments)?
a. $29,600
b. $30,100
c. $30,200
d. $30,700
ANS: C DIF: 3 REF: p. 328-331 OBJ: 2

84. Refer to Exhibit 7-9. What is the net amount of the increase or decrease in Telpen's cash balance which must
be recorded as a result of the adjustments identified by the bank reconciliation?
a. $100 decrease
b. $300 decrease
c. $400 decrease
d. $600 decrease
ANS: D DIF: 3 REF: p. 328-331 OBJ: 2

Exhibit 7-10
Use the data presented below for Polar Corp. for the year ended December 31, 2004 to answer the questions
that follow.

Sales (100% on credit) $1,500,000

Sales Returns and Allowances 60,000
Accounts Receivable (December 31, 2004) 250,000
Allowance for Doubtful Accounts (before
adjustment at December 31, 2004; credit balance) 3,000
Estimated amount of uncollectible accounts
based on an aging analysis 31,000

85. Refer to Exhibit 7-10. If Polar estimates its bad debts at 2% of net credit sales, what amount will be reported
as bad debt expense for 2004?
a. $28,800
b. $30,000
c. $25,800
d. $27,000
ANS: A DIF: 2 REF: p. 344-349 OBJ: 4

86. Refer to Exhibit 7-10. If Polar uses the percentage of net credit sales method to estimate its bad debts, what
will be the balance in the Allowance for Doubtful Accounts account after the adjustment for bad debts?
a. $31,800
b. $33,000
c. $25,800
d. $27,000
ANS: A DIF: 2 REF: p. 344-349 OBJ: 4
 Cash, Investments, and Receivables 249

87. Refer to Exhibit 7-10. If Polar estimates its bad debts at 12.4% of accounts receivable, what amount will be
reported as bad debt expense for 2004?
a. $31,000
b. $34,000
c. $28,000
d. $50,000
ANS: C DIF: 2 REF: p. 344-349 OBJ: 4

88. Refer to Exhibit 7-10. If Polar estimates its bad debts at 12.4% of accounts receivable, what will be the net
realizable value of its accounts receivable after the adjustment for bad debt expense?
a. $222,000
b. $216,000
c. $250,000
d. $219,000
ANS: D DIF: 3 REF: p. 344-349 OBJ: 4

Exhibit 7-11
Use the data presented below for Salsa Brava Foods, Inc. for 2004 to answer the questions that follow.

Accounts Receivable (January 1, 2004) $350,000

Credit sales during 2004 900,000
Collections from credit customers during 2004 790,000
Customer accounts written off as uncollectible
during 2004 12,000
Allowance for Doubtful Accounts (credit balance;
after write-off of uncollectible accounts) 1,700
Estimated uncollectible accounts based on an
aging analysis 13,200

89. Refer to Exhibit 7-11. What is the balance of Accounts Receivable at December 31, 2004?
a. $446,300
b. $448,000
c. $460,000
d. $472,000
ANS: B DIF: 2 REF: p. 344-349 OBJ: 4

90. Refer to Exhibit 7-11. If the aging approach is used to estimate bad debts, what amount should be recorded as
bad debts for 2004?
a. $2,900
b. $23,500
c. $11,500
d. $26,900
ANS: C DIF: 2 REF: p. 344-349 OBJ: 4
 Cash, Investments, and Receivables 250

91. Refer to Exhibit 7-11. If the aging approach is used to estimate bad debts, what should the balance in
Allowance for Doubtful Accounts be after the bad debts adjustment?
a. $13,200
b. $26,900
c. $14,900
d. $11,500
ANS: A DIF: 2 REF: p. 344-349 OBJ: 4

Exhibit 7-12
Use the data presented below for VanSlyke, Inc. for 2004 to answer the questions that follow.

Credit sales during the year $2,100,000

Accounts Receivable (12/31/04) 295,000
Allowance for Doubtful Accounts (12/31/04) 28,000
Bad debt expense for the year 17,000

92. Refer to Exhibit 7-12. What amount will VanSlyke show on its year-end balance sheet for the net realizable
value of its accounts receivable?
a. $295,000
b. $267,000
c. $250,000
d. $28,000
ANS: B DIF: 2 REF: p. 344-349 OBJ: 4

93. Refer to Exhibit 7-12. What are the effects on the accounting equation when VanSlyke makes an entry to
record bad debt expense using the allowance method?
a. Assets and owners' equity increase.
b. Assets and owners' equity decrease.
c. Assets increase and owners' equity decreases.
d. Assets decrease and owners' equity increases.
ANS: B DIF: 2 REF: p. 344-349 OBJ: 4

94. Crrekside Corp. reported net sales (all on credit) of $2,000,000 and cost of goods sold of $1,400,000 for 2004.
Its beginning balance of Accounts Receivable was $250,000. The accounts receivable balance increased by
$20,000 during 2004. What is Creekside's accounts receivable turnover ratio for 2004? (Round your answer to
two decimal places.)
a. 8.33
b. 7.41
c. 8.00
d. 7.69
ANS: D DIF: 3 REF: p. 350 OBJ: 4

Exhibit 7-13
Use the information presented below to answer the questions that follow.

Ritchey Company sold merchandise to Uppendahl Corp. on November 1, 2004, for $10,000. Ritchey accepted
a promissory note from Uppendahl Corp. for $10,000. The note has a term of 5 months and a stated interest
rate of 8%. Ritchey's accounting period ends on December 31, 2004.
 Cash, Investments, and Receivables 251

95. Refer to Exhibit 7-13. What amount should Ritchey recognize as interest revenue on December 31, 2004?
a. $ 66.67
b. $133.33
c. $200.00
d. $233.33
ANS: B DIF: 2 REF: p. 350-352 OBJ: 5

96. Refer to Exhibit 7-13. What amount should Ritchey recognize as interest revenue on the maturity date of the
note?
a. $66.67
b. $133.33
c. $200.00
d. $333.33
ANS: D DIF: 2 REF: p. 350-352 OBJ: 5

Exhibit 7-14
Use the information presented below to answer the questions that follow.

Munson Co. received a non-interest-bearing note from Murphree Co. on August 1, 2004. The amount of the
note due at the maturity date is $15,500. The note was accepted by Munson for merchandise sold to Murphree
with a selling price of $15,000. The note is due in 4 months.

97. Refer to Exhibit 7-14. The difference of $500 between the amount of the note ($15,500) and the sales price of
the merchandise ($15,000)
a. is the interest explicitly included in the amount of the note.
b. will be recorded in a contra account, Discount on Notes Receivable, by Munson Co.
c. will be recorded as interest revenue on August 1, 2004.
d. is an error made in preparing the note.
ANS: B DIF: 2 REF: p. 352-353 OBJ: 6

98. Refer to Exhibit 7-14. When the note is received on August 1, 2004, the entry to record the transaction by
Munson Co. will include
a. a credit to Sales for $15,500.
b. a debit to Notes Receivable for $15,000.
c. a credit to Interest Revenue for $500.
d. a credit to Discount on Notes Receivable for $500.
ANS: D DIF: 2 REF: p. 352-353 OBJ: 6

99. Refer to Exhibit 7-14. When the note is collected on the maturity date, the entry to record the transaction by
Munson Co. will include
a. a credit to Cash for $15,000.
b. a credit to Notes Receivable for $15,000.
c. a credit to Discount on Notes Receivable for $500.
d. a credit to Interest Revenue for $500.
ANS: D DIF: 2 REF: p. 352-353 OBJ: 6
 Cash, Investments, and Receivables 252

100. Kim's Kabin accepts VISA and MasterCard for payments of purchases made by customers. The credit card
drafts are deposited directly in a bank account. If a 3% collection fee is charged by VISA and MasterCard,
and credit card drafts totaling $10,000 are deposited, the entry to record the sales and deposits will include
a. a debit to Cash for $10,000.
b. a credit to Sales for $9,700.
c. a debit to Accounts Receivable for $9,700.
d. a debit to Collection Fee Expense for $300.
ANS: D DIF: 2 REF: p. 354-355 OBJ: 7

Exhibit 7-15
Use the information for Claypool Photography to answer the questions that follow.

Claypool Photography received a promissory note from a customer on April 1, 2004. The face amount of the
note is $2,000; the terms are 12 months and 8% interest.

101. Refer to Exhibit 7-15. What is the total amount of interest that Claypool Photography will record for the year
ended December 31, 2004?
a. $160.00
b. $40.00
c. $120.00
d. $106.67
ANS: C DIF: 2 REF: p. 350-352 OBJ: 5

102. Refer to Exhibit 7-15. At the maturity date, the customer pays the amount due for the note and interest.
Assume interest had already been recognized for 2004. The journal entry would not include a
a. debit to Cash.
b. debit to Notes Receivable.
c. credit to Interest Revenue.
d. credit to Notes Receivable.
ANS: B DIF: 2 REF: p. 350-352 OBJ: 5

103. What is the type of account and normal balance of Allowance for Doubtful Accounts?
a. Asset; credit.
b. Contra asset; credit.
c. Operating expense; debit.
d. Contra revenue; debit.
ANS: B DIF: 1 REF: p. 345-346 OBJ: 4

104. What is the type of account and normal balance of Bad Debts Expense?
a. Asset; credit.
b. Contra asset; credit.
c. Operating expense; debit.
d. Contra revenue; debit.
ANS: C DIF: 1 REF: p. 345-346 OBJ: 4
 Cash, Investments, and Receivables 253

105. What is the type of account and normal balance of Discount on Notes Receivable?
a. Asset; credit
b. Contra asset; credit
c. Revenue; debit
d. Contra revenue; debit
ANS: B DIF: 1 REF: p. 352-353 OBJ: 6

106. If there is a debit balance in Allowance for Uncollectible Accounts, then

a. there must have been an error.
b. actual accounts written off were more than amounts estimated to be uncollectible.
c. actual accounts written off were less than amounts estimated to be uncollectible.
d. no adjusting entry is necessary.
ANS: B DIF: 3 REF: p. 344-349 OBJ: 4

107. IvyWild Inc. received a $55,000 note from a customer in exchange for a bulldozer with a sales price of
$50,000. The note will be repaid in 5 months. The interest rate on the note is
a. 0%.
b. 20.0%.
c. 21.8%.
d. 24%.
ANS: D DIF: 2 REF: p. 352-353 OBJ: 6

108. Discounting a note receivable

a. requires an account called Discount on Notes Receivable.
b. must result in a note to the balance sheet.
c. slows the collection process.
d. is the process of selling a promissory note.
ANS: D DIF: 2 REF: p. 355 OBJ: 7

109. Beginning accounts receivable were $13,000 and ending accounts receivable were $11,000. All sales were on
credit and totaled $559,000. What was the amount of cash collected from customers?
a. $559,000
b. $557,000
c. $561,000
d. $ 2,000
ANS: C DIF: 3 REF: p. 355-356 OBJ: 8

110. When one company purchases debt securities in a second company,

a. the purchaser is referred to as the parent.
b. the purchaser is referred to as the subsidiary.
c. the company whose securities are purchased is the subsidiary.
d. the company whose securities are purchased is the investee.
ANS: D DIF: 1 REF: p. 335 OBJ: 3
 Cash, Investments, and Receivables 254

111. A company is referred to as a parent if it owns

a. 33% of the debt securities of another company.
b. more than 50% of the equity securities of another company.
c. more than 50% of the debt securities of another company.
d. 50% of the equity securities of another company.
ANS: B DIF: 1 REF: p. 335 OBJ: 3

112. For what reason would a company buy 10% of the common stock of a second company?
a. The company has idle cash and wishes to have a higher return than that available from
temporary money market investments.
b. The company wishes to diversify its investments.
c. The company wishes to insure a steady source of goods from the second company.
d. The company wishes to prepare consolidated financial statements.
ANS: A DIF: 1 REF: p. 335 OBJ: 3

113. The equity method of accounting for an investment is used when a company purchases
a. more than 20% of the debt securities of a second company.
b. 100% of the debt securities of a second company.
c. 15% of the equity securities of a second company.
d. 40% of the equity securities of a second company.
ANS: D DIF: 1 REF: p. 335-336 OBJ: 3

114. Consolidated financial statements are prepared

a. at the option of an investee company.
b. at the option of an investor company.
c. if one company owns 51% of another company.
d. only if one company owns 100% of another company.
ANS: C DIF: 2 REF: p. 335-336 OBJ: 3

115. SunFun Company purchased bonds of Tropical Tan, Inc. Because the interest rate on the bonds is higher than
similar investments, SunFun intends to hold the bonds for their remaining lifetime. The bonds are described
as
a. available-for-sale securities.
b. trading securities.
c. held-to-maturity securities.
d. subsidiary securities.
ANS: C DIF: 1 REF: p. 336 OBJ: 3

116. Investments in securities of other companies can be classified as any of the following except
a. held-to-maturity securities.
b. trading securities.
c. available-for-sale securities.
d. consolidated securities.
ANS: D DIF: 1 REF: p. 336 OBJ: 3
 Cash, Investments, and Receivables 255

117. On July 1, 2004, Mikulas Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually on
June 30. If the accounting year for Mikulas ends at December 31, 2004, what will be recorded with respect to
the bonds on that date?
a. The carrying value of the bonds will be $108,000.
b. The cash received in interest will be $8,000.
c. Interest income in the amount of $4,000 will be accrued.
d. No entry is necessary at December 31, 2004, because the bonds were purchased at face
value.
ANS: C DIF: 2 REF: p. 336-337 OBJ: 3

118. In a prior period, Harrison Company paid $10,000 for an investment in bonds classified as held to maturity.
When the need for cash arose, the company sold the bonds for $12,000. Which of the following statements
about the sale of the bonds is false?
a. The bonds sold at a gain of $2,000.
b. Harrison reported an unrealized gain of $2,000.
c. Total assets would increase $2,000.
d. The gain or loss is reported as "other income or expenses."
ANS: B DIF: 2 REF: p. 336-337 OBJ: 3

119. Which of the following statements is true with respect to investments in trading securities?
a. Companies make these investments with the intent of profiting from increases in market
price over a long period of time.
b. Trading securities are classified as noncurrent assets.
c. Trading securities are initially recorded at cost plus all fees paid to acquire them.
d. Dividends on trading securities must be accrued by the investor at the end of the year.
ANS: C DIF: 1 REF: p. 337-340 OBJ: 3

120. When trading securities are sold for less than the original purchase price, the seller records
a. an unrealized gain on sale of stock.
b. an unrealized loss on sale of stock.
c. a realized gain on sale of stock.
d. a realized loss on sale of stock.
ANS: D DIF: 1 REF: p. 337-340 OBJ: 3

121. On July 1, 2004, Interior Motives Company purchased shares of Roth, Inc. for $5,000 and shares of
Technologic for $7,000. At the end of 2004, the fair values of the stock were Roth, $4,000 and Technologic,
$9,000. If the stocks were classified as available for sale, how would Interior Motives record these changes in
stock price?
a. There is an unrealized loss of $1,000.
b. There is an unrealized gain of $1,000.
c. There is an unrealized gain of $2,000.
d. No adjustment would be needed because the overall fair value is higher than the overall
cost.
ANS: B DIF: 1 REF: p. 340-341 OBJ: 3
 Cash, Investments, and Receivables 256

122. An unrealized gain or loss resulting from a difference between fair value and cost of an investment in trading
securities is
a. reported on the income statement.
b. shown on the balance sheet as part of owners' equity.
c. treated as a prior period adjustment on the statement of retained earnings.
d. not recorded because no sale has taken place.
ANS: A DIF: 2 REF: p. 337-340 OBJ: 3

123. Lenkenann, Inc. purchased 1,000 shares of Dody & Co. for $17 per share and classified the investment as
trading securities. At the end of the year, the fair value of Dody stock was $15 per share. How would
Lenkenann record this change?
a. The investment in Dody stock would be increased by $2,000.
b. The investment in Dody stock would be decreased by $2,000.
c. An unrealized gain would be recorded on the income statement.
d. An unrealized loss would be recorded on the balance sheet.
ANS: B DIF: 1 REF: p. 337-340 OBJ: 3

124. The difference in accounting for trading securities and available-for-sale securities is that
a. the mark-to-market approach is used only for trading securities.
b. gains and losses resulting from differences in cost and fair value are realized for trading
securities and unrealized for available-for-sale securities.
c. unrealized gains and losses for trading securities affect the income statement while
unrealized gains and losses for available-for-sale securities affect the balance sheet.
d. trading securities are shown on the balance sheet at fair value while available-for-sale
securities are shown at cost.
ANS: C DIF: 1 REF: p. 337-342 OBJ: 3

125. Monument, Inc. purchased 1,000 shares of common stock for $50 per share and classified them as trading
securities. At the end of the year, the fair value of the stock was $46 per share. The investment was then sold
the next year for $53 per share. Which of the following statements is true?
a. Monument has a realized loss of $3,000.
b. Monument has a realized gain of $3,000.
c. Monument has a realized loss of $4,000.
d. Monument has a realized gain of $7,000.
ANS: D DIF: 3 REF: p. 337-340 OBJ: 3

126. A company acquired common stock and classified the investment as available-for-sale securities. If the
investment is subsequently sold and a realized loss is recorded, it represents the difference between the excess
of
a. cost over the selling price.
b. cost over the carrying value.
c. the carrying value over the cost.
d. selling price over the cost.
ANS: A DIF: 2 REF: p. 340-341 OBJ: 3
 Cash, Investments, and Receivables 257

127. In 2003, JJ, Inc. purchased trading securities for $3,000, decreased the carrying value to $2,000 at the end of
the year, and sold the investment in 2004 for $3,000. What journal entry would JJ make to record the sale?
a. Cash 3,000
Investment in Stock 2,000
Gain on Sale of Stock 1,000
b. Cash 3,000
Gain on Sale of Stock 1,500
Investment in Stock 1,500
c. Cash 3,000
Investment in Stock 3,000
d. Cash 3,000
Realized Gain 3,000
ANS: A DIF: 3 REF: p. 337-340 OBJ: 3

128. In 2003, Metro Corp. purchased stock and classified it as available-for-sale securities. The original cost was
$16,000, the fair value at the end of 2003 was $16,500, and the fair value at the end of 2004 was $17,000.
What statement describes the results of the change in fair value as of December 31, 2004?
a. There will be an unrealized gain on the income statement of $500.
b. There will be an unrealized loss on the income statement of $1,000.
c. There will be an unrealized gain shown in stockholders' equity of $1,000.
d. There will be an unrealized loss shown in stockholders' equity of $1,000.
ANS: C DIF: 2 REF: p. 340-341 OBJ: 3

129. In 2003, Villa, Inc. purchased securities for $10,000, classifying them as available-for-sale. The carrying
value was increased to $13,000 at the end of 2003, and the investment was sold in 2004 for $16,000. What
journal entry would Villa make to record the sale?
a. Cash 16,000
Investment in Stock 13,000
Gain on Sale of Stock 3,000
b. Cash 16,000
Unrealized Gain/Loss 3,000
Investment in Stock 13,000
Gain on Sale 6,000
c. Loss on Sale of Stock 3,000
Investment in Stock 13,000
Cash 16,000
d. Cash 16,000
Investment in Stock 10,000
Gain on Sale of Stock 6,000
ANS: B DIF: 3 REF: p. 340-341 OBJ: 3
 Cash, Investments, and Receivables 258

130. Which of the following statements is false when accounting for investments without significant influence?
a. The recent change to fair value accounting for certain investments can result in
investments being valued at amounts in excess of cost. This change has been widely
accepted by the accounting profession.
b. Cash flows from purchases and sales of held-to-maturity securities are reported in the
statement of cash flows as investing activities.
c. Unrealized gains and losses from holding available-for-sale securities are reported on the
balance sheet as part of stockholders' equity.
d. Held-to-maturity bonds are reported on the balance sheet at amortized cost while both
trading and available-for-sale securities are shown at fair value.
ANS: A DIF: 3 REF: p. 333-342 OBJ: 3

131. Significant influence of one company over another has been defined by the accounting profession as the
ownership of what minimum percent of the second company's stock?
a. 20% to 25%
b. 50%
c. 51%
d. 20%
ANS: D DIF: 1 REF: p. 335-336 OBJ: 3

132. Upon review of the balance sheet, you observed that there was an unrealized gain. You could assume that
a. trading securities were sold at a gain.
b. available-for-sale securities were sold at a gain.
c. trading securities increased in market value.
d. available-for-sale securities increased in market value.
ANS: D DIF: 2 REF: p. 340-341 OBJ: 3

133. Upon review of the income statement, you observed that there was an unrealized loss. You could assume that
a. trading securities were sold at a loss.
b. available-for-sale securities were sold at a loss.
c. trading securities decreased in market value.
d. available-for-sale securities decreased in market value.
ANS: C DIF: 2 REF: p. 337-340 OBJ: 3

134. Dividend income

a. is accrued.
b. is classified as "other revenue and expenses" on the income statement.
c. appears in the stockholders' equity section of the balance sheet.
d. occurs when the business owns debt securities.
ANS: B DIF: 2 REF: p. 338 OBJ: 3
 Cash, Investments, and Receivables 259

135. All of the following are investing activities on the statement of cash flows except
a. purchase of trading securities.
b. purchase of available-for-sale securities.
c. purchase of held-to-maturity securities.
d. purchase of intangible assets.
ANS: A DIF: 2 REF: p. 355-356 OBJ: 8

136. Select the only item below that is reported in the operating activities section of the statement of cash flows
using the indirect method.
a. Purchase of cash equivalents
b. Transfer of funds from a money market account to a checking account
c. Write-off of a customer account
d. Receipt of dividend income
ANS: D DIF: 3 REF: p. 355-356 OBJ: 8

137. Which of the following statements is false?

a. Investments in debt securities are shown on the balance sheet as a liability.
b. Accounts receivable is shown on the balance sheet at its net realizable value.
c. Investments in equity securities are shown on the balance sheet at fair market value.
d. Property, plant and equipment is shown on the balance sheet at its book value.
ANS: A DIF: 2 REF: p. 333-351 OBJ: 3, 4

TRUE/FALSE

1. Liquidity deals with a company's ability to pay its debts as they fall due.

ANS: T DIF: 1 REF: p. 324 OBJ: 1

2. A six-month bank certificate of deposit would not be classified as a cash equivalent.

ANS: T DIF: 1 REF: p. 324-325 OBJ: 1

3. Securities issued by corporations as a form of ownership in the business, such as common and preferred
stock, are called equity securities.

ANS: T DIF: 1 REF: p. 333 OBJ: 3

4. A check written by a company but not yet presented to the bank for payment is called a check in transit.

ANS: F DIF: 1 REF: p. 328-329 OBJ: 2

5. When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank
issues a debit memorandum.

ANS: F DIF: 1 REF: p. 328-329 OBJ: 2

 Cash, Investments, and Receivables 260

6. On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.

ANS: F DIF: 1 REF: p. 328-331 OBJ: 2

7. On a bank reconciliation, bank charges for the month are added to the cash balance per the books.

ANS: F DIF: 1 REF: p. 328-331 OBJ: 2

8. On a bank reconciliation, interest earned for the month is added to the cash balance per the books.

ANS: T DIF: 1 REF: p. 328-331 OBJ: 2

9. The establishment of a petty cash fund has no effect on the company's total cash balance.

ANS: T DIF: 1 REF: p. 331-333 OBJ: 2

10. The entry to replenish a petty cash fund includes debits to various expense accounts and a credit to the petty
cash fund.

ANS: F DIF: 1 REF: p. 331-333 OBJ: 2

11. Selling on credit causes two problems: it slows down the inflow of cash to the company and it subjects the
company to the risk that some of its receivables will never be collected.

ANS: T DIF: 1 REF: p. 343 OBJ: 4

12. Accounts receivable are shown on the balance sheet at their net realizable value.

ANS: T DIF: 1 REF: p. 344 OBJ: 4

13. One of the problems with the use of the allowance method to account for bad debts is that it often violates the
matching principle.

ANS: F DIF: 1 REF: p. 345 OBJ: 4

14. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts
before those debts actually occur.

ANS: T DIF: 1 REF: p. 345 OBJ: 4

15. Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

ANS: F DIF: 1 REF: p. 344-346 OBJ: 4

16. Because the allowance method results in better matching, accounting standards require its use rather than the
direct write-off method, unless bad debts are immaterial.

ANS: T DIF: 1 REF: p. 345-346 OBJ: 4

 Cash, Investments, and Receivables 261

17. An aging schedule typically categorizes the various accounts by the length of time each invoice is
outstanding.

ANS: T DIF: 1 REF: p. 348-349 OBJ: 4

18. The accounts receivable turnover ratio is defined as net credit sales divided by the net realizable value of the
accounts receivable.

ANS: F DIF: 1 REF: p. 350 OBJ: 4

19. The maker of a note recognizes a notes receivable on the balance sheet and interest revenue on the income
statement.

ANS: F DIF: 1 REF: p. 350 OBJ: 5

20. In determining how long a note is outstanding, it is normal practice to count the day the note matures, but not
the day it was signed.

ANS: T DIF: 1 REF: p. 350-351 OBJ: 5

21. With a non-interest-bearing note, even though interest is never mentioned, it is implicitly built into the
transaction.

ANS: T DIF: 1 REF: p. 352-353 OBJ: 6

22. When a note is discounted at a bank, it is normally done with recourse.

ANS: T DIF: 1 REF: p. 355 OBJ: 7

23. Purchases and sales of cash equivalents are not reported on a statement of cash flows.

ANS: T DIF: 1 REF: p. 355 OBJ: 8

24. An increase in accounts receivable represents an decrease in a company's cash flow from operating activities.

ANS: T DIF: 1 REF: p. 356 OBJ: 8

25. A subsidiary is a separate legal entity that is owned or controlled by another entity.

ANS: T DIF: 1 REF: p. 335 OBJ: 3

26. When Company P buys stock in Company W, Company P is referred to as the investee.

ANS: F DIF: 1 REF: p. 335 OBJ: 3

27. The equity method of accounting is used if the investee is more than 50% owned and the investor is able to
secure influence over the investee.

ANS: F DIF: 1 REF: p. 335 OBJ: 3

.
 Cash, Investments, and Receivables 262

28. According to current accounting standards, use of the equity method is appropriate when an investor owns at
least 20% of the common stock of the investee.

ANS: T DIF: 1 REF: p. 335 OBJ: 3

29. By their nature, only bonds, not stocks, can qualify as held-to-maturity securities.

ANS: T DIF: 1 REF: p. 336-337 OBJ: 3

30. An investment in held-to-maturity bonds is normally classified as a noncurrent asset, unless the bonds are one
year or less from maturity.

ANS: T DIF: 1 REF: p. 336-337 OBJ: 3

31. Trading securities are always classified as current assets.

ANS: T DIF: 1 REF: p. 337-340 OBJ: 3

32. Only realized gains, realized losses, and unrealized losses from trading securities are recognized on the
income statement.

ANS: F DIF: 1 REF: p. 337-340 OBJ: 3

33. Stocks and bonds that do not qualify as trading securities and bonds that are not intended to be held to
maturity are categorized as available-for-sale securities.

ANS: T DIF: 1 REF: p. 340 OBJ: 3

34. Cash flows from trading securities are classified as investing activities on the cash flow statement.

ANS: F DIF: 1 REF: p. 356 OBJ: 8

35. Held-to-maturity bonds are reported on the balance sheet as an asset.

ANS: T DIF: 1 REF: p. 336-337 OBJ: 3

COMPLETION

1. ________________________ are those investments that are readily convertible into known amounts of cash
and that have an original maturity to the investor of three months or less.

ANS: Cash equivalents

DIF: 1 REF: p. 324 OBJ: 1

2. Securities issued by corporations as a form of ownership in the business, such as common or preferred stock
are called ____________.

ANS: equity securities

DIF: 1 REF: p. 333 OBJ: 3

 Cash, Investments, and Receivables 263

3. Bonds issued by corporations or governmental bodies as a form of borrowing are called

_________________________.

ANS: debt securities

DIF: 1 REF: p. 333 OBJ: 3

4. _________________________ securities are purchased and held to sell in the near future.

ANS: Trading

DIF: 1 REF: p. 337-340 OBJ: 3

5. _________________________ securities are marketable, but their classification depends on the company's
intent for the holding period.

ANS: Available-for-sale

DIF: 1 REF: p. 340-341 OBJ: 3

6. A check written by a company but not yet presented to the bank for payment is called a(n)
_________________________.

ANS: outstanding check

DIF: 1 REF: p. 328 OBJ: 2

7. A check that is returned or "bounces" because of insufficient funds is called a(n)

_________________________.

ANS: NSF check

DIF: 1 REF: p. 328 OBJ: 2

8. Money which has been recorded as a debit to a company's cash account at month-end, but which has not yet
been reflected on the bank statement is called a(n) _________________________.

ANS: deposit in transit

DIF: 1 REF: p. 328 OBJ: 2

9. Items that are included on a bank statement and increase the bank account balance are called
___________________________.

ANS: credit memoranda

DIF: 1 REF: p. 328-329 OBJ: 2

 Cash, Investments, and Receivables 264

10. Items that are included on a bank statement and decrease the bank account balance are called
___________________________.

ANS: debit memoranda

DIF: 1 REF: p. 329 OBJ: 2

11. If a company records a $310 receipt as $130, this type of error is called a(n) _______________.

ANS: transposition error

DIF: 1 REF: p. 330 OBJ: 2

12. The mechanism which keeps track of the balances owed by individual customers is call a(n)
_________________________.

ANS: subsidiary ledger

DIF: 1 REF: p. 343-344 OBJ: 4

13. A general ledger account supported by a subsidiary ledger is called a(n) _________________________.

ANS: control account

DIF: 1 REF: p. 343-344 OBJ: 4

14. The gross accounts receivable less the allowance for doubtful accounts is known as the
_________________________.

ANS: net recoverable amount or net realizable value

DIF: 1 REF: p. 344 OBJ: 4

15. A(n) _________________________ categorizes the various accounts receivable amounts by the length of
time outstanding.

ANS: aging schedule

DIF: 1 REF: p. 348-349 OBJ: 4

16. A(n) _________________________ is a written promise to repay a definite sum of money either upon
demand, or at a fixed or determinable date in the future.

ANS: promissory note

DIF: 1 REF: p. 350 OBJ: 5

 Cash, Investments, and Receivables 265

17. The party that agrees to repay is the _________________________ of the note.

ANS: maker

DIF: 1 REF: p. 350 OBJ: 5

18. A company that holds a promissory note from another company has an asset, called a(n)
_________________________.

ANS: note receivable

DIF: 1 REF: p. 350 OBJ: 5

19. The company that makes or gives a promissory note to another company has a liability called, a(n)
_________________________.

ANS: note payable

DIF: 1 REF: p. 350 OBJ: 5

20. The maker of a note recognizes _________________________ on its income statement.

ANS: interest expense

DIF: 1 REF: p. 350 OBJ: 5

21. The payee of a note recognizes _________________________ on its income statement.

ANS: interest income

DIF: 1 REF: p. 350 OBJ: 5

22. The amount of money received, or the fair value of the products or services received by the maker when a
promissory note is issued is called the _________________________.

ANS: principal

DIF: 1 REF: p. 351 OBJ: 5

23. The length of time a note is outstanding (that is, the period of time between the date it is issued and the date it
matures) is called the _________________________.

ANS: term

DIF: 1 REF: p. 351 OBJ: 5

24. The party that receives the payment due from a note in the future is called the ______________.

ANS: payee

DIF: 1 REF: p. 350 OBJ: 5

 Cash, Investments, and Receivables 266

25. The date that a promissory note is due is the _________________________.

ANS: maturity date

DIF: 1 REF: p. 351 OBJ: 5

26. The difference between the principal amount of a note and its maturity value is called
______________________________.

ANS: interest

DIF: 1 REF: p. 351 OBJ: 5

27. The amount of cash the maker is to pay the payee on the maturity date of the note is called the
_______________________________.

ANS: maturity value

DIF: 1 REF: p. 351 OBJ: 5

28. A non-interest-bearing note includes _______________________________ interest.

ANS: implicit

DIF: 1 REF: p. 352-353 OBJ: 6

29. The process of assigning a note due in the future to a bank before its maturity date is called
_____________________________.

ANS: discounting

DIF: 1 REF: p. 355 OBJ: 7

30. If a company discounts a note at a bank, but still is contingently liable for the maturity value, then the
discounting was done _________________________________.

ANS: with recourse

DIF: 1 REF: p. 355 OBJ: 7

31. A(n) ________________________ results when one company loans money to another company.

ANS: debt security

DIF: 1 REF: p. 333 OBJ: 3

32. When an investor is able to secure influence over an investee, the _______________________ method of
accounting is used.

ANS: equity

DIF: 1 REF: p. 335 OBJ: 3

 Cash, Investments, and Receivables 267

33. _____________________________ are stocks and bonds that are not classified as either held-to-maturity or
trading securities.

ANS: Available-for-sale securities

DIF: 1 REF: p. 336 OBJ: 3

34. Trading securities are classified as _________________________.

ANS: current assets

DIF: 1 REF: p. 337 OBJ: 3

35. At the end of each accounting period, the carrying values of investments in trading securities are adjusted to
their _____________.

ANS: fair values

DIF: 1 REF: p. 337-340 OBJ: 3

36. At the end of each accounting period, the carrying values of available-for-sale securities are adjusted to their
fair values, and any gain or losses reported _____________________________.

ANS: in stockholders' equity

DIF: 1 REF: p. 340-341 OBJ: 3

37. Cash purchases and sales of held-to-maturity securities and available-for-sale securities are classified as
____________________________ activities.

ANS: investing

DIF: 1 REF: p. 356 OBJ: 8

38. The use of fair value accounting is an exception to the ____________.

ANS: cost principle

DIF: 1 REF: p. 342 OBJ: 3

MATCHING

Match the following:

a. Interest
b. Payee
c. Maturity Value
d. Term
e. Principal
f. Maturity date
 Cash, Investments, and Receivables 268

1. The amount of money received, or the fair value of the products or services received by the maker
when a promissory note is issued
2. The length of time a note is outstanding; this is the period of time between the date it is issued and
the date it matures
3. The party that receives payment due from a note in the future
4. The date that a promissory note is due
5. The difference between principal amount of the note and its maturity value
6. The amount of cash the maker is to pay the payee on the maturity date of the note

1. ANS: E DIF: 1 REF: p. 350-351 OBJ: 5

2. ANS: D DIF: 1 REF: p. 350-351 OBJ: 5
3. ANS: B DIF: 1 REF: p. 350-351 OBJ: 5
4. ANS: F DIF: 1 REF: p. 350-351 OBJ: 5
5. ANS: A DIF: 1 REF: p. 350-351 OBJ: 5
6. ANS: C DIF: 1 REF: p. 350-351 OBJ: 5

PROBLEM

Exhibit 7-16
Mac Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for
October, 2004, indicated the following:

Balance, October 31, 2004 $7,920

Service charge for October 20
Interest earned during October 30
NSF check from Green Corp. (deposited by Mac) 32
Note ($3,000) and interest ($40) collected for Mac from a
customer of Mac's 1,040

An analysis of canceled checks and deposits and the records of Mac revealed the following items:

Checking account balance per Mac books $7,170

Outstanding checks as of October 31 952
Deposit in transit at October 31 1,310

Error in recording a check issued by Mac. (Correct amount of the

check is $450, but was recorded as a cash disbursement of $540. The
check was issued to pay for merchandise purchases.) 90
 Cash, Investments, and Receivables 269

Using the information provided above, answer the questions that follow.

1. Refer to Exhibit 7-16. Prepare a bank reconciliation at October 31, 2004 in proper form.

ANS:

Mac Corp.
Bank Reconciliation
October 31, 2004

Balance per bank statement, October 31 $7,920

Add: deposit in transit 1,310
Less: outstanding checks (952)
Adjusted balance, October 31 $8,278

Balance per books, October 31 $7,170

Add Interest earned 30
Add note ($1,000) and interest ($40) collected by the bank 1,040
Less NSF check (32)
Less service charges (20)
Correction of error-check for $540 recorded as $450 90
Adjusted balance, October 31 $8,278

DIF: 2 REF: p. 328-331 OBJ: 2

2. Refer to Exhibit 7-16. Based on the information in the bank reconciliation prepared in the preceding question,
prepare the journal entries to adjust Mac's cash balance to the correct account balance at October 31, 2004.

ANS:

Cash 1,108
Account Receivable-NSF check 32
Bank Service Expense 20
Purchases 90
Notes Receivable 1,000
Interest Revenue ($40 + $30) 70

DIF: 2 REF: p. 328-331 OBJ: 2

3. Refer to Exhibit 7-16. Explain how checking accounts, banks and bank reconciliations are used by Mac to
control its cash.

ANS:
Checking accounts allow entities an opportunity to make all, or almost all, cash payments by check.
Preventing direct access to cash provides better internal control. Bank statements and bank reconciliations
allow verification of the cash balance and help identify errors that have been made.

DIF: 2 REF: p. 328-331 OBJ: 2

4. Refer to Exhibit 7-16. Explain how Mac can control small payments that must be made in cash rather than by
check.
 Cash, Investments, and Receivables 270

ANS:
Small cash payments can be controlled by using a petty cash fund. The amount of cash to which employees
have direct access is small. The system established for petty cash provides a convenient and sound procedure
for identifying the assets and expenses which must be recorded when small cash payments are made.

DIF: 2 REF: p. 331-333 OBJ: 2

Exhibit 7-17
Hourigan Corp. sells merchandise only on credit. For the year ended December 31, 2004, the following data
is available:

Sales $2,400,000
Sales Returns & Allowances 60,000
Accounts Receivable, 1/1/04 270,000
Allowance for Doubtful Accounts, 12/31/04
(before adjustment for bad debts, after
accounts written off, credit balance) 1,900
Collections during 2004 2,426,300
Accounts written off as uncollectible during 2004 23,700
Estimated uncollectible accounts per aging schedule at 12/31/04 28,000

Using the information provided above, answer the questions that follow.

5. Refer to Exhibit 7-17. Determine the balance of Accounts Receivable at December 31, 2004.

ANS:

Accounts Receivable, 1/1/04 $ 270,000

Add: Sales on credit 2,400,000
Deduct: Sales Returns and Allowances (60,000)
Collections from customers (2,426,300)
Accounts written off (23,700)
Accounts Receivable, 12/31/04 $ 160,000

DIF: 2 REF: p. 343-349 OBJ: 4

6. Refer to Exhibit 7-17. Assume that Hourigan estimates bad debts at 1% of net credit sales.

(a) What amount will Hourigan record as bad debts expense for 2004?

(b) What will be the net realizable value of accounts receivable reported on Hourigan's
balance sheet at December 31, 2004?

ANS:

(a) ($2,400,000 - $60,000) x .01 = $23,400

(b) [$160,000 - ($1,900 + $23,400)] = $134,700

DIF: 2 REF: p. 343-349 OBJ: 4

 Cash, Investments, and Receivables 271

7. Refer to Exhibit 7-17. Assume that Hourigan estimates bad debts on an aging analysis, and the aging schedule
indicates that $28,000 of the December 31, 2004 accounts receivable will be uncollectible.

(a) What amount will Hourigan record as bad debts expense for 2004?

(b) What will be the net realizable value of the accounts receivable reported on Hourigan's
balance sheet at December 31, 2004?

ANS:

(a) ($28,000 - $1,900) = $26,100

(b) ($160,000 - $28,000) = $132,000

DIF: 2 REF: p. 343-349 OBJ: 4

8. Refer to Exhibit 7-17. Since Hourigan has a choice of acceptable methods to estimate bad debts, what factors
should be considered in the selection?

ANS:
The percentage of net sales approach emphasizes the matching principle. The aging approach emphasizes the
valuation of the receivables at the net amount to be collected. Hourigan is really concerned with both income
measurement and balance sheet valuation, but must choose one of the two approaches, mostly likely based on
management philosophy.

If most customer balances fall within a small range of variation, the percentage of sales approach, which is
easier to apply, probably will give reasonable results for both income measurement and asset valuation.
However, if there is a wide variation in the amounts of customer balances, and especially if some large
customer balances are significantly past due and their collection is very uncertain, then the aging approach
should give better results for both income measurement and asset valuation.

DIF: 2 REF: p. 343-349 OBJ: 4

9. Refer to Exhibit 7-17. Can Hourigan use the direct write-off method rather than the allowance method to
account for bad debts expense? Explain why or why not.

ANS:
The direct write-off method is not an acceptable GAAP (generally accepted accounting principles) procedure
to account for bad debts. It does not adequately match bad debt expense with the revenues unless the accounts
are determined to be uncollectible in the same year that the revenue was recognized. In rare cases, when a
company has very infrequent and immaterial amounts of bad debts, the direct write-off method can be
justified. It does not appear that Hourigan's situation meets these conditions for use of the direct write-off
method.

DIF: 2 REF: p. 343-349 OBJ: 4

 Cash, Investments, and Receivables 272

Exhibit 7-18
Use the information for Century Associates at the end of 2004 to answer the questions that follow. Enter your
answers in the space provided for each answer, and show your calculations.

Sales $1,200,000
Sales Returns & Allowances 15,000
Accounts Receivable, 12/31/04 262,000
Allowance for Doubtful Accounts, 12/31/04
(before adjustment for bad debts; debit balance) 2,500
Estimated uncollectible accounts per aging schedule at 12/31/04 11,500

10. Refer to Exhibit 7-18. If bad debts are estimated to be 1% of net sales, what will be Century's bad debts
expense for 2004?

ANS:
($1,200,000 - $15,000) x .01 = $11,850

DIF: 2 REF: p. 343-349 OBJ: 4

11. Refer to Exhibit 7-18. If the aging approach is used to estimate bad debts, what will be the bad debts expense
for 2004?

ANS:
($2,500 + $11,500) = $14,000

DIF: 2 REF: p. 343-349 OBJ: 4

12. Refer to Exhibit 7-18. If the aging approach is used to estimate bad debts, what will be the net realizable value
of the accounts receivable?

ANS:
($262,000 - $11,500) = $250,500

DIF: 2 REF: p. 343-349 OBJ: 4

13. Refer to Exhibit 7-18. Assume that the net realizable value is $170,000 after the adjustment for bad debts in
2004. What will be the net realizable value of accounts receivable after a customer's account of $2,500 is
written off?

ANS:
$170,000 (Accounts Receivable and the Allowance for Doubtful Accounts both decrease by the same amount,
$2,500, leaving the net realizable value of the accounts receivable unaffected.)

DIF: 2 REF: p. 343-349 OBJ: 4

14. Refer to Exhibit 7-18. Prepare the journal entry for Century Associates to record the adjustment for bad debts
if the aging approach is used.
 Cash, Investments, and Receivables 273

ANS:

Bad Debts Expense 14,000

Allowance for Doubtful Accounts 14,000

DIF: 2 REF: p. 343-349 OBJ: 4

15. Refer to Exhibit 7-18. Prepare the journal entry for Century Associates to write off the $2,700 account of
Dagney Corp., a customer, if the account is determined to be uncollectible and the allowance method is used
for bad debts.

ANS:

Allowance for Doubtful Accounts 2,700

Accounts Receivable - Dagney Corp. 2,700

DIF: 2 REF: p. 343-349 OBJ: 4

Exhibit 7-19
Harvey Corp. received a 6%, 180-day promissory note with a face amount of $12,000 from the Sedona
Company, for the sale of merchandise on May 1, 2004. Use the following information to answer the questions
that follow. Enter your answers on the space provided.

16. Refer to Exhibit 7-19. What is the maturity date of the note?

ANS:
Maturity date = October 28, 2004
May(30) + June(30) + July(31) + Aug(31) + Sept(30) + Oct(28) = 180 days

DIF: 2 REF: p. 350-352 OBJ: 5

17. Refer to Exhibit 7-19. What amount of interest revenue will be earned by Harvey Corp. over the term of the
note?

ANS:
Principle x Rate x Time
[$12,000 x 6% x (180/360)] = $360 Interest revenue

DIF: 2 REF: p. 350-352 OBJ: 5

18. Refer to Exhibit 7-19. Using the accounting equation below, indicate the effects on the accounting equation of
the May 1, 2004, transaction when the note is received by Harvey.

Assets = Liabilities + Owners' Equity

ANS:
Assets = Liabilities + Owners' Equity
+12,000 +12,000

DIF: 2 REF: p. 350-352 OBJ: 5

 Cash, Investments, and Receivables 274

19. Refer to Exhibit 7-19. Using the accounting equation below, indicate the effects on the accounting equation of
the transaction recorded when the note is collected by Harvey.

Assets = Liabilities + Owners' Equity

ANS:
Assets = Liabilities + Owners' Equity
+12,360 -12,000 +360

Cash 12,360
Notes Receivable 12,000
Interest Revenue 360

DIF: 2 REF: p. 350-352 OBJ: 5

Exhibit 7-20
LogoLooks Co. received a 60-day, non-interest-bearing promissory note with a face amount of $6,120 from
Lowell Corp. for the sale of merchandise on March 1, 2004. The sales price is $6,000. Use the following
information to answer the questions that follow. Enter your answers in the space provided.

20. Refer to Exhibit 7-20. What is the maturity date of the note?

ANS:
Maturity date = April 30, 2004
March(30) + April(30) = 60 days

DIF: 2 REF: p. 351-352 OBJ: 5

21. Refer to Exhibit 7-20. What amount of interest revenue will be earned by LogoLooks over the full term of the
note?

ANS:
($6,120 - $6,000) = $120

DIF: 2 REF: p. 352-353 OBJ: 6

22. Refer to Exhibit 7-20. How would this non-interest-bearing note be reported if a balance sheet is prepared on
March 1, 2004?

ANS:

Notes receivable $6,120

Less: Discount on notes receivable (120) $6,000

DIF: 2 REF: p. 353 OBJ: 6

23. Refer to Exhibit 7-20. Using the accounting equation below, indicate the effects on the accounting equation of
the March 1, 2004, transaction when the note is received by LogoLooks.

Assets = Liabilities + Owner's Equity

 Cash, Investments, and Receivables 275

ANS:
Assets = Liabilities + Owner's Equity

+6,120 -120 +6,000

Notes Receivable 6,120

Discount on Notes Receivable 120
Sales 6,000

DIF: 2 REF: p. 353 OBJ: 6

24. Refer to Exhibit 7-20. Using the accounting equation below, indicate the effects on the accounting equation of
the transaction recorded on the maturity date when the note is collected by LogoLooks.

Assets = Liabilities + Owner's Equity

ANS:
Assets = Liabilities + Owner's Equity
+6,120
-6,120 +120
+ 120

Cash 6,120
Discount on Notes Receivable 120
Notes Receivable 6,120
Interest Revenue 120

DIF: 2 REF: p. 353 OBJ: 6

Exhibit 7-21
Use the information for Trust Construction Corp. to answer the questions that follow. General journal forms
are provided for journal entries for each question.

Note 1: $75,000 face amount, 90-day, non-interest bearing, received on October 1, 2004;
sales amount of construction job, $72,500

Note 2: $60,000 face amount, 90-day, 8% interest bearing, received on November 1, 2004;
sales amount of construction job, $60,000

25. Refer to Exhibit 7-21.

a. Prepare the entry to record the receipt of Note 1 on October 1, 2004.
b. Prepare the entry to record the collection of Note 1 and the recognition of interest
revenue on the maturity date.
 Cash, Investments, and Receivables 276

General Journal Form for Answers

General Journal

Entry Description Debit Credit

ANS:

General Journal

Entry Description Debit Credit

a. 10/01/04 Notes Receivable 75,000
Discount on Notes Receivable 2,500
Construction Revenue 72,500

b. 12/30/04 Cash 75,000

Discount on Notes Receivable 2,500
Notes Receivable 75,000
Interest Revenue 2,500

DIF: 2 REF: p. 352-353 OBJ: 6

26. Refer to Exhibit 7-21.

a. Prepare the entry to record the receipt of Note 2 on November 1, 2004.
b. Prepare the entry to record the accrued interest revenue on Note 2 on December 31,
2004, the end of Trust's accounting year.
c. Prepare the entry to record the collection of Note 2 and the recognition of interest
revenue on the note on its maturity date.

General Journal Form for Answers

General Journal

Entry Description Debit Credit

 Cash, Investments, and Receivables 277

ANS:

General Journal

Entry Description Debit Credit

a. 11/01/04 Notes Receivable 60,000

Construction Revenue 60,000

b. 12/31/04 Interest Receivable 800

Interest Revenue 800
($60,000 x 8% x 60/360) = $800

c. 01/30/05 Cash 61,200

Notes Receivable 60,000
Interest Receivable 800
Interest Revenue 400
($60,000 x 8% x (30/360)) = $400

DIF: 2 REF: p. 350-352 OBJ: 5

Exhibit 7-22
The comparative financial statements for the years ended December 29, 2001 and December 30, 2000 in the
2001 annual report of PEPSICO, INC. AND SUBSIDIARIES reported the following information (in millions
of dollars). Use the information for PEPSICO, INC. to answer the questions that follow.

2001 2000
Balance Sheet:
Cash and cash equivalents $ 683 $ 1,038
(Accounts) Receivables, less allowance for
doubtful accounts of $121 (2001) and $126 (2000) 2,142 2,129

Income Statement:
Net sales for the year 26,935 25,479
Net income for the year 2,662 2,543

Statement of cash flows:

Net cash provided by operating activities 4,201 4,440
Increase (Decrease) in Accounts Receivable (7) (52)

27. Refer to Exhibit 7-22.

a. What is the gross amount of (Accounts) Receivables for PEPSICO at December 29, 2001?

b. What is the net realizable value of the (Accounts) Receivables for PEPSICO at December
29, 2001?
 Cash, Investments, and Receivables 278

ANS:

a. $2,142 + $121 = $2,263 Gross Accounts Receivable

b. $2,142 the net realizable amount is already reported on the balance sheet

DIF: 2 REF: p. 343-349 OBJ: 4

28. Refer to Exhibit 7-22. Why are the increase/decrease in Accounts Receivable reported as an adjustment to net
income in the operating activities section of PEPSICO's cash flows?

ANS:
Accounts Receivable arise from the accrual of sales revenue. The income statement, therefore, includes sales
revenue on the accrual basis, not the cash basis. By adjusting net income for the change in the accounts
receivable balance, sales on the accrual basis are being converted to the cash basis. Increases in accounts
receivable indicate that sales exceed actual cash collections from customers, and thus, these increases must be
deducted to determine the amount of cash flows from operating activities.

DIF: 2 REF: p. 355-356 OBJ: 8

29. Refer to Exhibit 7-22. What is meant by equivalents in the item "Cash and cash equivalents" reported on
PEPSICO's balance sheet?

ANS:
Cash "equivalents" refers to very short-term, highly liquid marketable securities with an original maturity of 3
months or less at the date of purchase. Because these securities can be converted into cash when needed very
quickly and without material loss, they are considered to be the equivalent of cash and are normally included
with cash on the balance sheet and on the cash flow statement.

DIF: 2 REF: p. 324 OBJ: 1

30. Refer to Exhibit 7-22. Calculate the (accounts) receivable turnover ratio for PEPSICO for the year ended
December 29, 2001.

ANS:
($2,142 + $2,129)/2 = $2,135.50 average (Accounts) Receivables for 2001

($26,935/$2,135.50) = 12.6 turnover rate

DIF: 3 REF: p. 350 OBJ: 4