Three-year zero-interest-bearing trade note.
1. Which of the following methods of determining bad debt expense does not properly match expense and revenue?
A.Charging bad debts with a percentage of sales under the allowance method.
B.Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.
C.Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
D.Charging bad debts as accounts are written off as uncollectible.
2.Which of the following methods of determining annual bad debt expense best achieves the matching concept?
A.Percentage of sales
B.Percentage of ending accounts receivable
C.Percentage of average accounts receivable
D.Direct write-off
3.The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach
A.Gives a reasonably correct statement of receivables in the balance sheet.
B.Best relates bad debt expense to the period of sale.
C.Is the only generally accepted method for valuing accounts receivable?
D.Makes estimates of uncollectible accounts unnecessary.
4.At the beginning of 2003, Fine Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Fine reported this note as a $1,000 trade note receivable on its 2003 year-end statement of financial position and $1,000 as sales revenue for 2003. What effect did this accounting for the note have on Fine's net earnings for 2003, 2004, 2005, and its retained earnings at the end of 2005, respectively?
A.Overstate, overstate, understate, zero
B.Overstate, understate, understate, understate
C.Overstate, overstate, overstate, overstate
D.None of these
5.Which of the following is true when accounts receivable are factored without recourse?
A.The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.
B.The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
C.The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables.
D.The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.
6.The accounts receivable turnover ratio is computed by dividing
A.Gross sales by ending net receivables.
B.Gross sales by average net receivables.
C.Net sales by ending net receivables.
D.Net sales by average net receivables.
7. Ell Co. received merchandise on consignment. As of January 31, Ell included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be
A.Net income, current assets, and retained earnings were overstated.
B.Net income was correct and current assets were understated.
C.Net income and current assets were overstated and current liabilities were understated.
D.Net income, current assets, and retained earnings were understated.
8.Cor Co. accepted delivery of merchandise which it purchased on account. As of December 31, Cor had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be
A.Net income, current assets, and retained earnings were understated.
B.Net income was correct and current assets were understated.
C.Net income was understated and current liabilities were overstated.
D.Net income was overstated and current assets were understated.
9.On June 15, 2004, Stile Corporation accepted delivery of merchandise which it purchased on account. As of June 30, Stile had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2004 would be
A.Assets and stockholders' equity were overstated but liabilities were not affected.
B.Stockholders' equity was the only item affected by the omission.
C.Assets, liabilities, and stockholders' equity were understated.
D.None of these.