ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 7
Reporting & Analyzing Receivables and Investments
Dr. Fred Barbee

Part I: Multiple-Choice Questions
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1. Which accounting principle requires reporting credit card expense in the same period as its related credit card sale?
a.  Materiality
b.  Matching
c.  Going Concern
d.  Historical Cost
e.  Business Entity
2. A promissory note received from a customer in exchange for an account receivable:
a.  Is a cash equivalent for the recipient.
b.  Is an account receivable for the recipient.
c.  Is a note receivable for the recipient.
d.  Is a short-term investment for the recipient.
e.  Is a note payable for the recipient.
3. The person who signs a note receivable and promises to pay the principal and interest is the:
a.  Maker
b.  Payee
c.  Holder
d.  Receiver
e.  Owner
4. A company receives a 10%, 90-day note for $1,500. The total interest on the note is:
a.  $37.50
b.  $150.00
c.  $75.00
d.  $50.00
e.  $87.50
5. The materiality principle
a.  States that an amount can be ignored if its effect on financial statements is unimportant to the user.
b.  Requires use of the allowance method for bad debts.
c.  Requires use of the direct write-off method for bad debts.
d.  States that bad debts not be written off.
e.  Requires that expenses be reported in the same period as the sales they helped produce.
6. If the balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt being written off, the entry to record the write-off against the allowance account results in:
a.  An increase in the expenses of the current period.
b.  A reduction in current assets.
c.  A reduction in equity.
d.  No effect on the expenses of the current period.
e.  A reduction in current liabilities.
7. On October 29 of the current year, a company concluded that a customer's $4,400 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on this company's current year net income and total assets assuming the allowance method is used to account for bad debts.
a.  Decrease in net income; no effect on total assets.
b.  No effect on net income; no effect on total assets.
c.  Decrease in net income; decrease in total assets.
d.  Increase in net income; no effect on total assets.
e.  No effect on net income; decrease in total assets.
8. The amount of bad debt expense can be estimated by:
a.  The percent of sales method.
b.  The percent of accounts receivable method.
c.  The aging of accounts receivable method.
d.  Only b and c.
e.  All of the above
9. An accounting procedure that (1) estimates and reports bad debts expense from credit sales during the period of the sales, and (2) reports accounts receivable at the amount of cash proceeds that is expected from their collection is the:
a.  Allowance method of accounting for bad debts.
b.  Aging of notes receivable.
c.  Adjustment method for uncollectible debts.
d.  Direct write-off method of accounting for bad debts.
e.  Cash basis method of accounting for bad debts.
10. Available-for-sale-securities:
a.  Can be either debt or equity securities.
b.  Are not actively managed and traded.
c.  Are purchased to earn interest, dividends, and/or for value appreciation.
d.  Are securities not classified as trading or held-to-maturity.
e.  All of the above.

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Part II: Short Problems

Short Problem #1

A company reports the following results in its financial statements:

Year 3
Year 2
Year 1
Net Sales
Accounts Receivable, Ending Balance

Calculate this company's accounts receivable turnover for Year 2 and Year 3. Compare these two results and give a possible explanation for any significant change.

Short Problem #2

At December 31 of the current year, a company reported the following:

Total sales for current year: $780,000, includes $160,000 in cash sales.
Accounts receivable balance at Dec. 31, current year: $190,000
Bad debts written off during the current year: $6,800
Balance of Allowance for Doubtful Accounts at January 1, current year: $8,300

Prepare the necessary adjusting entries to record bad debts expenses assuming this company's bad debts are estimated to equal:

  1. 1.5% of credit sales
  2. 5% of accounts receivable.

Short Problem #3

Prepare journal entries for the following transactions of Viking Company:

April 1 Sold $2,500 of merchandise to Arthur Co., receiving a 10%, 90-day, $2,500 note.
April 15 Wrote off $1,500 owed by Network Company. (The allowance method of accounting for bad debts is used.)
April 30 Received a$6,800, 12%, 30-day note receivable from Calvin Company in exchange for its $6,800 account receivable.
May 30 The note received from Calvin on April 30 was collected in full.
July 15 Network Company paid $1,000 of the amount written off on April 15.

Part III: Problems
Prepare journal entries to record the following investment-related transactions of a company for its first year of operations:

a. On May 4, the company purchased 600 shares of Orbital Company Stock at $120 per share plus a $750 brokerage fee as a short-term investment in an available-for-sale security.
b. On July 1, received a $2.50 per share cash dividend on the Orbital Company stock purchased in transaction (a).
c. On September 15, sold 300 shares of Orbital Company stock purchased in transaction (a) for $125 per share, less a $450 brokerage fee.
d. The December 31 end-of-year or market value of the company's short-term investments consisting solely of the Orbital Company stock, equaled $37,475.


Last Modified September 19, 2002