File: ch08, Chapter 8: Reporting and Analyzing Receivables
Multiple Choice
1. Kersee Company on June 15 sells merchandise on account to Soo Eng Co. for $1,000, terms 2/10,
n/30. On June 20 Eng Co. returns merchandise worth $300 to Kersee Company. On June 24 payment is
received from Eng Co. for the balance due. What is the amount of cash received?
a)
$700.
b)
$680.
c)
$686.
d)
None of the above.
Ans: c
Response A: The amount received on June 24 is $686.
Because payment is made within the discount
period of 10 days, the amount received is $700 ($1,000 – return of $300) minus the discount of $14
($700 X 2%), or $686.
Response B: The amount received on June 24 is $686.
Because payment is made within the discount
period of 10 days, the amount received is $700 ($1,000 – return of $300) minus the discount of $14
($700 X 2%), or $686.
Response C: Correct!
Response D: The amount received on June 24 is $686.
Because payment is made within the discount
period of 10 days, the amount received is $700 ($1,000 – return of $300) minus the discount of $14
($700 X 2%), or $686.
2. Net credit sales for the month are $800,000. The accounts receivable balance is $160,000. The
allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. If
the Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment, what is the
balance after adjustment?
a)
$12,000.
b)
$7,000.
c)
$17,000.
d)
$31,000.
Ans: a
Response A: Correct!
Response B: This amount represents the amount of the adjusting entry that would be required.
The
beginning balance of $5,000 plus a credit of $7,000 would result in the desired ending balance of
$12,000.
Response C: This amount would result if the $12,000 estimate were used as the amount for the adjusting
entry.
The $5,000 beginning balance plus a $12,000 credit would result in a $17,000 credit balance. But
this is $5,000 more than the desired balance.
Response D: The amount of the estimate from the percentage of receivables basis, in this case $12,000
($160,000 X 7.5%), is the desired ending balance in the Allowance for Doubtful Accounts.
3. In 2007 Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2007,
Allowance for Doubtful Accounts had a credit balance of $18,000. During 2007, $30,000 of
uncollectible accounts receivable were written off. Past experience indicates that the allowance should
be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable
balance at December 31 was $200,000, what is the required adjustment to the Allowance for Doubtful
Accounts at December 31, 2007?