MGMT 200 Exam #2 (Purdue)| 110
QUESTIONS| WITH COMPLETE SOLUTION
Credit sales are recorded as
A. Debit Cash, credit Deferred Revenue
B. Debit Service Revenue, credit Accounts Receivable
C. Debit Cash, credit Service Revenue
D. Debit Accounts Receivable, credit Service Revenue Correct Answer: D
Identify the condition(s) that must exist for a sale and the related receivable to be recognized.
A. Collection of cash is probable
B. The company must have collected cash from at least one previous sale to the customer
C. Goods or services have been provided to the customer
D. Two of the other answers are conditions that must exist Correct Answer: D
Which of the following items are classified as receivables?
A. Tax refund claims
B. Amounts owed by customers
C. Amounts loaned and expected to be collected
D. All of the other answers are classified as receivables Correct Answer: D
Identify the likely disadvantage(s) of extending credit to customers
A. Delay or failure to collect cash
B. Lower profitability
C. Lower revenues
D. All of the other answers are disadvantages of extending credit to customers Correct Answer:
A
The Sales Returns account is an expense account
A. True
B. False Correct Answer: B
Which of the following computations would be used to compute Net Revenue?
A. Total Revenue + Accounts Receivable - Sales Discounts - Sales Allowances
B. Net Revenue + Sales Allowances - Sales Discounts
C. Total Revenue - Sales Discounts - Sales Allowances
D. Net Income - Change in Accounts Receivable Correct Answer: C
When customers purchase products on account, Knomark, Inc. offers them a 2% reduction in the
amount owed if they pay within 10 days. This is an example of a:
A. Bad debt
B. Sales discount
C. Sales return
D. Sales allowances Correct Answer: B
,When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.
A. True
B. False Correct Answer: A
The Sales Discounts account is an example of a contra revenue account.
A. True
B. False Correct Answer: A
A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales
Allowances.
A. True
B. False Correct Answer: B
If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000,
and sales allowances of $2,000, the income statement will report net revenues of $91,000.
A. True
B. False Correct Answer: A
LePage's Inc. shipped the wrong color of paint to a customer. The customer agreed to keep the
paint upon being offered a 15% price reduction. The price reduction is an example of a:
A. Trade discount
B. Sales discount
C. Sales allowance
D. Sales return Correct Answer: C
The net realizable value of accounts receivable is the full amount owed by customers
A. True
B. False Correct Answer: B
The purpose of recording an allowance for uncollectible accounts is to:
A. Record the sales returns and allowances
B. Report net sales conservatively
C. Report accounts receivable at net realizable value
D. Report accounts receivable for the total amount of sales in the period Correct Answer: C
At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for
uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts
receivable suggests that the allowance for uncollectible accounts should be 3% of accounts
receivable. The amount of the adjustment for uncollectible accounts would be
A. $6,540
B. $7,800
C. $7,140
D. $7,740 Correct Answer: A
At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and
in Allowance for Uncollectible Accounts of $1,000 (debit) before any adjustments. An analysis
, of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not
expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment
will be:
A. $1,000
B. $16,000
C. $14,000
D. $15,000 Correct Answer: D
At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for
Uncollectible Accounts has a credit balance of $2,500 before any year‐end adjustment. What
adjustment should Mark Inc. record for the estimated bad debts at the end of the year?
A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500
B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000
C. Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000
D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000
Correct Answer: B
A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older
accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older
accounts, the total estimate of uncollectible accounts is $2,000.
A. True
B. False Correct Answer: B
Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is
past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of
receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10%
of the amount past due for up to 180 days, and 20% of the amount past due for more than 180
days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for
bad debt expense, what is the ending balance of the allowance account?
A. $29,000
B. $28,000
C. $27,000
D. $26,000 Correct Answer: D
Under the allowance method, when a company writes off an account receivable as an actual bad
debt, it records an expense
A. True
B. False Correct Answer: B
Cochrane, Inc. accounts for bad debts using the allowance method. On June 1, Cochrane wrote
off $2,500 customer account. Based on Cochrane's estimation, the customer will never pay any
portion of the balance in his account. What effect will this write‐off have on Cochrane's balance
sheet at the time of the write‐off?
A. An increase to stockholders' equity and a decrease to liabilities
B. No effect
C. An increase to assets and an increase to stockholders' equity
QUESTIONS| WITH COMPLETE SOLUTION
Credit sales are recorded as
A. Debit Cash, credit Deferred Revenue
B. Debit Service Revenue, credit Accounts Receivable
C. Debit Cash, credit Service Revenue
D. Debit Accounts Receivable, credit Service Revenue Correct Answer: D
Identify the condition(s) that must exist for a sale and the related receivable to be recognized.
A. Collection of cash is probable
B. The company must have collected cash from at least one previous sale to the customer
C. Goods or services have been provided to the customer
D. Two of the other answers are conditions that must exist Correct Answer: D
Which of the following items are classified as receivables?
A. Tax refund claims
B. Amounts owed by customers
C. Amounts loaned and expected to be collected
D. All of the other answers are classified as receivables Correct Answer: D
Identify the likely disadvantage(s) of extending credit to customers
A. Delay or failure to collect cash
B. Lower profitability
C. Lower revenues
D. All of the other answers are disadvantages of extending credit to customers Correct Answer:
A
The Sales Returns account is an expense account
A. True
B. False Correct Answer: B
Which of the following computations would be used to compute Net Revenue?
A. Total Revenue + Accounts Receivable - Sales Discounts - Sales Allowances
B. Net Revenue + Sales Allowances - Sales Discounts
C. Total Revenue - Sales Discounts - Sales Allowances
D. Net Income - Change in Accounts Receivable Correct Answer: C
When customers purchase products on account, Knomark, Inc. offers them a 2% reduction in the
amount owed if they pay within 10 days. This is an example of a:
A. Bad debt
B. Sales discount
C. Sales return
D. Sales allowances Correct Answer: B
,When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.
A. True
B. False Correct Answer: A
The Sales Discounts account is an example of a contra revenue account.
A. True
B. False Correct Answer: A
A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales
Allowances.
A. True
B. False Correct Answer: B
If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000,
and sales allowances of $2,000, the income statement will report net revenues of $91,000.
A. True
B. False Correct Answer: A
LePage's Inc. shipped the wrong color of paint to a customer. The customer agreed to keep the
paint upon being offered a 15% price reduction. The price reduction is an example of a:
A. Trade discount
B. Sales discount
C. Sales allowance
D. Sales return Correct Answer: C
The net realizable value of accounts receivable is the full amount owed by customers
A. True
B. False Correct Answer: B
The purpose of recording an allowance for uncollectible accounts is to:
A. Record the sales returns and allowances
B. Report net sales conservatively
C. Report accounts receivable at net realizable value
D. Report accounts receivable for the total amount of sales in the period Correct Answer: C
At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for
uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts
receivable suggests that the allowance for uncollectible accounts should be 3% of accounts
receivable. The amount of the adjustment for uncollectible accounts would be
A. $6,540
B. $7,800
C. $7,140
D. $7,740 Correct Answer: A
At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and
in Allowance for Uncollectible Accounts of $1,000 (debit) before any adjustments. An analysis
, of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not
expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment
will be:
A. $1,000
B. $16,000
C. $14,000
D. $15,000 Correct Answer: D
At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for
Uncollectible Accounts has a credit balance of $2,500 before any year‐end adjustment. What
adjustment should Mark Inc. record for the estimated bad debts at the end of the year?
A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500
B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000
C. Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000
D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000
Correct Answer: B
A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older
accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older
accounts, the total estimate of uncollectible accounts is $2,000.
A. True
B. False Correct Answer: B
Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is
past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of
receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10%
of the amount past due for up to 180 days, and 20% of the amount past due for more than 180
days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for
bad debt expense, what is the ending balance of the allowance account?
A. $29,000
B. $28,000
C. $27,000
D. $26,000 Correct Answer: D
Under the allowance method, when a company writes off an account receivable as an actual bad
debt, it records an expense
A. True
B. False Correct Answer: B
Cochrane, Inc. accounts for bad debts using the allowance method. On June 1, Cochrane wrote
off $2,500 customer account. Based on Cochrane's estimation, the customer will never pay any
portion of the balance in his account. What effect will this write‐off have on Cochrane's balance
sheet at the time of the write‐off?
A. An increase to stockholders' equity and a decrease to liabilities
B. No effect
C. An increase to assets and an increase to stockholders' equity
