Question 1

On June 1,Year 2,Carolina Company collected a $24,000 note receivable that had been issued on June 1,Year 1.The note carried a 6% interest rate.On June 1,Year 2,the company will recognize interest revenue in the amount of $1,440.

Accepted Answer

Only the interest earned during Year 2 of $600 (calculated below) should be recognized in Year 2. The interest earned during Year 1 of $840 (calculated below) should be accrued at the end of Year 1.
Recognized in Year 1 (June through December):
Interest revenue = $24,000 × 6% × 7/12 = $840
Recognized in Year 2 (January through May):
Interest revenue = $24,000 × 6% × 5/12 = $600

Question 2

With the direct write-off method,writing off an account receivable is an asset use transaction.

Accepted Answer

Using the direct write-off method, a write-off decreases assets (accounts receivable) and decreases stockholders' equity (retained earnings. It increases expenses (uncollectible accounts expense), which decreases net income.

Question 3

Other things being equal,the longer a company's operating cycle,the higher the company's operating costs are likely to be.

Accepted Answer

The length of the operating cycle is the average time it takes a business to convert inventory to accounts receivable plus the time it takes to convert accounts receivable into cash. The longer the operating cycle takes, the more it costs the company.

Question 4

Chadwick Company's sales for Year 1 were $8,700,000.The ending balance of accounts receivable was $801,000 at the end of the year.During Year 1,Chadwick collected $8,400,000 on its accounts receivable.The accounts receivable turnover ratio for the year was 10.5.

Accepted Answer

Accounts receivable turnover ratio = Sales of $8,700,000 ÷ Accounts receivable of $801,000 = 10.9

Question 5

The operating cycle is the average time that a company spends acquiring inventory to sell.

Accepted Answer

The operating cycle is the average time it takes a business to convert inventory to accounts receivable plus the time it takes to convert accounts receivable into cash.

Question 6

The longer it takes to collect accounts receivable,the greater the implicit interest cost that is incurred.

Accepted Answer

There is an implicit interest cost associated with extending credit. When a customer is permitted to delay payment, the creditor forgoes the opportunity to invest the amount the customer owes.

Question 7

Many businesses find it more efficient to offer credit directly to customers rather than to accept third-party credit cards.

Accepted Answer

Maintaining accounts and notes receivable is expensive. In addition to uncollectible accounts expense, companies extending credit to their customers incur considerable costs for such clerical tasks as running background checks and maintaining customer records. On the other hand, the credit card company deducts a service fee (usually between 1% and 5%) from the gross amount of the sale and pays the merchant the net balance (gross amount of sale less credit card fee) in cash. However, in return, the merchant avoids the risk of uncollectible accounts, as well as the cost of maintaining customer credit records. Many businesses find it more efficient to accept third-party credit cards instead of offering credit directly to their customers.

Question 8

Making a loan to another party is considered an investing activity on the statement of cash flows.

Accepted Answer

Loaning cash is a cash outflow for investing activities.

Question 9

Collecting a credit card receivable is an asset source transaction.

Accepted Answer

Collection of a credit card receivable is an asset exchange transaction that increases assets (cash) and decreases assets (accounts receivable - credit card company).

Question 10

The direct write-off method overstates assets on the balance sheet.

Accepted Answer

The direct write-off method overstates assets (accounts receivable) because receivables are reported at face value rather than net realizable value.

Question 11

When a company accepts a credit card payment for a sale,the amount of sales revenue to be recorded is reduced by the amount of the credit card company's fee.

Accepted Answer

The answer of When a company accepts a credit card...

Question 12

The year-end adjustment to accrue interest on a note receivable is an asset source transaction.

Accepted Answer

The answer of The year-end adjustment to accrue interest on...

Question 13

A company that uses the direct write-off method must still prepare a year-end adjustment to estimate its uncollectible accounts.

Accepted Answer

The answer of A company that uses the direct write-off...

Quiz 7: Accounting for Receivables