Question 1

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts. What entry would Oswego make on April 12?

Accepted Answer

Under the gross method of accounting for cash discounts, sales and accounts receivable are recorded at the gross amount of the sale. The discount is only recognized if the payment is made within the discount period. Therefore, the correct entry records the full sale amount of $46,000 without deducting the discount upfront.

Question 2

Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for cash discounts. What entry would Harvey's make on April 12?

Accepted Answer

Harvey's Wholesale Company uses the net method of accounting for cash discounts, which means they record sales and receivables net of the cash discount. The terms 1/15, n/60 offer a 1% discount if paid within 15 days. Therefore, the sale is recorded at $46,000 less 1% ($460), which equals $45,540.

Question 3

Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for cash discounts. What entry would Harvey's make on April 23, assuming the customer made the correct payment on that date?

Accepted Answer

Since Harvey uses the net method of accounting for cash discounts, the initial sale is recorded with the discount in mind. Therefore, when the customer pays within the discount period, the payment is for the discounted amount, and the entry reflects the receipt of cash and the reduction in accounts receivable by the discounted amount.

Question 4

Harvey's Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the current year, with terms 1/15, n/60. Harvey uses the net method of accounting for cash discounts. What entry would Harvey's make on June 10, assuming the customer made the correct payment on that date?

Accepted Answer

The answer of Harvey's Wholesale Company sold supplies of $46,000...

Question 5

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts. What entry would Oswego make on June 10, assuming the customer made the correct payment on that date?

Accepted Answer

Since the payment was made after the discount period (1/15, n/60), the full amount of $46,000 is due. The correct entry is to debit Cash and credit Accounts Receivable for the full invoice amount, without any discounts applied.

Question 6

Memorex Disks sells computer disk drives with right-of-return privileges. Returns are material and reasonably predictable. Memorex should:

Accepted Answer

Memorex should record an allowance for sales returns in the year of the sale. This is because the returns are material and reasonably predictable, and therefore it is probable that some of the sales will be returned. Recording an allowance for sales returns will reduce the amount of revenue recognized in the period of the sale, and will also provide an estimate of the amount of returns that will need to be processed in the future. This approach is consistent with the matching principle, which requires that expenses be matched with the revenues they help to generate.

Question 7

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting accounts receivable and debiting:

Accepted Answer

The reduction in price given to the customer is considered a sales allowance, which is a reduction in the selling price of goods sold to customers. Therefore, the correct account to debit in this scenario would be sales allowances.

Question 8

Galaxy sells used videogames for cash and provides a one-week return right. Returns are material and reasonably predictable. Galaxy should:

Accepted Answer

Galaxy should recognize a refund liability associated with estimated returns. This approach follows the matching principle of accounting and ensures that the financial statement reflects the most accurate picture of the company's financial position. It also provides transparency to investors and creditors about potential future cash outflows related to returns. Options A, B, and D are not appropriate as they either delay recognition of revenue or do not provide for future cash outflows.

Question 9

Rusty Hardware makes only cash sales. It began 2018 with a credit balance of $32,000 in the refund liability account. Sales during 2018 were $600,000. Rusty estimates that 6% of all sales will be returned. During 2018, customers returned merchandise for credit of $28,000 to their accounts. 
-What is the balance in the allowance for sales returns account at the end of 2018?

Accepted Answer

$32,000 + 36,000($600,000 × 6%) - 28,000 = $40,000

Question 10

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. What is the correct entry for Flores on November 17, assuming the correct payment was received on that date?

Accepted Answer

The correct entry reflects the receipt of cash of $7,840, which is the $8,000 invoice less the 2% discount ($160), and reduces accounts receivable by the full invoice amount of $8,000, recognizing the $160 as a sales discount.

Question 11

On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for cash discounts. What entry would Cherokee make on December 10, assuming the correct payment was received on that date?

Accepted Answer

The answer of On November 10 of the current year,...

Question 12

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. What is the correct entry for Flores on November 10?

Accepted Answer

Under the gross method, sales and accounts receivable are recorded at the gross amount. The discount is only recorded if the payment is made within the discount period.

Question 13

Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom's would credit accounts receivable and debit:

Accepted Answer

If a customer refuses to accept an order due to the wrong material being shipped, it is considered a sales return. Tom's Textiles would debit sales returns and credit accounts receivable to reflect the return of the merchandise. Sales discounts and sales allowances are generally used for resolving customer disputes or offering discounts to incentivize sales, which do not apply in this scenario.

Question 14

On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for cash discounts. What entry would Cherokee make on November 10?

Accepted Answer

Since Cherokee Industries uses the net method of accounting for cash discounts, they record the sale at the net amount (after discount) if the payment is expected to be made within the discount period. The discount is 2% of $8,000, which is $160. Therefore, the net sale amount is $8,000 - $160 = $7,840.

Question 15

Wilson Company had the following cash balance items listed in its trial balance at 12/31/2018: $\begin{array}{lr}
\text {Peters on Savings and Loan: }&\$50,000\
\text {Right Bank: }&(5,000)\
\text {Clinton County Trust Bank: }&10,000\
\end{array}$
 If Wilson reports under U.S. GAAP, its 12/31/2018 balance sheet would show what cash balance?

Accepted Answer

$50,000 + 10,000 = $60,000. The ($5,000) overdraft would be reported as a current liability.

Question 16

On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 2/10, n/30. Cherokee uses the net method of accounting for cash discounts. What entry would Cherokee make on November 17, assuming the correct payment was received on that date?

Accepted Answer

Since Cherokee Industries uses the net method of accounting for cash discounts, the initial sale would have been recorded at the net amount (assuming the discount would be taken). Therefore, when the payment is received within the discount period, the payment is recorded at the net amount, which is $8,000 less 2% discount ($160), resulting in a cash receipt of $7,840. There's no need to record a sales discount since the sale was initially recorded at the net amount.

Question 17

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. What is the correct entry for Flores on December 5, assuming the correct payment was received on that date?

Accepted Answer

Since the payment was made after the discount period (2/10, n/30), the customer pays the full amount of $8,000. The gross method records sales at the invoice amount; discounts are recorded only when they are taken. The customer did not take advantage of the discount, so the full amount is paid and recorded.

Question 18

False Value Hardware began 2018 with a credit balance of $32,000 in the allowance for sales returns account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2018, customers returned merchandise for credit of $28,000 to their accounts.
- What is the balance in the allowance for sales returns account at the end of 2018?

Accepted Answer

$32,000 + 39,000($650,000 × 6%) - 28,000 = $43,000

Question 19

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts. What entry would Oswego make on April 23, assuming the customer made the correct payment on that date?

Accepted Answer

The correct entry reflects the payment within the discount period, reducing the receivable by the full amount and recognizing the discount taken by the customer.

Question 20

False Value Hardware began 2018 with a credit balance of $32,000 in the allowance for sales returns account. Sales and cash collections from customers during the year were $650,000 and $610,000, respectively. False Value estimates that 6% of all sales will be returned. During 2018, customers returned merchandise for credit of $28,000 to their accounts. 
-False Value Hardware's 2018 income statement would report net sales of:

Accepted Answer

$650,000 - 39,000($650,000 × 6%) = $611,000

Quiz 7: Cash and Receivables