Question 1

Receivables can be used to obtain cash by either selling them or using them as security for a loan.

Accepted Answer

Receivables can be sold to a third-party factoring company, which provides cash in exchange for the right to collect on the receivables. Receivables can also be pledged as collateral for a loan from a bank or other lending institution. Both options allow a company to access cash quickly, although they may result in a loss of some of the value of the receivables due to fees or interest charges.

Question 2

The maturity date of a note refers to the date the note must be repaid.

Accepted Answer

The maturity date of a note is the date by which the borrower must repay the principal amount and any accumulated interest to the lender.

Question 3

TechCom's customer, RDA, paid off an $8,300 balance on its account receivable. TechCom should record the transaction as a debit to Accounts Receivable-RDA and a credit to Cash.

Accepted Answer

TechCom should record the transaction as a debit to Cash and a credit to Accounts Receivable-RDA, reflecting the increase in cash and the decrease in the amount owed by RDA.

Question 4

The person that borrows money and signs a promissory note is called the payee.

Accepted Answer

The person that borrows money and signs a promissory note is called the borrower or debtor. The payee is the person or entity that will receive the payment from the borrower or debtor.

Question 5

Sellers generally prefer to receive notes receivable rather than accounts receivable when the credit period is long and the receivable is for a large amount.

Accepted Answer

Sellers prefer notes receivable over accounts receivable when the credit period is long and the receivable is for a large amount because a note receivable legally binds the buyer to make payment on a specific date and includes interest, whereas an account receivable does not have a set payment date or interest. This provides more security and predictability for the seller.

Question 6

The process of using accounts receivable as security for a loan is known as factoring accounts receivable.

Accepted Answer

Factoring accounts receivable involves selling the receivables to a third party at a discount, not using them as security for a loan. Using receivables as security for a loan is called pledging.

Question 7

If a credit card sale is made, the seller can either debit Cash or debit Accounts receivable at the time of the sale depending on the type of credit card.

Accepted Answer

If the credit card is a bank credit card, the seller will debit Cash. If it is a third-party credit card, the seller will debit Accounts receivable.

Question 8

Since pledged accounts receivables only serve as collateral for a loan and are not sold, it is not necessary to disclose the pledging.

Accepted Answer

It is necessary to disclose the pledging of accounts receivables even if they are serving as collateral for a loan and not being sold. This is because the pledging affects the financial position and creditworthiness of the company. Disclosure allows investors and creditors to understand the level of risk associated with the company's financing activities.

Question 9

A promissory note is a written promise to pay a specified amount of money either on demand or at a definite future date.

Accepted Answer

A promissory note is indeed a written promise to pay a specified amount of money either on demand or at a definite future date.

Question 10

Installment accounts receivable are classified as current assets, even though the installment period is more than one year, if the seller regularly offers customers such terms.

Accepted Answer

This is because installment accounts receivable are expected to be collected within one year, regardless of the length of the installment period, as long as they are part of the seller's regular business practices.

Question 11

Accounts receivable occur from credit sales to customers.

Accepted Answer

Accounts receivable represent the amount of money owed to a company for goods or services sold on credit to customers.

Question 12

A company borrowed $1,000 by signing a six month promissory note at 5% interest. The total amount of interest is $25.

Accepted Answer

The total interest can be calculated using the formula:
Total Interest = (Principal x Rate x Time)

In this case, we have:

Principal = $1,000
Rate = 5% = 0.05
Time = 6 months = 0.5 years

Total Interest = ($1,000 x 0.05 x 0.5) = $25

Therefore, the given statement is true.

Question 13

Companies can report credit card expense as a discount deducted from sales or as a selling expense.

Accepted Answer

Companies have the option to report credit card expenses as a discount deducted from sales or as a selling expense on their financial statements. This can affect how the expenses impact the company's bottom line and net income.

Question 14

The quality of receivables refers to the likelihood of collection without loss.

Accepted Answer

The quality of receivables reflects the probability of receiving payment without incurring a loss.

Question 15

A company factored $35,000 of its accounts receivable and was charged a 2% factoring fee. The journal entry to record this transaction would include a debit to Cash of $35,000, a debit to Factoring Fee Expense of $700, and credit to Accounts Receivable of $35,700.

Accepted Answer

The correct journal entry would include a debit to Cash for $34,300 (which is $35,000 minus the 2% factoring fee of $700), a debit to Factoring Fee Expense of $700, and a credit to Accounts Receivable of $35,000. The total debits equal the total credits, maintaining the balance in the accounting equation.

Question 16

As long as a company accurately records total credit sales information, it is not necessary to have separate accounts for specific customers.

Accepted Answer

Separate accounts for specific customers are necessary for tracking individual balances, managing credit risk, and providing detailed transaction history, which cannot be achieved by only recording total credit sales.

Question 17

A company borrowed $6,000 by signing a 4-month promissory note at 12%. The total interest on the note is $720.

Accepted Answer

The total interest on the note is calculated using the formula: Interest = Principal × Rate × Time. Here, Principal = $6,000, Rate = 12% per annum (or 0.12), and Time = 4 months (or 4/12 year). So, Interest = $6,000 × 0.12 × (4/12) = $240.

Question 18

If a customer owes interest on accounts receivable, Interest Revenue is debited and Accounts Receivable is credited.

Accepted Answer

Interest Revenue should be credited, not debited, when recording interest earned on accounts receivable, as it increases the company's income. Accounts Receivable is debited to reflect the increase in the amount owed by the customer.

Question 19

Credit sales are recorded by crediting an Accounts Receivable.

Accepted Answer

Credit sales are recorded by debiting Accounts Receivable (to increase the asset) and crediting Sales Revenue (to record the income).

Question 20

The formula for computing interest on a note is principal of the note times the annual interest rate times time expressed in fraction of year.

Accepted Answer

This is the correct formula for computing interest on a note.

Quiz 9: Accounting for Receivables