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Exam 7: Cash and Receivables

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Question 1

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Briefly explain why the direct write-off of uncollectible accounts is not permitted by GAAP if bad debts are material.

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The direct write-off method is not permitted by GAAP if bad debts are material because it overstates total assets, retained earnings, and net income. The direct write-off method may be used if bad debts are immaterial.

Question 2

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As of December 31, 2017, Gill Co. reported accounts receivable of $216,000 and an allowance for uncollectible accounts of $8,400. During 2018, accounts receivable increased by $22,000 (that change includes $7,800 of bad debts that were written off) . An analysis of Gill Co.'s December 31, 2018, accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. Bad debt expense for 2018 would be:

A) $6,540.
B) $7,800.
C) $7,140.
D) None of these answer choices are correct.

E) B) and C)
F) All of the above

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Question 3

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Recognizing sales returns only when merchandise is returned could result in an overstatement of income in the period of the related sale.

A company uses the allowance method to account for bad debts. What is the effect on each of the following accounts of the collection of an account previously written off? $\begin{array}{lcc}&\text { Allowance for } & \text { Accounts } \\&\text { Uncollectible Accounts } & \text { Receivable } \\\text { a. } & \text { Increase } & \text { Decrease } \\\text { b. } & \text { No effect } & \text { Decrease } \\\text { c. } & \text { Increase } & \text { No effect } \\\text { d. } & \text { No effect } & \text { No effect }\end{array}$

Which of the following is true about reporting cash under IFRS?

Beethoven Music Company started business in March 2018. Sales for its first year were $400,000. Beethoven priced its merchandise to yield a 45% gross profit based on sales dollars. Industry statistics suggest that 10% of the merchandise sold to customers will be returned. Beethoven estimated its sales returns based on the industry average. During the year, customers returned $30,000 in sales. Beethoven uses a perpetual inventory system. Required: Prepare summary journal entries to record (1) sales, (2) sales returns, and (3) the year-end adjusting entry for estimated sales returns. Assume that cash has not yet been collected for merchandise that could yet be returned.

-Using a T-account for the allowance for doubtful accounts, identify the changes in the account during fiscal year 2015.

-How could a company with receivables like HP be able to manage earnings in applying generally accepted accounting principles?

Which of the following is not true regarding accounting for transfers of receivables under IFRS?

The following note disclosure appeared in a recent annual report of Halliburton: Our receivables are generally not collateralized. Included in notes and accounts receivable are notes with varying interest rates totaling $12 million at December 31. At December 31, 39% of our consolidated receivables related to our United States government contracts, primarily for projects in the Middle East -Explain the reason that Halliburton indicates that its receivables are generally not collateralized. What significance does this have to the reader?

Describe some key elements of an internal control system for cash.

Assume a company has been maintaining a receivables factoring program for the past five years and has been experiencing the same level of sales, factoring, and bad debts over that period. Customers typically pay their receivables within 60 days. Which of the following is true with respect to the current period (all else equal) ?

Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period for which cash has already been collected from customers.

The journal entry to record the replenishment of a petty cash fund includes a credit to the petty cash fund.

AT&T's financial statements for the 2015 and 2014 fiscal years contained the following information: Balance Sheets ($ in millions) 2015 2014 Current assets: Accounts receivable, net of allowances for doubtful accounts of $704 and $454 $16,532 $14,527 Income Statements ($ in millions) 2015 2014 Revenues $146,801 $132,447 In addition, the statement of cash flows disclosed bad debt expense of $1,416 million in 2015 and $1,032 million in 2014. Required: 1. Determine the amount of actual bad debt write-offs made during 2015. 2. Determine the amount of cash collected from customers during 2015. 3. Compute the receivables turnover ratio for 2015.

-What kind of account is the provision for doubtful accounts in HP's financial statements?

A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity date. Mild Max would debit:

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

On July 1, 2018, Cromartie Furniture established a $150 petty cash fund. A check for $150 was made out to the petty cash custodian. During July, the petty cash custodian paid the following bills from the petty cash fund: $\begin{array}{lr}\text { Office supplies } & \$ 36 \\\text { Postage } & 22 \\\text { Delivery charges } & 40 \\\text { Bottled water } & 28 \\\text { Total } & \$ 126\end{array}$ -At the end of July the petty cash fund was replenished. The journal entry to replenish the petty cash fund includes:

NOTE 5: ALLOWANCE FOR LOAN LOSSES The allowance for loan loss is maintained at a level to absorb probable losses inherent in the loan portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans. The following is a summary of the changes in the allowances for loan losses for three years: Winchester also reported (in thousands) in its comparative balance sheet that it held Loans receivable, net, of $6,869,11 and $6,819,209 at December 31, 2018, and December 31, 2017, respectively. -For each posted entry in the Allowance account during 2018, indicate the remaining entry(ies) in other accounts.