Practice Problems
Self-test
True-false
Indicate whether each of the following statements is true or false.
1. The percentage-of-sales method estimates the uncollectible accounts from the ending balance in Accounts Receivable.
2. Under the allowance method, uncollectible accounts expense is recognized when a specific customer's account is written off.
3. Bank credit card sales are treated as cash sales because the receipt of cash is certain.
4. Liabilities result from some future transaction.
5. Current liabilities are classified as clearly determinable, estimated, and contingent.
6. A dishonored note is removed from Notes Receivable, and the total amount due is recorded in Accounts Receivable.
7. When an interest-bearing note is given to a bank when taking out a loan, the difference between the cash proceeds and the maturity amount is debited to Discount on Notes Payable.
Multiple-choice
Select the best answer for each of the following questions.
1. Which of the following statements is false?
a. Any existing balance in the Allowance for Uncollectible Accounts is ignored in calculating the uncollectible accounts expense under the percentage-of-sales method except that the allowance account must have a credit balance after adjustment.
b. The percentage-of-receivables method may use either an overall rate or a different rate for each age category.
c. The Allowance for Uncollectible Accounts reduces accounts receivable to their net realizable value.
d. A write-off of an account reduces the net amount shown for accounts receivable on the balance sheet.
e. None of the above.
2. Hunt Company estimates uncollectible accounts using the percentage-of-receivables method and expects that 5 percent of outstanding receivables will be uncollectible for 2010. The balance in Accounts Receivable is USD 200,000, and the allowance account has a USD 3,000 credit balance before adjustment at year-end. The uncollectible accounts expense for 2010 will be:
a. USD 7,000.
b. USD 10,000.
c. USD 13,000.
d. USD 9,850.
e. None of the above.
3. Which type of company typically has the longest operating cycle?
a. Service company.
b. Merchandising company.
c. Manufacturing company.
d. All equal.
4. Maxwell Company records its sales taxes in the same account as sales revenues. The sales tax rate is 6 percent. At the end of the current period, the Sales account has a balance of USD 265,000. The amount of sales tax payable is:
a. USD 12,000.
b. USD 15,000.
c. USD 15,900.
d. USD 18,000.
5. Dawson Company sells fax machines. During 2010, the company sold 2,000 fax machines. The company estimates that 5 percent of the machines require repairs under warranty. To date, 30 machines have been repaired. The estimated average cost of warranty repairs per defective fax machine is USD 200. The required amount of the adjusting entry to record estimated product warranty payable is:
a. USD 400,000.
b. USD 6,000.
c. USD 14,000.
d. USD-0-.
6. To compute interest on a promissory note, all of the following elements must be known except:
a. The face value of the note.
b. The stated interest rate.
c. The name of the payee.
d. The life of the note.
e. None of the above.
7. Keats Company issued its own USD 10,000, 90-day, non interest-bearing note to a bank. If the note is discounted at 10 percent, the proceeds to Keats are:
a. USD 10,000.
b. USD 9,000.
c. USD 9,750.
d. USD 10,250.
e. None of the above.
Check your answers on the next page.