Multiple Choice Questions

Use the following information for questions 1–4. Fred’s Supply Store just received its monthly bank statement from Local Street Bank. The bank gives a balance of $45,000. Fred’s accounting clerk has calculated that outstanding checks amount to $20,000. Fred’s Supply Store made a deposit of $5,000 on the last day of the month, and it was not included on the bank statement.

Bank service fees, not yet recorded on the store’s books, were shown on the statement as $35. The bank statement also included an NSF check returned from a new customer in the amount of $250.

1. What is the store’s true cash balance at the end of the month?

a. $25,000

b. $30,000

c. $29,715

d. $29,750

2. How should outstanding checks be treated on the bank reconciliation?

a. They should be deducted from the balance per books.

b. They should be added to the balance per books.

c. They should be deducted from the balance per bank.

d. They should be added to the balance per bank.

3. Which items would need to be recorded in Fred’s Supply Store’s accounting records?

a. Outstanding checks and the deposit in transit

b. NSF check

c. Bank service fee

d. Both NSF check and bank service fee

4. What was the cash balance in its accounting records before Fred’s Supply Store began the bank reconciliation?

a. $30,285

b. $30,250

c. $45,250

d. $25,285

Use the following information to answer multiple-choice questions 5 and 6. At the end of the year, before any adjustments are made, the accounting records for Sutton Company show a balance of $100,000 in accounts receivable. The allowance for uncollectible accounts has a remaining balance of $2,000. (This means last year’s estimate was too large by $2,000.) The company uses accounts receivable to estimate bad debts expense. An analysis of accounts receivable results in an estimate of $27,000 of uncollectible accounts.

5. The bad debts expense on the income statement for the year would be

a. $27,000.

b. $25,000.

c. $23,000.

d. $29,000.

6. Net realizable value of the receivables on the year-end balance sheet would be

a. $100,000.

b. $75,000.

c. $73,000.

d. $77,000.

7. Suppose a firm uses the percentage of sales method for estimating bad debts expense. The firm has credit sales for the year of $200,000 and a balance of $80,000 in accounts receivable. The firm estimates that 2% of its credit sales will never be collected. What is the bad debts expense for the year?

a. $1,600

b. $2,000

c. $4,000

d. $3,600

8. Scott Company uses the allowance method of accounting for bad debts. During May, the company found out that one of its largest customers filed for bankruptcy. If Scott Company decides to write off the customer’s account, what effect will that decision have on Scott Company’s net income for the period?

a. Bad debts expense will decrease income.

b. Writing off the receivable will decrease income.

c. Both a. and b. will happen.

d. There is no effect on net income.

9. Merry Maids, Inc., sells vacuum cleaners to McKenzie-Grace Corporation for $1,000. McKenzie-Grace pays Merry Maids with the company Visa card. Visa charges Merry Maids a 3% fee for all Visa sales. What is the net effect of this transaction on the accounting equation for Merry Maids?

a. Increase assets $1,000; increase retained earnings $1,000

b. Decrease assets $1,000; decrease retained earning $1,000

c. Increase assets $970; increase retained earnings $970

d. Not enough information