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Lesson 5 - Intermediate Accounting 1 A04B

Table 5-1

Top Hat, Inc Unadjusted Trial Balance

Year 5

Sales$600,000

Ending Accounts Receivable 180,000

Ending Allowance for Uncollectible 6,200CR

Bad Debt Expense 5,000

Estimated Uncollectible 4%

1.RefertoTable 5-1.If Top Hat uses the sales revenue approach for estimating bad debt expense, after the proper adjustments to the accounts are recorded, the Allowance for Uncollectible account should show a balance of:

a.$6,200

b.$7,200

c.$11,200

d.$25,200

2.RefertoTable 5-1.If Top Hat uses the gross accounts receivable approach for estimating bad debt expense, after the proper adjustments to the accounts are recorded, the Allowance for Uncollectible account should show a balance of:

a.$6,200

b.$7,200

c.$11,200

d.$25,200

3.When a specific account becomes uncollectible, the Accounts Receivable account is credited and which one of the following accounts is debited?

a.$6,200

b.$7,200

c.$11,200

d.$25,200

4.When goods are returned by customers, the seller will debit ______ and credit Accounts Receivable.

a. Allowance for Uncollectible

b.Sales

c.Sales Discounts

d.Sales Returns and Adjustments

Table 5-2

The Gerner Corporation sells to customers on a note basis with 10% credit terms with interest payable quarterly. All notes are due in one year.Gerner made the following sales on April 1, Year 6.

Customer Note MaturityInterest DueInterest Rate

Potts$50,000Quarterly10%

Larabee50,000NANone

Future ValuePresent Value

Of $50,000 inof $50,000 for

One year:One year:

$55,191$45,298

Note: To encourage sales, Larabee was given a special deal on interest.

5.RefertoTable 5-2.Which one of the following entries would record the sale to Larabee?

a.DR Notes Receivable55,191

CR Sales55,191

b.DR Notes Receivable50,000

CR Sales50,000

c.DR Notes Receivable45,298

CR Sales45,298

d.DR Notes Receivable45,298

DR Interest Receivable4,702

CR Sales50,000

6.RefertoTable 5-2.As of June 30, Year 6, which one of the following entries will be made to record the interest earned, but not yet received, by Gerner on the Potts note?

a.DR Accrued InterestReceivable1,250

CR Interest Income1,250

b.DR Cash1,250

CR Interest Income1,250

c.DR Cash1,132

CR Accrued Interest Receivable1,132

d.DR Notes Receivable - Potts 1,132

CR Interest Income1,132

7.RefertoTable 5-2.As of June 30, Year 6, which one of the following entries will be made to record the interest earned, but not yet received, by Gerner on the Larabee note?

a.DR Notes Receivable- Larabee1,132

CR Interest Income1,132

b.DR Accrued Interest Receivable1,250

CR Interest Income1,250

c.DR Cash1,250

CR Interest Income1,250

d.There is no entry because the note is non-interest bearing.

8.ABC, Inc. enters into an arrangement with Matt D Corporation whereby Matt D will assume $100,000 of ABC's receivables for 6% fee. Assuming that the transaction has a factoring arrangement with recourse and a $9,000 holdback, which one of the following entries will ABC make to record this transaction?

a.DR Cash100,000

CR Accounts Receivable100,000

b.DR Cash91,000

DRInterest Expense9,000

CR Accounts Receivable100,000

c.DR Cash85,000

DR Due from Matt D. Corp9,000

DR Interest Expense6,000

CR Accounts Receivable100,000

d.DRCash85,000

DR Interest Expense15,000

CR Due to Matt D Corp100,000

9.ABC, Inc. enters into an arrangement with Matt D Corporation whereby Matt D will assume $100,000 of ABC's receivables for 6% fee. Assuming that the transaction was a collateralized loan, which one of the following entries will ABC make to record this transaction?

a.DR Cash94,000

DR Prepaid Interest6,000

CR Accounts Receivable100,000

b.DR Cash94,000

DRInterest Expense6,000

CR Loan Payable - Matt D100,000

c.DR Cash94,000

DR Prepaid Interest 6,000

CR Loan Payable - Matt D100,000

d.DRCash94,000

CR Due to Matt D Corp94,000

10.Paula Smith accepted a six month 9%, $10,000 Note Receivable from a customer on June 1. Smith has an arrangement with the Regency Bank to discount selected customer notes at 12%. If the note were discounted on July 1 under the terms of agreement with Regency Bank, which one of the following journal entries would Smith record?

a.DR Cash10,000

CR Notes Receivable10,000

b.DR Cash9,928

CR Note Payable - Regency Bank9,928

c.DR Cash9,928

DR Interest Expense 72

CR Notes Receivable10,000

d.DRCash9,928

DR Interest Expense 72

CR Note Payable - Regency Bank10,000

11.Cook Industries purchased a machine on January 2, Year 5, for $100,000. It paid $20,000 down and financed the balance over 5 years at Fidelity Bank. Terms of the loan were 10% interest payable on December 31 each year with a required $16,000 principal payment. Year 8 proved to be a difficult one and on December 1, Cook negotiated a debt restructuring with Fidelity Bank. The settlement calls for a cash payment of accrued interest plus $4,000 on December 1 and the transfer of 400 acres of land held by Cook that cost $15,000. The land has a current market value of $22,000. Which one of the following entries would be made to record the settlement on Cook's books?

a.DR Note Payable - Fidelity Bank 32,000

CR Cash4,000

CR Land15,000

CR Extraordinary Gain on Debt Restr.13,000

b.DR Note Payable - Fidelity Bank 32,000

DR Interest Payable2,933

CR Cash6,933

CR Land22,000

CR Extraordinary Gain on Debt Restr.6,000

c.DR Note Payable - Fidelity Bank 32,000

DR Interest Payable2,933

CR Cash4,000

CR Land22,000

CR Extraordinary Gain on Debt Restr.8,933

d.DRNote Payable - Fidelity Bank26,000

CR Cash4,000

CR Land22,,000

12.Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported income tends to:

a. become highly volatile

b.decrease

c.increase

d.remain the same

Lesson 5 - Intermediate Accounting 1 A04B Table 5-1 Top Hat, Inc Unadjusted Trial Balance Sales Ending Accounts Receivable Ending Allowance for Uncollectible Bad Debt Expense Estimated Uncollectible Year 5 $600,000 180,000 6,200CR 5,000 4% 1. Refer to Table 5-1. If Top Hat uses the sales revenue approach for estimating bad debt expense, after the proper adjustments to the accounts are recorded, the Allowance for Uncollectible account should show a balance of: a. $6,200 b. $7,200 c. $11,200 d. $25,200 2. Refer to Table 5-1. If Top Hat uses the gross accounts receivable approach for estimating bad debt expense, after the proper adjustments to the accounts are recorded, the Allowance for Uncollectible account should show a balance of: a. $6,200 b. $7,200 c. $11,200 d. $25,200 3. When a specific account becomes uncollectible, the Accounts Receivable account is credited and which one of the following accounts is debited? a. $6,200 b. $7,200 c. $11,200 d. $25,200 4. When goods are returned by customers, the seller will debit ______ and credit Accounts Receivable. a. Allowance for Uncollectible b. Sales c. Sales Discounts d. Sales Returns and Adjustments Table 5-2 The Gerner Corporation sells to customers on a note basis with 10% credit terms with interest payable quarterly. All notes are due in one year. Gerner made the following sales on April 1, Year 6. Customer Potts Larabee Note Maturity $50,000 50,000 Interest Due Quarterly NA Interest Rate 10% None Future Value Of $50,000 in One year: $55,191 Present Value of $50,000 for One year: $45,298 Note: To encourage sales, Larabee was given a special deal on interest. 5. Refer to Table 5-2. Which one of the following entries would record the sale to Larabee? a. DR Notes Receivable 55,191 CR Sales 55,191 b. DR Notes Receivable 50,000 CR Sales 50,000 c. DR Notes Receivable 45,298 CR Sales 45,298 d. DR Notes Receivable 45,298 DR Interest Receivable 4,702 CR Sales 50,000 6. Refer to Table 5-2. As of June 30, Year 6, which one of the following entries will be made to record the interest earned, but not yet received, by Gerner on the Potts note? a. DR Accrued Interest Receivable 1,250 CR Interest Income 1,250 b. DR Cash 1,250 CR Interest Income 1,250 c. DR Cash 1,132 CR Accrued Interest Receivable 1,132 d. DR Notes Receivable - Potts 1,132 CR Interest Income 1,132 7. Refer to Table 5-2. As of June 30, Year 6, which one of the following entries will be made to record the interest earned, but not yet received, by Gerner on the Larabee note? a. DR Notes Receivable- Larabee 1,132 CR Interest Income 1,132 b. DR Accrued Interest Receivable 1,250 CR Interest Income 1,250 c. DR Cash 1,250 CR Interest Income 1,250 d. There is no entry because the note is non-interest bearing. 8. ABC, Inc. enters into an arrangement with Matt D Corporation whereby Matt D will assume $100,000 of ABC's receivables for 6% fee. Assuming that the transaction has a factoring arrangement with recourse and a $9,000 holdback, which one of the following entries will ABC make to record this transaction? a. DR Cash 100,000 CR Accounts Receivable 100,000 b. DR Cash DR Interest Expense CR Accounts Receivable c. DR Cash DR Due from Matt D. Corp DR Interest Expense CR Accounts Receivable d. DR Cash DR Interest Expense CR Due to Matt D Corp 91,000 9,000 85,000 9,000 6,000 100,000 100,000 85,000 15,000 100,000 9. ABC, Inc. enters into an arrangement with Matt D Corporation whereby Matt D will assume $100,000 of ABC's receivables for 6% fee. Assuming that the transaction was a collateralized loan, which one of the following entries will ABC make to record this transaction? a. DR Cash 94,000 DR Prepaid Interest 6,000 CR Accounts Receivable 100,000 b. DR Cash 94,000 DR Interest Expense 6,000 CR Loan Payable - Matt D 100,000 c. DR Cash 94,000 DR Prepaid Interest 6,000 CR Loan Payable - Matt D 100,000 d. DR Cash 94,000 CR Due to Matt D Corp 94,000 10. Paula Smith accepted a six month 9%, $10,000 Note Receivable from a customer on June 1. Smith has an arrangement with the Regency Bank to discount selected customer notes at 12%. If the note were discounted on July 1 under the terms of agreement with Regency Bank, which one of the following journal entries would Smith record? a. DR Cash 10,000 CR Notes Receivable 10,000 b. DR Cash 9,928 CR Note Payable - Regency Bank 9,928 c. DR Cash 9,928 DR Interest Expense 72 CR Notes Receivable 10,000 d. DR Cash 9,928 DR Interest Expense 72 CR Note Payable - Regency Bank 10,000 11. Cook Industries purchased a machine on January 2, Year 5, for $100,000. It paid $20,000 down and financed the balance over 5 years at Fidelity Bank. Terms of the loan were 10% interest payable on December 31 each year with a required $16,000 principal payment. Year 8 proved to be a difficult one and on December 1, Cook negotiated a debt restructuring with Fidelity Bank. The settlement calls for a cash payment of accrued interest plus $4,000 on December 1 and the transfer of 400 acres of land held by Cook that cost $15,000. The land has a current market value of $22,000. Which one of the following entries would be made to record the settlement on Cook's books? a. DR Note Payable - Fidelity Bank 32,000 CR Cash 4,000 CR Land 15,000 CR Extraordinary Gain on Debt Restr. 13,000 b. DR Note Payable - Fidelity Bank 32,000 DR Interest Payable 2,933 CR Cash 6,933 CR Land 22,000 CR Extraordinary Gain on Debt Restr. 6,000 c. DR Note Payable - Fidelity Bank DR Interest Payable CR Cash CR Land CR Extraordinary Gain on Debt Restr. d. DR Note Payable - Fidelity Bank CR Cash CR Land 32,000 2,933 26,000 4,000 22,000 8,933 4,000 22,,000 12. Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported income tends to: a. become highly volatile b. decrease c. increase d. remain the same