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TRUE-FALSE STATEMENTS Trade receivables occur when two companies trade or exchange notes receivables. 1. 2 Other receivables include nontrade receivables such as loans to company officers. 3. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. 4. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts. 5. The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing. 6. Accounts receivable are the result of cash and credit sales. 7. If a retailer assesses a finance charge on the amount owed by a customer, Accounts Receivable is debited for the amount of the interest. 8. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts. 9. The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships. 10. Under the direct write-off method, no atempt is made to match bad debts expense to Accounting for Receivables Allowance for Doubtful Accounts is debited under the direct write-off method when an sales revenues in the same accounting period. 11. account is determined to be uncollectible 12 13 14. 15. 16 Allowance for Doubtful Accounts is a contra asset account Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales Generally accepted accounting principles require that the direct write-off method be used for financial reporting purposes if it is also used for tax purposes. Under the allowance method, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off The percentage of sales basis for estimating uncollectible accounts always results in more Bad Debts Expense being recognized than the percentage of receivables basis An aging schedule is prepared only for old accounts receivables that have been past due for more than one year. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected 17. 18. 19. 23 20. Sales resulting from the use of VISA and MasterCard are considered credit sales by the retailer 21 A factor purchases receivables from businesses for a fee and collects the remittances directly from customers. 22. A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services Receivables may be sold because they may be the only reasonable source of cash. 24. If a retailer accepts a national credit card such as VISA, the retailer must maintain detailed records of customer accounts. 25. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time 26. The maturity date of a 1-month note receivable dated June 30 is July 30 27 The two key parties to a note are the maker and the payee. 28 When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days. 9-6 Test Bank for Accounting Principles, Eighth Edition 29 The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year. 30. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements. Additional True False Questions 31. Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt. 32. The two methods of accounting for uncollectible accounts are (a) percentage of sales and (b) percentage of receivables. 33. The account Allowance for Doubtful Accounts is closed out at the end of the year. 34. In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash. 35. When counting the exact number of days to determine the maturity date of a note, the date of issue is included but the due date is omitted. 36. A note is dishonored when it is not fully paid at maturity. 37. Short-term receivables are reported in the current assets section before temporary investments