ACC 371 Week 6 Quiz 8

ACC 371 Week 6 Quiz 8 | Mercer University

Question 1

Latham has a 5%, $40,000 note receivable from the sale of merchandise on January 1, 2020. The note was issued when the market rate was 5%. The note is due December 31, 2024. Annual interest is due each December 31. On December 31, 2020, Latham reviews the collectibility of its note and determines that there is a 30% probability of collecting $15,000 on the due date (and no further interest), and a 70% probability of collecting no further payments. 

What is included as part of the adjusting entry that Latham records on December 31, 2020?  

Debit to Bad Debt Expense of $31,702.  

Credit to Accounts Receivable for $25,798.  

Debit to Bad Debt Expense of $36,298.  

Credit to the Allowance for Doubtful Accounts for $35,500. 

Question 2

On July 1, 2020, Leland Corp. sold goods in exchange for a $100,000, 5%, one-year note, with interest due at maturity. Leland Corp. discounted the note on September 1 to a bank. Assume that the discounting qualifies as a sale and that the bank charges an 8% fee on the maturity value of the note. 

What amount did Lee receive when it discounted the note?  

$99,360 

$92,000 

$93,333  

$98,000

Question 3

On January 1, 2020, Mumford Inc. sells equipment financed through a $50,000, two-year, zero-interest bearing note, issued by its customer. The company uses the effective interest method to amortize any discounts or premiums. 

Assuming a market rate of 8%, what is balance of Note Receivable, Net on January 1, 2020, and what is interest revenue recognized for 2021? 

Note Receivable, Net     Interest Revenue

         Jan. 1, 2020                               2021     

$50,000                     $4,000  

$50,000                     $3,429  

$46,296                     $4,000 

$44,855                     $3,429  

$42,867                     $3,704                  

Question 4

The aging schedule at December 31, 2020, for Gidget Inc. shows the following breakdown of total accounts receivable. 

~

Status   Amount

Not past due      $455,000

Past due 1-30 days          108,000

Past due 31-60 days        55,000

Past due over 60 days        14,000

Total      $632,000 

The company considers the risk of credit losses to be similar within the aging pools and estimates the following credit loss rates by pool: not past due, 0.5%; past due 1-30 days, 1%; past due 31-60 days, 2%; and past due over 60 days, 8%. The Allowance for Doubtful Accounts has an $1,800 debit balance before adjustment. 

What is included in the entry to adjust the Allowance for Doubtful Accounts on December 31, 2020 to its desired ending balance?  

A debit to Bad Debt Expense for $5,575. 

A debit to Bad Debt Expense for $4,775.  

A debit to Bad Debt Expense for $7,375.  

A debit to Bad Debt Expense for $3,775. 

 Accounts Receivable     Credit Loss Rate                Credit Loss

 $                    455,000         0.5%      $       2,275

                       108,000          1.0%                1,080

                         55,000          2.0%                1,100

                         14,000          8.0%                1,120

 $                    632,000                                   5,575                               

Question 5

Six Sisters Inc. sells merchandise for $480,000 with a cost of $216,000 in the month of June. The company estimates returns to be equal to 3% of sales. Actual returns for the month for items sold in June totaled $10,000. The unadjusted credit balance in Refund Liability on June 30 is $2,400 and the unadjusted debit balance in Inventory—Estimated Returns is $1,080. 

What is included as part of the entries to estimate returns at month-end?  

A debit to Sales Returns for $4,400.  

A debit to Inventory—Estimated Returns for $1,980.  

A debit to Cost of Goods Sold for $900.  

A credit to Refund Liability for $2,000.

The entries to estimate returns at the end of the period are as follows.

Sales Returns ((($480,000 x 3%) - $10,000) - $2,400))        2,000

               Refund Liability                 2,000

Inventory—Estimated Returns ($2,000 x 45%)        900

               Cost of Goods Sold                             900 

Question 6

How does a sale of accounts receivable differ from the use of accounts receivable as collateral for a loan?  

With a sale of receivables, the operating cycle is shortened, but with a collateralized loan, the operating cycle is extended.  

With a collateralized loan, the borrower records a note payable, but in a sale, the seller records a note receivable.  

With a collateralized loan, the borrower recognizes potential credit losses, but in a sale with recourse, the seller does not recognize potential credit losses.  

With a collateralized loan, the receivables remain under the control of the borrower but in a sale, the seller no longer has title to the receivables.

Question 7

Which of the following statements does not illustrate the accounting for sales returns and allowances?  

Sales returns and allowances are considered forms of variable consideration.  

A refund liability is recognized for consideration received from a customer that is expected to be refunded in part or total.  

Estimating sales returns involves a review of historical information and consideration of changes expected in the future.  

A difference between actual and expected sales returns and allowances is treated as a change in accounting principle.

Discrepancies are treated as a change in accounting estimate (not a change in accounting principle), which requires prospective accounting treatment.

Question 8

On December 31, 2020, Caprio Consulting Inc., received two notes from customers in exchange for services rendered. First, the note from Talen Corp. is a two-year, $8,000 note with a 4% stated rate. Cash interest is due each December 31 beginning December 31, 2021, and the entire principal is due December 31, 2022.  The second note is a two-year, noninterest-bearing note with a stated value of $5,000 from Blanton Inc. The market rate for similar notes from both customers is 8% on December 31, 2020. 

At what amounts should the two notes be reported on Caprio Consulting Inc.'s December 31, 2020, balance sheet?

Talen Note                          Blanton Note      

$7,429                                 $4,287  

$8,000                                 $4,287                                    

 $8,604                                 $5,000                            

$8,888                                 $3,969 

$8,000                                 $5,000                                                

Question 9

Which of the following statements best illustrates the process of estimating credit losses when adjusting the allowance for doubtful accounts under the CECL (Current Expected Credit Loss) model?  

The allowance for doubtful accounts primarily reflects credit losses expected over the next year because accounts receivable is a current asset account. 

It is not necessary to consider credit losses that are considered remote when adjusting the allowance for doubtful accounts.  

Accounts receivable of similar risks may be pooled together when estimating credit losses to adjust the allowance for doubtful accounts.  

An entity may rely only on historical information in estimating credit losses such as trends of collections.

Question 10

Zinnea Corp. had the following amounts at December 31, 2020. 

Description         Amount

Amount on deposit in a checking account              $10,000

Certificate of deposit, 4-month term       2,500

Legally restricted compensating balance on deposit         5,000

Checks received from customer; not deposited   4,500

Receivable from employee for travel advance     1,000 

What amount would be classified as cash and cash equivalents on December 31, 2020?

$10,000  

$14,500  

$17,000  

$16,500  

$17,500