Question

Which of the following would not be used to help a company determine the net realizable value of its accounts receivable?

a. Industry averages and trends

b. The company’s ability to pay its own debts

c. Current economic conditions

d. Efficiency of the company’s collection procedures

2. Which principle states that expenses should be recorded in the period in which they help generate revenues?

a. Matching principle

b. Going concern principle

c. Cost/benefit analysis

d. Measurement principle

3. SunFun Company manufactures lawn furniture that is sold to retailers like big box home improvement stores. During October 20X1, SunFun sold furniture to Home Place on account in the amount of $40,000. At the end of 20X1, the balance was still outstanding. In January 20X2, SunFun decided to write off this particular account as it did not appear the balance would ever be collected. Choose the correct journal entry for this transaction below.

a. Figure 7.16

b. Figure 7.17

c. Figure 7.18

d. Figure 7.19

4. Ornate Inc. ended 20X3 with $400 in allowance for bad debts. In 20X4, Ornate wrote off $360 in accounts receivable that appear to be uncollectible. At the end of 20X4, Ornate recorded bad debt expense of $330. What is the balance in the allowance for doubtful accounts at the end of 20X4?

a. $370

b. $730

c. $60

d. $690

5. Gladson Corporation accrues bad debt expense using the percentage of sales method. At the end of the year, Gladson has $450,000 in accounts receivable and $4,000 in its allowance for doubtful accounts before any entry is made for bad debts. Sales for the year were $1,900,000. The percentage that Gladson has historically used to calculate bad debts is 1 percent of sales. Which of the following is true?

a. Gladson’s bad debt expense for the year is $500.

b. The percentage of sales method is designed to achieve an accurate balance sheet presentation of the net realizable value of accounts receivable.

c. Gladson would report an allowance for doubtful accounts of $23,000.

d. Gladson would need to make an adjustment because the $4,000 remaining balance in the allowance for doubtful accounts indicates they estimated wrong last year.

5. Darlene Corporation has $300,000 in assets, 30 percent of which are current, and $100,000 in liabilities,40 percent of which are current. Which
of the following is true?

a. Darlene’s current ratio is 3 to 1.
b. Darlene’s working capital is $200,000.
c. Darlene’s working capital is $50,000.
d. The current ratio and working capital are measures of a company’s
profitability.

1. Fifer Inc. began the year with $450,000 in accounts receivable, ended the
year with $590,000 in accounts receivable, and $4,000,000 in sales. Last
year Fifer’s age of receivables was forty-six days and its receivables
turnover was six times. Which of the following is not true?
a. Fifer’s age of receivables is fifty-four days.
b. Fifer’s receivables turnover is 7.92 times.
c. Fifer’s age of receivables improved this year over last year.
d. Analysts monitor the time it takes a company to collect its
receivables.

Answer 1

1 Answer is b The company's ability to pay its own debts The company's ability pay its own debts is a measure of solvency it does not help in determining net realisable value of debtors Rest of the 3 points help in estimating and determining net realisable value of debtors 2 Answer is a Matching principle As per matching principle the revenue generated in a period should be matched with expenses incurred to generate the revenue. Going concern principle assumes firm is going to continue for a foreseeable future Cost/benefit principle is measuring cost and benefits and comparing them Measurement principle is report items which are measureable in monetary currency 3 Please select as per figure Credit Entry Provision for doubtful debts Accounts receivable Debit $40,000 $40,000 4 Answer is a $370 Allowance for bad debts Opening balance Bad debts during the year $400 $330 $730 $360 Bad debts written off Closing balance $370 5 Answer is c Gladson would report an allowance for doubtful accounts of $23,000. Allowance for doubtful debts Opening balance $4,000 Bad debts $19,000 1% of $1,900,000 Closing balance $23,000 5 Answer is c Darlene's working capital is $50,000. Current assets Current liabilities Working capital $90,000 30% of $300,000 $40,000 40% of $100,000 $50,000 (Current assets - Current liabilities) Current ratio is $90,000/$40,000 = 2.25:1 1 Answer not matching below working. Please check answer options Receivable turnover Sales Average receivables Receivables Turnover ratio $4,000,000 a $520,000 b (opening AR + Closing AR)/2 7.69 a/b Age of receivables 47.45 (365 days / receivables turnover ratio)