On the December 31 balance sheet of Mann Co., the current Answer (B) is correct.

receivables consisted of the following: If a receivable is expected to be collected within the longer of 1
Trade accounts receivable year or the operating cycle, it is current. If the receivable is
$ 93,000 noncurrent, it should be classified as an investment. Thus, the
Allowance for uncollectible accounts claim against the shipper is most likely a current receivable but
(2,000) the deposit is not. The unsold consigned goods are in the
Claim against shipper for goods lost in possession of the consignee but are the property of the consignor
transit (November) and are included in the consignor’s inventory. Sales revenue from
3,000 consigned goods should be recognized by the consignor when
Selling price of unsold goods sent by Mann on consignment at 130% of the merchandise is sold. Thus, the unsold consigned goods
cost (not included in Mann’s ending inventory) should be included in inventory at cost, not in receivables at their
26,000 sales price. Consequently, current net receivables should equal
Security deposit on lease of warehouse $94,000 [($93,000 – $2,000) net trade receivables + $3,000
used for storing some inventories claim].
30,000
Total
$150,000
At December 31, the correct total of Mann’s current net receivables
was
A. $124,000
B. $94,000
C. $150,000
D. $120,000
A shoe retailer allows customers to return shoes within 90
days of purchase. The company estimates that it is
probable that 5% of sales will be returned within the 90-
day period. During the month, the company has sales of
$200,000 and returns of sales made in prior months of
$5,000. What amount should the company record as net
sales revenue for new sales made during the month?
A. $200,000
B. $185,000
C. $190,000
D. $195,000
Answer (C) is correct.
The company has $200,000 of sales and estimates that
5% of sales will be returned. Sales are recognized only in
the amount of consideration to which the entity expects to
be entitled. Thus, no sales are recognized for the products
expected to be returned. The entity therefore recognizes
net sales equal to 95% of gross sales. Net sales
recognized are $190,000 ($200,000 × 95%).

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year Answer (A) is correct.
note that required five equal, annual year-end payments of Leaf Co. will receive cash of $25,045 ($5,009 × 5). Hence,
$5,009. The note was discounted to yield a 9% rate to Leaf. interest revenue is $5,560 ($25,045 – $19,485 present
At the date of purchase, Leaf recorded the note at its value).
present value of $19,485. What should be the total interest
revenue earned by Leaf over the life of this note?
A. $5,560
B. $8,000
C. $5,045
D. $9,000
On January 1, the Fulmar Company sold personal property
to the Austin Company. The personal property had cost
Fulmar $40,000. Fulmar frequently sells similar items of
property for $44,000. Austin gave Fulmar a noninterest-
bearing note payable in six equal annual installments of
$10,000 with the first payment due this December 31.
Collection of the note is reasonably assured. A reasonable
rate of interest for a note of this type is 10%. The present
value of an annuity of $1 in arrears at 10% for six periods
is 4.355. What amount of sales revenue from this
transaction should be reported in Fulmar’s income
statement for the year ended December 31?
A. $44,000
B. $40,000
C. $43,550
D. $10,000
Answer (A) is correct.
When a noninterest-bearing note is exchanged for
property, the note, the sales price, and the cost of the
property exchanged for the note should be recorded at the
fair value of the property or at the market value of the
note, whichever is more clearly determinable. Here, the
$44,000 fair value of the property is clearly determinable
because Fulmar frequently sells similar items for that
amount. Consequently, $44,000 is the proper amount to
be recorded as sales revenue from this transaction
A note payable was issued in payment for services
received. The services had a fair value less than the face
amount of the note payable. The note payable has no
stated interest rate. How should the note payable be
presented in the statement of financial position?
A. At the face amount with a separate deferred asset for
the discount calculated at the imputed interest rate.
B. At the face amount minus a discount calculated at the
imputed interest rate.
C. At the face amount with a separate deferred credit for
the discount calculated at the imputed interest rate.
D. At the face amount.
Frame Co. has an 8% note receivable dated June 30, Year
1, in the original amount of $150,000. Payments of $50,000
in principal plus accrued interest are due annually on July
1 for Year 2, Year 3, and Year 4. In its June 30, Year 3,
balance sheet, what amount should Frame report as a
current asset for interest on the note receivable?
A. $4,000
B. $12,000
C. $0
D. $8,000
Answer (B) is correct.
When a note is exchanged for property, goods, or
services, the interest rate determined by the parties in an
arm’s-length transaction is presumed to be fair. But when
the note is issued with no stated rate, the transaction
should be recorded at the more clearly determinable of (1)
the fair value of goods or services received or (2) the
market value of the note. Assuming that the market value
of the note cannot be reliably determined, the transaction
is recorded at the fair value of services received, if known.
Because the fair value of services received is lower than
the note’s face amount, a discount on the note is
recognized. The imputed interest rate on this note is the
one that equates the present value of future payments on
the note with the fair value of services received.
Answer (D) is correct.
Current assets are those reasonably expected to be
realized in cash, sold, or consumed during the longer of
the operating cycle of a business or 1 year. Given that the
date of the balance sheet is 6/30/Yr 3, the interest to be
paid on the next day, 7/1/Yr 3, should be classified as a
current asset. On 7/1/Yr 3, $8,000 ($100,000 remaining
principal × 8%) of interest and $50,000 of principal are to
be received. The $8,000 of interest receivable is a current
asset.
A method of estimating uncollectible accounts that
emphasizes asset valuation rather than income
measurement is the allowance method based on
A. Aging the receivables.
B. Direct write-off.
C. Credit sales less returns and allowances.
D. Gross sales.
Johnson Company uses the allowance method to account
for uncollectible accounts receivable. After recording the
estimate of uncollectible accounts expense for the current
year, Johnson decided to write off in the current year the
$10,000 account of a customer who had filed for
bankruptcy. What effect does this write-off have on the
company’s current net income and total current assets,
respectively?
Answer (A) is correct.
Under the allowance method, uncollectible accounts are
estimated in two ways. The method that emphasizes asset
valuation is based on an aging of the receivables to
determine the balance in the allowance for uncollectible
accounts. Bad debt expense is the amount necessary to
adjust the allowance account to this estimated balance.
The method emphasizing the income statement calculates
bad debt expense as a percentage of sales.
Answer (D) is correct.
Johnson uses the allowance method. Thus, when a
specific amount is written off, the journal entry is
Allowance for doubtful accounts
$10,000
Accounts receivable
$10,000
The write-off of a bad debt has no effect on expenses, net
income, and total current assets.
On March 31, Vale Co. had an unadjusted credit balance of Answer (D) is correct.
$1,000 in its allowance for uncollectible accounts. An The aging schedule determines the balance in the
analysis of Vale’s trade accounts receivable at that date allowance for uncollectible accounts. Of the accounts that
revealed the following: are no more than 30 days old, the amount uncollectible is
$3,000 ($60,000 × 5%). Accounts that are 31-60 days old
and over 60 days old have estimated uncollectible
Estimated balances of $400 ($4,000 × 10%) and $1,400 ($2,000 ×
Age 70%), respectively. Hence, the amount recorded in the
Amount allowance for uncollectible accounts is $4,800 ($3,000 +
Uncollectible $400 + $1,400). The $1,000 balance already in the
0-30 days account is disregarded because the aging schedule
$60,000 determines the balance that should be in the account.
5%
31-60 days
4,000
10%
Over 60 days
2,000
70%
What amount should Vale report as allowance for
uncollectible accounts in its March 31 balance sheet?
A. $3,000
B. $3,800
C. $4,000
D. $4,800
Inge Co. determined that the net value of its accounts Answer (D) is correct.
receivable at December 31, based on an aging of the The allowance for uncollectible accounts before year-end
receivables, was $325,000. Additional information is as adjustment is $14,000 ($30,000 beginning balance –
follows: $18,000 write-offs + $2,000 recovered). The balance
Allowance for uncollectible accounts at 1/1 should be $25,000 ($350,000 year-end A/R – $325,000
$ 30,000 net value based on aging). Thus, the allowance account
Uncollectible accounts written off during the year should be credited and uncollectible accounts expense
18,000 debited for $11,000 ($25,000 desired balance – $14,000).
Uncollectible accounts recovered during the year
2,000
Accounts receivable at 12/31
350,000
For the year, what would be Inge’s uncollectible accounts
expense?
A. $5,000
B. $15,000
C. $21,000
D. $11,000
Ace Co. sold to King Co. a $20,000, 8%, 5-year note that
required five equal annual year-end payments. This note
was discounted to yield a 9% rate to King. The present
value factors of an ordinary annuity of $1 for five periods
are as follows:
8%
3.992
9%
3.890
What should be the total interest revenue earned by King
on this note?
A. $5,560
B. $8,000
C. $9,000
D. $5,050

The equal annual payment based on the terms of the note was
$5,010 ($20,000 ÷ 3.992 PV of an ordinary annuity for five
periods at 8%). However, the note was discounted at 9%.
Thus, the amount King must have paid for the note was the
present value of the periodic payments discounted at 9%, or
$19,489 ($5,010 × 3.89 PV of an ordinary annuity for five
periods at 9%). Total interest revenue earned by King was
therefore $5,561 [(5 payments × $5,010) – $19,489 cash paid].
The following information relates to Jay Co.’s accounts
receivable for the year just ended:
Accounts receivable, 1/1
$ 650,000
Credit sales for the year
2,700,000
Sales returns for the year
75,000
Accounts written off during the year
40,000
Collections from customers during the year
2,150,000
Estimated uncollectible accounts at 12/31
110,000
What amount should Jay report for accounts receivable,
before allowance for uncollectible accounts, at December
31?
A. $1,200,000
B. $1,165,000
C. $1,125,000
D. $1,085,000

Answer (D) is correct.

The ending balance in accounts receivable consists of the
$650,000 beginning debit balance, plus debits for $2,700,000
of credit sales, minus credits for $2,150,000 of collections,
$40,000 of accounts written off, and $75,000 of sales returns.
Accounts Receivable (in 000s)
1/1
$ 650
$ 75
Sales returns
Credit sales
2,700
2,150
Collections

40
Write-offs
12/31
$1,085

The $110,000 of estimated uncollectible receivables is not

relevant because it affects the allowance account but not gross
accounts receivable.
The following information pertains to Tara Co.’s accounts
receivable at December 31, Year 2:
Days
Estimated
Outstanding
Amount
% Uncollectible
0 - 60
$120,000
1%
61 - 20
90,000
2%
Over 120
100,000
6%
$310,000
During Year 2, Tara wrote off $7,000 in receivables and
recovered $4,000 that was written off in prior years. Tara’s
December 31, Year 1, allowance for uncollectible accounts
was $22,000. Under the aging method, what amount of
allowance for uncollectible accounts should Tara report at
December 31, Year 2?
A. $10,000
B. $9,000
C. $19,000
D. $13,000
Answer (B) is correct.
The aging schedule determines the allowance for uncollectible
accounts based on year-end accounts receivable, their age,
and their estimated collectibility. This year-end amount is
$9,000 [($120,000 × 1%) + ($90,000 × 2%) + ($100,000 ×
6%)].
Orr Co. prepared an aging of its accounts receivable at
December 31 and determined that the net realizable value
of the receivables was $250,000. Additional information is
available as follows:
Allowance for uncollectible accounts at 1/1 --
credit balance
$ 28,000
Accounts written off as uncollectible during the year
23,000
Accounts receivable at 12/31
270,000
Uncollectible accounts recovered during the year
5,000
For the year ended December 31, Orr’s uncollectible
accounts expense is
A. $15,000
B. $23,000
C. $10,000
D. $20,000

Answer (C) is correct.

As indicated in the T-account analysis below, the beginning
balance of the allowance is $28,000, the ending balance is
$20,000 ($270,000 gross accounts receivable at 12/31 –
$250,000 NRV), total debits for write-offs equaled $23,000, and
credits for recoveries of accounts written off totaled $5,000.
The balancing credit for uncollectible accounts expense is
therefore $10,000.
Allowance
$28,000
1/1
Write-offs
$23,000
5,000
Recoveries
10,000
Uncollectible accounts

expense
$20,000
12/31