Multiple Choice Questions

True/False
1. Accounts receivable are the result of cash and credit sales.

2. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.

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3. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

4. 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.

5. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

6. The book value of a plant asset is always equal to its fair market value.

7. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

8. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

Multiple choice

Use the following data for questions 9 and 10:
A customer charges a treadmill at Fred’s Sport Shop. The price is $1,000 and the financing charge is 18% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer’s account.
9. What is the amount of the finance charge?
a. $ 30
b. $ 15
c. $180
d. $ 6

10. The accounts affected by the journal entry made by Fred’s Sport Shop to record the finance charge are
a. Accounts Receivable
Cash
b. Cash
Finance Receivable
c. Accounts Receivable
Interest Payable
d. Accounts Receivable
Interest Revenue

11. An aging of a company’s accounts receivable indicates that $6,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debts Expense for $6,000.
b. debit to Allowance for Doubtful Accounts for $4,900.
c. debit to Bad Debts Expense for $4,900.
d. credit to Allowance for Doubtful Accounts for $6,000.

12. A debit balance in the Allowance for Doubtful Accounts
a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of sales method of estimating bad debts is used.

13. A reasonable amount of uncollectible accounts is evidence
a. that the credit policy is too strict.
b. that the credit policy is too lenient.
c. of a sound credit policy.
d. of poor judgments on the part of the credit manager.

14. The interest on a $4,000, 10%, 1-year note receivable is
a. $4,000.
b. $400.
c. $4,040.
d. $4,400.

15. Which one of the following items is not considered a part of the cost of a truck purchased for business use?
a. Sales tax
b. Truck license
c. Freight charges
d. Cost of lettering on side of truck

16. Which of the following assets does not decline in service potential over the course of its useful life?
a. Equipment
b. Furnishings
c. Land
d. Fixtures

17. Bad Debts Expense is reported on the income statement as
a. part of cost of goods sold.
b. an expense subtracted from net sales to determine gross profit.
c. an operating expense.
d. a contra-revenue account.

18. Allowance for Doubtful Accounts on the balance sheet
a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable.
c. appears under the heading “Other Assets.”
d. is offset against accounts receivable.

19. The book value of an asset is equal to the
a. asset’s market value less its historical cost.
b. blue book value relied on by secondary markets.
c. replacement cost of the asset.
d. asset’s cost less accumulated depreciation.

20. Management should select the depreciation method that
a. is easiest to apply.
b. best measures the plant asset’s market value over its useful life.
c. best measures the plant asset’s contribution to revenue over its useful life.
d. has been used most often in the past by the company

Solution Preview
True/False
1. Accounts receivable are the result of cash and credit sales.

False – Accounts Receivable are a result of only credit sales

2. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.

True – Since the write off happens in a different period as compared to sales

3. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

False – under the direct write off method there is no allowance account

4. 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.

False – the greater the probability that it will not be collected

5. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

True

6. The book value of a plant asset is always equal to its fair market value.

False – Book value is based on historical cost and accumulated depreciation and may have no relation to market value

7. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

True – Under declining balance the formula is cost X rate

8. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

True

Multiple choice

Use the following data for …

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