1. Sales discounts with terms 2/10, n/30 mean:
10 percent discount for payment within 30 days.
2 percent discount for payment within 10 days, or the full amount (less returns) due within 30 days.
Two-tenths of a percent discount for payment within 30 days.
None of the above.
2. A company has been successful in reducing the amount of sales returns and allowances. At the same time, a credit card company reduced the credit card discount from 3% to 2%. What effect will these changes have on the company’s net sales, all other things equal?
a. Net sales will not change.
b. Net sales will increase.
c. Net sales will decrease.
d. Either (b) or (c).
3. When a company using the allowance method writes off a specific customer’s $100,000 account receivable from the accounting system, which of the following statements are true?
Total stockholders’ equity remains the same.
Total assets remain the same.
Total expenses remain the same.
b. 1 and 3
c. 1 and 2
d. 1, 2, and 3
4. You have determined that Company X estimates bad debt expense with an aging of accounts receivable schedule. Company X’s estimate of uncollectible receivables resulting from the aging analysis equals $250. The beginning balance in the allowance for doubtful accounts was $220. Write-offs of bad debts during the period were $180. What amount would be recorded as bad debt expense for the current period?
5. Which of the following is not a component of net sales?
a. Sales returns and allowances
b. Sales discounts
c. Cost of goods sold
d. Credit card discounts
6. Consider the following information: ending inventory, $24,000; sales, $250,000; beginning inventory, $30,000; selling and administrative expenses, $70,000; and purchases, $90,000. What is cost of goods sold?
7. The inventory costing method selected by a company will affect
a. The balance sheet.
b. The income statement.
c. The statement of retained earnings.
d. All of the above.
E6-12 Recording and Reporting a Bad Debt Estimate Using Aging Analysis
Chou Company uses the aging approach to estimate bad debt expense. The balance of each account receivable is aged on the basis of three time periods as follows: (1) not yet due, $295,000, (2) up to 120 days past due, $55,000, and (3) more than 120 days past due, $18,000. Experience has shown that for each age group, the average loss rate on the amount of the receivables at year-end due to uncollectability is (1) 2.5 percent, (2) 11 percent, and (3) 30 percent, respectively. At December 31, 2015 (end of the current year), the Allowance for Doubtful Accounts balance is $100 (credit) before the end-of-period adjusting entry is made.
Prepare the appropriate bad debt expense adjusting entry for the year 2015.
Show how the various accounts related to accounts receivable should be shown on the December 31, 2015, balance sheet.
E6-15 Inferring Bad Debt Write-Offs and Cash Collections from Customers
Microsoft develops, produces, and markets a wide range of computer software, including the Windows operating system. On its recent financial statements, Microsoft reported the following information about net sales revenue and accounts receivable (amounts in millions).
According to its Form 10-K, Microsoft recorded bad debt expense of $14 and did not reinstate any previously written-off accounts during the current year. (Hint: Refer to the summary of the effects of accounting for bad debts on the Accounts Receivable (Gross) and the Allowance for Doubtful Accounts T-accounts. Use the T-accounts to solve for the missing values.)
What amount of bad debts was written off during the current year?
Based on your answer to requirement (1), solve for cash collected from customers for the current year, assuming that all of Microsoft’s sales during the period were credit sales.
Penn Company uses a periodic inventory system. At the end of the annual accounting period, December 31, 2015, the accounting records provided the following information for product 1:
Compute ending inventory and cost of goods sold under FIFO, LIFO, and average cost inventory costing methods. (Hint: Set up adjacent columns for each case.)