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CHAPTER5ACCOUNTING NOTES FOR STUDENTS, Lecture notes of Accounting

Abertay UniversityAccounting

CHAPTER 5 ACCOUNTING NOTES FOR STUDENTS

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2019/2020

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Financial Accounting, 9e (Harrison/Horngren/Thomas)
Chapter 5 Short-Term Investments & Receivables
5.1 Learning Objective 5-1
1) Another term for short-term investments is held-to-maturity securities.
Answer: FALSE
Diff: 1
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) Short-term investments may be divided into held-to-maturity securities, trading
securities and available-for-sale securities.
Answer: TRUE
Diff: 2
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
3) Short-term investments are the most liquid asset.
Answer: FALSE
Diff: 2
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
4) The purpose of a trading security is to hold it for a short term and then sell it for its cost.
Answer: FALSE
Diff: 2
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
5) An unrealized gain occurs when a company sells a trading security.
Answer: FALSE
Diff: 2
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
6) Fair value is the amount for which the securities can be sold.
Answer: TRUE
Diff: 1
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
7) Trading securities may generate dividend revenue.
Answer: TRUE
Diff: 1
LO: 5-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
1
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 5 Short-Term Investments & Receivables

5.1 Learning Objective 5-

  1. Another term for short-term investments is held-to-maturity securities. Answer: FALSE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Short-term investments may be divided into held-to-maturity securities, trading securities and available-for-sale securities. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. Short-term investments are the most liquid asset. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. The purpose of a trading security is to hold it for a short term and then sell it for its cost. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  5. An unrealized gain occurs when a company sells a trading security. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  6. Fair value is the amount for which the securities can be sold. Answer: TRUE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  7. Trading securities may generate dividend revenue. Answer: TRUE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Trading securities are originally recorded at their cost. Answer: TRUE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. A company will have an unrealized loss if the fair value of the investment is greater than its cost. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. It takes good judgment, which includes ethics, to become a successful accountant. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. Unrealized gains and losses on trading securities are reported as part of current income. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  5. An unrealized loss occurs when the current market value is more than the original cost of the investment. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Investments in marketable securities fall into three categories, including: A) available-for-exchange securities. B) available for maturity securities. C) accounts receivable securities. D) trading securities. Answer: D Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Which of the following statement is correct? A) Trading securities can be current or long-term assets. B) Available-for-sale securities are always current assets. C) Held-to-maturity securities are always current assets. D) Trading securities are always current assets. Answer: D Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. All investments in marketable securities NOT classified as trading securities or held-to- maturity securities are classified as: A) debt securities. B) equity securities. C) marketable securities. D) available-for-sale securities. Answer: D Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. The purpose of owning trading securities is to: A) increase cash reserves. B) hold the investment for at least one year. C) sell the investment for more than its cost. D) sell the investment to decrease net income. Answer: C Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Trading securities: A) must be sold for more than their cost. B) do not include debt securities of another company. C) must increase in fair value. D) can generate dividend revenue. Answer: D Diff: 2 LO: 5- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. ABC Company purchases a trading security for $12,000. The entry to record this transaction will include a: A) debit to the Investment account. B) credit to the Investment account. C) debit to the Unrealized Gain account. D) credit to the Dividend Revenue account. Answer: A Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. When a company receives a cash dividend from a trading security, the journal entry includes: A) a debit to cash and credit to dividend revenue. B) a debit to dividend revenue and credit to cash. C) a debit to cash and credit to trading investment. D) none of the above. Answer: A Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. An unrealized gain: A) is recorded when a trading security is sold for more than its cost. B) is recorded when a trading security is sold for less than its cost. C) is recorded when the fair value of the trading security is more than its cost. D) is recorded when the fair value of the trading security is less than its cost. Answer: C Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  5. When a company receives a cash dividend on a trading security: A) revenue is increased. B) revenue is decreased. C) assets are decreased. D) liabilities are decreased. Answer: A Diff: 2
  1. A realized gain occurs when the: A) sales price is greater than the trading investment carrying amount. B) sales price is less than the trading investment carrying amount. C) fair value exceeds the cost of the trading investment. D) cost of the investments exceeds the fair value of the trading investment. Answer: A Diff: 2 LO: 5- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. When a company sells a trading investment, the gain or loss on the sale is reported in the: A) revenues section of the income statement. B) short-term investments section of the balance sheet. C) other revenue, gains, and losses section of the balance sheet. D) other revenue, gains, and losses section of the income statement. Answer: D Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. When dealing with gains and losses on trading securities: A) the word "realized" must be used in the account title. B) unrealized gains and losses must be labeled "unrealized." C) unrealized gains go on the balance sheet and realized gains go on the income statement. D) unrealized losses and realized losses are both part of other expenses on the income statement. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. Strategies to increase the current ratio may include: A) increasing sales. B) paying off current liabilities before the end of the year. C) the questionable practice of reclassifying long-term investments as short-term investments. D) all of the above. Answer: D Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. Trading securities purchased for $400,000 were valued at $410,000 at the end of the year. The adjusting entry to record this difference included a credit to: A) retained earnings. B) unrealized gain on investments. C) short-term investments. D) none of the accounts since no adjusting entry is required. Answer: B Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. Trading securities purchased in 2011 for $90,000 were valued at $92,000 on December 31, 2011. At December 31, 2013 the securities had a fair value of $95,000. The journal entry on December 31, 2013 would include a: A) debit to the Investment account for $5,000. B) debit to the Investment account for $3,000. C) credit to the Unrealized Gain account for $5,000. D) debit to the Unrealized Loss account for $3,000. Answer: B Diff: 3 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. Orange Company purchased a trading investment that had a carrying amount of $35,000 when they decided to sell it. Orange purchased the investment for $31,000. If Orange Company sold this investment for $43,000, Orange will have a(n): A) realized gain of $12,000. B) realized gain of $8,000. C) an unrealized loss of $3, D) an unrealized gain of $11,000. Answer: B Explanation: B) 43,000 - 35,000 = 8,000 gain Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. On April 3, Evan's Boat Store purchased Yacht stock for $26,000 with the intent of selling the stock at a profit before the boating season starts in two months. On April 28, Evan's Boat Store received dividends from Yacht of $850. On May 25, the Yacht stock was sold for $24,500. Required:
  1. How will Evan's Boat Store classify the investment?
  2. Prepare the journal entries needed to record the transactions.
  3. What will Evan's Boat Store report on its income statement for the year ended December 31? Answer:
  4. This is a trading investment because the intent is to sell it in the near future to generate profit.

Date Account Debit Credit April 3 Investment in Yacht Stock 26, Cash 26, April 28 Cash 850 Dividend Revenue 850 May 25 Cash 24, Loss on Sale of Stock 1, Investment in Yacht Stock 26,

  1. The dividend revenue of $850 would be reported in the in the income statement as other revenue. The realized loss of $1,500 would also appear on the income statement under the other category. Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. On March 1, 2011, Anya's Toy Store purchased Hasbro stock for $33,400 with the intent of selling the stock at a profit within a few months. On April 10, dividends of $1, were received from the Hasbro stock. On December 31, 2011, the end of Anya's Toy Store's calendar year, the Hasbro stock had a market value of $32,300. On January 3, 2012, Anya's Toy Store sold all of the Hasbro stock for $34,000. Prepare the journal entries needed to record the transactions for 2011 and 2012. Answer: Date Account Debit Credit March 1, 2011 Investment in Hasbro Stock 33, Cash 33, April 10 Cash 1, Dividend Revenue 1, Dec 31 Unrealized Loss on Investments 1, Investment in Hasbro Stock 1, 32,300-33, Jan 3 Cash 34, Investment in Hasbro Stock 32, Gain on sale of investments 1, Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. The ABC Company has current assets of $10,000 and current liabilities of $8,000. They are concerned about their current ratio and are considering paying liabilities totaling $3,000. The ABC Company has a loan with First Bank which requires them to maintain a minimum current ratio of 1.4. Required:
  1. What is the formula for the current ratio?
  2. Compute the current ratio before the possible payment of the liabilities of $3,000.
  3. Compute the current ratio assuming that ABC Company pays the $3,000 in current liabilities.
  4. What are some possible consequences if ABC's current ratio falls below the required 1.4? Answer: 1. Current ratio = Current assets/Current liabilities
  5. 10,000/8,000 = 1.
  6. (10,000-3,000)/(8,000-3,000) = 7,000/5,000 = 1.
  7. First Bank can call the loan for immediate payment and if the borrower cannot pay, then the bank may take over the company. Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. ABC Company has shipped goods to one of its customers FOB shipping point. ABC Company will recognize sales revenue when: A) their customer has received and inspected the goods. B) when the goods leave ABC's shipping dock. C) whenever the two parties agree that revenue should be recognized. D) when the customer pays the invoice. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. When goods are shipped FOB destination: A) revenue is recognized when the goods leave the shipping dock. B) revenue is recognized after any returns are received by the seller. C) revenue is recognized only after cash payment is received. D) revenue is recognized when the goods are received by the customer. Answer: D Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. If a buyer takes advantage of a sales discount, the journal entry recorded by the seller will include a(n): A) debit to Cash and a credit to Sales Discount. B) debit to Cash and a debit to Sales Discount. C) debit to Cash and debit to Accounts Receivable. D) debit to Cash and debit to Sales Returns and Allowances. Answer: B Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. A business offers credit terms of 1/15, n/30. These terms indicate that: A) the total amount of the invoice must be paid within 15 days. B) a discount of 1% can be taken if the invoice is paid within 15 days. C) the buyer can take a 1% discount if the bill is paid within 15 or 30 days. D) no discount is offered for early payment. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Which of the following is a true statement about sales? A) Net revenue is gross revenue plus sales discounts less sales returns and allowances. B) Sales discounts are offered to customers in order to speed up cash flow. C) Sales returns and allowances increase a company's profit. D) Retailers do not generally record sales returns and allowances in a separate account. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. ABC company sells goods to the XYZ Company for $1,000, It offers credit terms of 2/10, n/30. If XYZ Company pays the invoice within the discount period, ABC Company will record a debit to cash in the amount of: A) $20. B) $200. C) $980. D) $1,000. Answer: C Explanation: C) 1,000 * .02 = 20 discount 1,000 - 20 = 980 cash Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. A company has gross revenue of $400,000; sales discounts of $4,500; and sales returns and allowances of $3,000. Net revenue is: A) $392,500. B) $398,500. C) $401,500. D) $407,500. Answer: A Explanation: A) 400,000 - 4,500 - 3,000 = 392, Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. Accounts (trade) receivables are amounts to be collected from customers from the sale of goods or services. Answer: TRUE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Accounts receivable have a maturity date. Answer: FALSE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. The Accounts Receivable account in the general ledger has a separate account for each customer. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. Businesses that sell on credit receive most of their cash receipts from collections of accounts receivable. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  5. By selling on credit, companies run the risk of not collecting some receivables. Answer: TRUE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  6. Formal monetary claims against others acquired mainly by lending money are: A) accounts receivable. B) notes receivable. C) accounts payable. D) notes payable. Answer: B Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Monetary claims against others acquired mainly by selling goods and services are: A) accounts receivable. B) notes receivable. C) accounts payable. D) notes payable. Answer: A Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Other receivables will include: A) notes receivable. B) accounts receivable. C) loans to employees. D) none of the above. Answer: C Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. A separate account for each customer is kept in a(n): A) control account. B) subsidiary ledger. C) general ledger. D) control ledger. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. ________ may be required on a note receivable as security for the loan. A) Maturity value B) Interest C) Collateral D) Principal Answer: C Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Tom is the accountant for ABC Auto Stores. Tom receives and opens all mail. Tom follows company policies by separating customer checks from the remittance advices. Tom deposits the checks in the bank and posts the payments indicated on the remittance advices to the customers' accounts in the subsidiary ledger. At the end of each day, Tom totals the amounts posted to the customers' accounts and compares the total to the bank deposit slip ensure that all receipts are deposited in the bank. List any internal control weaknesses and propose ways to strengthen the controls. Answer: Weaknesses:
  1. No segregation of the cash-handling duties from the cash-recording duties.
  2. The same person receives the cash, deposits the cash, and records the payments.
  3. The same person compares the total postings to the bank deposit. Ways to strengthen the controls:
  4. Segregate the cash-handling duties from the cash-recording duties.
  5. Consider having the payments sent to a lockbox, especially if this is a small company and there is no other person to handle some of the duties.
  6. If a small company and there is no other person to share the duties, the owner must take an interest in the cash receipts process and if possible perform some of the duties. At a minimum, he should look at the daily deposits to see if customer payments match what he thinks should be coming in and he should reconcile the bank account. Diff: 2 LO: 5- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5.4 Learning Objective 5-

  1. Accounts receivable are shown on the balance sheet at their net realizable value. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Selling on credit creates both a benefit and a cost. Answer: TRUE Diff: 1 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. Uncollectible-account expense is an operating expense on the income statement. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. The journal entry to record uncollectible-account expense includes a credit to Accounts Receivable. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory

AICPA Functional: Measurement

  1. Companies are prohibited from combining the percent-of sales and the aging methods when estimating uncollectible accounts. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. There are two basic ways to estimate uncollectibles—the direct write off method and the allowance method. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. Under the direct write-off method, uncollectible-account expense is recorded in the same accounting period as the sale. Answer: FALSE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. The Allowance for Uncollectible Accounts normally has a credit balance. Answer: TRUE Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  5. The biggest risk of selling on credit is: A) the risk of posting a payment to the wrong subsidiary account. B) the risk of not collecting some of the receivables. C) the risk of losing a sale. D) none of the above. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  6. The net realizable value of accounts receivable is the difference between accounts receivable and: A) sales discounts. B) allowance for uncollectible accounts. C) uncollectible-account expense. D) net revenue. Answer: B Diff: 2 LO: 5- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement