171. Refer to the above data. On May 1, 2011 (maturity date), the note is collected in full by Salem Corporation. Assuming a fiscal year-end of December 31, Salem recognizes which of the following in its income statement for 2011 with regard to this note?
A. $927,000 sales revenue.
B. $27,000 interest revenue.
C. $18,000 interest revenue.
D. $9,000 interest revenue.
172. Refer to the above data. Assuming the maker of the note defaults on May 1, 2011, Salem will record on this date:
A. An account receivable of $900,000 from the maker of the note.
B. An account receivable in the amount of $900,000, as well as interest expense of $27,000.
C. An account receivable in the amount of $927,000, as well as interest revenue of $18,000.
D. An account receivable in the amount of $900,000, as well as interest revenue of $18,000.
Essay Questions
173. Accounting terminology
Listed below are nine technical accounting terms emphasized in this chapter.
Mark-to-market
Factoring
Direct write-off
Financial asset
Cash equivalent
Bank reconciliation
Allowance for doubtful accounts
Accounts receivable turnover
Uncollectible accounts expense
Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.
a. A transaction in which a business sells its accounts receivables to a financial institution.
b. An estimate of the portion of year-end accounts receivable that ultimately will turn out to be uncollectible.
c. Schedule explaining any differences between cash balances appearing in the accounting records and in the monthly bank statement.
d. Balance sheet valuation standard applicable to investments in marketable securities.
e. Cash and assets convertible directly into known amounts of cash, such as marketable securities and receivables.
f. A ratio, computed by dividing 365 days by average receivables, that indicates the liquidity of the receivables.
g. Method of accounting for uncollectible receivables that fails to match revenues and expenses.
174. Internal control over cash transactions
Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a separate list of internal control procedures. Indicate the internal control procedure that should prevent the error or problem from occurring. If none of the control procedures would effectively prevent the error, place X in the space provided.
Possible Error or Problem
1. A purchase invoice was paid even though the merchandise was never received.
2. An employee issued a credit memorandum for a nonexistent sales return in order to conceal his theft of the amount received in payment of an account receivable.
3. Management is unaware that blank checks are being issued for unauthorized expenditures by the official designated to sign checks.
4. A salesclerk collects the full selling price from a customer but rings up the sale at less than actual price and pockets the difference
5. Several days' cash receipts are lost in a fire.
6. A new employee often gives customers an incorrect amount of change.
7. No one has discovered that amounts deposited in the company's bank account by the cashier over the last few years are frequently smaller than amounts forwarded to him from the mailroom or sales department.
Internal Control Procedures
(a.) Periodic reconciliation of bank statements to accounting records.
(b.) Use of a Cash Over and Short account.
(c.) Adequate subdivision of duties.
(d.) Use of pre-numbered sales tickets.
(e.) Depositing each day's cash receipts intact in the bank.
(f.) Use of electronic cash registers equipped with optical scanners to read magnetically coded labels on merchandise.
(g.) Immediate preparation of a control listing when cash is received and the comparison of this listing with bank deposits.
(h.) Cancellation of paid vouchers.
(i). Requirement that a voucher be prepared as advance authorization of every cash disbursement.