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Quizzes > Business & Finance > Finance & Economics

Master Chapters 5 & 6: Financial Accounting Quiz - Take the Challenge!

Ready to tackle note receivables, sales discounts & bad debt expense questions? Dive in!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art style finance quiz concept with notes receivable sales discounts bad debt icons on sky blue background

This Financial Accounting quiz helps you practice notes receivable, sales discounts, and bad debt so you can spot gaps before an exam. Work through short items at your own pace, see where you need review, and then explore more accounting practice or try another finance quiz.

What is a promissory note receivable?
A written promise to pay a specific amount on a future date
An equity security issued by a corporation
A verbal agreement to receive payment
A contingent liability for the issuer
A promissory note receivable is a formal, written promise made by a debtor to pay a specified sum on an agreed future date. It is classified as a financial asset under receivables and includes details such as principal, interest rate, and maturity date. This instrument differs from verbal agreements because it is documented and enforceable in court. .
Under the gross method, how are sales discounts recorded?
Discounts are recognized only when the customer takes the discount
Discounts are recognized at the sale date as contra-revenue accounts
Discounts are never recognized
Discounts are recognized as an expense at the sale date
Under the gross method, sales are recorded at their full invoice price. A sales discount is only recognized if the customer pays within the discount period, at which point the discount is recorded as a contra-revenue. If the customer fails to take the discount, no adjustment is needed. .
What does the term 2/10, n/30 signify?
A 10% discount if paid within 2 days; net amount due in 30 days
A 2% discount if paid within 10 days; net amount due in 30 days
A 2% discount if paid after 30 days
A 30% discount if paid within 2 days
The credit term 2/10, n/30 means the buyer can take a 2% discount on the invoice price if payment is made within 10 days; otherwise the full invoice amount is due within 30 days. This term incentivizes early payment and helps manage receivables. .
Under the allowance method, how is bad debt expense recorded?
As a direct reduction of Accounts Receivable
When cash is collected from a previously doubtful account
Estimate at period end and record to Bad Debt Expense and Allowance for Doubtful Accounts
Only when a specific receivable is written off
Under the allowance method, companies estimate uncollectible accounts at the end of each period and record an expense in Bad Debt Expense with a corresponding credit to Allowance for Doubtful Accounts. This matches the expense to the period in which the related sales occur. It ensures receivables are stated at net realizable value. .
What is the net realizable value of accounts receivable?
Gross receivables plus sales discounts
Gross receivables minus allowance for doubtful accounts
Total cash minus uncollectible accounts expense
Net sales minus cost of goods sold
Net realizable value (NRV) of accounts receivable is calculated by subtracting the allowance for doubtful accounts from the total or gross accounts receivable. NRV represents the amount expected to be collected in cash. This figure is reported on the balance sheet. .
A company issues a $10,000, 6-month, 6% note on April 1. What is the amount of interest due at maturity?
$300
$150
$360
$600
Interest on a note is computed as principal × rate × time. Here, $10,000 × 6% × (6/12) = $300. This amount is accrued at maturity or through periodic adjusting entries. .
What journal entry is made when a note receivable matures and is paid in full?
Debit Notes Receivable; credit Cash
Debit Accounts Receivable; credit Cash and Interest Revenue
Debit Cash; credit Notes Receivable and Interest Revenue
Debit Cash and Interest Receivable; credit Sales
At maturity, cash is debited for the total received (principal plus interest) and Notes Receivable is credited for principal. Interest Revenue is credited for the interest portion. This clears the note receivable from the books. .
What does a trade discount represent?
A discount for early payment
A finance charge
A reduction for credit terms
A reduction from list price to arrive at the selling price
A trade discount reduces the list price of goods or services to arrive at the actual sale price. It is typically offered for bulk purchases or preferred customers. Trade discounts are not recorded separately in accounting records; transactions are recorded at the discounted price. .
When a note receivable is dishonored, which account is debited to reinstate the receivable?
Accounts Receivable
Interest Revenue
Cash
Notes Receivable
When a note is dishonored (not paid at maturity), the face amount plus accrued interest is reclassified back to Accounts Receivable. This reinstates the original receivable for collection under normal credit terms. .
What is a key difference between the net method and gross method of recording sales discounts?
The net method overstates revenue initially
Both methods record the same initial revenue amount
The gross method records revenue net of discounts
The net method initially understates revenue by the amount of expected discounts
Under the net method, sales are recorded at the net amount assuming the discount will be taken, which understates revenue initially by the discount amount. If the discount is not taken, the additional revenue is recorded when payment is received. The gross method records sales at full invoice price and recognizes discounts only when they are taken. .
How is the Allowance for Doubtful Accounts reported on the balance sheet?
As a contra-asset reducing Accounts Receivable
As a reduction of sales revenue
As a liability
As an expense
Allowance for Doubtful Accounts is a contra-asset account that offsets Accounts Receivable on the balance sheet. It represents management's estimate of the receivables that will not be collected. The net of Accounts Receivable and the allowance is reported as net realizable value. .
Under the percentage of receivables method, if accounts receivable is $100,000 and the allowance target is 5%, what adjustment is required when the existing allowance has a $4,000 credit balance?
$5,000 increase to allowance
$500 increase to allowance
$4,000 decrease to allowance
$1,000 increase to allowance (debit Bad Debt Expense $1,000)
The desired allowance is 5% of $100,000 = $5,000. The existing credit balance is $4,000, so an additional $1,000 is needed. The entry debits Bad Debt Expense $1,000 and credits Allowance for Doubtful Accounts $1,000. .
A 90-day, $20,000 note at 8% interest is discounted at a bank at 10%. How much cash does the company receive at discounting if the bank uses a 360-day year?
$20,400
$20,040
$20,060
$19,660
Interest on the note is $20,000 × 8% × (90/360) = $400; maturity value is $20,400. The bank discount is $20,400 × 10% × (60/360) = $340, leaving cash proceeds of $20,400 ? $340 = $20,060. .
Under GAAP, when should bad debt expense be recognized?
When the original sales invoice is issued
Only when a specific receivable is written off
When it is probable and estimable
When cash is collected
GAAP requires bad debt expense to be recognized when it is probable that a receivable will not be collected and the amount can be reasonably estimated. This ensures expenses are matched to the period of the related sale. .
What is the effect on net income of writing off an account under the allowance method?
Increases net income
Decreases net income
Requires an additional expense recognition
No effect on net income
Under the allowance method, the expense for uncollectibles was already recognized when the allowance was established. Writing off a specific account reduces Accounts Receivable and the allowance, but has no additional effect on net income. .
How is a non-interest-bearing note presented on the balance sheet at issuance?
As a contingent liability
At face amount
At maturity value
At the present value of the cash to be received
Non-interest-bearing notes are recorded at their present value (face value minus implicit interest). The discount is amortized to interest revenue over the term of the note. This follows the effective interest method. .
A $50,000 note receivable is issued on February 15 of a leap year for 180 days. What is the maturity date?
August 13
August 15
August 14
September 14
Counting 180 days from February 15 in a leap year (February has 29 days) yields a maturity date of August 14. Proper day count methods ensure accurate maturity dating. .
Which statement correctly describes recourse factoring of receivables?
The factor cannot seek reimbursement if accounts become uncollectible
The seller transfers all credit risk to the factor
Recourse factoring is treated as a loan rather than a sale
The seller retains risk of uncollectible accounts and may have to reimburse the factor
In recourse factoring, the seller retains the risk of uncollectibility and must reimburse the factor for bad debts. This contrasts with nonrecourse factoring, where the factor assumes credit risk. Accounting treatment depends on risk retention. .
Using the aging method, a company has $120,000 in receivables. The allowance account has a $2,000 credit balance. If 5% of receivables are estimated uncollectible, what is the bad debt expense?
$6,000
$8,000
$2,000
$4,000
5% of $120,000 equals $6,000 desired allowance. The existing $2,000 credit balance means an additional $4,000 expense is needed. Debit Bad Debt Expense $4,000 and credit Allowance for Doubtful Accounts $4,000. .
A non-interest-bearing note with face value $10,000 is discounted at a bank at 12% and yields cash proceeds of $9,600. How many days to maturity were on the note (360-day year)?
90 days
60 days
180 days
120 days
The bank discount equals $10,000 - $9,600 = $400. Using Discount = Face × Rate × Time/360, we solve 400 = 10,000 × 12% × Time/360, giving Time = 120 days. .
When a note receivable is endorsed to a bank for collection, how is it reported before collection?
As Restricted Cash
As Cash
As Notes Receivable in current assets
As a Liability
A note receivable endorsed for collection remains a note receivable on the balance sheet until the bank collects the funds. It is not reported as cash or restricted cash until collection is confirmed. .
Under IFRS 9, how are expected credit losses on financial assets measured at initial recognition?
Only incurred losses
12-month expected credit losses unless significant credit risk increase
Lifetime expected credit losses immediately
Credit losses are not recognized until default
IFRS 9 requires recognition of 12-month expected credit losses at initial recognition for assets with no significant credit deterioration. If credit risk increases significantly, lifetime losses are recognized. This forward-looking approach differs from the incurred loss model. .
How does the direct write-off method violate the matching principle?
It records an expense at invoice date
It requires an allowance account that misstates assets
Expenses are recognized only when accounts are written off, not when related sales occur
It understates expenses by delaying recognition
The direct write-off method records bad debt expense only when a specific account is deemed uncollectible, which may occur in a different period than the related sale. This fails to match expenses with the revenues they help generate. The allowance method corrects this by estimating bad debts in the same period as sales. .
In computing interest for a note dated March 1 to August 1 using the 360-day year, how many days are used?
154 days
153 days
150 days
120 days
Using the 360-day bank year, each month is considered 30 days. From March 1 to August 1 spans five months, or 5 × 30 = 150 days. This simplifies interest calculations. .
Last year's allowance for doubtful accounts was overstated by $5,000. How should this error be corrected in the current period?
Debit Allowance for Doubtful Accounts $5,000; credit Bad Debt Expense $5,000
Debit Sales Revenue $5,000; credit Allowance for Doubtful Accounts $5,000
Debit Bad Debt Expense $5,000; credit Accounts Receivable $5,000
Debit Retained Earnings $5,000; credit Allowance for Doubtful Accounts $5,000
To correct an overstatement of the allowance, the current period's Bad Debt Expense is reduced by crediting it and debiting the Allowance for Doubtful Accounts. This restores the correct allowance balance without adjusting prior-period financials. .
A zero-interest note with a face value of $100,000 is due in two years. The market interest rate is 6%. What is the present value of the note?
$89,000 (approximately)
$106,000
$94,340
$100,000
Present value is calculated as 100,000 ÷ (1 + 6%)^2 ? 100,000 ÷ 1.1236 ? $89,000. This discounts the future cash flow at the market rate. .
According to IFRS 9, which model is used to recognize credit losses on financial assets?
Expected credit loss model
Historical loss model
Direct write-off model
Incurred loss model
IFRS 9 requires the expected credit loss (ECL) model, which recognizes credit losses based on forward-looking information. It replaced the incurred loss approach under IAS 39. ECL ensures earlier recognition of potential credit losses. .
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Study Outcomes

  1. Analyze note receivables recognition and valuation -

    Leverage the note receivables quiz section in this Financial Accounting Quiz to distinguish short-term and long-term notes, calculate maturity values, and grasp recognition criteria.

  2. Calculate interest and maturity values -

    Apply time value of money formulas to compute interest revenue and maturity amounts for various notes, ensuring accurate financial reporting and exam-ready precision.

  3. Evaluate sales discounts -

    Assess trade and cash discount scenarios, record appropriate journal entries, and tackle sales discounts questions in our accounting practice exam format.

  4. Apply bad debt estimation methods -

    Demonstrate proficiency in the allowance and direct write-off methods by estimating uncollectible accounts in our bad debt expense practice scenarios.

  5. Interpret financial statement impacts -

    Analyze how notes receivable, sales discounts, and bad debt expense affect balance sheets and income statements, enhancing your analytical skills for accounting exams.

Cheat Sheet

  1. Recognition and Measurement of Notes Receivable -

    When you accept a promissory note, record the principal at face value and accrue interest over time using the formula Interest = Principal × Rate × (Days/360). This step in your note receivables quiz ensures you measure assets accurately under GAAP (ASC 310) or IFRS (IAS 39).

  2. Understanding Sales Discounts (2/10, n/30) -

    Memorize "2 - 10, Net 30" to recall a 2% discount if paid within 10 days; otherwise full payment is due in 30 days. Use the gross method to record discounts only when taken, and the net method to assume discounts will be taken - key distinctions for your sales discounts questions practice.

  3. Estimating Bad Debt Expense -

    Apply the allowance method by estimating uncollectible accounts via the percentage-of-sales or aging-of-receivables approach; for percentage-of-sales, Bad Debt Expense = Net Credit Sales × Estimated Uncollectible Rate. This allocation meets the matching principle and preps you for bad debt expense practice on your accounting practice exam.

  4. Journal Entries for Note Honor and Dishonor -

    On note maturity, if honored, debit Cash for principal plus interest and credit Notes Receivable and Interest Revenue for accruals. If dishonored, transfer the amount to Accounts Receivable to reflect the unsettled debt - handy for related entries in any Financial Accounting Quiz.

  5. Mnemonic for Allowance Accounts: "ADA SIR" -

    Remember "Allowance Debits Authorized, Subtract Impaired Receivables" (ADA SIR) to track adjustments correctly. This catchy phrase anchors your knowledge of Allowance for Doubtful Accounts and streamlines responses on note receivables and bad debt questions.

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