Accounting Knowledge practice questions

Receivables, payables & cash application

30 practice questions on receivables, payables & cash application, each with the answer and why it is right. From Questiva Consultants' QuickBooks Online skills test.

1. On the June 30 A/R Aging Summary, Harbor Cafe shows a balance of −$150.00. What does that mean, and what do you check first?

   1. Harbor Cafe owes $150 that is not yet due. Next month it moves to the 1–30 days column and turns positive.
   2. A $150 Harbor Cafe invoice was written off as bad debt, and write-offs show as negatives until the period closes.
   3. A $150 Harbor Cafe invoice was deleted after it was sent, so the aging shows a negative until it is re-entered.
   4. Harbor Cafe has been credited $150 more than it was billed. Look for an overpayment, an unapplied payment or an unapplied credit memo.

   Answer: D) Harbor Cafe has been credited $150 more than it was billed. Look for an overpayment, an unapplied payment or an unapplied credit memo.. A negative A/R balance is a credit: the customer paid or was credited more than billed. Typical causes are an overpayment, an unapplied payment or an unapplied credit memo. A write-off or deleted invoice lowers what is owed but never creates a customer credit.

2. A $5,000 vendor bill is dated March 1, terms 2/10 net 30. The client has no cash until March 31. They could pay $4,900 on March 11 by drawing on a credit line that charges 1.5% a month (18% a year) for the 20 days. What should they pay, and is it worth it?

   1. $4,900 on March 11. Yes, the $100 discount is more than the $49 of interest for 20 days.
   2. $5,000 on March 31. No, a 2% discount is smaller than an 18% interest rate, so borrowing to pay early loses money.
   3. $4,900 on March 11. No, a business should never borrow to pay a bill early, whatever the discount.
   4. $4,500 on March 11. Yes, 2/10 means 10% off if paid within 2 weeks, which beats any interest the line could charge.

   Answer: A) $4,900 on March 11. Yes, the $100 discount is more than the $49 of interest for 20 days.. 2/10 net 30 means 2% off if paid within 10 days. Paying early saves $100. Borrowing $4,900 for 20 days costs $49, which is two-thirds of a month at 1.5%. Comparing 2% with 18% ignores time: 2% for 20 days is about 36% a year.

3. A customer mails a $1,200 check with a remittance slip for invoices 201 ($700) and 205 ($500). The bookkeeper records it as a new $1,200 cash sale instead of a payment on the invoices. What is the effect on the accrual-basis books?

   1. Cash is overstated by $1,200, because a payment on account should not be recorded in the bank until the invoices are closed.
   2. There is no effect: cash and revenue both increase by $1,200 either way, and the open invoices will close at the month-end reconciliation.
   3. A/R is understated by $1,200, because the cash sale credited the receivable without an invoice for the payment to be applied to.
   4. Revenue and A/R are each overstated by $1,200: the sale was already recognised when invoiced, and the two invoices stay open.

   Answer: D) Revenue and A/R are each overstated by $1,200: the sale was already recognised when invoiced, and the two invoices stay open.. Invoices 201 and 205 recorded the revenue and the receivable when issued. The check collects that receivable: Debit Cash / Credit A/R. Recording it as a sale counts the revenue twice and leaves $1,200 of paid invoices open on the aging, so the customer is chased for money already received. Cash itself is correct — the deposit is real — the revenue recognition principle.

4. Pinewood Landscaping invoiced a customer $800 on April 2. On April 9 the customer returned $200 of plants, and Pinewood issued a credit memo. What entry records the credit memo, and what does the customer now owe?

   1. Debit Sales Returns 200 / Credit Accounts Receivable 200; the customer now owes $600.
   2. Debit Accounts Receivable 200 / Credit Sales Returns 200; the customer now owes $1,000.
   3. Debit Cash 200 / Credit Accounts Receivable 200; the customer now owes $600.
   4. No entry until the customer pays; the $200 is deducted from the payment when it arrives.

   Answer: A) Debit Sales Returns 200 / Credit Accounts Receivable 200; the customer now owes $600.. A credit memo reduces what the customer owes and reverses the revenue on the returned goods: Debit Sales Returns (or Sales) / Credit A/R, leaving $600 open. Cash is not involved — nothing was paid or refunded. Waiting until payment leaves A/R and revenue overstated by $200 in the meantime and makes the aging wrong — revenue must match what was actually sold.

5. A review finds $3,000 of customer payments posted to Accounts Receivable but never applied to the invoices they paid. Those invoices still show open. What is the effect on the A/R Aging?

   1. Total A/R is overstated by $3,000, because an unapplied payment does not count against receivables.
   2. Revenue is understated by $3,000, because an unapplied payment reduces sales until it is applied.
   3. Cash is understated by $3,000, because a payment is not cash until it is applied to an invoice.
   4. Total A/R is right, but paid invoices show as open next to $3,000 of unapplied credits.

   Answer: D) Total A/R is right, but paid invoices show as open next to $3,000 of unapplied credits.. The payments already credited A/R when received, so the total is right. The detail is wrong: paid invoices look open, offset by unapplied credits, so customers may get statements for money they sent. Apply each payment to its invoice. Cash and revenue are fine.

6. At December 31, Accounts Receivable is $40,000 and the company estimates 3 % will prove uncollectible. Before adjustment, Allowance for Doubtful Accounts has a $200 credit balance. Which adjusting entry is correct?

   1. Debit Bad Debt Expense 1,200 / Credit Allowance for Doubtful Accounts 1,200
   2. Debit Bad Debt Expense 1,000 / Credit Accounts Receivable 1,000
   3. Debit Allowance for Doubtful Accounts 1,200 / Credit Accounts Receivable 1,200
   4. Debit Bad Debt Expense 1,000 / Credit Allowance for Doubtful Accounts 1,000

   Answer: D) Debit Bad Debt Expense 1,000 / Credit Allowance for Doubtful Accounts 1,000. Under the percentage-of-receivables approach the allowance must END at 3 % of $40,000 = $1,200. It already holds $200, so the adjustment is $1,000. The credit goes to the allowance, a contra-asset, never directly to A/R — specific customer balances are only reduced when an individual account is written off. Booking the full $1,200 ignores the existing balance and overstates the expense.

7. A company uses the allowance method. On May 14 it learns that customer Delta Signs has gone out of business and its $600 balance will never be collected. What entry writes the account off?

   1. Debit Bad Debt Expense 600 / Credit Accounts Receivable 600
   2. Debit Allowance for Doubtful Accounts 600 / Credit Accounts Receivable 600
   3. Debit Sales Returns and Allowances 600 / Credit Accounts Receivable 600
   4. Debit Accounts Receivable 600 / Credit Allowance for Doubtful Accounts 600

   Answer: B) Debit Allowance for Doubtful Accounts 600 / Credit Accounts Receivable 600. Under the allowance method the expense was already recognised when the allowance was estimated. Writing off a specific account simply uses that allowance: Debit Allowance / Credit A/R. Net receivables do not change. Debiting Bad Debt Expense again would count the loss twice; a sales return is for goods coming back, not for a customer who cannot pay — the matching principle.

8. A consulting firm has no allowance account. In March it gives up on a $250 invoice from an October sale and records Debit Bad Debt Expense 250 / Credit Accounts Receivable 250. Which statement is correct?

   1. It is the direct write-off method. It is simple, but the expense lands after the sale period, so GAAP prefers an allowance when bad debts are material.
   2. It is the allowance method. The expense is recognized when the specific account is written off, which GAAP requires for all receivables.
   3. It is wrong under any method. An uncollectible invoice must be reversed against Sales Revenue in the period of the sale.
   4. It is the direct write-off method, and GAAP prefers it because the loss is recorded only once it is certain, not estimated.

   Answer: A) It is the direct write-off method. It is simple, but the expense lands after the sale period, so GAAP prefers an allowance when bad debts are material.. Expensing a specific invoice when it is given up is the direct write-off method. It is acceptable when bad debts are immaterial, but an October sale produces a March expense, which breaks matching. GAAP prefers an allowance estimated in the sale period.

9. Last year a company wrote off Ridge Bakery's $400 balance under the allowance method. This year Ridge Bakery pays the $400 in full. Which entries record the recovery?

   1. Debit Cash 400 / Credit Bad Debt Expense 400, then Debit Allowance for Doubtful Accounts 400 / Credit Accounts Receivable 400
   2. Debit Cash 400 / Credit Other Income 400, then Debit Allowance for Doubtful Accounts 400 / Credit Bad Debt Expense 400
   3. Debit Accounts Receivable 400 / Credit Allowance for Doubtful Accounts 400, then Debit Cash 400 / Credit Accounts Receivable 400
   4. Debit Accounts Receivable 400 / Credit Sales Revenue 400, then Debit Cash 400 / Credit Accounts Receivable 400

   Answer: C) Debit Accounts Receivable 400 / Credit Allowance for Doubtful Accounts 400, then Debit Cash 400 / Credit Accounts Receivable 400. Reverse the write-off first, which reinstates the receivable and restores the allowance, then record the collection like any payment. Crediting an expense, income or sales account would treat money from an earlier sale as new profit.

10. A $2,000 bill from a lumber supplier was entered in Accounts Payable on June 3. On June 10 the supplier issues a $300 credit for boards that arrived damaged. How is the credit recorded, and what is now owed?

    1. Debit Accounts Payable 300 / Credit Cash 300; the company now owes $1,700 and has received a $300 refund in cash.
    2. Debit Accounts Payable 300 / Credit Inventory (or the expense on the bill) 300; the company now owes $1,700.
    3. Debit Cash 300 / Credit Accounts Payable 300; the company now owes $2,300, the original bill plus the refund.
    4. Debit Inventory (or the expense on the bill) 300 / Credit Accounts Payable 300; the company now owes $2,300.

    Answer: B) Debit Accounts Payable 300 / Credit Inventory (or the expense on the bill) 300; the company now owes $1,700.. A vendor credit reduces the liability and reverses the cost of the damaged goods: Debit A/P / Credit Inventory (or the expense the bill hit). No money moves, so Cash is untouched — crediting Cash would record a payment that never happened. Debiting Inventory and crediting A/P would add to the bill instead of reducing it — the liability must reflect what is actually owed.

11. The June 30 A/P Aging Summary totals $4,000, with $2,800 over 60 days. The owner insists they pay every vendor on time. What is the most likely explanation, and what should you check?

    1. The report is on the wrong basis. Re-run the aging on the cash basis and the old balances will disappear, because cash-basis reports ignore unpaid bills.
    2. The vendors issued $2,800 of credits that were entered as bills instead of vendor credits. Reverse each one and the over-60 column clears.
    3. Bills were paid by check or expense without being applied, so they stay open. Look for a paid check and an open bill for the same vendor and amount.
    4. The old bills are leftovers from a prior bookkeeper. Delete anything over 60 days so the aging matches what the owner says.

    Answer: C) Bills were paid by check or expense without being applied, so they stay open. Look for a paid check and an open bill for the same vendor and amount.. Old open bills at a company that pays on time usually mean a payment was recorded as a stand-alone check or expense instead of against the bill. That counts the expense twice and overstates A/P. Apply each paid check to its bill. Deleting bills leaves the duplicate expense.

12. A vendor statement lists invoices 3311 and 3320, both already entered in June and unpaid, with a balance of $1,450. The bookkeeper enters the statement as a new $1,450 bill. What has happened?

    1. Nothing is wrong. A statement is a bill for the account balance, and entering it monthly keeps the vendor's balance current.
    2. Expense and Accounts Payable are both overstated by $1,450, because the statement summarizes invoices already recorded.
    3. Accounts Payable is understated by $1,450, because the individual invoices should have been removed once the statement was entered.
    4. Only Cash is affected, because entering a statement records a payment of the balance forward.

    Answer: B) Expense and Accounts Payable are both overstated by $1,450, because the statement summarizes invoices already recorded.. A statement summarizes invoices, payments and the running balance. It is not a new obligation. Entering it as a bill records the same invoices twice, doubling the expense and the liability, and the vendor could be paid twice. Reconcile statements to the A/P detail instead.

13. A $750 customer check deposited on May 2 is returned by the bank on May 6 marked NSF, and the bank charges a $25 returned-item fee. Which treatment is correct?

    1. Debit Accounts Receivable 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25 (or charge the $25 to the customer's account).
    2. Debit Bad Debt Expense 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25, because a bounced check is an uncollectible sale.
    3. Delete the original payment and its deposit so the invoice reopens, then record the $25 fee as a bank charge when the statement is reconciled.
    4. Debit Sales Returns 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25, because the bank has effectively reversed the sale.

    Answer: A) Debit Accounts Receivable 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25 (or charge the $25 to the customer's account).. When a check bounces the customer owes the money again: reinstate the receivable and reduce cash by what the bank took back. The fee is a bank charge, or goes on the customer's balance if passed on. It is not a bad debt yet — the customer may still pay — and deleting the payment destroys the audit trail and the deposit match — A/R must show what is owed.

14. At month end the Accounts Receivable control account in the general ledger shows $12,400, but the customer balances in the subsidiary ledger add up to $11,900. What does this tell you?

    1. The $500 difference is a normal timing difference that will clear when next month's customer payments are applied to their invoices.
    2. Customers have overpaid by $500 in total; issue refunds or credits until the customer balances agree with the control account total.
    3. An entry hit the control account without a customer — such as a journal entry to A/R — or a customer entry never posted; find it.
    4. $500 of bad debt should be written off against the allowance so the control account comes down to agree with the customer total.

    Answer: C) An entry hit the control account without a customer — such as a journal entry to A/R — or a customer entry never posted; find it.. Every receivable entry must post both to the control account and to a specific customer, so the subsidiary ledger always totals the control balance. A difference means an entry hit one without the other — typically a general-journal entry to A/R with no customer attached. Forcing agreement with a write-off or refund hides a posting error instead of correcting it — the subsidiary ledger must reconcile to the control.

15. Brookline Industrial ages its receivables at December 31: current $50,000 (1 % estimated uncollectible), 1–30 days $20,000 (5 %), 31–60 days $8,000 (10 %), over 60 days $5,000 (30 %). Write-offs during the year ran ahead of the estimate, so Allowance for Doubtful Accounts carries a $400 debit balance before adjustment. What is the adjusting entry?

    1. Debit Bad Debt Expense 3,800 / Credit Allowance for Doubtful Accounts 3,800
    2. Debit Bad Debt Expense 3,400 / Credit Allowance for Doubtful Accounts 3,400
    3. Debit Bad Debt Expense 4,200 / Credit Allowance for Doubtful Accounts 4,200
    4. Debit Bad Debt Expense 4,200 / Credit Accounts Receivable 4,200

    Answer: C) Debit Bad Debt Expense 4,200 / Credit Allowance for Doubtful Accounts 4,200. The aging schedule sets the ending allowance: 500 + 1,000 + 800 + 1,500 = $3,800. A debit balance means earlier write-offs used up more allowance than was estimated, so the entry has to cover that too: 3,800 + 400 = $4,200. Booking $3,800 leaves the allowance $400 short, and $3,400 treats the debit balance as a credit. The credit belongs to the contra-asset, never to A/R.

16. Granite Peak Outfitters ships $7,500 of goods to a customer on December 29, FOB shipping point. The carrier delivers on January 4. The company's fiscal year ends December 31. When does the sale belong in the books?

    1. In January, when the customer takes delivery and can inspect the goods; nothing is recorded while a shipment is still in transit.
    2. In December: title passes to the buyer at the shipping dock, so December carries the $7,500 of revenue and the receivable.
    3. In January, when the invoice is dated and mailed to the customer, because the invoice is the document that creates a receivable.
    4. In December, but only as unearned revenue, because the customer cannot be billed until the goods have actually arrived at its door.

    Answer: B) In December: title passes to the buyer at the shipping dock, so December carries the $7,500 of revenue and the receivable.. FOB shipping point means ownership and the risk of loss pass to the buyer when the carrier takes the goods, so the sale is complete on December 29: revenue and the receivable fall in the closing year and the goods leave inventory. Waiting for delivery or for the invoice date pushes an earned sale into the next year. Nothing is unearned — the seller has already performed.

17. A company invoices a customer $1,000 on July 1, terms 2/10 net 30. The customer pays on July 9 with a check for $980. What entry records the receipt and closes the invoice?

    1. Debit Cash 980 / Credit Accounts Receivable 980, leaving $20 open until the customer is billed for the shortfall.
    2. Debit Cash 980 / Debit Sales Discounts 20 / Credit Accounts Receivable 1,000, closing the invoice.
    3. Debit Cash 980 / Debit Bad Debt Expense 20 / Credit Accounts Receivable 1,000, writing off the shortfall.
    4. Debit Cash 980 / Credit Sales Revenue 980, and issue a $20 credit memo against the customer's next invoice.

    Answer: B) Debit Cash 980 / Debit Sales Discounts 20 / Credit Accounts Receivable 1,000, closing the invoice.. The customer paid inside the 10-day window, so the $20 is an earned discount, not a shortfall. Debit Cash 980 and Sales Discounts 20 (a contra-revenue account), and clear the full $1,000 receivable. The $20 is not a bad debt.

18. A customer of Coastal Prints sent $1,500 against a $1,350 invoice and has asked for the $150 difference back. The invoice is fully paid and the extra $150 sits on the customer's account as an unapplied credit. What records the refund check?

    1. Debit Miscellaneous Expense 150 / Credit Cash 150; money leaving the business with no product received is an expense of the period.
    2. Debit Sales Revenue 150 / Credit Cash 150; refunding a customer reverses that part of the revenue recorded on the original sale.
    3. Debit Accounts Receivable 150 / Credit Cash 150, applying the refund to the credit so the customer's balance comes to zero.
    4. Issue a $150 credit memo against the customer's account instead, which clears the credit balance without any cash leaving the bank.

    Answer: C) Debit Accounts Receivable 150 / Credit Cash 150, applying the refund to the credit so the customer's balance comes to zero.. The overpayment already sits in Accounts Receivable as a credit; the refund pays it back, so the entry debits A/R and credits Cash and the customer nets to zero. It is not an expense — the business is returning money it never earned — and revenue is untouched, because the $1,350 sale still stands. A credit memo would double the credit the customer holds.

19. A company sells on net 30. Net credit sales for the year were $500,000 and average Accounts Receivable was $50,000. What do those figures say about collections?

    1. Days sales outstanding is 10, because receivables turned over ten times, so collections beat the terms.
    2. Days sales outstanding is 30, because the terms are net 30 and the balance is a tenth of the year's credit sales.
    3. Days sales outstanding cannot be judged; a receivables balance says nothing about speed without an aging report.
    4. Days sales outstanding is about 37, so invoices are collected roughly a week past the net-30 due date.

    Answer: D) Days sales outstanding is about 37, so invoices are collected roughly a week past the net-30 due date.. Turnover is 500,000 ÷ 50,000 = 10 times. 365 ÷ 10 gives about 37 days sales outstanding, a week past net 30, so collections are slipping. Ten is the turnover, not the days. Terms say when invoices are due, not when they get paid.

20. A store's fiscal year ends December 31. A repair crew finished work on the cooler on December 22. The $1,800 invoice is dated January 5 and arrives January 8, while the books are still open. On the accrual basis, which period carries the $1,800?

    1. December. The service was received in December, so accrue Debit Repairs Expense 1,800 / Credit Accounts Payable 1,800.
    2. January. An expense belongs to the period of the invoice date, when the vendor recorded the sale.
    3. January. An expense belongs to the month the bill is paid, when the cash leaves the account.
    4. December, but as Debit Accounts Payable 1,800 / Credit Repairs Expense 1,800, reversed when the January bill is entered.

    Answer: A) December. The service was received in December, so accrue Debit Repairs Expense 1,800 / Credit Accounts Payable 1,800.. Accrual accounting records an expense when the service is received. The cooler was repaired in December, so December carries the $1,800 and a year-end payable. Dating it by invoice or payment puts it in the wrong year. Option d reverses the entry.

21. A purchase order was for 100 faucets at $32 each. The receiving report shows 92 delivered, none back-ordered, but the vendor's bill is for 100 at $32, or $3,200. What should Accounts Payable do?

    1. Enter the bill for $3,200 as billed and sort out the shortage at the year-end inventory count.
    2. Enter and pay the $3,200 bill, coding the $256 for undelivered faucets to a shortage expense.
    3. Enter the bill for $2,944, the 92 units received, and ask the vendor for a corrected invoice or credit memo.
    4. Hold the bill unentered until the vendor ships the 8 missing faucets, so the order, receipt and invoice agree.

    Answer: C) Enter the bill for $2,944, the 92 units received, and ask the vendor for a corrected invoice or credit memo.. A three-way match compares the purchase order, receiving report and vendor bill. The company owes only for what it received: 92 × $32 = $2,944. Paying as billed pays $256 for faucets never delivered. Holding the bill keeps a real liability off the books.

22. On August 3 a company issues a $9,000 purchase order for gym equipment that ships in September. Nothing has been received and there is no vendor bill. How does the purchase order affect the August financial statements?

    1. It adds $9,000 to Accounts Payable in August, because the company is committed to pay for the order.
    2. It records Debit Equipment 9,000 / Credit Accounts Payable 9,000, because the asset is on order.
    3. It records Debit Prepaid Expenses 9,000 / Credit Accounts Payable 9,000 until the equipment arrives.
    4. It does not affect them. A purchase order is a commitment, not a transaction, so nothing posts until goods or a bill arrive.

    Answer: D) It does not affect them. A purchase order is a commitment, not a transaction, so nothing posts until goods or a bill arrive.. A purchase order is an offer to buy. Nothing has been delivered and no obligation exists yet, so no entry is made and A/P is unchanged. Large commitments are disclosed, not accrued. Posting it would record a liability that does not exist.

23. Cedar Lane Veterinary has a $640 vendor bill for supplies sitting open in Accounts Payable. On May 20 the office manager pays that bill with the practice's business credit card. What does the payment record?

    1. Debit Accounts Payable 640 / Credit Credit Card Payable 640; the bill closes and the debt moves to the card.
    2. Debit Supplies Expense 640 / Credit Credit Card Payable 640; the bill stays open until the card statement itself is paid.
    3. Debit Accounts Payable 640 / Credit Cash 640; a card charge is treated as cash because the vendor is paid immediately.
    4. No entry until the card statement is paid; the expense and the payment are recorded together when the bank clears it.

    Answer: A) Debit Accounts Payable 640 / Credit Credit Card Payable 640; the bill closes and the debt moves to the card.. Paying a bill with a card settles the vendor and creates a new liability to the card issuer: Debit A/P, Credit the credit card account. The expense was recorded when the bill was entered, so charging Supplies Expense again counts it twice and leaves the bill open. Crediting Cash shows money leaving a bank account that never moved, and waiting understates liabilities until the statement is paid.

24. A vendor's $2,150 invoice for shop supplies was entered twice, as invoice 4471 and 4471-A, and both bills were paid in June. The vendor has said nothing. What is true of the books now, and what fixes it?

    1. Nothing is overstated. The two payments net against each other on the A/P aging, so the vendor shows a zero balance.
    2. Expense and cash paid are each overstated by $2,150. Ask the vendor for a refund or credit and apply it to a future bill.
    3. Only Accounts Payable is overstated. Delete the second bill and its payment so the June reconciliation clears the extra amount.
    4. Cash is overstated by $2,150. Enter a third bill for the same invoice so the duplicate payment has a bill to apply to.

    Answer: B) Expense and cash paid are each overstated by $2,150. Ask the vendor for a refund or credit and apply it to a future bill.. Both payments cleared, so supplies hit expense twice and $2,150 of real cash left the bank. A/P is fine because both bills were paid, and book cash matches the bank. Get a refund or vendor credit. Deleting a cleared payment breaks the reconciliation.

25. A company pays a $4,000 deposit on April 3, half the price of custom cabinets to be built and delivered in June. Nothing has been received. How should the April payment be recorded?

    1. Debit Cost of Goods Sold 4,000 / Credit Cash 4,000. The money is spent, so April carries the cost.
    2. Debit Accounts Payable 4,000 / Credit Cash 4,000. The deposit sits as a negative liability until the final bill.
    3. No entry until the cabinets arrive in June with the vendor's bill for the remaining $4,000.
    4. Debit Vendor Deposits (an asset) 4,000 / Credit Cash 4,000. The cost moves to inventory or expense on delivery.

    Answer: D) Debit Vendor Deposits (an asset) 4,000 / Credit Cash 4,000. The cost moves to inventory or expense on delivery.. Nothing has been received, so no cost exists yet. The $4,000 is an asset, a claim on the vendor, until delivery, when it moves to inventory or expense. Charging COGS overstates April. Debiting A/P leaves a negative liability. No entry leaves cash off the books.

26. A customer has an open $2,400 invoice and a $150 credit memo issued last week for a short shipment. The customer's check arrives for $2,250. How should it be handled?

    1. Apply the $2,250 to the invoice, leave $150 open and write it off as bad debt at quarter end.
    2. Apply the $2,250 to the invoice and record the $150 credit memo as a new invoice so the balance returns to zero.
    3. Apply the $2,250 and the $150 credit memo to the invoice together, closing it and clearing the credit.
    4. Deposit the $2,250 as a payment on account without applying it, so the invoice and credit memo offset on the aging.

    Answer: C) Apply the $2,250 and the $150 credit memo to the invoice together, closing it and clearing the credit.. The customer netted the credit against the invoice, so both belong on it: $2,250 cash plus the $150 credit equals the $2,400 balance. Leaving $150 open makes a paid invoice look overdue and creates a false bad debt. Invoicing the credit re-bills the short shipment.

27. A $500 invoice from Lakeside Studio is paid by the customer's credit card. The processor deposits $485.50 into the bank and keeps a $14.50 processing fee. How is this recorded so the invoice closes?

    1. Apply $500 to the invoice, record the deposit as $485.50 net, and charge the $14.50 to Merchant Fees expense.
    2. Apply $485.50 to the invoice and leave the $14.50 open, since that is all the customer's card actually delivered.
    3. Apply $485.50 to the invoice and issue a $14.50 credit memo so the balance clears with no expense being recorded.
    4. Apply $500 to the invoice and record a $500 deposit, adjusting the difference at the next bank reconciliation.

    Answer: A) Apply $500 to the invoice, record the deposit as $485.50 net, and charge the $14.50 to Merchant Fees expense.. The customer paid the whole $500, so the invoice is settled for $500; the $14.50 the processor keeps is the studio's cost of accepting cards and belongs in an expense account. Applying only the net leaves a paid invoice showing $14.50 overdue, and a credit memo hides a real expense. Recording a $500 deposit when $485.50 reached the bank will not reconcile.

28. A catalog lists a display case at $900. The retailer buys on a wholesale account, so the vendor's bill shows $720, list less a 20% trade discount, terms net 30. What amount goes into the retailer's books?

    1. $900 as the cost, with the $180 trade discount posted to Purchase Discounts when the bill is paid.
    2. $720. A trade discount sets the invoice price, so the $180 is never recorded.
    3. $900 as the cost and $180 as other income, because the wholesale account earned that difference.
    4. $720 now, but the $180 is added to cost if the bill is not paid within 30 days.

    Answer: B) $720. A trade discount sets the invoice price, so the $180 is never recorded.. A trade discount is a price, not a payment term. The transaction price is $720 and neither side records the $180. Purchase Discounts is for cash discounts like 2/10 net 30, earned by paying early. Net 30 sets a due date, not a penalty.

29. Trestle Machine Works holds a $6,000 receivable that is 90 days past due. On October 1 the customer signs a six-month promissory note for $6,000 at 8 % annual interest to replace the open invoice. What happens on October 1 and at the December 31 year end?

    1. Debit Notes Receivable 6,000 / Credit Sales Revenue 6,000 on October 1; accrue $120 of interest receivable at December 31.
    2. Debit Notes Receivable 6,000 / Credit Accounts Receivable 6,000 on October 1; record all $240 of interest when the note is paid in April.
    3. No entry on October 1; the note is only a promise to collect, so nothing in the books changes until the customer pays in April.
    4. Debit Notes Receivable 6,000 / Credit Accounts Receivable 6,000 on October 1; accrue $120 of interest receivable at December 31.

    Answer: D) Debit Notes Receivable 6,000 / Credit Accounts Receivable 6,000 on October 1; accrue $120 of interest receivable at December 31.. The note replaces the open invoice, so the receivable only changes form — A/R is credited and no new revenue arises, because the sale was recorded when it was invoiced. Interest is earned with time, so three months at 8 % on $6,000, or $120, accrues at December 31 even though nothing is collected until April. Waiting for payment pushes earned interest into the wrong year.

30. A customer disputes $200 of a $2,000 invoice and mails a check for $1,800 with 'paid in full' written on it. Nobody at the company has agreed to reduce the invoice, and company policy is that only a manager may approve a credit. What is the correct bookkeeping response?

    1. Apply $1,800 and issue a $200 credit memo at once, because a check marked 'paid in full' settles the invoice once it is deposited.
    2. Delete the $2,000 invoice and re-enter it for $1,800 so the customer's balance agrees with the amount that was actually paid.
    3. Apply $1,800 to the invoice, leave $200 open, and refer the dispute to the manager who can approve a credit.
    4. Apply $1,800 and write the $200 off to Bad Debt Expense, since a customer who disputes a charge has effectively refused to pay.

    Answer: C) Apply $1,800 to the invoice, leave $200 open, and refer the dispute to the manager who can approve a credit.. Cash application records what arrived; it does not settle a dispute. Apply the $1,800, let the $200 stand on the aging, and route the disagreement to the manager who can approve a credit. Issuing the credit unasked gives away $200 without authority, deleting and re-entering the invoice destroys the record of what was billed, and a disputed charge is not a bad debt.