RECEIVABLES

1. Which of the following statements is incorrect regarding receivables?

a. Receivables are financial assets
b. Receivables are financial instruments
c. Nontrade receivables are generally reported as separate items in the statement of financial
position
d. Accounts receivable are written promises of the purchaser to pay goods or services

2. All of the following are required when classifying receivables, except

a. Indicate the receivables classified as current and noncurrent
b. Disclose any receivables pledged as collateral
c. Disclose all significant concentrations of credit risk arising from receivables
d. All of the choices are required when classifying receivables

3. Which of the following items should be included in accounts receivable reported in the statement
of financial position?
a. Notes receivable c. Allowance for doubtful accounts
b. Interest receivable d. Advances to related parties and officers

4. In calculating the carrying amount of a loan receivable, the lender adds to the principal
a. Direct loan origination cost incurred by the lender
b. Indirect loan origination cost incurred by the lender
c. Loan origination fee charged to the borrower
d. Direct origination cost incurred by the lender and loan origination fee charged to the
borrower

5. If there is evidence that an impairment loss on receivable has been incurred, the amount of the
loss is equal to the
a. Excess of the carrying amount of the loan receivable over the present value of the cash flows
related to the loan
b. Excess of the present value of cash flows related to the loan over the carrying amount of the
loan receivable
c. Excess of the carrying amount of the loan over the principal amount of the loan
d. Excess of the principal amount of the loan over its carrying amount

6. Trade receivables are classified as current assets when they are reasonably expected to be
collected
a. Within one year
b. Within the normal operating cycle
c. Within one year or within the normal operating cycle, whichever is shorter
d. Within one year or within the normal operating cycle, whichever is longer

7. Nontrade receivables are classified as current assets only if they are reasonably expected to be
realized in cash
a. Within one year or normal operating cycle, whichever is shorter
b. Within the normal operating cycle
c. Within one year of the normal operating cycle, whichever is longer
d. Within one year, the length of the operating cycle notwithstanding

8. The ideal measure of short-term receivables is the discounted value of cash to be received in the
future. Failure to follow this practice usually does not make the statement of financial position
misleading because
a. Most short-term receivables are noninterest bearing
b. The allowance for uncollectible accounts includes a discount element
c. The amount of the discount is not material
d. Most receivables can be sold to a bank or factor

9. Credit balances in accounts receivable should be classified as

a. Current liability c. Noncurrent liability
b. Part of accounts payable d. Deduction from accounts receivable
10. A method of estimating doubtful accounts that focuses on the income statement rather than the
statement of financial position is the allowance method based on
a. Direct writeoff
b. Aging of trade accounts receivable
c. Credit sales
d. Balance of accounts receivable

11. Estimation of uncollectible accounts receivable based on percentage of sales

a. Emphasizes measurement of net realizable value of accounts receivable
b. Emphasizes measurement of bad debt expense
c. Emphasizes measurement of total assets
d. Is only acceptable for tax purposes

12. Which of the following methods of determining annual bad debt expense best achieves the
matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct writeoff

13. A method of estimating doubtful accounts that emphasizes asset valuation rather than income
measurement is the allowance method based on
a. Aging of accounts receivable
b. Direct writeoff
c. Gross sales
d. Credit sales less sales returns and allowances

14. Which of the following is not permitted for accounting for material amount of uncollectible
accounts receivable?
a. Percentage of accounts receivable using allowance method
b. Percentage of sales using allowance method
c. Direct writeoff method
d. All of the choices are acceptable

15. Why is the allowance method preferred over the direct writeoff method of accounting for bad
debts?
a. Allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under direct writeoff method is difficult to do
d. Improved matching of bad debt expense with revenue

16. Which method of recording uncollectible accounts expense is consistent with accrual accounting?
a. Allowance method only
b. Direct writeoff method only
c. Both allowance method and direct writeoff method
d. Neither allowance method nor direct writeoff method

17. When the allowance method of recognizing uncollectible accounts is used, the entry to record the
writeoff of a specific account would
a. Decrease both accounts receivable and allowance for uncollectible accounts
b. Decrease accounts receivable and increase the allowance for uncollectible accounts
c. Increase the allowance for uncollectible accounts and decrease net income
d. Decrease both accounts receivable and net income

18. An entity uses the allowance method to recognize uncollectible accounts expense. What is the
effect at the time of the collection of an account previously written off on allowance for doubtful
accounts and doubtful accounts expense, respectively?
a. No effect and Decrease c. Increase and No effect
b. Increase and Decrease d. No effect and No effect
19. An entity uses the allowance method for recognizing doubtful accounts. The entry to record the
writeoff of a specific uncollectible account
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts receivable
c. Decreases both net income and working capital
d. Decreases both net income and accounts receivable

20. When the direct writeoff method is used, the entry to writeoff a specific customer account would
a. Increase net income
b. Have no effect on net income
c. Increase both accounts receivable and net income
d. Decrease both accounts receivable and net income

21. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of an account previously written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income

22. A debit balance in the allowance for doubtful accounts

a. Should never occur
b. Is always the result of management not providing a large enough allowance in order to
manage earnings
c. May occur before year-end adjustments for uncollectible accounts
d. May exist even after year-end adjustment of uncollectible accounts

23. Which accounting principle primarily supports the use of allowance for doubtful accounts?
a. Continuity principle c. Matching principle
b. Full disclosure principle d. Conservatism

24. Which of the following statements is incorrect regarding how the impairment assessment is to be
performed on receivables?
a. Receivables that are individually significant should be considered for impairment separately
or individually
b. Receivables that are not individually significant should be assessed for impairment
individually
c. Any receivables individually assessed as not impaired should be included with the other
receivables that are not individually significant and collectively assessed
d. Any receivables not individually significant should be collectively assessed for impairment

25. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amounts collected
d. To comply with customer agreement

26. All but one of the following are required before a transfer of receivables cab be recorded as a
sale?
a. The transferred receivables are beyond the reach of the transferor and its creditors
b. The transferor has not kept effective control over the transferred receivables through a
repurchase agreement
c. The transferor maintains continuing involvement
d. The transferee can pledge or sell the transferred receivables

27. If financial assets are exchanged for cash and other consideration but the transfer does not meet
the criteria for a sale, the transferor and the transferee should account for the transaction os
a. Secured borrowing
b. Pledge of collateral
c. Both secured borrowing and pledge of collateral
d. Neither secured borrowing nor pledge of collateral
28. If receivables are hypothecated against borrowings, the amount of receivables involved should be
a. Disclosed in the notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face value
and the amount of borrowings

29. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale
b. The receivables are used as collateral for a promissory note issued to the factor
c. The factor assumes the risk of collectability and absorbs any credit losses in collecting the
accounts receivable
d. The financing cost should be recognized ratably over the collection period of the receivables

30. An entity factored accounts receivable without recourse with a bank. The entity received cash as
result of the transaction which is best described as
a. Loan from bank collateralized by the entity’s accounts receivable
b. Loan from bank to be repaid by the proceeds from the entity’s accounts receivable
c. Sale of the entity’s accounts receivable to the bank with the risk of uncollectible accounts
retained by the entity
d. Sale of the entity’s accounts receivable to the bank with the risk of uncollectible accounts
transferred to the bank

31. It is a predetermined amount withheld by a factor as a protection against customer returns,

allowances and other special adjustments
a. Equity in assigned accounts
b. Service charge
c. Commission
d. Factor’s holdback or due from factor

32. Which of the following is used to account for probable sales discounts, sales returns and sales
allowances in relation to factoring of accounts receivable?
a. Factor’s holdback
b. Recourse liability
c. Both factor’s holdback and recourse liability
d. Neither recourse holdback nor recourse liability

33. Notes receivable discounted with recourse should be

a. Included in total receivables with disclosure of contingent liability
b. Included in total receivables without disclosure of contingent liability
c. Excluded from total receivables with disclosure of contingent liability
d. Excluded from total receivables without disclosure of contingent liability

34. Accounting for the imputed interest on a noninterest bearing note receivable is an example of
what aspect of accounting theory?
a. Matching c. Substance over form
b. Verifiability d. Accounting entity

35. What is imputed interest?

a. Interest based on stated interest rate
b. Interest based on implicit interest rate
c. Interest based on average interest rate
d. Interest rate based on bank prime rate

36. An entity uses the installment sales method to recognize revenue. Customers pay the installment
notes in 24 equal monthly amounts, which include 12% interest. What is the installment notes
receivable balance six months after the sale?
a. 75% of the original sales price
b. Less than 75% of the original sales price
c. The present value of the remaining monthly payments discounted at 12%
d. Less than the present value of the remaining monthly payments discounted at 12%
37. After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a
bank at 15%. What is the formula for the proceeds received from the bank?
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face value less the discount at 12%
d. Face value less the discount at 15%

38. A 90-day 15% interest-bearing note receivable is sold to a bank without recourse after being held
for 60 days. The proceeds are calculated using a 12% interest rate. The amount credited to note
receivable at the date of the discounting transaction should be
a. The same as the cash proceeds
b. Less than the face value of the note
c. The face value of the note
d. The maturity value of the note

39. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of
the discounting transaction, the note receivable discounted account should be
a. Decreased by the proceeds from the discounting transaction
b. Increased by the proceeds from the discounting transaction
c. Increased by the face amount of the note
d. Decreased by the face amount of the note

40. At the middle of the current year, an entity received a one-year note receivable bearing interest at
the market rate. The face amount of the note receivable and the entire amount of the interest are
due in one year. When the note receivable was initially recorded, which of the following was
debited?
a. Interest receivable
b. Unearned discount on note receivable
c. Both interest receivable and unearned discount on note receivable
d. Neither interest receivable nor unearned discount on note receivable

41. On July 1, 2022, an entity obtained a two-year 8% note receivable for services rendered. At that
time, the market rate of interest was 10%. The face amount of the note and the entire amount of
interest are due on June 30, 2024. Interest receivable on December 31, 2022 was
a. 5% of the face value of the note
b. 4% of the face value of the note
c. 5% of the July 1, 2022 present value of the amount due on June 30, 2024
d. 4% of the July 1, 2022 present value of the amount due on June 30, 2024

PROBLEMS

1. Jamaica Company provided the following information for 2022:

Accounts receivable – January 1 2,000,000

Credit sales 10,000,000
Collection from customers, excluding the recovery of accounts written off 8,000,000
Accounts written off as worthless 100,000
Sales returns 500,000
Recovery of accounts written off 50,000
Estimated future sales returns on December 31 150,000
Estimated uncollectible accounts on December 31 per aging 300,000

What is the net realizable value of accounts receivable on December 31, 2022?
a. 3,400,000 b. 3,100,000 c. 2,950,000 d. 2,900,000

2. Nathalie Company reported accounts receivable of P8,000,000 on December 31, 2022 and
allowance for doubtful accounts of P1,000,000 on January 1, 2022. During the year, accounts of
P400,000 were written off and recoveries of accounts written off totaled P100,000.

Time outstanding Accounts receivable Percent uncollectible

Under 30 days 5,000,000 10%
31 – 180 days 1,500,000 20%
 181 – 360 days 1,000,000 50%
More than one year 500,000 100%

What amount should be reported as doubtful accounts expense for the current year?
a. 1,800,000 b. 1,100,000 c. 1,000,000 d. 1,400,000

3. During the current year, Glydel Company reported beginning allowance for doubtful accounts
P200,000, sales P9,500,000, sales returns and allowances P1,000,000, sales discounts P500,000,
accounts written off P300,000 and recovery of accounts written off P50,000. It is estimated that
5% of net sales may prove uncollectible. What is the allowance for doubtful accounts at year-
end?
a. 350,000 b. 375,000 c. 400,000 d. 425,000

4. Claudine Company reported on December 31, 2022 accounts receivable P5,000,000, debit
balance in allowance for doubtful accounts P50,000 and sales P20,000,000. The entity estimated
that 8% of accounts receivable may prove uncollectible. What amount should be reported as
doubtful accounts expense for 2022?
a. 400,000 b. 450,000 c. 350,000 d. 500,000

5. Rellyne Company reported accounts receivable on December 31, 2022 as follows:

Aye company 800,000

Bee company 2,000,000
Cee company 1,200,000
Day company 1,000,000
All other accounts receivable 5,000,000

The entity determined that Aye company’s receivable is impaired by P400,000 and Day
company’s receivable is totally impaired. The other receivables from Bee and Cee are not
considered impaired. The entity determined that a composite rate of 5% is appropriate to measure
impairment on the remaining accounts receivable. What is the total impairment of accounts
receivable for 2022?
a. 1,810,000 b. 1,400,000 c. 1,650,000 d. 1,830,000

6. On December 31, 2022, Marjorie Company sold used equipment with carrying amount of
P2,000,000 in exchange for a noninterest bearing note requiring ten annual payments of
P500,000. The first payment was made on December 31, 2023. The market interest for similar
note was 12%. The present value of an ordinary annuity of 1 for ten periods is 5.65. What is the
carrying amount of the note receivable on December 31, 2022?
a. 5,000,000 b. 2,825,000 c. 2,175,000 d. 4,500,000

7. On January 1, 2022, Ryan Company sold equipment with a carrying amount of P4,800,000 in
exchange for P6,000,000 noninterest bearing note due January 1, 2025. There was no established
exchanged price for the equipment. The prevailing interest rate for this note was 10%. The
present value of 1 at 10% for three periods is 0.75.
A. What amount should be reported as gain or loss on sale of equipment?
a. 1,200,000 gain b. 2,700,000 gain c. 300,000 gain d. 300,000 loss

B. What amount should be reported as interest income for 2022?

a. 600,000 b. 500,000 c. 450,000 d. 90,000

8. Katrina Bank loaned P7,500,000 to a borrower on January 1, 2020. The terms of the loan were
payment in full on January 1, 2025, plus annual interest payment at 12%. The interest payment
was made as scheduled on January 1, 2021. However, due to financial setbacks, the borrower was
unable to make the 2022 interest payment. The bank considered the loan impaired and projected
the cash flows from the loan on December 31, 2022. The bank has accrued the interest on
December 31, 2021 but did not continue to accrue interest for 2022 due to the impairment of the
loan. The projected cash flows are:
Amount projected
Date of cash flow December 31, 2022
December 31, 2023 500,000
December 31, 2024 1,000,000
 December 31, 2025 2,000,000
December 31, 2017 4,000,000

The PV of 1 at 12% is .89 for one period, .80 for two periods, .71 for three periods and .64 for
four periods

1. What is the loan impairment loss to be recognized on December 31, 2022?

a. 2,275,000 b. 3,175,000 c. 5,225,000 d. 2,175,000

2. What is the interest income to be reported by the bank in 2023?

a. 627,000 b. 900,000 c. 567,000 d. 0

3. What is the carrying amount of the loan receivable on December 31, 2023?
a. 5,352,000 b. 4,725,000 c. 5,225,000 d. 7,000,000

9. Krishtel Company assigned P3,000,000 of accounts receivable as collateral for a P2,000,000 loan
with a bank. The bank assessed a 5% finance fee on the amount of the loan and charged interest
on the note at 6% at maturity. What would be the journal entry to record the transaction on the
date of assignment?
a. Debit cash P1,900,000, debit finance charge P100,000 and credit note payable P2,000,000
b. Debit cash P1,850,000, debit finance charge P150,000 and credit note payable P2,000,000
c. Debit cash P1,900,000, debit finance charge P100,000, debit due from bank P1,000,000 and
credit accounts receivable P3,000,000
d. Debit cash P1,880,000, debit finance charge P120,000 and credit note payable P2,000,000

10. On December 1, 2022, Jahara Company assigned on a nonnotification basis accounts receivable
of P5,000,000 to a bank in consideration for a loan of 80% of the accounts less a 5% service fee
on the accounts assigned. The entity signed a note for the bank loan. On December 31, 2022, the
entity collected assigned accounts of P2,000,000 less discount of P200,000. The entity remitted
the collections to the bank in partial payment for the loan. The bank applied first the collection to
the interest and the balance to the principal. The agreed interest is 1% per month on the loan
balance. The entity accepted sales returns of P100,000 and wrote off assigned accounts totaling
P300,000. What is the balance of accounts receivable assigned on December 31, 2022?
a. 3,000,000 b. 2,600,000 c. 2,400,000 d. 2,900,000

11. On January 1, 2022, Ricalyn Company sold land with carrying amount of P4,500,000 in exchange
for a 9-month, 10% note with face value of P6,000,000. On April 1, 2022, the entity discounted
the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted
for as a conditional sale with recognition of contingent liability. On October 1, 2022, the maker
dishonored the note receivable. The entity paid the bank the maturity value of the note plus
protest fee of P50,000. On December 31, 2022, the entity collected the dishonored note in full
plus 12% annual interest on the total amount due.

A. What amount was received from the note discounting on April 1, 2022?
a. 6,063,000 b. 6,450,000 c. 6,150,000 d. 5,963,000

B. What amount should be recognized as loss on note discounting on April 1, 2022?

a. 450,000 b. 387,000 c. 87,000 d. 63,000

C. What is the total amount collected from the customer on December 31, 2022?
a. 6,450,000 b. 6,500,000 c. 6,695,000 d. 6,662,500

12. Heizel Company factored P5,000,000 of accounts receivable to a finance company. Control was
surrendered by the entity. The finance company assessed a fee of 5% and retains a holdback equal
to 10% of the accounts receivable. In addition, the finance company charged 12% interest
computed on a weighted average time to maturity of the accounts receivable for 30 days?

A. What is the amount initially received from the factoring of accounts receivable?
a. 4,250,000 b. 4,200,000 c. 4,700,685 d. 4,200,685

B. What total amount should be recognized as loss on factoring?

a. 299,315 b. 799,315 c. 250,000 d. 0