Financial Accounting

and Reporting
(FAR)

#128 Maginhawa St., Brgy. Teacher’s Village East, Quezon City pinnaclecpareview.ph
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 CASH AND CASH EQUIVALENTS sufficient to cover the overdraft, the total cash
shall be shown net of the overdraft.
DEFINITIONS:
o Compensating balance
o Cash - includes money in the form of currency and coins, ● If this amount is legally restricted to withdrawal,
negotiable instruments in the form of checks and money it is therefore excluded from cash. However, in
orders acceptable by the bank for immediate credit and cases that it still remains to be unrestricted, the
bank deposits whether in a savings or current account. compensating balance shall be part of cash. If the
compensating balance is legally restricted the
o Cash Equivalents - under PAS 7, cash equivalents are following rules shall be followed:
short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they ✓ The related loan is short-term: The
present insignificant risk in changes in value because of compensating balance shall be part of
changes in interest rates. current assets but separately from cash.
✓ The related loan is long-term: The
o Bank Reconciliation - a statement that that settles the compensating balance is part of
difference between the bank statement balance and the noncurrent assets as an investment.
cash balance per book which is the current balance in the
● An informal agreement to maintain a minimum
checkbook of the depositor.
amount of deposit will not be legally restricted
and therefore included in cash.
o Book Reconciling Items - include credit memos, debit
memos and errors that need to be adjusted by the
Cash Equivalents
depositor to reconcile with the adjusted balance.
o The three important characteristics for cash
equivalents as mentioned in PAS 7 are short-term,
o Bank Reconciling Items - these include deposits in transit,
highly liquid and near maturity. In other words, short-
outstanding checks and errors.
term debt instruments with low risk (also low yield)
and acquired 3 months or less from maturity date
o Certified Checks - checks that have been accepted by the
shall be considered as cash equivalents.
bank and where the drawer’s account has been debited
but the money has yet to be withdrawn by the payee. The
✓ Examples include Treasury Bills, Bonds and
funds are now held by the bank on behalf of the payee and
Notes, Time Deposits, Certificate of deposits
the check is no longer outstanding.
and Bankers Acceptances and Commercial
Papers.
o Petty Cash Fund - money set aside to pay small and
recurring expenses where it will be inefficient to settle
o Time deposits – Bank savings account that earns
such payments by issuing checks. Petty cash fund may be
interest but not subject to immediate withdrawal or
accounted for using either imprest fund system or
check issuance.
fluctuating fund system.
● Time deposits are excluded from cash because of
o Imprest Control System - a control system where all cash
their restriction on availability as funds and are
receipts including checks to be deposited intact and all
classified as investments and shall follow these
cash disbursements be made by the issuance of a check.
specific classifications:
a. Cash equivalents if the original term is 3
Cash includes the following items plus adjustments:
months or less.
✓ Undeposited currency and coins.
b. Short term investments if the original
✓ Checks and money orders held unless the checks are
term is more than 3 months to 1 year
post-dated, defective or stale. Such items shall still be
c. Long-term investments if the original
included as receivables.
term is more than 1 year.
✓ Unrestricted bank deposits.
✓ Funds on hand and deposits that are for current use.
Example of Adjusted Balance Reconciliation:
This includes petty cash fund, payroll fund and funds
for taxes and dividends as mentioned in PAS 1 but
Bank Book
excludes funds appropriated for non-current assets.
Unadjusted Balance Unadjusted
✓ Foreign currencies converted to their peso values. X X
Balance
✓ Bank drafts.
Deposit in transit + Credit memo* +
Special Items of Cash Outstanding checks (-) Debit memo** (-)
o Bank overdraft – A credit or negative balance in the Errors +/(-) Errors +/(-)
bank account of the depositor resulting from an Adjusted balance X Adjusted balance X
issuance of a check that exceeds the amount of the
deposit. o Credit memos include collections by the bank;
interest credited by the bank and matured time
✓ As a rule, an overdraft shall be classified as a deposits transferred to the current account.
current liability and not offset against current
accounts with a positive or debit balance. o Debit memos include NSF checks, bank service
✓ As an exception, if the overdraft is in a bank charges and authorized bank debits.
where there are other accounts that have a
positive balance and those accounts are - - END - -

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 CASH AND CASH EQUIVALENTS
THEORY
1. Cash or Cash on Hand and In Banks on the balance sheet may include the following items
I. Currency or cash items on hand
II. Deposits in foreign countries which are subject to foreign exchange restrictions
III. Short-term placements of excess cash which can be pre-terminated
IV. Postdated checks
V. Cash set aside for the acquisition or construction of noncurrent assets
a. 1, 2 and 3 only c. 1 and 3 only
b. 2, 3 and 5 only d. Not given

2. Cash equivalents are

a. Short-term and highly liquid investments that are readily convertible into cash
b. Short-term and highly liquid investments that are readily convertible into cash with remaining
maturity of three months
c. Short-term and highly liquid investments that are readily convertible into cash and acquired three
months before maturity
d. Short-term and highly liquid marketable equity securities

3. All of the following can be classified as cash and cash equivalents, except
a. Bank drafts
b. Equity investments
c. Loan notes held due for repayment in 90 days
d. Redeemable preference shares acquired and due in 60 days

4. Which of the following items should not be included in “cash”?

a. Coins and currency in the cash register
b. Amounts on deposit in checking account at the bank
c. Checks from other parties presently in the cash register
d. Money market placement

5. Which of the following is not considered cash for financial reporting purposes?
a. Bank charges for the period c. Petty cash funds and change funds
b. Errors made by the company d. Postdated checks and IOUs

6. What is a compensating balance?

a. Savings account balances
b. Margin account held with brokers
c. Temporary investment serving as collateral for outstanding loan
d. Minimum deposit required to be maintained in connection with a borrowing arrangement

7. If the deposit is legally restricted as to withdrawal, the compensating balance related to a long-term loan is
shown as
a. Cash c. Long-term investment
b. Other asset d. Current liability

8. Bank overdraft, if material, should be

a. Reported as a deduction from the current asset section
b. Reported as a deduction from cash
c. Netted against cash and a net cash amount reported
d. Reported as a current liability

9. If a financial institution has cash funds in a company, which is in bankruptcy, and the amount recoverable is
estimated to be lower than the face amount, cash should be
a. Eliminated from the balance sheet
b. Written down to its discounted or present value
c. Written down to estimated realizable value
d. Stated at face amount

10. The following statements relate to cash. Which statement is true?

a. The term “cash equivalent” refers to demand credit instruments such as money order and bank drafts
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 b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time
c. Classification of a restricted cash balance as current or non-current should parallel the classification
of the related obligation for which the cash was restricted
d. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”

11. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals

12. All cash receipts are deposited intact and all cash disbursements are made by means of check. This internal
control is known as
a. Administrative control c. Accounting control
b. Imprest system d. Auditing control

13. Entries to record the replenishment of petty cash fund result in a debit to various expense accounts and a
credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system c. Internal control
b. Fluctuating petty cash system d. Administrative control

14. What is the major purpose of an imprest petty cash fund?

a. To effectively plan cash inflows and outflows c. To determine the honesty of the employees
b. To ease the payment of cash to vendors d. To effectively control cash disbursements

15. A cash over or short account

a. Is not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash

16. Which is true when a petty cash fund is used?

a. The petty cash fund balance should be reported as investment
b. The reimbursement of the petty cash fund should be debited to expenses and credited to the cash
account
c. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted to the
appropriate general ledger account
d. Entries that include a credit to the cash account should be recorded at the time payments from the
petty cash fund are made

17. The following statements relate to the petty cash fund. Which statement is true?
a. The amount of coins and currency in the petty cash fund is the same before the fund is reimbursed as
it is afterwards
b. Entries to record the replenishment of the imprest petty cash fund result in debit to various expense
accounts and a credit to the petty cash funds
c. At any time, the sum of the cash in the petty cash fund and the total petty cash vouchers should equal
the amount for which the imprest petty cash fund was established
d. Under the imprest petty cash system, it is not necessary to adjust unreplenished petty cash expenses
at end of the year

18. A bank reconciliation is prepared monthly in order for the enterprise to

a. Arrive at the correct cash balance c. Correct book errors
b. Correct bank errors d. Unearth any undetected cash fraud

19. Bank reconciliation

a. Is the process of transferring money in or out of a bank account

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 b. Requires that every transaction which will result in a cash payment be verified, approved and
recorded before a bank check is prepared
c. Is an analysis that reflects the bank transactions made by a depositor
d. Explains the difference between the bank balance and the balance shown in the depositor’s records

20. A bank statement provides information about all of the following, except
a. Bank charges for the period c. Errors made by the company
b. Check cleared during the period d. NSF checks

21. When preparing a bank reconciliation, bank credits are

a. Added to the bank statement balance c. Added to the balance per book
b. Deducted from the bank statement balance d. Deducted from the balance per book

22. For purposes of bank reconciliation, debit memos are

a. Added to the bank balance c. Deducted from the bank balance
b. Added to the book balance d. Deducted from the book balance

23. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation
which ends with adjusted balance?
a. Note receivable collected by the bank in favor of the depositor and credited to the account of the
depositor
b. NSF customer check
c. Service charge
d. Erroneous bank credit

24. In the process of preparing a bank reconciliation

a. Outstanding checks should be added to the bank balance of cash
b. Outstanding checks should be subtracted from the book balance of cash
c. All of the reconciling items shown on a bank reconciliation must be entered in the accounting
records after the reconciliation is completed
d. Items that appear on the reconciliation as corrections to the book balance of cash should be entered
in the accounting records

25. The reconciling item in bank reconciliation that will result in an adjusting entry by the depositor is
a. Outstanding checks c. Bank error
b. Deposit in transit d. Bank service charges

26. What is the adjusting entry for a customer NSF check?

a. Debit cash and credit accounts receivable c. Debit service charge and credit cash
b. Debit accounts receivable and credit cash d. No adjustment is necessary

27. If the cash balance shown in a company’s accounting records is more than the correct cash balance and neither
the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the company

28. In reconciling the bank balance with the book cash balance, which of the following would not cause the bank
balance shown in the bank statement to be lower than the unadjusted book balance?
a. Deposits in transit
b. Cash on hand at the company
c. Interest credited to the account by the bank
d. NSF checks from a customer as reported on the bank statement

29. If the cash balance in a company’s bank statement is less than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit
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 30. If the cash balance in a company’s bank statement is more than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit

31. A proof of cash

a. Is a physical count of currencies on hand at the end of reporting period
b. Is a formal statement showing the total cash receipts during the year
c. Is a four-column bank reconciliation showing reconciliation of cash balances per book and per bank
at the beginning and end of the current month and reconciliation of cash receipts and cash
disbursement of the bank and the depositor during the current month
d. Is a summary of cash receipts and cash payments

PROBLEMS

1. The composition of Addi Company’s “cash account” as of December 31, 2021 is as follows:

Demand deposit account P2,000,000

Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2022) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2022 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000

Additional information follows:

• Check of P200,000 in payment of accounts payable was recorded on December 31, 2021 but mailed
to suppliers on January 5, 2022.
• Check of P100,000 dated January 15, 2022 in payment of accounts payable was recorded and mailed
on December 31, 2021.
• The company uses the calendar year. The cash receipts journal was held open until January 15, 2022,
during which time P400,000 was collected and recorded on December 31, 2021.

The cash and cash equivalents to be shown on the December 31, 2021 balance sheet is:
a. P3,310,000 c. P2,910,000
b. P1,910,000 d. P4,410,000

2. Juan Company reported the checkbook balance on December 31, 2021 at P8,000,000. In addition, the entity
held the following items in the safe on that date:
Check payable to the entity, dated January 2, 2022 in payment 1,000,000
of a sale, not included in December 31 check book balance
Check payable to the entity, deposited December 15 and
included in December 31 checkbook balance, but returned by
bank on
December 30 stamped “NSF”. The check was redeposited on 3,000,000
January 2, 2022 and cleared on January 5, 2022
Check drawn on the entity’s account, dated and recorded on
December 31, 2021 but not mailed until January 15, 2022 2,500,000
Coins and currencies on hand 800,000
Three-month money market instruments 1,500,000
What is the correct amount of Cash on December 31, 2021?
a. P7,500,000 c. P8,300,000

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 b. P9,300,000 d. P9,000,000

3. On December 31, 2021, the cash account of Christopher Company has a debit balance of P3,500,000. An
analysis of the cash account shows the following details:
Undeposited collections P 60, 000
Cash in bank-PCIB checking account 500, 000

Cash in bank-PNB (overdraft) (50, 000)

Undeposited NSF check received from a customer, dated Dec. 1, 2021 15, 000
Undeposited check from a customer, dated January 15, 2022 25, 000
Cash in bank-PCIB (fund for payroll) 150, 000
Cash in bank-PCIB (savings deposit) 100, 000
Cash in bank-PCIB (money market instrument, 90 days) 2, 000,000
Cash in foreign bank (restricted) 100, 000
IOUs from officers 30, 000
Sinking fund cash 450, 000
Listed stock held as temporary investment 120, 000
P3,500,000
Cash and cash equivalents on its December 31, 2021 statement of financial position should be
a. P2,760,000 c. P2,885,000
b. P2,810,000 d. P2,935,000

4. The current assets of Rhosendy Company on December 31, 2021 include the following:
Cash on hand P 50,000
Petty cash fund 10,000
Cash in bank 200,000
Accounts receivable 400,000
Inventory 500,000
Marketable equity securities 145,000
Deferred charges 20,000
Total P1,325,000

A. Cash on hand includes:

• Customer’s check of P4,000 returned by bank on December 26, 2021 due to insufficient funds but
subsequently redeposited and cleared by bank on January 5, 2022.
• Customer’s check for P6,000 dated January 15, 2022, received December 22, 2021.
• Postal money orders received from customers, P5,000.
• Cash withheld from wages for income tax of employees, P15,000.
B. The petty cash fund consists of the following items on December 31, 2021:
• Currency and coins, P2,800.
• Employees’ vales, P2,000.
• Currency in envelope marked “collections for birthday party”, P1,000.
• Unreplenished petty cash vouchers, P2,000.
• Check drawn payable to petty cashier, P2,200.
C. Included among the checks in payment of accounts payable drawn by the company against its current
account and recorded in December 2021 are:
• Check written and dated December 22, 2021 and delivered to payee on January 5, 2022, P10,000.
• Check written December 26, 2021 and dated January 21, 2022, delivered to payee on December 26,
2021, P15,000.
Question 1: How much is the adjusted cash on hand on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000

Question 2: How much is the adjusted petty cash fund balance on December 31, 2021?
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 a. P40,000 c. P5,000
a. P1,328,000 d. P225,000

Question 3: How much is the adjusted cash in bank balance on December 31, 2021?
a. P40,000 c. P5,000
b. P1,328,000 d. P225,000

Question 4: How much is the correct cash balance on December 31, 2021?
a. P270,000 c. P275,000
b. P265,000 d. P280,000

5. Shown below is the bank reconciliation for Johanna Company for November 2021:

Balance per bank, Nov. 30, 2021 P150,000

Add: Deposit in transit 24,000
Total P174,000
Less: Outstanding checks P28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2021 P136,000
The bank statement for December 2021 contains the following data:
Total deposits P110,000
Total charges, including NSF check of P8,000
and a service charge of P400 96,000
All outstanding checks on November 30, 2021, including the bank credit, were cleared in the bank in December
2021. There were outstanding checks of P30,000 and deposits in transit of P38,000 on December 31, 2021.
Question 1: How much is the cash balance per bank on December 31, 2021?
a. P154,000 c. P164,000
b. P150,000 d. P172,400

Question 2: How much is the December receipts per book?

a. P124,000 c. P110,000
b. P 96,000 d. P148,000

Question 3: How much is the December disbursements per books?

a. P96,000 c. P89,600
b. P79,600 d. P98,000

Question 4: How much is the cash balance per books on December 31, 2021?
a. P150,000 c. P180,400
b. P170,400 d. P162,000

Question 5: The adjusted cash in bank balance as of December 31, 2021 is:
a. P141,600 c. P180,400
b. P170,400 d. P162,000

Note: Final answer should be P172,000.

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 6. Charles Company is making a four-column reconciliation on June 30 from the following data. The amounts
per bank statement were: Balance - May 31, P6,500; June receipts, P13,000; June disbursements, P11,000.
The amounts per books were: Balance – May 31, P7,635; June receipts, P11,548; June disbursements, P11,235;
Balance – June 30, P7,948.
May 31 June 30
Deposits in transit P1,200 P1,500
Outstanding checks 670 840
The bank overlooked a check for P75 when
recording a deposit on June 10
Note collected by bank, recorded after
receiving the bank statement 1,800
NSF checks recorded after receiving
bank statement 560 480
Service charge, recorded after receiving
the bank statement 45 60
Bored recorded a P374 check received from
a customer in June as P347
Question 1: The corrected balance per bank on June 30 is:
a. P9,085 c. P9,235
b. P9,160 d. P10,075

Question 2: The corrected June receipts per books is:

a. P11,575 c. P13,346
b. P13,300 d. P13,375

Question 3: The corrected June disbursements per books is:

a. P10,830 c. P11,250
b. P11,170 d. P11,300

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 TRADE AND OTHER RECEIVABLES o The net realizable value shall be computed after
o Trade and Other Receivables – a one-line-item account deducting an allowance for the following:
used to summarize receivables that are classified as ● Sales returns – value of merchandise expected to be
current assets. As to its details, they are disclosed in the returned by customers as a result in error of deliveries and
defects.
notes to financial statements.
● Sales discounts – value of price savings to customers
Composition
expected to pay within the discount period and take
✓ Trade Receivables advantage of the cash discount.
✓ Non-trade Receivables ● Freight charges – amount of freight charges collected by
Valuation the shipper from the buyer even though the shipment was
o Short-term receivables – Face value under FOB destination terms. This amount shall not be
o Long-term receivables remitted by the buyer hence deducted from the receivable.
● Discounted amount or present value ● Doubtful accounts – allowance for expected uncollectibility
● Amortized cost using effective interest method that is an inherent risk from selling on credit.
o Receivables may be current or noncurrent and trade or Allowance Method vs. Direct Write-off Method
nontrade.
Allowance Direct
● The rules on current and noncurrent classification are Application Generally Accepted Non-GAAP
discussed in detail under PAS 1 and are also based on Accounts considered Expense and Increase
the receivable as either trade or nontrade. Not accounted for
doubtful the Allowance
● Trade receivables arise from the sale of goods or Debit Allowance and Debit expense and
Write-off
services to customers and in the form of accounts Credit AR Credit AR
receivable or notes receivable. Debit AR and credit Debit AR and
Recovery
✓ Classified as current asset if collectible Allowance credit expense
within one year or normal operating cycle, o The computation for the doubtful accounts expense
whichever is longer. which is an adjusting entry and the allowance for doubtful
● Nontrade receivables are receivables from all other accounts will be as follows:
types of transactions like advances to officers and Beginning balance X
employees and advances to other entities. Write off (X)
✓ Non-Trade Receivables – current asset if Recovery X
collectible within one year, notwithstanding Balance before adjustment X
the normal operating cycle. Doubtful accounts expense X
o Accounts receivable arise from credit sales. The amount Ending balance X
to be recorded as accounts receivable from sales on o There are 3 methods in estimating doubtful accounts:
account shall be the “Invoice Price” which is the amount ● The percentage of net credit sales method which will
after deducting trade discounts from the List Selling Price. provide the amount of doubtful accounts expense for
Take note that trade discounts are not accounted for and the year and therefore is a method that emphasizes
are ignored for recording purposes. proper matching of doubtful accounts against sales.
o The following transactions also affect accounts receivable This amount will then be added to the balance before
in computing for the ending balance: adjustment, the total of the two will then be the
ACCOUNTS RECEIVABLE amount of allowance at year-end or after adjustment.
+ Credit Sales (-) Sales returns and allowances ● The percentage of accounts receivable method will
+ Recovery of accounts (-) Sales discounts provide the amount of required allowance for doubtful
written off accounts and just like its counterpart the “Aging
(-) Collections including recovery Method”, the amount of doubtful accounts expense
(-) Write off will be worked back as an adjustment to the amount of
(-) Factored accounts
required allowance.
● The aging of accounts receivable method that is
o The write-off for accounts receivable under the allowance arguably the most accurate of all three methods since
method is recorded by: an analysis is made and each classification of accounts
Allowance for doubtful accounts xx receivable is multiplied by a specific rate of the
Accounts Receivable xx estimate of uncollectibility.
o The recovery or the collection on an accounts receivable
that already has been written off cannot be recorded by Special Treatments
✓ Advances to Subsidiaries and Affiliates – usually classified
simply debiting cash and crediting accounts receivable.
as long-term investments.
The entry for the write off must be reversed and before
✓ Customers with Credit Balances – usually classified as
recording the collection with the following two entries: current liabilities. Otherwise, non-current liabilities.
Accounts Receivable xx ✓ Receivables from Officers, Directors, and Employees –
Allowance for doubtful accounts xx usually classified as current assets. Otherwise, non-current
assets.
Allowance for doubtful accounts xx ✓ Subscriptions Receivables – presented as part of the
Accounts Receivable xx stockholders’ equity. Otherwise, part of current assets.
✓ Receivables Hypothecated against Borrowings (Pledged or
o Combining the two entries will be more efficient by: Assigned) – still included as part of the current assets with
the corresponding disclosure in the notes to financial
Cash xx
statements.
Allowance for doubtful accounts xx
✓ Receivables Discounted with Recourse – excluded.
o The ending balance of accounts receivable shall be ✓ Receivables Sold without Recourse – excluded.
presented as part of current assets under the heading of ✓ Unearned Finance Charges and Interests – deducted from
“trade and other receivables” at the Net Realizable Value the related receivables.
(expected cash value) or “amortized cost”
- - END - -

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 TRADE AND OTHER RECEIVABLES

THEORY

1. Accounts receivable shall be recognized initially at

a. Face value c. Maturity value
b. Discounted value d. Current value

2. Subsequent to initial recognition, accounts receivable should be carried at

a. Face value c. Maturity value
b. Net realizable value d. Present value

3. Assuming that the ideal measure of short- term receivable in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make
the balance sheet misleading because
a. Most short- term receivables are not interest- 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

4. Receivables denominated in a foreign currency should be

a. Translated to local currency using the exchange rate at the time the receivable arise
b. Shown at face value of the foreign currency
c. Translated to local currency using the exchange rate at the balance sheet date
d. Translated to local currency using the exchange rate when the balance sheet is issued

5. In reporting accounts receivable at the balance sheet

a. An aging schedule is used to determine which accounts should be written off prior to
preparing the balance sheet totals
b. The allowance for uncollectible accounts, freight charges, sales discounts, and sales
returns and allowances are deducted from accounts receivable
c. The direct write off method is used to determine the appropriate balance in the allowance
for uncollectible accounts at year-end
d. Only those accounts likely to be collected before the beginning of the next period should
be included in the accounts receivable

6. When individual customer’s accounts have credit balances of material amounts, these amounts
a. Should be omitted from the balance sheet
b. Must be reported separately in the liability section of the balance sheet
c. May be shown as “credit balances of customers accounts” in the current assets section
d. May be deducted from the debit balance in other customers accounts in the asset section

7. Bad debt expense represents

a. that portion of this period’s sales on account not likely to be collected
b. that portion of the balance in accounts receivable at the end of the period not likely to be
collected
c. the amount of accounts receivable written off as uncollectible during the current period
d. the total of those accounts receivable written off during the period and the amount judged
to be uncollectible at the beginning of the period

8. Which of the following statement is true in relation to presentation of receivables in statement of

financial position?
a. Trade receivables and nontrade receivables are shown separately
b. Nontrade receivables are presented as noncurrent assets
c. Trade account receivables and trade notes receivable shall be presented separately
d. Trade receivable and nontrade receivable which are currently collectible shall be
presented as one line item called “trade and other receivables”

9. Accounts receivable usually appear in the balance sheet

a. As current assets, combined with cash and cash equivalents
b. As current assets, immediately after cash and cash equivalents
c. Only if the balance sheet method of estimating uncollectible accounts is used
d. As either current assets or noncurrent assets, depending on whether the allowance
method or the direct write-off method is used to account for uncollectible accounts
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 10. Accounts receivable are classified as current assets
a. Only if convertible into cash beyond one year
b. Only if convertible into cash within 60 days or sooner
c. Only if the allowance method is used to estimate the uncollectible accounts
d. Whenever accounts receivable arise from “normal” sales to customers, regardless of the
credit terms

11. If a company employs the gross method of recording receivables from customers, then sales
discounts taken should be reported as
a. A deduction from sales in the income statement
b. An item of other expense in the income statement
c. Sales discounts forfeited in the cost of sales section of the income statement
d. A deduction from accounts receivable in determining the net realizable value

12. Which of the following is an advantage of using the net price method for recording cash discounts
on credit sales?
a. It properly reflects current periods sales revenue
b. It simplifies recording of sales returns and allowances
c. It eases communication with customers about their balances
d. It requires less record-keeping efforts than the gross method

13. Which of the following concepts relates to the allowance method in accounting for accounts
receivable?
a. Bad debt expense is based on the actual amount determined to be uncollectible
b. Bad debt expense is an estimate that is based only on an aging of accounts receivable
c. Bad debts expense is an estimate that is based on historical and prospective information
d. Bad debt expense is management determination of which accounts will be sent to the
attorney for collection

14. Which of the following is a generally accepted method of determining the amount of the
adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance

15. Which is a generally accepted method of determining the amount of the adjustment to bad debt
expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of accounts receivable not adjusted for the balance in the allowance
c. An amount derived from aging accounts receivable adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable not adjusted for the balance in the
allowance

16. Which method does not properly match expense and revenue?
a. Charging bad debts as accounts are written off as uncollectible
b. Charging bad debts with a percentage of sales under the allowance method
c. Charging bad debts using aging of accounts receivable under the allowance method
d. Charging bad debts using a percentage of accounts receivable under the allowance
method

17. A method of estimating bad debts that focuses on the income statement whether rather than the
statement of financial position is the allowance method based on
a. Direct write-off method c. Credit sales
b. Aging the trade accounts receivable d. The balance in the trade accounts
receivable

18. When an accounts receivable aging schedule is prepared, a series of computations is made to
determine estimated uncollectible accounts. The resulting amount from this aging schedule
a. When added to the total accounts written off during the year is the desired credit balance
of the allowance for doubtful accounts at year-end
b. Is the amount of doubtful accounts expense for the year

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 c. Is the amount that should be added to the beginning allowance for doubtful accounts to
get the doubtful accounts expense for the year
d. Is the amount of desired credit balance of the allowance for doubtful accounts to be
reported at year end

19. From the standpoint of accounting theory, the allowance method of accounting for uncollectible
accounts expense is much better than the direct write off method because
a. Uncollectible accounts are merely charged to expense in the period when such receivables
are determined to be collectible
b. Expenses are unmatched with related revenues
c. The receivables are not stated at their provable realizable value
d. Uncollectible accounts are recorded as expenses in the period in which the individual
accounts are determined to be worthless

20. When the allowance method is used, the entry which is appropriate when a particular account is
written off as uncollectible should include a
a. Credit to sales revenue c. Debit to accounts receivable
b. Credit to bad debt expense d. Debit to allowance for doubtful accounts

21. A company, which has an adequate amount in its Allowance for Doubtful Accounts, writes off as
uncollectible an accounts receivable from a bankrupt customer. This action will
a. Have no effect on total current assets c. Reduce the amount of equity
b. Reduce net income for the period d. Reduce total current assets

22. When a specific customer’s account receivable is written off as uncollectible, what will be the
effect on net income under each of the following methods of recognizing bad debt expense?
Allowance Direct write-off Allowance Direct write-off
a. None Decrease c. Decrease Decrease
b. Decrease None d. None None

PROBLEMS

1. Judy Company reported current receivables on December 31, 2021 which consisted of the
following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts 20,000
Claim against shipper for goods lost in transit in November 2021 30,000
Selling price of unsold goods sent by the entity on consignment
at 130% of cost and not included in the ending inventory 260,000
Security deposit on lease of warehouse used for storing inventories 300,000
What is the correct total of current net receivables on December 31, 2021?
a. P1,500,000 c. P1,240,000
b. P1,200,000 d. P940,000

2. The following information relates to Kay Co.’s accounts receivable for 2021:
Accounts receivable, 1/1/21 P650,000
Credit sales for 2021 2,700,000
Sales returns for 2021 75,000
Accounts written off during 2021 40,000
Collections from customers during 2021 2,150,000
Estimated future sales returns at 12/31/21 50,000
Estimated uncollectible accounts at 12/31/21 140,000
What amount should it report for account receivable, before allowances for sales returns and
uncollectible accounts as of December 31, 2021?
a. P1,200,000 c. P1,085,000
b. P1,125,000 d. P925,000

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 3. When examining the accounts of Lorelie Company, you ascertain that balances relating to both
receivables and payables are included in a single controlling account called receivables control that
has a debit balance of P4,850,000. An analysis of the make-up of this account revealed the
following:
Debit Credit
Accounts receivable – customers P7,800,000
Accounts receivable – officers 500,000
Debit balances – creditors 300,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise P4,500,000
Credit balances in customers’ accounts 200,000
Cash received in advance from customers
for goods not yet shipped 100,000
Expected bad debts 150,000

After further analysis of the aged accounts receivable, you determined that the allowance for
doubtful accounts should be P200,000. What is the correct total of current net receivables?
a. P8,950,000 c. P8,600,000
b. P8,800,000 d. P8,850,000

4. Harrah Corporation showed the following balances on January 1, 2021:

Accounts receivables P600,000
Allowance for doubtful accounts 30,000
The following transactions affecting accounts receivable occurred during the year ended
December 31, 2021:
Sales – cash and credit P3,280,000
Cash received from cash customers 400,000
Cash received from credit customers, excluding recovery 2,475,000
Cash received from credit customers who took
advantage of the 2/10, n/30 terms (included in P2,475,000) 1,470,000
Accounts receivable written off as worthless 20,000
Recoveries of accounts written off 5,000
Credit memoranda for returned credit sales 55,000
Cash refunds to cash customers 10,000
The company uses the percentage of accounts receivable method in determining the allowance
for doubtful accounts. What is the net realizable value of accounts receivable on December 31,
2021?
a. P855,000 c. P850,000
b. P900,000 d. P895,000

5. Mary Company began operations on January 1, 2021. On December 31, 2021, it provided for
uncollectible accounts based on 1% of annual credit sales. On January 1, 2022, it changed its
method of determining its allowance for uncollectible accounts by applying certain percentages to
the accounts receivable aging as follows:
Days past invoice date Percent uncollectible
0 – 30 1
31 – 90 5
91 – 180 20
Over 180 80
In addition, it wrote off all accounts receivables that were over 1 year old. The following additional
information relates to the years ended December 31, 2022 and 2021:
2022 2021
Credit sales P3,000,000 P2,800,000
Collections (including recovery) 2,915,000 2,400,000
Accounts written off 27,000 none
Recovery of accounts previously
written off 7,000 none
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 Days past invoice date at 12/31:
0 – 30 300,000 250,000
31 – 90 80,000 90,000
91 – 180 60,000 45,000
Over 180 25,000 15,000
What is the uncollectible accounts expense for the year ended December 31, 2022?
a. P39,000
b. P31,000
c. P38,000
d. P11,000

6. Gelyn Company began operations on January 1, 2018. From 2018 to 2020, the entity provided for
doubtful accounts based on 5% of annual credit sales. On January 1, 2021, the entity changed the
method of determining the allowance for doubtful accounts using an aging schedule. In addition,
the entity writes off all accounts receivable that are over 1 year old. The following information
relates to the years ended December 31, 2018, 2019, 2020 and 2021:
2021 2020 2019 2018

Credit sales 15,000,000 9,500,000 8,000,000 6,000,000

Collections excluding recovery 11,700,000 8,200,000 6,700,000 4,500,000
Accounts written off during year 200,000 120,000 80,000 None
Recovery of accounts written off 90,000 40,000 25,000 None
Days Account Outstanding Amount Probability of Collection
Less than 16 days 3,000,000 98%
Between 16 and 50 days 1,500,000 80%
Between 51 and 100 days 1,200,000 75%
Between 101 and 200 days 800,000 50%
Between 201 and 365 days 400,000 20%
Over 365 days – to be written off 100,000 0%
Question 1: What was the allowance for doubtful accounts on January 1, 2021?
a. P1,175,000 c. P1,240,000
b. P1,040,000 d. P975,000

Question 2: What amount should be reported as allowance for doubtful accounts on December
31, 2021?
a. P1,380,000 c. P2,420,000
b. P1,480,000 d. P1,060,000

Question 3: What amount should be reported as doubtful accounts expense for 2021?
a. P550,000 c. P450,000
b. P750,000 d. P200,000

Question 4: What is the net realizable value of accounts receivable on December 31, 2021?
a. P6,900,000 c. P5,520,000
b. P7,000,000 d. P5,620,000

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 NOTES RECEIVABLE directly attributable to the acquisition of the financial
asset.
✓ Claims supported by formal promises to pay usually in
the form of notes. ● Transaction costs that are directly attributable to the
loan receivable include direct origination costs.
✓ Standing alone, the term “notes receivable”
represents only claims arising from sale of ✓ Direct origination costs should be included in
merchandise or service in the ordinary course of the initial measurement of the loan
business. receivable.

✓ Thus, notes received from officers, employees, ✓ However, indirect origination costs should
shareholders and affiliates shall be designated be treated as outright expense.
separately.
o Subsequent measurement
Initial measurement ● PFRS 9 provides that if the business model in
● Conceptually, notes receivable shall be measured managing financial assets is to collect contractual
initially at present value. cash flows on specified dates and the contractual cash
flows are solely payments of principal interest, the
● However, short-term notes receivable shall be financial asset shall be measured at amortized cost.
measured at face value.
● Accordingly, a loan receivable is measured at
o Cash flows relating to short-term notes amortized cost using the effective interest method.
receivable are not discounted because the
effect of discounting is usually not material. o Origination fees
● Lending activities usually precede the actual
● Interest-bearing notes receivable disbursement of funds and generally include efforts
to identify and attract potential borrowers and to
o Measured at face value which is actually the originate a loan.
present value upon issuance.
● The fees charged by the bank against the borrower
● Noninterest-bearing notes receivable for the creation of the loan are known as “origination
fees”.
o Measured at present value which is the
discounted value of the future cash flows o Impairment of loan
using the effective interest rate. ● PFRS 9 provides that an entity shall recognize a
loss allowance of expected credit losses on
Subsequent measurement financial asset measured at amortized cost.
● Subsequent to initial recognition, long-term notes
receivable shall be measured at amortized cost using ● An entity shall measure the loss allowance for a
the effective interest method. financial instrument at an amount equal to the
lifetime expected credit losses if the credit risk on
Meaning of amortized cost that financial instrument has increased
● The “amortized cost” is the amount at which the note significantly since initial recognition.
receivable is measured initially:
o Measurement of impairment
✓ Minus principal repayment ● The amount of impairment loss can be measured as
the difference between the carrying amount and the
✓ Plus or minus cumulative amortization of present value of estimated future cash flows
any difference between the initial carrying discounted at the original effective rate.
amount and the principal maturity amount
● The computation corresponding entry shall be as
✓ Minus reduction for impairment or follows:
uncollectibility PV of expected cash flows X
Less: Face value X
● For long-term noninterest-bearing notes receivable, Accrued interest X X
the amortized cost is the present value plus Loan impairment loss (X)
amortization of the discount, or the face value minus
the unamortized unearned interest income. Loan impairment loss xx
Interest receivable xx
Allowance for loan xx
LOAN RECEIVABLE impairment

● A financial asset arising from a loan granted by a bank ● The interest receivable shall be written off if interest
or other financial institution to a borrower or client. income already recognized shall not be realized
meanwhile the allowance shall be deducted from the
o Initial measurement current balance of the notes receivable.
● At initial recognition, an entity shall measure a loan
receivable at fair value plus transaction costs that are - - END - -

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 NOTES RECEIVABLE AND LOAN IMPAIRMENT

THEORY

1. Loans and receivables are

a. nonderivative financial assets with fixed or determinable payments that are not quoted in
an active market
b. nonderivative financial assets with fixed or determinable payments that are quoted in an
active market
c. nonderivative financial assets without fixed or determinable payments that are not quoted
in an active market
d. nonderivative financial assets without fixed or determinable payments that are quoted in
an active market

2. All of the following are characteristics of financial assets classified as loan and receivables except
a. They are not quoted in an active market
b. They have fixed or determinable payments
c. The holder has demonstrated positive intention and ability to hold them to maturity
d. The holder can recover substantially all of its investment (unless there has been credit
deterioration)

3. Initially, loans and receivables are measured at

a. Fair value
b. Fair value plus transaction costs that are directly attributable to the acquisition
c. Maturity value
d. Maturity value plus transaction costs that are directly attributable to the acquisition

4. Subsequent to initial recognition, loans and receivables are measured at

a. Cost
b. Amortized cost using the straight-line method
c. Amortized cost using the effective interest method
d. Fair value

5. The “amortized cost” of loan receivable is the amount of which

a. The loan receivable is measured initially minus principal repayment, plus or minus the
cumulative amortization of any difference between the initial amount recognized and the
principal maturity amount, minus reduction for impairment
b. The loan receivable is measured initially minus principal repayment, plus or minus
amortization recognized and the principal maturity amount
c. The loan receivable is measured initially
d. The loan receivable is measure initially minus principal payment

6. Long-term notes receivable which nominally bear no interest or an interest which is unreasonably
low should be recognized initially at
a. Face value c. Maturity value
b. Present value d. Net realizable value

7. Assuming that the ideal measure of short-term receivable in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make
the balance sheet misleading because
a. The amount of discount is not material
b. Most receivables can be sold to a bank or factor
c. Most short-term receivables are not interest-bearing
d. The allowance for uncollectible accounts includes a discount element

8. Accounting for the interest in a non-interesting bearing note receivable is an example of what
aspect of accounting theory?
a. Matching c. Substance over form
b. Verifiability d. Accounting entity

9. On January 1 of the current year, 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 the date of maturity. Interest receivable on June 30 of the
current year is
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 a. 4% of the face amount of the note c. 4% of the present value of the note
b. 5% of the face amount of the note d. 5% of the present value of the note

10. The carrying value of an impaired note immediately after the recognition of the impairment loss is
the
a. Nominal sum of remaining cash flows to be received
b. The book value before the impairment is recognized less accrued interest
c. Present value of remaining cash flows to be received, discounted at the current market
rate of interest
d. Present value of remaining cash flows to be received, discounted at the original interest
rate implicit in the note

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

12. The carrying value of an impaired note before recognizing a loan impairment
a. Includes accrued interest
b. Excludes accrued interest
c. Is less than the carrying value after recognizing the impairment
d. Is the same as the carrying value after recognizing the impairment

13. The discount on notes receivable represents

a. Unearned interest c. Prime interest
b. Prepaid interest d. Accrued interest

14. What is the treatment of “direct origination costs” incurred in connection with loans and
receivables?
a. Included in profit or loss
b. Part of the initial carrying amount of the loans receivable and amortized using the effective
interest method
c. Part of the initial carrying amount of the loans receivable and amortized using the straight-
line method
d. Charged directly to retained earnings

PROBLEMS

1. Gel Company is a dealer in equipment. On December 31, 2021, the company sold an equipment in
exchange for a noninterest bearing note requiring five annual payments of P500,000. The first
payment was made December 31, 2022. The market interest for similar notes was 8%. The relevant
present value factors are:
PV of 1 @ 8% for 5 periods .68
PV of an ordinary annuity of 1 @ 8% for 5 years 3.99
Question 1: In its December 31, 2021 statement of financial position, what should it report as notes
receivable?
a. P2,500,000 c. P1,700,000
b. P1,995,000 d. P1,495,000

Question 2: What interest income should be reported for 2022?

a. P505,000 c. P159,600
b. P101,000 d. P119,600

2. Erwin Bank grants a 10-year loan to X Company in the amount of P1,500,000 with a stated interest
rate of 6%. Payments are due monthly and are computed to be P16,650. The bank incurs P40,000
of direct loan origination cost and P20,000 of indirect loan origination cost. In addition, the bank
charges X a 4-point nonrefundable loan origination fee.
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 Question 1: The bank, the lender, has a carrying amount of:
a. P1,440,000 c. P1,500,000
b. P1,480,000 d. P1,520,000

Question 2: X, the borrower, has a carrying amount of:

a. P1,440,000 c. P1,500,000
b. P1,480,000 d. P1,520,000

3. On January 1, 2018, Ioanina Company loaned P3,000,000 to X Inc. The terms of the loan were
payment in full on January 1, 2023, plus annual interest payments at 11%. The interest payment
was made as scheduled on January 1, 2019; however, due to financial setbacks, X Inc. was unable
to make its 2020 interest payment. The company considers the loan impaired and projects the
following cash flows from the loan as of December 31, 2020 and 2021. Assume that it accrued the
interest on December 31, 2019 but did not continue to accrue interest afterwards due to the
impairment of the loan.
Amount projected as of Period PVF at 11%
Date of Flow Dec. 31, 2020 Dec. 31, 2021 1 0.9009
December 31, 2021 P 200,000 P 200,000 2 0.8116
December 31, 2022 400,000 600,000 3 0.7312
December 31, 2023 800,000 1,200,000 4 0.6587
December 31, 2024 1,200,000 1,000,000 5 0.5935
December 31, 2025 400,000
Question 1: Loan impairment loss in 2020
a. P882,380 c. P1,212,380
b. P1,549,500 d. P1,542,380

Question 2: Interest income for 2021 assuming the P200,000 was collected on December 31, 2021
as scheduled
a. P195,855 c. P200,000
b. P232,938 d. P66,000

Question 3: Allowance for loan impairment as of December 31, 2021

a. P554,340 c. P649,442
b. P752,640 d. P776,900

Question 4: Interest income in 2022 assuming the P600,000 was collected on December 31, 2022
as scheduled
a. P225, 210 c. P236,561
b. P247,023 d. P222,541

Question 5: Carrying amount of loan receivable as of December 31, 2022

a. P1,672,570 c. P1,645,641
b. P2,150,558 d. P1,892,683

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 RECEIVABLE FINANCING soon as goods are delivered to the customers. The
following items shall be deducted from the face value of
o Accelerating the collection of receivables either by using the receivables:
accounts receivable as a loan collateral, selling the
receivables without recourse and discounting of notes Face value of AR X
receivable. Less: Service fee or commissions X
Interest charges X
o The use of receivables as a loan collateral can either be Factor’s holdback X X
designated as a pledging of accounts receivable or an Proceeds from factoring X
assignment of accounts receivables.
o Both the service fee and interest shall be recognized as an
Forms of Receivable Financing: expense, meanwhile the factor’s holdback is a receivable
✓ Pledging and a value where the factor shall deduct the sales
✓ Assignment discounts and sales returns taken by the seller’s
✓ Factoring customers before finally remitting to the seller the
✓ Discounting balance when all of the accounts receivable is collected.

PLEDGING DISCOUNTING
o Refers to the use of receivables as collateral for a loan. o In essence, selling the note to the bank with recourse.
o The only entry required in the books would record the
loan obtained from the finance company or bank. o Discounting of notes receivable that is with recourse and
o The accounts receivable, in any manner, is not affected by on a notification basis shall involve the following
the pledging. The accounts receivable is accounted for computation:
normally and are not reclassified.
o However, disclosures should be made in the notes to Face value or principal X
financial statements. Interest on maturity X
Maturity value X
ASSIGNMENT Less: Discount (MV x DR x remaining term) X
o A more formal borrowing arrangement in which the Proceeds from discounting X
receivables are used as security.
o The borrower (assignor) assigns the receivables to a o The discount rate shall be determined by the bank buying
lender (assignee) and signs a promissory note. the note, however if there is no discount rate provided,
o A reclassification is made on the assigned accounts. the same rate on the note shall be used as the discount
o The “equity in the assigned accounts” is the difference rate. The remaining term is also known as the “discount
between the balance of the assigned accounts and the period”.
balance of the loan. Disclosure of this account is required.
o Assignment may be done on a notification or non- o The total receivable shall also be computed on the date of
notification basis. the discounting which is the face value plus the accrued
interest from the date of the note. This amount shall then
FACTORING be compared with the proceeds of the discounting and a
o A sale of receivables since the transfer of these “loss” shall be recognized for the difference.
receivables is without recourse.
o The factor company (finance company) assumes the risk o Journal Entries Related to the Discounting of Notes
of collection and generally handles the billing and Receivable Under Conditional Sale:
collection function.
o As in any sale of assets, a gain or loss is recognized for the Cash xx
difference between the proceeds received and the net Loss on discounting xx
carrying amount of the receivables factored. Notes receivable discounted xx
o Factoring can either be a “casual factoring” transaction or Interest income or interest receivable xx
“factoring as a continuing agreement”.
o Casual factoring is a sale of the receivables at a discount. o Journal Entries Related to the Discounting of Notes
This is similar to any type of sale of an asset in order to Receivable Under Secured Borrowing:
generate cash quickly. However, the sale is always made
below the carrying amount or the net realizable value of Cash xx
the accounts receivable and therefore a loss shall be Interest Expense xx
recognized as follows: Notes receivable discounted xx
Interest income or interest receivable xx
Face value of AR X
Less: Service fee or commissions X o The note receivable discounted account is credited rather
Selling price X than writing off the notes receivable account because of
Less: Accounts receivable X the contingent liability feature of the discounting
Allowances X (X) transaction. However, this account shall be a contra-asset
Loss on factoring X account and deducted from the total notes receivable to
be presented in the statement of financial position.
o Factoring as a continuing agreement involves the sale of
accounts receivable to a financing entity on a long term - - END - -
basis and where the buyer is committed to buy the
receivables before the actual goods are sold to the
customers on credit. In other words, the collection and
credit responsibilities are surrendered to the buyer as
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 RECEIVABLE FINANCING
THEORY

1. Which of the following is a method to generate cash from accounts receivable?

a. Assignment only c. Both A and B
b. Factoring only d. Neither A nor B

2. The equity of the assignor in assigned accounts is equal to

a. assigned accounts receivable
b. bank loan balance
c. assigned accounts receivable minus the bank loan balance
d. bank loan balance minus the assigned accounts receivable

3. 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 c. Commission
b. Service charge d. Factor’s holdback

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

5. 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 transaction as
I. Secured borrowing
II. Pledge of collateral
a. I only c. Both I and II
b. II only d. Neither I nor II

6. If receivables are hypothecated (pledged) 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

7. 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

8. After being held for 60 days, a 120-day 8% interest-bearing note receivable was discounted at a
bank at 12%. The amount received from the bank is equal to
a. Face value less discount rate at 8% c. Maturity value less discount at 8%
b. Face value less discount rate at 12% d. Maturity value less discount at 12%

9. If a note receivable is discounted without recourse

a. The contingent liability may be disclosed in either a contra account to note receivable or
in a note to the financial statements
b. Liability for note receivable discounted should be credited
c. Note receivable should be credited
d. The transaction should be accounted for as a borrowing as opposed to a sale

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 PROBLEMS

1. On January 1, Deliela Company assigned P500,000 of accounts receivable to X Finance Inc. The
company gave a 14% note for P450,000 representing 90% of the assigned accounts and received
proceeds of P432,000 after deduction of a 4% fee. On February 1, it remitted P80,000 to X,
including interest for 1 month on the unpaid balance. As a result of this P80,000 remittance,
accounts receivable assigned and notes payable will be decreased by what amount?
Accounts receivable Notes payable
a. P80,000 P74,750
b. P80,000 P80,000
c. P72,000 P74,750
d. P74,750 P80,000

2. Shiella Corporation factored P6,000,000 of accounts receivable to X Enterprises on October 1,

2021. Control was surrendered by the corporation. X accepted the receivables subject to recourse
for nonpayment. X assessed a fee of 3% and retains a holdback equal to 5% of the accounts
receivable. In addition, X charged 15% interest computed on a weighted-average time to maturity
of the receivables of 54 days. The fair value of the recourse obligation is P90,000.
Question 1: The corporation will receive and record cash of:
a. P5,296,850 c. P5,476,850
b. P5,386,850 d. P5,556,850

Question 2: Assuming all receivables are collected, the corporation’s cost of factoring the
receivables would be:
a. P313,150 c. P433,150
b. P180,000 d. P613,150

3. Dan Corporation received a P300,000, 6-month, 12% interest bearing note from a customer. The
note was discounted the same day by Sea Bank at 15%. As a result of the discounting, it should
recognize:
a. P0 interest expense c. P5,850 interest expense
b. P18,000 interest revenue d. P5,850 interest revenue

4. Jvion Company received from a customer a 1-year, P500,000 note bearing annual interest of 8%.
After holding the note for 6 months, it discounted the note at a nearby bank at an effective interest
rate of 10%. What amount of cash did it received from the bank?
a. P540,000 c. P513,000
b. P523,810 d. P495,238

5. Mamelia Company accepted from a customer a P4,000,000, 90-day, 12% interest bearing note
dated August 31, 2021. On September 30, 2021, it discounted the note with recourse at Sea Bank
at 15%. However, the proceeds were not received until October 1, 2021. The discounting with
recourse is accounted for as a conditional sale with recognition of a contingent liability. What is
the loss on note receivable discounting?
a. P40,000 c. P17,000
b. P23,000 d. P20,000

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 INVENTORY (PAS 2)
o First in, First out (FIFO)
VALUATION: ● The FIFO method assumes that “the goods first
General Rule: Lower of Cost or Net Realizable Value (LCNRV) purchased are first sold” and consequently the
● LCNRV = Estimated Selling Price Less Estimated Cost goods remaining in the inventory at the end of
of Completion and Disposal) the period are those most recently purchased or
produced.
Cost of Inventories: ● Accordingly, in period of inflation or rising prices,
o Cost of purchase – purchase price, import duties and the FIFO method would result to the highest net
taxes, freight, handling and other direct acquisition income.
costs (minus trade discounts, rebates and other ● However, in a period of deflation or declining
similar items). prices, the FIFO method would result to the
o Cost of conversion – direct labor and overhead lowest income.
(variable and fixed) incurred in conversion.
o Other costs o Weighted average – Periodic
● Other costs are included in the cost of inventories ● The average unit cost is computed by dividing the
only to the extent that they are incurred in total cost of goods sold available for sale by the
bringing the inventories to their present location total number of units available for sale.
and condition. ● Such weighted average unit cost is then
multiplied by the units on hand to derive the
o Inventory cost should exclude: inventory value.
✓ Abnormal waste
✓ Storage costs o Weighted average – Perpetual
✓ Administrative overheads unrelated to ● When used in conjunction with the perpetual
production system, the weighted average method is
✓ Selling costs popularly known as the moving average method.
✓ Foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in a ● Under this method, a new weighted average unit
foreign currency cost must be computed after every purchase and
✓ Interest cost when inventories are purchased purchase return.
with deferred settlement terms.
● Thus, the total cost of goods available after every
COMPOSITION OF INVENTORY purchase and purchase return is divided by the
Term BUYER SELLER total units available for sale at this time to get a
1) FOB shipping point Included Excluded new weighted average unit cost.
2) FOB seller Included Excluded
3) FOB FAS (free alongside ship) Included Excluded ● Such new weighted average unit cost is then
4) FOB CIF (cost, insurance, and multiplied by the units on hand to get the
Included Excluded inventory cost.
freight)
5) FOB place of the seller Included Excluded
6) Bill and hold arrangement Included Excluded Measurement of Inventories
7) Sold on installment Included Excluded o Inventories are required to be stated at the lower of
8) Sale on with high probability of cost and net realizable value (NRV). Inventories are
Included Excluded usually written down to net realizable value item by
return
9) Goods manufactured at item. In some circumstances, however, it may be
Included Excluded appropriate to group similar or related items.
customer’s specification
10) Special order Included Excluded
11) FOB destination Excluded Included ● Raw materials and factory supplies
12) FOB buyer Excluded Included Replacement cost will be accounted for as the
13) FOB ex-ship Excluded Included net realizable value. Materials and other
14) FOB place of the buyer Excluded Included supplies held for use in the production of
15) Lay away sales Excluded Included inventories are not written down below cost if
16) Sale with buyback agreement Excluded Included the finished products in which they will be
17) Sale under inventory financing Excluded Included incorporated are expected to be sold at or
18) Hold for shipping instruction Excluded Included above cost.
19) Sale on trial/sale on approval Excluded Included
20) Inventory pledged Excluded Included ● Work-in-process or partially completed goods
Net realizable value of work-in-process
Presentation inventory is computed by deducting estimated
o Current Asset – for those unsold or remaining goods or cost of completion and estimated cost to sell
items. from estimated selling price.
o Cost of Sales – for those sold goods or items.
o Operating Expenses – for those used office and store ● Finished goods
supplies. Net realizable value of finished goods inventory
is computed by deducting estimated cost to sell
Cost formulas from estimated selling price.
o PAS 2, paragraph 25, expressly provides that the cost
of inventories shall be determined by using either: - - END - -
● First in, first out (FIFO)
● Weighted average
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 INVENTORY

THEORY

1. Inventories are assets

I. Held for sale in the ordinary course of business
II. In the process of production for such sale
III. In the form of materials or supplies to be consumed in the production process or in the rendering
of services
a. I and II only c. I, II and III
b. I only d. II and III only

2. A manufacturing company has which three basic types of inventory?

a. Perpetual, periodic and estimated
b. Specific identification, FIFO and averaged cost
c. Raw materials, work in progress and finished goods
d. Finished goods, work-in-process, and ready-to-sell-merchandise

3. Which of the following items are comprised (added or deducted) in the cost of inventories according
to IAS 2, Inventories?
I. Storage costs for work in progress
II. Fixed administration overheads
III. Trade discount
IV. Storage costs relating to finished goods
V. Fixed production overheads
a. I, II and V only c. I, III and V only
b. I and V only d. All of the above

4. The cost of purchase of inventories does not include

a. Purchase price
b. Import duties and taxes
c. Freight, handling and other costs directly attributable to the acquisition of goods
d. Trade discounts, rebates and other similar items

5. Which of the following conversion costs cannot be included in cost of inventory?

a. Cost of direct labor c. Production rent and utilities
b. Salaries of sales staff d. Factory overhead based on normal capacity

6. The cost of inventories shall comprise all costs of purchase, cost of conversion and other costs
incurred in bringing the inventories to their present location and condition. Which of the following
cost shall be included in the cost of inventories?
a. Import duties and other taxes, transport, handling and other costs directly attributable to
the acquisition of finished goods, materials and services
b. Abnormal amounts of wasted materials, labor or other production costs
c. Storage costs unnecessary in its production process
d. Administrative overheads that do not contribute to brining inventories to their present
location and condition

7. Which of the following items should be included in a company’s inventory at the balance sheet date?
a. Goods in transit which were purchased FOB destination
b. Goods received from another company for sale on consignment
c. Goods sold to a customer which are being held for the customer to call for at the customer’s
convenience
d. Goods in transit which were purchased FOB shipping point

8. Valuation of inventories requires determination of all of the following except the

a. Costs to be included in inventory c. Physical goods to be included in inventory
b. Cost flow assumption to be adopted d. Cost of goods held on consignment from
other entities

9. Theoretically, freight and warehousing costs incurred in the transfer of consigned goods from the
consignor to the consignee should be considered
a. An expense by the consignor c. Inventoriable by the consignor
b. An expense by the consignee d. Inventoriable by the consignee
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 10. The measurement rule for inventories, mandated by IAS 2 Inventories, is
a. Lower of fair value and selling price c. Higher of initial cost and realizable value
b. Lower of cost and net realizable value d. Higher of completion costs and replacement
costs
11. Net realizable value is
a. estimated selling price in the ordinary course of business
b. estimated selling price in the ordinary course of business less the estimated costs of
completion in the case of finished goods and estimated costs necessary to make the sale in
the case of work in process
c. estimated selling price in the ordinary course of business less the estimated costs of
completion in the and estimated costs necessary to make the sale
d. is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction

12. Net realizable value of inventories may fall below cost for a number of reasons including
I. Product obsolescence
II. Physical deterioration of inventories
III. An increase in the expected replacement costs of the inventory
IV. An increase in the estimated costs of completion
a. I, II and IV only c. II, III and IV only
b. I, III and IV only d. I and II only

13. PAS 2, Inventories, requires that when inventories are written down to net realizable value, they are
written down
a. On a class-by-class basis c. On the basis of industry segment
b. On an item-by-item basis d. According the geographical segment within
the entity
14. The amount of any writedown of inventory to net realizable value and all losses of inventory shall be
a. Recognized as operating expenses in the period the writedown or loss occurs
b. Recognized as other expense in the period the writedown or loss occurs
c. Recognized as component of cost of sales in the period the writedown or loss occurs
d. Deferred until the related inventory is sold

15. What methods are used to measure cost under IAS 2?

I. Standard costing system IV. FIFO
II. Retail method V. Weighted average method
III. Specific identification method
a. IV and V only c. II, III, IV and V only
b. III, IV and V only d. All of these

16. The cost of inventories shall be measured using

a. FIFO c. LIFO
b. Average method d. Either FIFO or average method

17. During periods of declining inventory costs, which of the following methods yields the most
conservative net income?
a. FIFO c. Weighted average
b. LIFO d. Specific identification

18. The weighted-average inventory costing method is particularly suitable to inventory where
a. Homogeneous products are mixed together
b. Dissimilar products are stored in separate locations
c. The entity carries stocks of raw materials, work-in-process and finished goods
d. Goods have distinct use-by dates and the goods produced first must be sold earliest

19. The cost of inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be measured using
a. FIFO c. LIFO
b. Average method d. Specific identification

20. What is the method of accounting for inventory in which the cost of goods sold is recorded each time
a sale is made?
a. Periodic system c. Professional system
b. Perpetual system d. Accounting system
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 21. In a perpetual inventory system, two entries are normally made to record each sales transaction
a. One entry records the purchase of merchandise and other records the sale
b. One entry updated the subsidiary ledger and the other updates the general ledger
c. One entry recognizes sales revenue and the other recognizes cost of the goods sold
d. One entry records the cost of goods and the other reduces the balance in the ‘Inventory’
account

22. When a periodic inventory system is used

a. Two entries must be made when goods are purchased
b. Cost of goods sold is a residual amount, rather than an account
c. Ending inventory is treated as an expense and beginning inventory is treated as an asset
d. ‘Purchases’ account is not used; all inventory purchase entries are debited to inventory
account

23. In computing for cost of goods sold with a periodic inventory system
a. Ending inventory and purchases are added to beginning inventory
b. Beginning inventory is added to goods available for sale
c. Purchases are deducted from beginning inventory plus ending inventory
d. Ending inventory is deducted from total goods available for sale

24. Which of the following is not true about accounting for inventory?
a. FIFO is allowed c. The weighted-average method is acceptable
b. Interest costs should not be capitalized d. Inventories are always valued at net
realizable value

25. Why are inventories measured at lower of cost and net realizable value?
a. To be conservative
b. To permit future profit to be recognized
c. To report a loss when there is a decrease in the future utility
d. To report a loss when there is a decrease in the future utility below the original cost

26. The use of discount loss account implies that cost of a purchased inventory item is the
a. List price of the item
b. Invoice price of the item
c. Invoice price less the purchase discount taken on the item
d. Invoice price less the purchase discount not taken on the item

27. When the beginning inventory is overstated, then

a. the cost of goods sold is understated and the profit is overstated
b. the cost of goods sold is overstated and the profit is overstated
c. the cost of goods sold is overstated and the profit is understated
d. the cost of goods sold is understated and the profit is understated

28. An entity uses a periodic inventory system and neglected to record a purchase of merchandise on
account at year-end. This merchandise was omitted from the year-end physical count. How will these
errors affect the entity’s assets, liabilities, and shareholders’ equity at year-end and net earnings
from the year?
Assets Liabilities Equity Net earnings
a. Understate Understate No effect No effect
b. Understate No effect Understate Understate
c. No effect Understate Overstate Overstate
d. No effect Overstate Understate Understate

29. When a portion of inventories has been pledged as security on a loan

a. The value of the portion pledged should be subtracted from the debt
b. An equal amount of retained earnings should be appropriated
c. The fact should be disclosed but the amount of current assets should not be affected
d. The cost of the pledged inventory should be transferred from current to noncurrent asset

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 PROBLEMS

1. Shiela Company reported an inventory balance of P2,575,000 on December 31, 2021 which was
based on a physical count conducted as of December 29, 2021. An analysis of the purchase records
of the company revealed the following information:
• Goods costing P120,000 purchased fob shipping point were sent by the seller on December 30,
2021 and were received by the company on January 5, 2022.
• Goods costing P150,000 purchased fob destination were sent by the seller on December 27, 2021
and were received by the company on January 2, 2022.
• Goods costing P175,000 were shipped to the company fob destination on December 28, 2021
and were received on December 31, 2021.
• Goods costing P125,000 were received on December 30, 2021 from X Enterprises on
consignment. The company was to sell the goods at a mark-up of 25% of cost. 80% of the goods
remained unsold on December 31, 2021.
• Goods costing P130,000 and P125,000 were sent out on consignment to Y Company on
December 28, 2021 and Z Company on December 31, 2021 respectively. The goods remained
unsold as of December 31, 2021.
The correct amount of inventory to be reported as of December 31, 2021 by the company is
a. P3,000,000 c. P3,125,000
b. P2,875,000 d. P2,825,000

2. Christopher Corporation included the following items in inventory on December 31, 2021:
Materials P300,000
Advances for materials ordered for January delivery 50,000
Materials in transit, FOB destination 100,000
Goods in process, at cost of materials and direct labor 200,000
Finished goods in factory, at cost including overhead of P100,000 500,000
Finished goods in company-owned retail store,
at sales price (150% of cost) 150,000
Finished goods in the hands of consignees, at sales price, including
40% profit on sales but excluding freight paid of P4,000 80,000
Finished goods in transit to customers – FOB shipping point, at cost 40,000
Finished goods out on approval, at cost, including delivery
freight of P5,000 75,000
Finished goods, at cost, unsalable 10,000
Unexpired insurance on inventories 12,000
Advertising catalogs and shipping supplies 6,000
Gasoline and oil for testing finished goods 15,000
Machine lubricants 13,000
What is the correct cost of the inventory on December 31, 2021?
a. P1,300,000 c. P1,318,000
b. P1,272,000 d. P1,250,000

3. The balance in Michelle Company’s accounts payable account on December 31, 2021 was P1,225,000
before the following information was considered:

• Goods shipped FOB destination on December 21, 2021 from a vendor to the company were
lost in transit. The invoice cost of P45,000 was recorded by the company. On December 28,
2021, it notified the vendor of the lost shipment.
• Goods were in transit from a vendor to the company on December 31, 2021. The invoice
cost was P60,000 and the goods were shipped FOB shipping point on December 28, 2021.
The company received the goods on January 6, 2022.
• Goods shipped to the company, FOB shipping point on December 20, 2021 from a vendor
were lost in transit. The invoice price was P50,000. On January 5, 2022, the company filed
a P50,000 claim against the common carrier.
• On December 27, 2021, a vendor authorized the company to return, for full credit, goods
shipped and billed at P35,000 on December 20, 2021. The returned goods were shipped by
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 the company on December 27, 2021. A P35,000 credit memo was received and recorded by
the company on January 6, 2022.
What amount should it report as accounts payable in its December 31, 2021 statement of financial
position?
a. P1,300,000 c. P1,255,000
b. P1,345,000 d. P1,250,000

4. Candy Company’s usual sales terms are net 60 days, FOB shipping point. Sales, net of returns and
allowances totaled P2,300,000 for the year ended December 31, 2021 before year-end adjustments.
Additional data are as follows:

• On December 27, 2021, it authorized a customer to return, for full credit, goods shipped and
billed at P50,000 on December 15, 2021. The returned goods were received by the company
on January 4, 2022 and a P50,000 credit memo was issued on the same date.
• Goods with an invoice amount of P80,000 were billed to a customer on January 3, 2022. The
goods were shipped on December 30, 2021.
• Goods with an invoice amount of P100,000 were billed but unrecorded on December 30,
2021. The goods were shipped on January 3, 2022.
The adjusted net sales for the year 2021 should be:
a. P2,330,000 c. P2,250,000
b. P2,280,000 d. P2,230,000

5. On January 1, 2021, Leonardo Corp, signed a three-year non-cancellable purchase contract, which
allows it to purchase up to 500,000 units of a computer part annually from X Co. at P.10 per unit and
guarantees a minimum annual purchase of 100,000 units. During 2021, the part unexpectedly
became obsolete. The company had 250,000 units of his inventory as of Dec. 31, 2021 and believes
these parts can be sold as scrap for P.02 per unit. What amount of probable loss from the purchase
commitment should it report in its 2021 income statement?
a. P24,000 c. P16,000
b. P20,000 d. P8,000

6. On Jan. 1, 2021, Kristin Inc. contracted with the X City to provide custom built desks for the city
schools. The contract made the company the sole supplier and required it to supply no less than
4,000 desks and no more than 5,500 desks per year for two years. In turn, X agreed to pay a fixed
price of P110 per desk. During 2021, the company produced 5,000 desks for X. On Dec. 30, 2021, 500
of these desks were segregated from the regular inventory and were accepted and awaiting pickup
by X. X paid the company P450,000 during 2021. What amount should the company recognize as
contract revenue in 2021?
a. P450,000 c. P550,000
b. P495,000 d. P605,000

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