ACCO

20053 – FINANCIAL ACCOUNTING & REPORTING 1

Reviewer on Receivables

Theories

INSTRUCTION: Choose the letter of the correct answer.

1. Which of the following statements is incorrect?
a. Trade receivables are initially recognized simultaneous to recognition of related revenues.
b. Cash discount is recorded when it is taken under the gross price method.
c. Cash discount is recorded when it is not taken under the net price method.
d. Trade discounts are deducted from the list price and are recognized for financial accounting
purposes.

2. Which of the following items is not a trade receivable?
a. Customer’s accounts on which post-dated checks are held
b. Claims from employees representing selling price of goods sold under normal condition
c. Claims from employees representing cash advances
d. Dishonored notes receivable

3. Which of the following is not a qualification for a note to be reported as notes receivable?
a. It must be negotiable.
b. It must not yet be due.
c. It must be payable to order or bearer.
d. It must bear an interest rate.

4. Receivables denominated in foreign currency should be translated in the statement of financial position at
a. the exchange rate on the reporting date.
b. the exchange rate on the date of the origin of transaction.
c. the average exchange rate during the year.
d. the exchange rate at the beginning of the year.

5. Which of the following receivables is not classified as a current asset?
a. Receivables that arise from sale of goods in the normal course of business and collectible within 12
months after the reporting date.
b. Receivables that arise from sale of goods in the normal course of business and collectible within 18
months after the reporting date.
c. Subscription receivable that is collectible 15 months after the reporting date
d. 60-day note received from sale of a fully depreciated equipment

6. Which of the following is a trade receivable?
a. Claims against transport company for damaged or lost goods
b. Advances to officers and employees
c. Receivable arising from legal services rendered by a law firm
d. Accrued interest on notes receivable

7. If the company employs the net method of recording accounts receivable from customers, sales discount not
taken is reported as
a. other operating revenue on the statement of comprehensive income.
b. addition to sales revenue on the statement of comprehensive income.
c. deduction from accounts receivable in arriving at the amortized cost of accounts receivable on the
statement of financial position.
d. deduction from cost of goods sold on the statement of comprehensive income.

8. A loss on discounting of notes receivables is recorded when the discounting is made
a. with recourse. c. with or without recourse.
b. without recourse. d. a secured borrowing.

9. A non-interest bearing note received in exchange for property, goods or services is recorded at
a. fair market value of property, goods or service or note, whichever is more reliably determinable.
b. maturity value of the note.
c. face value of the note.
d. carrying amount of the property.

10. When a note discounted with recourse is dishonored by the maker, the bank (endorsee) would usually
charge the endorser an amount equal to
a. the face amount of the note. c. the proceeds upon discounting.
b. the maturity value of the note. d. the desired amount by the bank.


11. Which of the following is not a means of using receivables to obtain immediate cash?
a. Pledge and assignment of receivables c. Aging of accounts receivable
b. Factoring of accounts receivable d. Discounting of notes receivable

12. What is the proper valuation of receivables on a statement of financial position?
a. Face value c. Maturity value
b. Amortized cost d. Market value


13. 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, depending upon
the substance of the transaction.
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 collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection period of the
receivables.

14. A three-year, non-interest bearing note was received from XYZ Company in exchange for services rendered.
The fair value of the services is not immediately available but the fair value of interest on similar note
obligation is 12%. The note is due after three years. At what amount should this note be shown on the
statement of financial position at the end of the first year?
a. At face amount less the discount on notes receivable
b. At face amount plus the discount on notes receivable
c. At face amount plus interest earned
d. At face amount minus interest earned

15. Which of the following is not a required disclosure relating to receivables?
a. Accounting policies and methods adopted including the criteria for recognition and the basis of
measurement applied.
b. Information about the extent and nature of receivables.
c. Names and information about the customers whose accounts were written off during the period.
d. Nature and amount of any impairment loss recognized in profit or loss.

16. Discount on notes receivable is initially recognized in the accounts if
a. the present value of the note exceeds its face value.
b. the rate of interest stated on the note is less than the market rate of interest for similar
instruments.
c. the rate of interest stated on the note exceeds the market rate of interest for similar instruments.
d. the rate of interest stated on the note approximates the market rate of interest for similar
instruments.

17. If receivables are pledged against borrowings, the amount of receivables involved should be
a. disclosed in the statements or notes thereto.
b. excluded from the total receivables, with disclosures.
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.

18. The entry debiting accounts receivable and crediting allowance for uncollectible accounts would be made
when
a. a customer pays its accounts receivable.
b. a customer defaults on its account.
c. a previously defaulted customer pays its outstanding balance.
d. estimated uncollectible receivables are too low.

19. A company uses the allowance method to recognize uncollectible accounts expense. What is the effect of a
recovery of an account previously written off on each of the following accounts?
Allowance for bad debts Bad debts expense Accounts receivable
a. No effect No effect Increase
b. Increase No effect No effect
c. Increase Decrease No effect
d. No effect Decrease No effect

20. When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off
of a specific account
a. decreases both accounts receivable and allowance for uncollectible accounts.
b. decreases accounts receivable and increases the allowance for uncollectible accounts.
c. increases the allowance for uncollectible accounts and decreases net income.
d. decreases both accounts receivable and net income.


II – Problems

INSTRUCTION: Supply the correct answer.

A. On January 1, 2020, Palazzo Company had Accounts Receivable and Allowance for Bad Debts of P160,000
and P12,000, respectively. Sales (all on credit) during 2020 amounted to P1,800,000. Accounts of P7,000
were also written off during the year. An analysis of Palazzo Company’s accounts receivable at December
31, 2020 revealed the following:
Age Amount Estimated uncollectible
0-60 days P120,000 1%
61-120 days 90,000 2%
over 120 days 100,000 6%
P310,000

 There are no other transactions affecting accounts receivable.

1. How much is the cash collected from customers during 2020?
2. What is Palazzo Company’s bad debts expense for the year 2020?
3. What is the net realizable value of Palazzo Company’s accounts receivable at December 31,
2020?

B. The following were abstracted from Orchard Company’s unadjusted trial balance at December 31:
Debit Credit
Accounts Receivable 1,500,000
Allowance for Uncollectible Accounts 12,000
Net credit sales P3,500,000
Orchard Company estimates that 5% of the gross accounts receivable will become uncollectible.

4. What is the Orchard Company’s net accounts receivable at December 31?
5. What is the uncollectible accounts expense for the year ended December 31?

C. McKinley, Inc. prepared an aging of its accounts receivable at December 31, 2020 and determined that the
net realizable value of the receivables was P750,000. The statement of comprehensive income for the year
ended December 31, 2020 reported bad debts expense of P30,000, Additional information follows:
Accounts written off as uncollectible during 2020 69,000
Accounts Receivable at 12/31/20 810,000
Uncollectible accounts recovery during 2020 15,000

6. How much is the allowance for bad debts account balance at December 31, 2019?

D. Cave Company prepared an aging of its accounts receivable at December 31, 2020 and determined that the
estimated uncollectibles on that date was P85,200. During 2020 some customers’ accounts were written
off. Additional information is available as follows:
Allowance for Bad Debts at 12/31/19-credit balance P 63,000
Bad Debts Expense reported in the income statement 18,000
Accounts Receivable at 12/31/20 607,500
Uncollectible accounts recovery during 2020 12,000

7. How much were the accounts written off during 2020?

E. Newport Company, a calendar-year company, sells to its customers with terms 5/10; 2/25; n/40. During
the month of December, 2020, it made sales as follows:
December 3 - Customer A - P120,000
December 12 - Customer B - 380,000
December 19 - Customer C - 250,000

Customer A paid its account on December 20, while Customer C paid its account on December 29. It is
expected that Customer B will pay its account on January 21, 2021. Ignore other sales and collection data
during the year.

8. Under the gross invoice price method, what is the amount of sales discount reported in
Newport Company’s 2020 income statement?
9. Under the net method of accounting for cash discounts, what is the amount of the sales
discounts forfeited reported in Newport Company’s 2020 income statement?

F. On July 31, 2020, Berkeley Company discounted at the bank a customer’s P2,400,000, 180-day, 10% note
receivable dated May 31, 2020. The bank discounted the note at 12%. Use 360-day year.

10. How much net proceeds did Berkeley Company receive from this discounted note?
11. Assuming that the note was discounted with recourse, and on maturity date, the note was
dishonored. As a consequence, the bank charged Berkeley Company for the amount due,
plus a protest fee of P5,000. How much is the total amount charged by the bank to Berkeley
Company?

G. Venice Company assigned P2,000,000 specific accounts receivable to AB Finance Company as a security for
a loan of P1,200,000. AB Finance charged a 2% finance charge based on the amount of the loan. The
interest rate of the loan/note was 12%. During the first month, Venice Company collected P490,000 on
assigned accounts after deducting P10,000 of sales discounts. In addition, defective merchandise worth
P20,000 were returned. Venice Company also wrote off P15,000 of assigned accounts as uncollectible. One
month after the loan was obtained, Venice Company paid AB Finance P300,000 plus interest.

12. How much is Venice Company’s equity in assigned accounts after considering all the given
transactions?

H. On July 1, 2020, Strawberry Company sold for P200,000 an old machine having an original cost of P280,000
and a book value of P80,000. Strawberry received a two-year non-interest bearing note due on July 1, 2020
for this transaction. The prevailing rate of interest of similar transactions on July 1, 2020 is 10%. Present
value of P1 at 10% for two periods is 0.8264.

13. How much is the carrying amount of the notes receivable at July 1, 2020?
14. How much is the interest revenue for the year 2020?

I. On December 31, 2020, Strawberry Company sold for P200,000 an old machine having an original cost of
P280,000 and a book value of P80,000. Strawberry received a down payment of P40,000 and a 10%
interest bearing, one-year note for the remainder of the sales price.

15. How much is the gain on sale of the equipment?
16. How much is the interest revenue recognized by Strawberry for the year 2020?

J. Princeton Company has the following data relating to accounts receivable for the year ended 2020:
Accounts Receivable, January 1 P 235,000
Allowance for Bad Debts, January 1 19,200
Sales during the year, all on account terms: 2/10, 1/15, n/30 4,567,000
Cash received from customers during the year 3,456,000
Accounts written off during the year 17,500

An analysis of cash received from customers during the year revealed that P1,764,000 was received from
customers availing the 10-day discount period, P841,500 from customers availing the 15-day discount
period, P9,000 represented recovery of accounts written off, and the balance was received from customers
paying beyond the discount period. Princeton Company’s year-end balance of allowance for bad debts
based on aging was estimated to be P35,000.

17. What was the balance of Accounts Receivable as at December 31, 2020?
18. How much is the bad debts expense for the year ended December 31, 2020?

K. On December 31, 2020, the Reliable Finance Company had a P5,000,000 note receivable from Burgundy
Company. The note bears 10% interest. The books reported accrued interest of P500,000 on this date.
Because of financial distress being suffered by Burgundy Company, Reliable Finance agreed to the
restructuring and modification of the terms of its loan to Burgundy as follows:
• reduction of principal to P4,000,000;
• reduction of interest to 8% payable annually beginning December 31, 2021;
• accrued interest on December 31, 2020 is condoned; and
• principal payment was reset to December 31, 2022.
The prevailing market rate of interest for similar obligations on the date of restructuring is 12%. Present
value factors are as follows:
10% 12%
Present value of P1 for 2 periods 0.8264 0.7972
Present value of an ordinary annuity of P1 for 2 periods 1.7355 1.6901

19. How much impairment loss should Reliable Finance record on December 31, 2020 as a
result of the restructuring?

L. On January 1, 2020, Global Company sold a piece of land with a carrying amount of P3,000,000 in exchange
for a 8% promissory note with face amount of P4,500,000. The note is payable in annual installments of
P1,500,000 plus accrued interest on the outstanding balance. The first installment is due on December 31,
2020. There is no established cash price for the land and the note has no ready market. The prevailing
interest rate for a note of this type is 12% and the difference in the interest rates is deemed significant.
Present value factors are as follows:
At 8% At 12%
Present value of P1 for 1 period 0.9259 0.8929
Present value of P1 for 2 periods 0.8573 0.7972
Present value of P1 for 3 periods 0.7938 0.7118

20. What is the carrying amount of the note on December 31, 2020?

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 ANSWERS

Theories Problems

1. D 1. 1,643,000
2. C 2. 4,000
3. D 3. 301,000
4. A 4. 1,425,000
5. C 5. 87,000
6. C 6. 84,000
7. A 7. 7,800
8. B 8. 14.900/22,500
9. A 9. 15,000/22,600
10. B 10. 2,420,040
11. C 11. 2,525,000
12. B 12. 565,000
13. C 13. 165,280
14. A 14. 8,264
15. C 15. 120,000
16. B 16. -0-
17. A 17. 1,293,000
18. C 18. 24,300
19. B 19. 1,639,040
20. A 20. 2,845,163