CENTRO ESCOLAR UNIVERSITY

FINANCIAL ACCOUNTING AND REPORTING

FAR 02 – ACCOUNTING FOR RECEIVABLES

Multiple Choices – Theories

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

2. If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other income and expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.

3. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividend receivable
d. Sale of goods on account to a customer

4. Which of the following accounts is not affected when an account receivable written off as uncollectible is
recovered?
a. Cash
b. Bad debts expense
c. Accounts Receivable
d. Allowance for bad debts

5. Which of the following transaction will decrease the recorded accounts receivable?
a. Sale of goods on account.
b. Collection of accounts previously written off.
c. Return of goods sold to a customer on account.
d. Cash discount availed using the net method.

6. Jedrick Company prepares an account receivable aging schedule with a series of computations as follows:
2% of the total peso balance of accounts from 1-60 days past due, plus 5% of the total peso balance of
accounts from 61-120 days past due and so on. How would you describe the total of the amounts determined
in this series of computations?
a. It is the amount of uncollected accounts expense for the year.
b. It is the amount that should be added to the allowance for uncollectible accounts at year-end.
c. It is the amount of the desired credit balance of the allowance for uncollectible accounts to be reported
in the year-end financial statements.
d. When added to the total of accounts written off during the year, this new sum is the desired credit balance
of the allowance account.

7. When the allowance method of recognizing uncollectible account expense is used, the entries at the time of
collection of an account previously written off would
a. Increase profit.
b. Increase the amortized cost of accounts receivable.
c. Decrease profit.
d. Decrease the amortize cost of accounts receivable.

8. Courage Company, which has an adequate amount in its allowance for doubtful accounts, write-off as
uncollectible an account receivable from a bankrupt customer. This action will:
a. Have no effect on total current assets
b. Reduce net income for the period
c. Reduce total current assets
d. Reduce the amount of total equity

9. A non-interest-bearing note receivable:

a. Cause no interest revenue to be recorded.
b. Includes a specified principal amount plus specified interest
c. Includes a specified principal amount but an unspecified interest
 d. Includes an unspecified principal amount and unspecified interest

10. The amortization of discount on note receivable will:

a. Increase the amount of interest received to arrive at interest income.
b. Decrease the amount of interest received to arrive at interest income.
c. Decrease the carrying value of the note receivable.
d. Increase the face value of the note receivable.

11. If the note has a nominal interest of 10% and was issued at a market rate of interest of 12%, the note:
a. was issued at market rate of interest.
b. was issued resulting to a discount.
c. was issued resulting to a premium.
d. was a non-interest-bearing note

12. How would the interest-bearing note collectible in installment shall be reported in the statement of financial
position?
a. the entire carrying value is always reported as non-current asset.
b. the carrying value maybe reported as partly current and partly non-current.
c. the entire carrying value is always reported as current asset.
d. the carrying value is not reported in the statement of financial position.

13. The total interest on a non-interest-bearing note is equal to?

a. The excess of the face value over the present value
b. The excess of the present value of over the face value
c. The excess of the market value over the present value
d. Zero

14. The proceeds on discounting notes receivable is:

a. Reduced by the amount of interest up to maturity value.
b. Reduced by the amount of discount
c. Increased by the total interest earned by the company
d. Increased by any protest fee

15. Statement 1: When a notes receivable is discounted on a with recourse basis, the transaction is treated as
borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a discounting of notes
receivable is always equals to the amount of discount.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false

16. Which of the following is deducted from the principal loan amount when a loan was made to arrive at its initial
amortized cost?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.

17. Statement 1: The loan after the effect of direct origination costs and fees shall have a new effective interest.
Statement 2: The loan receivable shall be amortized using the original nominal interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false

18. Which of the following indicator should be present to shift the expected credit loss from stage 1 to stage 2?
a. an increase in credit risk.
b. a significant increase in credit risk.
c. objective evidence of impairment.
d. financial difficulties of the borrower.

19. Where there is objective evidence of impairment, the amount of interest income should be?
a. computed based on the gross carrying value of the loan.
b. computed based on the net carrying value of the loan.
 c. no interest shall be recognized.
d. no correct answer.

20. When the company assessed the loan on stage 1 expected credit loss:
a. the amount of impairment loss is based on lifetime ECL.
b. the amount of impairment loss is based on lifetime ECL multiplied by the % of default over the life of the
loan.
c. No impairment loss shall be recognized.
d. the amount of impairment loss is based on lifetime ECL multiplied by the % of default for the next 12
months.

Multiple Choices – Problems

Living Company has four operating segments, one segment is into wholesaling of groceries, other segment deals
in the trading of household equipment and office equipment, the other segment is into servicing. The other
segment is into car rental. The following items were taken from the books of the different segments pertaining to
their Receivables as of December 31, 2023:
Arising from rental of cars P420,000
Claim from insurance for damage rental cars 370,000
Arising from sale of old cars 330,000
Arising from the accrual of interests on above receivables 280,000
Arising from sale of groceries 600,000
Arising from sale of old grocery store equipment 600,000
Arising from sale of household and office equipment 580,000
Arising from sale of service 450,000
Arising from sale of old service equipment used in servicing segment 500,000
Arising from employee advances 150,000

1. In the consolidated December 31, 2023 statement of financial position what total amount of trade receivables
should Living Company report?
a. P2,050,000 b. P2,380,000 c. P2,880,000 d. P3,480,000

Hollywood Company had the following transaction related to its accounts receivable during 2023:
Accounts receivable, beginning balance P2,700,000
Allowance for bad debts, beginning 33,750
Sales on account made to customers 3,950,000
Collection of accounts from credit customers 4,350,000
Sales discounts granted 50,000
Accounts written off as uncollectible 80,000
Accounts recovered during the year 15,000

The following transactions were included in the recorded sales during 2023:
[1.] Invoice dated December 28, 2023 for P420,000 was shipped and received by the buyer on December 31,
2023, terms FOB Destination point.
[2.] Invoice dated and recorded on November 29, 2023 for P600,000 was received by another entity on
December 1, 2023. The agreement of the parties is to remit the selling price less commission upon sale of
the goods. None of the goods have been sold yet as of December 31, 2023.

The following was prepared from an aging of accounts receivable outstanding on December 31, 2023:
Number of days outs. % of the ending balance % uncollectible
0 - 30 days 50% 2%
31 - 60 days 30% 5%
Over 60 days 20% 15%

2. What is the balance of accounts receivable as of December 31, 2023?

a. P1,990,000 b. P1,585,000 c. P1,570,000 d. P1,555,000

3. How much is the balance of allowance for bad debts as of December 31, 2023?
b. P76,250 b. P82,350 c. P84,450 d. P86,350

4. How much is the amount of bad debts expense in 2023?

a. P117,600 b. P132,600 c. P147,600 d. P152,600

The following is the summary of transactions of Johnson Company 2023:

Accounts receivable, beginning – net of P23,450 beginning allowance P750,000
Credit sales 6,200,000
 Total collections from customers during the year 5,550,000
Accounts written off as uncollectible 90,000
Recovery of accounts previously written off 35,000

Days past invoice date at December 31

0 – 30 700,000
31 – 90 320,000
91 – 180 210,000
Over 180 ?

The company’s policy to provide allowance on its account receivable at year end as follows: 0-30 days –
1%; 31-90 days – 4%; 91-180 days – 8%; and over 180 days – 15%.

5. How much is the balance of allowance for bad debts as of December 31, 2023?
a. P52,738 b. P53,850 c. P57,368 d. P58,150

6. How much is the amount of bad debts expense in 2023?

a. P66,400 b. P84,288 c. P89,700 d. P88,918

7. Kelvin Company prepared an aging of its accounts receivable at December 31, 2023 and determined that
the balance of its accounts receivables was P400,000 on January 1, 2023. Additional information is available
as follows:
Allowance for uncollectible accounts at 1/1/23 – credit balance P 34,000
Accounts written off as uncollectible during 2023 32,000
Accounts receivable at 12/31/23 375,000
Uncollectible accounts recovered during 2023 5,000
Total bad debts expense in 2023 12,000

How much is the net realizable value of accounts receivable as of December 31, 2023?
a. P349,000 b. P356,000 c. P381,000 d. P324,000

On January 1, 2023, Exo Company received a P200,000 cash and a 4-year, 3%, P500,000 note to be collected
on December 31, 2026. Interest on this note is to be collected at the end of each year. The note was received
from sale of an equipment with original cost of P1,000,000 and accumulated depreciation of P400,000 on date
of sale. Interest effective on the note is 5%.

8. How much is the amount of gain (loss) on sale recognized on January 1, 2023 from sale of equipment?
a. P63,240 loss b. P52,460 gain c. P64,540 gain d. P135,460 loss

9. How much is the amount of interest income recognized in its statement of comprehensive income for the
period ending December 31, 2024?
a. P23,227 b. P23,638 c. P24,070 d. P24,524

Morgan Company reported the following notes receivable balances as of December 31, 2023:
Notes receivable from sale of goods P2,000,000
Notes receivable from sale of equipment 3,000,000
Notes receivable from services rendered 1,000,000

Additional information:
[1.] The notes receivable from sale of goods has a coupon rate of 12% per annum dated July 1, 2022. The note
is payable in two equal annual installments of P1,000,000 plus interest on the unpaid balance every July 1.
The initial principal and interest payments were made on July 1, 2023.
[2.] The notes receivable from sale of equipment is dated January 1, 2023, has a stated rate of 12%. The principal
and compounded interests are to be received on maturity date. The note matures on January 1, 2026.
[3.] The notes receivable from services rendered dated December 31, 2023 has a stated rate of 12% payable
annually every December 31. The note matures on December 31, 2025.

Present value of P1 at 12% for two periods is 0.797194. Present value of P1 at 12% for one period is 0.892857.
The present value of an ordinary annuity of 1 at 12% for two periods is 1.690051.

10. How much is the interest receivable on December 31, 2024 related to notes receivable from sale of goods?
a. P30,000 b. P60,000 c. P90,000 d. P120,000

11. How much is the interest income for the year 2024 related to notes receivable from sale of equipment?
a. P360,000 b. P403,200 c. P286,920 d. P763,200
12. How much is the carrying value of notes receivable on December 31, 2024 related to notes receivable from
services rendered?
a. P797,194 b. P892,857 c. P1,000,000 d. P1,120,000

On January 1, 2022, Nitrus Company received a 5%, P10,000,000, note collectible in installment plus interest
every December 31 of each year until December 31, 2025. The note is collectible in principal as follows:
December 31, 2022 P1,000,000
December 31, 2023 2,000,000
December 31, 2024 3,000,000
December 31, 2025 4,000,000
The interest effective on January 1, 2022 is at 3%, on December 31, 2022 is at 4%.

13. How much is the carrying value of the note on December 31, 2022?
a. P9,379,932 b. P9,567,291 c. P8,827,281 d. P8,746,232

14. How much of the carrying value of the note receivable is reported as non-current as of December 31, 2023?
a. P4,085,281 b. P4,077,670 c. P4,068,281 d. P4,065,980

On October 31, 2021, Hagrid Corp. engaged the following transactions:

• Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledge P600,000 of the
accounts receivable as a security for the loan.
• Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nahum Finance
Company. Nahum Finance charged a factoring fee of 5% of the amount of receivable factored and withheld
10% of the receivable factored.

15. What is the total cash received from the financing of receivables and the amount of loss, respectively?
a. P1,320,000 and P50,000
b. P1,320,000 and P150,000
c. P1,420,000 and P50,000
d. P1,420,000 and P150,000

On April 1, 2023, Lunar Company loaned P20,000,000 to Eclipse Company. The loan is to repayable after 5
years. Interest on this loan is 3% annually every April 1 of each year starting 2024. Direct origination cost of
P478,991 was paid by Lunar and direct origination fee was deducted to the proceeds received by Eclipse
Company. The interest effective on this loan is 5% after the origination costs and fees.

16. How much is the direct origination fee?

a. P2,178,271 b. P2,008,899 c. P2,210,782 d. P2,190,792

17. How much is the interest income recognized in its 2022 income statement?
a. P925,163 b. P913,410 c. P929,081 d. P941,442

18. What is the carrying value of the loan on December 31, 2024?
a. P18,581,620 b. P18,828,431 c. P18,910,701 d. P19,169,852

Details for one of the loans of Cheles Teh Company that is probably impaired during the period is as follows:
a. The company made a loan of P40,000,000 to a customer with similar credit risk to Cebuano Company
on January 1, 2023.
b. Interest is receivable on this loan at the end of each year at 2% per annum for the next five years.
c. The loan was properly recorded and classified as amortized cost.
d. The company made an initial assessment of the loan and the total expected credit losses over the life of
the loan was P1,000,000. The discount rate applicable was at 2%.
e. On January 1, 2023, the probability of default over the next 12 months was 5%.

At December 31, 2023, there was a significant increase in the credit risk on the loan made by Cheles Teh
Company, the expert assessed that the total expected credit losses over the life of the loan was increase to
P2,200,000. The discount rate applicable was at 2%.

19. How much is the total impairment loss recognized by Cebuano Company in its Statement of Comprehensive
income for period ending December 31, 2023?
a. P1,947,321 b. P1,946,416 c. P1,986,268 d. P2,031,554

20. How much is the balance of the allowance for credit losses as of December 31, 2023?
a. P2,032,460 b. P1,992,608 c. P2,011,835 d. no correct answer