TA & P1 – RECEIVABLES 005

(Time allocated: 1.5 hours)

I. TRUE OR FALSE (10 pts)

1. Long-term receivables are measured at present value of all future cash flows
discounted using the prevailing market rate.
2. The direct write-off method used in recording uncollectible accounts receivable
allows the expense associated with bad debts always to be recorded in the
accounting period in which the sale was made.
3. The percentage-of-receivables approach is also referred to as the income statement
approach.
4. The inclusion in the income statement of all returns and allowances made during
the period is not acceptable accounting practice as some of the returns and
allowances resulted from sales of a prior period, and thus, the matching concept is
violated.
5. A trade receivable due two years hence should never be classified as a current
asset.
6. The present value of a note is measured by the fair value of the property, goods, or
services exchanged for the note or by an amount that reasonably approximates the
market value of the note.
7. Nontrade receivables which are expected to be realized in cash within one year or
within the normal operating cycle, whichever is longer, are classified as current
assets.
8. The sales discount forfeited account is classified as other operating expense.
9. Correction in the allowance for doubtful accounts which pertains to the prior
year(s) is considered a fundamental error.
10. For long term noninterest-bearing notes receivable, the amortized cost is the
present value plus amortization of the discount, or the face value minus the
unamortized unearned interest income.

II. MULTIPLE CHOICES (20 pts)

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

2. Which of the following is the proper balance sheet presentation of receivables?

a. Trade receivables and nontrade receivables should be shown separately.

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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

b. Nontrade receivables should be presented as current assets.

c. Trade accounts receivables and trade notes receivable should be presented
separately.
d. Trade receivables and nontrade receivables which are currently collectible should
be presented as one line item called “Trade and other receivables”.

3. How should credit balances in accounts receivable be classified?

a. As current liabilities.
b. As part of accounts payable.
c. As noncurrent liabilities.
d. As deduction from accounts receivable.

4. Accounts receivable should be stated at

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

5. Long-term notes receivable which are zero-interest-bearing or those whose rates are
unreasonably low may be stated at
A. Face value. C. Maturity value.
B. Discounted value. D. Book value.

6. Receivables denominated in foreign currency should be

a. Translated to local currency using the exchange rate at the transaction date.
b. Stated at the face value of the foreign currency.
c. Translated to local currency using the exchange rate at balance sheet date.
d. Translated to local currency using the exchange rate in effect at the date the
balance sheet is issued.

7. Which of the following methods of determining bad debt expense violates the
matching principle?
a. Determining the allowance for bad debts using the percentage of receivables
method.
b. Determining the allowance for bad debts using the percentage of sales method.
c. Determining the allowance for bad debts based on aged accounts receivable.
d. Charging bad debts expense as accounts are written off as collectible.

8. Which of the following methods of determining bad debt expense most closely
matches expense to revenue?
a. Estimating the allowance for doubtful accounts by aging the accounts receivable.

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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

b. Charging bad debts with a percentage of sales for that period.

c. Charging bad debts only as accounts become worthless or uncollectible.
d. Estimating the allowance for doubtful accounts as percentage of accounts
receivable.

9. This method of estimating bad debts is also known as the balance sheet approach.
a. Allowance method based on aging the receivables.
b. Direct writeoff method.
c. Allowance method based on credit sales.
d. Allowance method based on total sales.

10.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 writeoff
A. None Decrease
B. Decrease None
C. Decrease Decrease
D. None None

11.A company uses the allowance method to recognize uncollectible accounts expense.
What is the effect at the time of the collection of an account previously written off on
each of the following accounts?

Allowance Uncollectible
Doubtful Accounts Accounts Expense
A. No effect Decrease
B. Increase Decrease
C. Increase No effect
D. No effect No effect

12.Dishonored note receivable should be debited to

a. Accounts receivable at face value.
b. Accounts receivable at face value plus interest and other charges.
c. Dishonored note receivable at face value.
d. Accounts payable at face value plus interest and other charges.

13.The interest on a noninterest bearing note is equal to

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

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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

d. The excess of the present value over the face value.

14.On October 1, 2010, a company received a one-year note receivable bearing interest
at the market rate. The face amount of the note receivable and the entire amount of
the interest are due on September 30, 2011. The interest receivable account at
December 31, 2010 would consist of an amount representing
a. Three months of accrued interest income.
b. Nine months of accrued interest income.
c. One year of accrued interest income.
d. The excess at Oct. 31, 2010 of the present value of the note receivable over its
face value.

15.On July 1 of this year a company received a one-year note receivable bearing interest
at the market rate. The face amount of the note receivable and the entire amount of
the interest are due on June 30 of next year. At December 31 of this year, the
company should report in its balance sheet.
a. A deferred credit for interest applicable to next year.
b. Interest receivable for the entire amount of the interest due on June 30 of next
year.
c. No interest receivable.
d. Interest receivable for the interest accruing this year.

16.On Russel’s April 30, 2010 balance sheet a note receivable was reported as a
noncurrent asset and its accrued interest for eight months was reported as a current
asset. Which of the following terms would fit Russel’s note receivable?
a. Both principal and interest amounts are payable on August 31, 2010, and August
31, 2011.
b. Principal and interest are due December 31, 2010.
c. Both principal and interest amounts are payable on December 31, 2010, and
December 31, 2011.
d. Principal is due August 31, 2011, and interest is due August 31, 2010, and August
31, 2011.

17.On August 15, 2010, Guzman Co. sold goods for which it received a note bearing the
market rate of interest on that date. The four-month note was dated July 15, 2010.
Note principal, together with all interest, is due November 15, 2010. When the note
was recorded on August 15, 2010, which of the following accounts increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest revenue

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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

18.A method of estimating uncollectible accounts that emphasizes asset valuation rather
than income measurement is the allowance method based on
a. Aging of receivables
b. Direct write-off
c. Gross Sales
d. Credit sales less returns and allowances

19.Which method of recording uncollectible accounts expense is consistent with accrual

accounting?
Allowance Direct write-of
a. Yes Yes
b. Yes No
c. No Yes
d. No No

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 the 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.

III. PROBLEMS (20 pts)

1. On the December 31, 2013 balance sheet of Neil Co., the current receivable
consisted of the following:
Trade accounts receivable P 93,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (November 2013) 3,000
Selling price of unsold goods sent by Neil on consignment at 130% of
Cost (not included in Neil’s ending inventory) 26,000
Security deposit on lease of warehouse used for storing some inventories 30,000
Total P 150,000

At December 31, 2013, what is the correct total of Neil’s current net receivable?

2. The following information relates to Russ Co. accounts receivable for 2013:
Accounts receivable, 1/1/13 P 650,000
Credit sales for 2010 2,700,000
Sales returns for 2010 75,000
Accounts written off during 2013 40,000
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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

Collections from customers during 2013 2,150,000

Estimated future sales returns at 12/31/13 50,000
Estimated uncollectible accounts at 12/31/13 110,000

What amount should Russ report for accounts receivable, before allowances for
sales returns and uncollectible accounts, at December 31, 2013?

3. Neil Co. has an 8% note receivable dated June 30, 2010, in the original amount of
P150,000. Payments of P50,000 in principal plus accrued interest are due
annually on July 1, 2011, 2012 and 2013.

In its June 30, 2012 balance sheet, what amount should Neil report as a current
asset for interest on the note receivable?

4. On December 1, 2013, Rose Mortgage Co. gave Glen Corp. a P200,000, 11% loan.
Glen received proceeds of P194,000 after the deduction of a P6,000
nonrefundable loan origination fee. Principal and interest are due in sixty
monthly installments of P4,310, beginning January 1, 2014. The repayments yield
an effective interest rate of 11% at a present value of P200,000, and 12.4% at a
present value of P194,000.

What amount of accrued interest receivable should Rose include in its December
31, 2013 balance sheet?

5. Lynn, Inc. sells to wholesalers on terms of 2/15, net 30. Lynn has no cash sales but
50% of Lynn’s customers take advantage of the discount. Lynn uses the gross
method of recording sales and trade receivables. An analysis of Lynn’s trade
receivables balances at December 31, 2013 revealed the following:

Age Amount Collectible

0 - 15 days P100,000 100%
16 - 30 days 60,000 95%
31 - 60 days 5,000 90%
Over 60 days 2,500 P 500
P167,500
=======

In its December 31, 2013 balance sheet, what amount should Lynn report for
allowance for discounts?

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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

6. Nathan Co. determined that the net value of its accounts receivable at December
31, 2013, based on an aging of the receivables, was P325,000. Additional
information is as follows:
Allowance for uncollectible accounts – 1/1/13 P 30,000
Uncollectible accounts written off during 2013 18,000
Uncollectible accounts recovered during 2013 2,000
Accounts receivable at 12/31/13 350,000

For 2013, what would be Nathan’s uncollectible accounts expense?

7. The following information pertains to Glenn Co.’s accounts receivable at

December 31, 2013:
Days outstanding Amount Estimated % uncollectible
0 – 60 P120,000 1%
61 – 120 90,000 2%
Over 120 120,000 6%
P310,000
========

During 2013, Glenn wrote off P7,000 in receivables and recovered P4,000 that
have been written off in prior years. Glenn’s December 31, 2009 allowance for
uncollectible accounts was P22,000.

Under the aging method, what amount of allowance for uncollectible accounts
should Glenn report at December 31, 2013?

(For items 8 -10)

The financial statements of Desire Company include the following:

December 31, 2012 December 31, 2013

Accounts receivable P900,000
Allowance for doubtful accounts 45,000
Sales P9,500,000
Cash collected from customers 8,540,000

Among the cash collections was the recovery of P15,000 receivable from a
customer whose account had been written off as worthless in 2009. During 2010,
it was necessary to write off uncollectible customers’ accounts at P75,000. On
December 1, 2013, a customer settled his account by issuing a 12%, six-month
note for P300,000.

On December 31, 2013, the accounts receivable included P450,000 of past due
accounts. After careful study, the management estimated that the probable loss
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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

on past due accounts is 20% and that in addition, 5% of the current accounts may
prove uncollectible.

8. What is the adjusted balance of accounts receivable on December 31, 2013, gross
of allowance for doubtful accounts?
9. What is unadjusted the balance of allowance for doubtful accounts on December
31, 2013?
10.How much increase (decrease) in allowance for doubtful accounts is required on
December 31, 2013?
11.Aspire Company manufactures and sells electrical generators. On January 1, 2013,
the entity sold an electrical generator costing P700,000 for P1,000,000. The buyer
paid P100,000 down and signed a P900,0000 noninterest bearing note payable in
three equal instalments every December 31. The prevailing interest rate for a note
of this type is 12%.

What is the carrying value of the note on December 31, 2014?

(For items 12 & 13)

On December 31, 2013, Solis Bank granted a P5,000,000 loan to a borrower with
10% stated rate payable annually and maturing in 5 years. The loan was
discounted at the market interest rate of 12%. Unfortunately, the financial
condition of the borrower worsened because of lower revenue. On December 31,
2015, the bank determined that the borrower would pay back only P3,000,000 of
the principal at maturity. However, it was considered likely that interest would
continue to be paid on the P5,000,000 loan. Round off PV factors into 2 decimal
places.

12.What is the carrying amount of the loan receivable on December 31, 2015?
13.What is the impairment loss to be recognized on December 31, 2015?

(For items 14 & 15)

Dean Bank loaned P9,000,000 to a borrower on January 1, 2011. The terms of the
loan were payment in full on January 1, 2016, plus annual interest payment at
12%. The interest payment was made as scheduled on January 1, 2012. However,
due to financial setbacks, the borrower was unable to make the 2013 interest
payment. The bank considered the loan impaired and projected the cash flows
from the loan on December 31, 2013. The bank has accrued the interest on
December 31, 2012, but did not continue to accrue interest for 2013 due to the
impairment of the loan. The projected cash flows are: 1,500,000 on 12/31/14;
2,000,000 on 12/31/15; 2,500,000 on 12/31/16; 3,000,000 12/31/17
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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward
 TA & P1 – RECEIVABLES 005

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

14.What is the loan impairment loss on December 31 2013?

15.What is the carrying amount of the loan receivable on December 31, 2014?

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“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and
dream while others are wishing” – William A. Ward