2_Receivables Theory of Accounts

1. These are receivables that arise from the sale of goods or services in the ordinary course of
business.
a. Financial assets b. Trade receivables c. Note receivables d. Account
receivables

2. Non-trade receivables are

a. non-derivative financial instruments which do not require settlement in cash
b. non-derivative financial assets which may or may not be settled through the receipt of
cash
c. derivative or non-derivative financial instruments which do not require settlement in cash
d. receivables other than trade receivables

3. Trade receivables are presented as current assets

a. when they are collectible within one year
b. when they are collectible within an entity’s normal operating cycle
c. when they are backed by sufficient collateral security
d. when they are collectible within an entity’s normal operating cycle, even if the normal
operating cycle extends beyond one year.

4. Which of the following receivables may be presented as part of current assets?

a. Receivable from a subscriber of the entity’s own shares collectible within 12 months from
end of reporting period.
b. Advances to affiliates, the settlement date is not yet agreed upon.
c. Loan receivables from the entity’s officers collectible beyond 12 months
d. Long-term receivables (non-trade) of a construction firm. The firm’s normal operating cycle
extends beyond one year.

5. A discount given to a customer for purchasing a large volume of merchandise is typically

referred to as a
a. Cash discount b. Trade discount c. Size discount d. Quantity discount

6. A method of estimating bad debts that focuses on the statement of financial position rather
than the statement of comprehensive income is the allowance method based on
a. Direct write-off c. Credit sales
b. Aging the trade receivable accounts d. Specific accounts determined to be
uncollectible

7. Estimation of uncollectible accounts receivable based on accounts receivable

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

8. Under GAAP, an entry should be made to the bad debt expense account
a. When an account receivable with terms 2/10, n/30 is past thirty days due
b. When an account receivable previously written off is determined to be collectible
c. When an account receivable is determined not to be collectible and is written off
d. In the period when a sale is made and not when the receivable associated with the sale
is determined to be uncollectible
2_Receivables Theory of Accounts

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

10. A company writes off as uncollectible an account receivable from a bankrupt customer. The
company has an adequate amount in its Allowance for Bad debts. This transaction will
a. Decrease profit for the period c. Decrease the amount of owners’ equity
b. Decrease total current assets d. Have no effect on total current assets

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

12. When the direct write-off method of recognizing bad debts expense is used, the entry to write-
off a specific customer account would
a. Increase net income c. Increase both accounts receivable and net
income
b. Have no effect on net income d. Decrease both accounts receivable and
net income

13. When the direct write-off method of recognizing bad debts expense is used, the entries at the
time of collection of an account previously written off would
a. Increase the net realizable value of the accounts receivable
b. Decrease the net realizable value of the accounts receivable
c. Increase net income
d. Decrease net income

14. If a note is exchange for property and no interest rate is stated, the note is recorded at
a. Fair market value of the property or note c. Face value of the note
b. Maturity value of the note d. Carrying value of the property

15. How should unearned interest included in the face amount of notes receivable be presented
on the statement of financial position?
a. As a deferred credit c. In the footnotes
b. As a deduction from the related receivable d. As a current liability

16. According to the PFRSs, receivables are initially recognized at

a. Fair value c. Present value
b. Cost d. Fair value plus direct transaction costs

17. AAA Co. makes all of its sales on 30-day credit terms. During the period, AAA made a special
sale to one of its customers, wherein the customer was extended a 9-month credit term. AAA
received a P10M noninterest-bearing note on the sale. According to the PFRSs, AAA should
initially recognize the receivable at
a. Face amount b. Present value c. Appraised value d. Fair value less costs to sell
2_Receivables Theory of Accounts

18. AAA Co. received a 3-year, 3%, note receivable from one of its customers. The current rate
at the date of receipt of the note was 12%. AAA should initially recognize the receivable at
a. Face amount b. Present value c. Appraised value d. Fair value less costs to sell

19. Which of the following rates may be used to compute for the interest income on a receivable?
a. Stated rate b. Nominal rate c. Coupon rate d. Effective interest rate

20. Which of the following rates may be used to compute for the interest receivable on a note
receivable?
a. Yield rate b. Current rate c. Nominal rate d. Imputed rate of interest

21. A noninterest-bearing note

a. Bears no effective interest rate
b. Has a specified principal but an unspecified interest rate
c. Does not result to any interest income
d. Has an unspecified principal and an unspecified interest

22. The imputed rate of interest is

a. The prevailing rate for a similar instrument of an issuer with a similar credit rating
b. A rate of interest that discounts the face (nominal) amount of the receivable to the current
cash sales price of the goods or services
c. The more clearly determinable of either (a) or (b)
d. None of these

23. The concept of time value of money

a. Is irrelevant in financial reporting
b. States that money loses its value over time because of inflation
c. Provides that contractual agreements to receive cash or to pay cash in the future will earn
or incur interests due to passage of time regardless of whether interests have been
agreed upon or not
d. Is a pervasive concept which affects only financial reporting but not managerial accounting

24. When a note receivable earns compounded interest,

a. The principal is due at maturity but interests are due periodically
b. It means that the note is a long-term asset
c. Both the principal and interest are due only at maturity date
d. Interest income on the note is computed using a very complex formula

25. When the contractual cash flows on a debt instrument that is measured at amortized cost are
due in installments and the first installment is due a period from the date of the instrument,
the present value (PV) factor used to discount the future cash flows is
a. PV of P1 c. PV of an annuity due of P1
b. PV of ordinary annuity of P1 d. PV of a deferred annuity

26. Total interest income recognized over the life of a noninterest-bearing note is
1. Zero
2. Greater than the total interest received on the note
3. Less than the total interest received on the note
4. Equal to the unearned interest income on initial recognition
2_Receivables Theory of Accounts

27. If receivables are hypothecated against borrowings, the amount of receivables involved
should be
a. Disclosed in the notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face
value and the amount of borrowings

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

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

29. When accounts receivable are factored, terms of this agreement is usually done on a
a. With recourse and notification basis
b. With recourse and without notification basis
c. Without recourse and with notification basis
d. Without recourse and without notification basis

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

31. 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

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

33. Goods sold to officers, directors, and employees in the ordinary course of business and in
accordance with the usual credit terms. Under what conditions, if any may the related
receivables be included in trade accounts receivables?
a. The amount is significant, and should be disclosed
b. Proper control is executed in granting credit and the amount, if significant, properly
disclosed
c. The receivables can be included with trade discounts without any conditions
2_Receivables Theory of Accounts

d. The receivables are nontrade and should not be included with trade accounts.

34. Which of the following statements is incorrect?

a. If the estimate of doubtful accounts expense is made on the basis of net credit sales, an
entry is made each period to the account, “ allowance for doubtful accounts,” without
regard to the prior balance in that account.
b. If the allowance for doubtful accounts has been underestimated, a sale of the related
receivables to a factor is more likely to result in a gain than in a loss.
c. If credit terms to customers were 2/10, n/30, a two percent discount will be granted if
payment is made within 10 days of the date of sale.
d. If the estimate of doubtful accounts expense is made on the basis of accounts
receivable, the balance of the account, “allowance for doubtful accounts,” is adjusted so
that the adjusted balance reflects the computed amount needed to properly value the
accounts receivable.

Practice questions:
1. Receivable from officers, employees, or affiliated companies should be reported in the
statement of financial position as
a. Current assets, if collectible within twelve months or operating cycle, whichever is longer.
b. Noncurrent assets only
c. Current assets, if collectible within twelve months
d. Offsets to capital

2. A debit balance in the allowance for doubtful account

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

3. Which of the following is a generally accepted method of determining the amount of the
adjustment to bad debts 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 not adjusted for the balance in the
allowance

4. Assuming that the ideal measure of short-term receivables in the statement of financial
position is the discounted value of the cash to be received in the future, failure to follow this
practice usually does not make the statement of financial position misleading because
a. Most short-term receivables are 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

5. On April 1, 2016, 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 March 31, 2017. The interest receivable account at June 30, 2016 would consist of
the amount representing
2_Receivables Theory of Accounts

a. The excess on April 1, 2016 of the present value of the notes receivable over its face
value.
b. Three months of accrued interest income
c. Nine months of accrued interest income
d. Twelve months of accrued interest income

6. At the beginning of 2016, Evans Company received a three-year zero-interest-bearing

P60,000 note receivable for merchandise sold. The market rate for equivalent notes was 8%
at that time. Evans reported this note as charge to notes receivable and a credit to sales
revenue for P60,000. What effect did this accounting for the note have on Evan’s profit for
2016, 2017, 2018, and its retained earnings at the end of 2018, respectively?
a. Overstate, understate, understate, understate
b. Overstate, understate, understate, no effect
c. Overstate, overstate, overstate, overstate
d. Overstate, overstate, understate, no effect

Answers: CCBCBB