DySAS Center for CPA Review (DCCPAR)

Room 201 State Investment Building, corner Tiano-Hayes Sts.

infront of Club Mojo, Cagayan de Oro City

FINANCIAL ACCOUNTING Batch 2 – October 2009

Review Material Mr. John C. Frivaldo, MBA, CPA

INVENTORIES (PAS 2)

I. Definition

These are assets –

a. held for sale in the ordinary course of business,
b. in the process of production for such sale, or
c. in the form of materials or supplies to be consumed in the production process or rendering
services

The matching concept in relation to inventories is followed.

All goods to which the enterprise has legal title at inventory date, regardless of their location at
that time, should be included in the inventory.

Terms in determining Ownership of Goods In Transit:

1. FOB Destination
2. FOB Shipping Point
3. Consignment

II. Composition

(a) Trading companies:

- merchandise inventory (goods purchased for resale)
- office and/ or store supplies
(b) Manufacturing companies:
- finished goods (ready for sale to customers)
- work in progress (in the process of production for subsequent sale)
- raw materials and factory supplies (in the form of materials and supplies to be
consumed in the production process)
- office and/ or store supplies
(c) Service companies:
- work in progress
- office supplies

III. Valuation

(a) General Rule – Historical Cost*

a. FIFO (First-In, First-Out)
b. Average:
i. Weighted Average
ii. Moving Average
c. Specific Identification

* Cost of Inventories:
1. Cost of purchase – purchase price, import duties and taxes, freight, handling and other
direct acquisition costs (minus trade discounts, rebates and other similar items).
2. Cost of conversion – direct labor and overhead (variable and fixed) incurred in
conversion.
3. Other costs incurred in bringing the inventories to their present location and
condition – borrowing cost, etc. (excluding abnormal amounts of wastes, storage
costs, administrative and selling costs).
 Methods of Recording Purchases:
1. Gross Method
2. Net Method

Accounting Systems for Inventories:

1. Periodic – based on physical count
2. Perpetual – based on stock cards

Methods of Inventory Estimation:

1. Gross Profit Method
2. Retail Inventory Method –
a. Conservative
b. Average Cost
c. FIFO, Conservative
d. FIFO, Average Cost

(b) Alternatives –
a. Lower of Cost or Net Realizable Value (Estimated Selling Price less Estimated
Cost of Completion and Disposal) – Item by Item
b. Net Realizable Value (for Livestock, Agricultural, Mineral & Forest Products)
c. Net Realizable Value Minus Normal Profit Margin (for Trade-In Merchandise)

IV. Classification

(a) As a Current Asset – for those Unsold/Unused/Remaining Goods or Items.

– is a one-line item account used to summarize inventories that are classified as current
assets. As to its details, they are disclosed in the notes to financial statements.
(b) As part of Cost of Sales – for those Sold/Used/Expired Goods or Items
(c) As part of Operating Expenses – for those Office and/ or Store Supplies
1. The cost of inventories should comprise all of the following costs, except:
(a) cost of purchase.
(b) cost of conversion.
(c) other cost incurred in bringing the inventories to their present location and condition.
(d) selling cost. D

2. 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. D

3. Costs excluded from cost of inventories and recognized as expenses in period when incurred
are:
(a) storage costs, unless necessary in the production process.
(b) borrowing costs incurred for inventories that require a substantial period of time to bring
them to a saleable condition.
(c) foreign exchange differences which result from severe devaluation of a currency against
which there is no hedging and that affects liabilities directly arising from the recent
acquisition of inventories.
(d) freight and handling costs in acquiring goods. A

4. Net realizable value is:

(a) current replacement cost.
(b) estimated selling price.
(c) estimated selling price less estimated cost to complete.
(d) estimated selling price less estimated cost to complete and estimated cost to sell. D

5. When agricultural crops have been harvested or mineral ores have been extracted and a sale is
assured under a forward contract or government guarantee, such inventories are measured at:
(a) net realizable value (c) standard cost
(b) cost (d) relative sales price A

6. This costing method is appropriate for inventories that are segregated for a specific project and
inventories that are not ordinarily interchangeable.
(a) specific identification (c) relative sales price
(b) standard cost (d) net realizable value A

7. Which inventory pricing method reflects the most recently incurred purchase costs in the ending
inventory
(a) FIFO (c) Retail
(b) LIFO (d) Weighted average A

8. Cost of goods sold is the same under a periodic system as under a perpetual system when an
enterprise uses:
(a) FIFO (c) Weighted average
(b) LIFO (d) Specific identification A

9. 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 A

10. Total cost of goods available for sale during the period divided by the total units available for
sale during the period equals an average unit cost multiplied by the units on hand equals cost
of ending inventory.
(a) weighted average – periodic (c) specific identification
(b) weighted average – perpetual (d) standard cost A
11. The average inventory pricing method under a perpetual inventory system is called:
(a) weighted average method (c) composite average method
(b) moving average method (d) simple average method B

12. Which means that “the buyer actually paid the freight charge but is not legally responsible for
the same”?
(a) FOB destination, freight prepaid (c) FOB shipping point, freight prepaid
(b) FOB destination, freight collect (d) FOB shipping point, freight collect B

13. If a merchandise company ended a period with a larger inventory that it had at the beginning
of the period, which of the following statements must be true?
(a) The cost of goods sold was greater than net purchases.
(b) Net income was greater than gross profit.
(c) The cost of goods available for sale was smaller than cost of goods sold.
(d) The cost of goods sold was smaller than net purchases. D

14. When determining the unit cost of an inventory item, which of the following should not be
included?
(a) interest on loan obtained to purchase the item
(b) commission paid when purchased
(c) labor cost of the item when manufactured
(d) depreciation of plant equipment used in manufacturing the item A

15. Losses which are expected to arise from firm and uncancelable commitments for the future
purchase of inventory items should, if material, be:
(a) recognized in the accounts by debiting loss on purchase commitments and crediting
estimated liability for loss on purchase commitments.
(b) disclosed only in the notes.
(c) ignored.
(d) charged to retained earnings. A

16. Theoretically, how should the following affect the costs to be included in a manufacturer’s
inventory?
Insurance on raw materials Cash discounts taken on
while on transit purchased raw materials
(a) Increase No effect
(b) Increase Decrease
(c) No effect Decrease
(d) No effect No effect B

17. Which will not require an estimate of inventory?

(a) inventory destroyed by typhoon
(b) proof of the reasonable accuracy of the physical inventory
(c) interim financial statements are prepared
(d) determination of ending inventory to be shown on the balance sheet at year-end D

18. If the gross profit is based on costs, the cost of sales is computed as:
(a) net sales times cost ratio (c) gross sales times cost ratio
(b) net sales divided by sales ratio (d) gross sales divided by sales ratio B

19. What is the treatment of inventory normal spoilage under the retail method?
(a) ignored (c) deducted from cost of goods available for sale
(b) deducted from sales (d) deducted from goods available for sale at retail
D
20. It is the increase in sales price above the original sales price minus markup cancellation.
(a) additional markup (c) markdown
(b) net markup (d) markon B

21. In computing cost ratio, the conservative retail method should:

(a) includes markup and markdown (c) includes markup but not markdown
(b) excludes markup and markdown (d) includes markdown but not markup C
22. The retail method would include which of the following in the calculation of goods available for
sale at cost but not at retail?
(a) freight in (c) net markup
(b) purchase returns (d) net markdown B

23. The conservative retail method produces an ending inventory which is the:
(a) lower of FIFO cost or market. (c) lower of average cost or market.
(b) lower of LIFO cost or market. (d) lower of cost or retail price. C

24. The cost of conversion of inventories include:

I. Cost directly related to units of production, such as direct labor.
II. Systematic allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods.
(a) both I and II (c) I only
(b) neither I nor II (d) II only

25. Which statement is incorrect concerning the valuation of inventory at LCM?

I. Inventories are usually written to net realizable value on an item by item basis.
II. It is appropriate to write down inventories based on a classification of inventory, for
example, finished goods or all inventories in a particular industry or geographical segment.
(a) I only (c) both I and II
(b) II only (d) neither I nor II

26. An exception to the general rule that costs should be charged to expense in the period incurred
is:
(a) commissions incurred in connection with sale of inventory
(b) general and administrative fixed costs in connection with the purchase of inventory
(c) interest costs for financing of inventories that are routinely manufactured in large quantities
on a repetitive basis
(d) factory overhead costs incurred on a product manufactured but not sold during the current
period

27. South Company paid the in-transit insurance premium for consignment goods shipped to
Hendon Company, the consignee. In addition, South advanced part of the commissions that
will be due when Hendon sells the goods. Should South include the in-transit insurance
premium and advanced commissions in inventory costs?
Insurance premium Advanced commissions
(a) Yes Yes
(b) No No
(c) Yes No
(d) No Yes C

28. A consignee paid the freight costs for goods shipped from a consignor. These freight costs are
to be deducted from consignee’s payment to consignor when the consignment goods are sold.
Until the consignee sells the goods, the freight costs should be included in consignee’s:
(a) cost of goods sold (c) selling expenses
(b) freight-out costs (d) accounts receivable D

29. Purchases were ordered by D Company from O Company on December 15, 2008. The terms of
sale were FOB destination. O shipped the merchandise on December 28, 2008 and D received
them on January 5, 2009. When should D record the accounts payable?
(a) December 15, 2008 (c) December 31, 2008
(b) December 28, 2008 (d) January 5, 2009 D

30. The gross margin method of estimating ending inventory may be used for all of the following
except:
(a) internal as well as external interim reports
(b) internal as well as external year-end reports
(c) estimate of inventory destroyed by fire or other casualty
(d) rough test of the validity of an inventory cost determined under either periodic or perpetual
system B
31. The cost of inventories of a service provided consists primarily of:
(a) Labor and other cost of personnel directly engaged in providing the service, including
supervising personnel and attributable overhead
(b) Labor and other cost relating to sales and general administrative personnel
(c) Cost of materials used, direct labor incurred and attributable overhead
(d) Operating supplies

32. “Bill and hold” sales, in which delivery is delayed at the buyer’s request but the buyer assumes
title and accepts invoicing, shall be recognized when:
(a) The buyer makes an order.
(b) The seller starts manufacturing the goods.
(c) The title has been transferred but the goods are kept on the seller’s premises.
(d) It is probable that the delivery will be made, payment terms have been established, and the
buyer has acknowledged the delivery instructions.

33. 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 D

34. The best method of inventory valuation for a dealer in jewelries is:
(a) specific identification. (c) base stock.
(b) last invoice price. (d) weighted average. A

35. Under the retail inventory method, freight-in would be included in the calculation of the goods
available for sale for which of the following?
Cost Retail
(a) No No
(b) No Yes
(c) Yes No
(d) Yes Yes C

36. Where the market price of goods contracted for falls below the contract price and title has
passed to the buyer and he values goods at cost or market, whichever is lower, the loss:
(a) will be deferred until such time that these goods become obsolete and unsalable.
(b) will be reflected at some future time when the market price improves.
(c) will be reflected immediately because of the reduced value of the closing inventory.
(d) will not be considered in view of the inventory valuation of cost or market, whichever is
lower. C

37. 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. C

38. The September 30, 2009 physical inventory of X Company appropriately included P3,800 of
merchandise which was not recorded as purchases until October 2009. What effect will this
error have on September 30, 2009 assets, liabilities, retained earnings, and earnings for the
year then ended, respectively?
Assets Liabilities Retained earnings Net earnings
(a) No effect Overstate Understate Understate
(b) No effect Understate Understate Overstate
(c) Understate No effect Overstate Overstate
(d) No effect Understate Overstate Overstate D

39. The estimated closing inventory for a particular period may be derived from which formula?
(a) cost of goods available for sale minus [net sales plus (gross profit percentage multiplied by
net sales)]
(b) net sales minus gross profit on net sales
(c) cost of goods available for sale minus [net sales minus (gross profit percentage multiplied
by net sales)]
(d) cost of goods available for sale minus gross profit on net sales C
40. The following information pertains to an item in the inventory of Cecilia Company at year-end:
Cost 300
Replacement cost 260
Net realizable value 240
Net realizable value less normal profit 170
Under the lower of cost or market, how much is the year-end inventory value of this item?
(a) P300 (b) P260 (d) P240 (d) P170 C

LCM – Net Realizable Value 240

41. On December 31, 2008, Miles, Inc. shipped merchandise with a list price of P792,000 to Smile
Company. The goods were sold on account with terms of net 30 days, FOB shipping point.
Due to an oversight, the sale was not recorded until January 2009, and the merchandise, which
was sold at a 25% markup, was included in Miles’ perpetual inventory on December 31, 2008.
As a result, Miles’ income before taxes for the year December 31, 2008 was understated by:
(a) P792,000 (b) P633,600 (c) P592,000 (d) P158,400 D

Selling price P792,000

Cost of goods sold (792,000 / 125%) (633,600)
Gross profit (understatement of income) P158,400

42. The Good Company values its inventory by using the retail method (FIFO basis, lower of cost or
market). The following information is available for the year just ended:
Cost Retail
Beginning inventory P176,000 P308,000
Purchases 653,400 924,000
Freight-in 8,800
Shortages 17,600
Markups (net) 22,000
Markdowns (net) 4,400
Sales 880,000
At what amount would the Good Company report its ending inventory?
(a) P246,400 (b) P249,480 (c) P258,720 (d) P261,800 A

Cost Retail
Beginning inventory P176,000 P 308,000
Purchases P653,400 P 924,000
Freight-in 8,800
Markups (net) 22,000
P622,200 P 946,000
Goods available for sale P838,200 P1,254,000
Markdowns (net) ( 4,400)
Sales ( 880,000)
Shortages ( 17,600)
Ending inventory at retail P 352,000
Cost to retail ratio (662,200 / 946,000) x 70%
Ending inventory at estimated cost P 246,400

43. On July 1, the Oriental Company recorded purchases of inventory of P408,000 and P510,000
under credit terms of 2/15, net 30. The payment due on the P408,000 purchases were
remitted on July 14. The payment due on the P510,000 purchases was remitted on July 25.
Under the net method and the gross method, these purchases would be included at what
respective net amounts in the determination of cost of goods available for sale?
Net Method Gross Method Net Method Gross Method
(a) P918,000 P918,000 (c) P899,640 P909,840
(b) P909,840 P899,640 (d) P899,640 P899,640 C
 Journal entries:
Gross Method
Purchases 408,000
Accounts payable 408,000
#
Purchases 510,000
Accounts payable 510,000
#
Accounts payable 408,000
Purchase discount (2%) 8,160
Cash 399,840
#
Accounts payable 510,000
Cash 510,000
#

PURCHASES = 909,840

Net Method
Purchases 399,840
Accounts payable 399,840
#
Purchases 499,800
Accounts payable 499,800
#
Accounts payable 408,000
Cash 399,840
#
Accounts payable 499,800
Purchase discount lost 10,200
Cash 510,000
#
PURCHASES = 899,640

44. On the night of September 30, 2008, a fire destroyed merchandise inventory at Sonia Company.
All goods were completely destroyed except for partially damaged goods that normally sell for
P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that
normally sell for P60,000. The following data are available:
Inventory – January 1 P 660,000
Net purchases, Jan. 1 to Sept. 30 4,240,000
Net sales, Jan. 1 to Sept. 30 5,600,000
Total 2007 2006 2005
Net sales P9,000,000 P5,000,000 P3,000,000 P1,000,000
Cost of sales (6,750,000) (3,840,000) (2,200,000) ( 710,000)
Gross income P2,250,000 P1,160,000 P 800,000 P 290,000
What is the estimated amount of fire loss on September 30, 2008?
(a) P700,000 (b) P630,000 (c) P615,000 (d) P580,000 B

Average gross profit rate

(2,250,000/ 9,000,000) 25%
Inventory – January 1 P 600,000
Net purchases 4,240,000
Goods available for sale P4,900,000
Cost of sales (5,600,000 x 75%) 4,200,000
Inventory – September 30 P 700,000
Less: Undamaged goods
(60,000 x 75%) ( 45,000)
Realizable value of damaged
goods ( 25,000)
Fire loss P 630,000
45. At December 31, 2008, the following information was available from Huff Company’s accounting
records:
Cost Retail
Inventory – January 1 P147,000 P 203,000
Purchases 833,000 1,155,000
Additional markup ________ 42,000
P980,000 P1,400,000
Sales for the year ended totaled P1,106,000. Markdowns amounted to P14,000. Under the
approximate lower of average cost or market retail method, Huff’s inventory at December 31,
2008:
(a) P308,000 (b) P280,000 (c) P215,600 (d) P196,000 D

Cost Retail
Available for sale P980,000 P1,400,000
Markdowns ( 14,000)
Sales (1,106,000)
Inventory, December 31 P 280,000
Conservative cost ratio (980,000/1,400,000) 70%
Inventory, December 31 at cost P 196,000

46. Dean Company uses the retail inventory method to estimate its inventory for interim statement
purposes. Data relating to the computation of the inventory at July 31, 2008 are as follows:
Cost Retail
Inventory, February 1, 2007 P 180,000 P 250,000
Purchases 1,020,000 1,575,000
Net markups 175,000
Sales 1,705,000
Net markdowns 125,000
Estimated normal shoplifting losses 20,000
Under the approximate lower of average cost retail method, Dean’s estimated inventory at July
31, 2008 is:
(a) P102,000 (b) P150,000 (c) P90,000 (d) P96,000 C

Cost Retail
Inventory, February 1 P 180,000 P 250,000
Purchases 1,020,000 1,575,000
Net markups _________ 175,000
Available for sale – conservative P2,000,000
Net markdowns _________ ( 125,000)
Available for sale – average P1,200,000 P1,875,000
Sales (1,705,000)
Estimated normal shoplifting losses ( 20,000)
Inventory, July 31 P 150,000

Inventory (150,000 x 60%) P90,000

47. The inventory on hand on December 31, 2008 for Benevolent Corporation is valued at a cost of
P300,000. The following items were not included in the inventory:
- Purchased goods in transit shipped FOB destination, with price of P30,000 which includes
freight charge of P3,000.
- Goods held on consignment by Benevolent at a sales price of P10,000, excluding a 20%
commission on the sales price. Freight paid by Benevolent, P1,000.
- Goods sold in transit FOB destination with invoice price of P49,000 which includes freight
charge of P4,000 to deliver the goods.
- Purchased goods in transit FOB shipping point with invoice price of P60,000. Freight cost
amounts to P6,000.
- Goods out on consignment with sales price of P30,000. Shipping cost amounts to P3,000.
What is the correct inventory on December 31, 2008 assuming corporation’s selling price is
150% of cost?
(a) P300,000 (b) P420,000 (c) P419,000 (d) P435,000 C
 Inventory on hand P300,000
A -
B -
C (45,000/ 150%) 30,000
D (60,000 + 6,000) 66,000
E (30,000/ 150% + 3,000) 23,000
Correct inventory – 12/31/2007 P419,000

For items 48 and 49:

The Computer Express Company sells only one product, a wonder calculator designed
specifically for accounting students. After experiencing record sales of P500,000, the
accountant is ready to prepare the annual financial statements. At the start of the year, there
were 21,000 calculators on hand at a cost of P15 per unit. During the year, the company
purchased three shipments of wonder calculators consisting of 9,000, 5,000 and 12,000 units
costing P144,000, P85,000 and P126,000 respectively. Throughout the entire year, Computer
Express sold the wonder calculators for P20 each.

48. The cost of the ending inventory using the weighted average cost method would be:
(a) P313,720 (b) P363,000 (c) P404,250 (d) P412,500 A

Units Unit cost Total costs

Beginning inventory 21,000 15.00 315,000
Purchases: 9,000 16.00 144,000
5,000 17.00 85,000
12,000 10.50 126,000
Available for sale 47,000 670,000
Weighted average unit cost (670,000/ 47,000) 14.26
Ending inventory (22,000 x 14.26) 313,720

49. The cost of goods sold using FIFO would be:

(a) P331,000 (b) P379,000 (c) P381,000 (d) P429,000 B

Units Unit cost Total costs

5,000 16.00 80,000
5,000 17.00 85,000
12,000 10.50 126,000
22,000 291,000

Beginning inventory 315,000

Purchases 355,000
Available for sale 670,000
Ending inventory (291,000)
Cost of goods sold 379,000

50. A retail store has goods available for sale of P500,00 at retail and P300,000 at cost. Its ending
inventory is P50,000 at retail. What is the store’s estimated cost of goods sold?
(a) P30,000 (b) P50,000 (c) P270,000 (d) P450,000 C

At cost At retail Ratio

Available for sale 300,000 500,000 60%

Ending inventory at retail 50,000

Ending inventory at cost
(50,000 x 60%) 30,000

Available for sale 300,000

Less: Ending inventory (30,000)
Cost of goods sold 270,000
51. A company has goods available for sale costing P500,000, sales of P600,000, and a gross
margin percentage of 30%. Using the gross margin method, what is the estimated cost of the
company’s ending inventory?
(a) P80,000 (b) P320,000 (c) P420,000 (d) P350,000 A

Sales 600,000
Cost of sales (70%) (420,000)
Gross profit (30%) 180,000

Available for sale 500,000

Cost of sales (420,000)
Ending inventory 80,000

52. Top company has given you the following financial information. All inventory figures are stated
at cost.
Beginning inventory P122,000
Ending inventory 340,000
Maximum inventory level during the period 671,000
Minimum inventory level during the period 17,000
Average inventory level during the period 400,000
Sales 1,500,000
Gross margin 20%
Top’s inventory turnover is:
(a) 3.49 times (b) 3.75 times (c) 5.19 times (d) 3 times D

Inventory turnover = Cost of goods sold

Average inventory
= 1,500,000 x 80%
400,000
= 3 times
 DySAS Center for CPA Review (DCCPAR)
Room 201 State Investment Building, corner Tiano-Hayes Sts.
infront of Club Mojo, Cagayan de Oro City

FINANCIAL ACCOUNTING Batch 2 – October 2009

Review Material Mr. John C. Frivaldo, MBA, CPA

TRADE & OTHER RECEIVABLES

I. Definition

These represent amounts collectible from customers and others, most frequently arising
from sales of merchandise, claims for money lent, or the performance of service. They may
be interest bearing, collateralized, or billed.

They represent a contractual right to receive cash or another financial asset from another
entity.

II. Composition

(a) For retailers or manufacturers –

1. Trade Receivables
2. Non-Trade Receivables

(b) For banks and other financial institutions

III. Valuation

(a) General Rule – Fair Value plus Transaction Costs

1. Short-term receivables – Face value
2. Long-term receivables – Face value
– Discounted Amount or Present Value
(b)Alternatives:
d. Net Realizable Value
e. Discounted Amount or Present Value
f. Amortized Cost using Effective Interest Method

IV. Classification

(a) As Current Assets–

1. Trade Receivables – within one year or normal operating cycle, whichever is longer
(i.e., installment sales on household appliances and real estate where a major portion
will be collected beyond normal operating cycle).
2. Non-Trade Receivables – within one year, notwithstanding the normal operating
cycle.
3. Trade and Other Receivables – is a one-line item account used to summarize
receivables that are classified as current assets. As to its details, they are disclosed in
the notes to financial statements. Otherwise, they are presented separately as non-
current items.

(b) As Noncurrent Assets –

1. Long-term Investments
2. Other Non-Current Assets

(c) As Current Liabilities

(d) As Contra-Shareholders’ Equity

V. Methods of Estimating Doubtful Accounts:

a. Balance Sheet Approach – aging of accounts receivable, percentage of accounts

receivable
b. Income Statement Approach – based on sales (gross or net, total or credit)
VI. Methods of Accounting for Doubtful Accounts:

(a) Allowance Method

(b) Direct Write-Off Method

VII. Special Treatments

(a) Advances to Subsidiaries and Affiliates – are usually classified as long-term

investments.
(b) Customers’ with Credit Balances – are usually classified as current liabilities.
Otherwise, they are to be offset if the amounts are immaterial or of customers’ accounts.
(c) Receivables from Officers, Directors, and Employees – are usually classified as
current assets. Otherwise, they are presented as part of non-current assets.
(d) Subscriptions Receivables – are presented as part of the stockholders’ equity.
Otherwise, they are presented as part of the current assets.
(e) Receivables Hypothecated against Borrowings (Pledged or Assigned) * – are still
included as part of the current assets with the corresponding disclosure in the notes to
financial statements.
(f) Receivables Discounted with Recourse * – are excluded.
(g) Receivables Sold without Recourse * – are excluded.
(h) Unearned Finance Charges and Interests – are deducted from the related receivables.

* Forms of Receivable Financing:

a. Pledging – refers to the use of receivables as collateral for a loan. The only entry
required in the books would record the loan obtained from the finance company or
bank. The accounts receivable, in any manner, is not affected by the pledging.
However, disclosures should be made in the notes to financial statements.
b. Assignment – is a more formal borrowing arrangement in which the receivables are
used as security. The borrower (assignor) pledges the receivables to a lender
(assignee) and signs a promissory note payable. Assignment may be done on a
notification or non-notification basis.
c. Factoring – is a sale of receivables since the transfer of these receivables is without
recourse. The factor company (finance company) assumes the risk of collection and
generally handles the billing and collection function. As in any sale of assets, a gain or
loss is recognized for the difference between the proceeds received and the net carrying
amount of the receivables factored.
d. Discounting – is in essence selling the note to the bank with recourse.

Interest Rate Discount Rate

Endorser Endorsee
Prom. Note Prom. Note

Customer Company Bank

Maker/ Payor Payee

Net Proceeds = Maturity Value – Discount

Principal + Interest Maturity Value x Discount Rate

x Discount Period

Principal x Interest Rate x Time

1. Which of the following statements is not valid in determining balance sheet disclosures of
accounts receivable?
(a) accounts receivable should be identified on the balance sheet as pledged if they are used
as security for a loan eventhough the loan is shown on the same balance sheet as a liability
(b) the portion of installment accounts receivable from customers which falls due more than 12
months from the balance sheet date usually would be excluded from current assets
(c) allowances to be deducted from accounts receivable for discounts, returns and adjustments
to be made in the future on accounts can be shown in the current balance sheet
(d) trade receivables are best shown separately from nontrade receivables where amounts of
each are material B

2. 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. C

3. The expected cash to be collected from a receivable is referred to as the receivable’s:

a. net present value (c) cash realizable value
b. foreign-currency equivalent (d) relative sales value C

4. 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 A

5. The allowance for uncollectible accounts is:

(a) increased when an account receivable is collected
(b) decreased when an account receivable is collected
(c) increased when an accounts receivable is written off
(d) decreased when an account receivable is written off D

6. Accounts receivable of a company are sold outright to a financing company on a without

recourse basis are said to have been:
(a) pledged (c) factored
(b) assigned (d) collateralized C

7. The equity in assigned accounts receivable account is classified on the balance sheet as:
(a) an asset account (c) a liability account
(b) a contra-asset account (d) a disclosure only D

8. When a specific customer’s accounts 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 Allowance Direct writeoff
(a) none decreased (c) decreased decreased
(b) decreased none (d) none none A

9. 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 receivable are not stated at their provable realizable value
(d) uncollectible accounts are recorded as expenses in the period in which the individual
account are determined to be worthless D
10. From the standpoint of account classification, the allowance for doubtful accounts is included in
what account category?
(a) assets (c) owner’s equity
(b) liabilities (d) footnote only A

11. A 90- day, 15 % interest bearing note receivable sold to a bank without recourse after being
held for 60 days. The proceeds are calculated using an 18% interest rate. The amount credited
to note receivable at the date of discounting transaction would be:
(a) The same as cash proceeds. (c) The face value of the note.
(b) Less than the face value of the note. (d) The maturity value of the note. C

12. G Company sold equipment to F Company, taking in exchange a noninterest bearing note, the
face amount of which was in excess of the fair market value of the equipment. On a balance
sheet prepared immediately after receipt of the note, G should present the note at its face
amount:
(a) without adjustment
(b) less implicit interest
(c) plus implicit interest
(d) plus the anticipated net earnings related to note B

13. The discount on notes receivable represents:

a. unearned interest (c) prime interest
b. prepaid interest (d) accrued interest A

14. If the maker of a note that has been discounted at a bank with recourse defaults, the
contingently liability on the books of the endorser becomes:
a. an expense (c) a note receivable
b. a revenue (d) a liability D

15. When an enterprise discounts its “own” note with a bank, the face value is credited to:
(a) Note receivable discounted (c) Note payable trade
(b) Note payable – bank. (d) Note receivable B

16. 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 A

17. 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 B

18. 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 C
19. 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 B

20. If there is evidence that an impairment loss on loans and receivables has been incurred, the
amount of the loss is equal to:
(a) excess of the carrying amount of the loan receivable over the present value of the cash
flows related to the loan
(b) excess of the present value of cash flows related to the loan over the carrying amount of
the loan receivable
(c) excess of the carrying amount of the loan over the principal amount of the loan
(d) excess of the principal amount of the loan over its carrying amount A

21. Big Company, which has an adequate amount in its allowance for doubtful accounts, writes off
as uncollectible an account receivable from a bankrupt customer. This action will:
(a) have no effect on total current assets (c) reduce net income for the period
(b) reduce total current assets (d) reduce the amount of owner’s equity A

22. An accounts receivable’s cash realizable value:

(a) can be collected with full certainty
(b) can be enforced by the application of the accounting standard
(c) can be determined with exactitude by reference to the future viability of an enterprise
(d) might not be collected eventually D

23. Interest on promissory note may be computed by which of the following formulas?
(a) principal x rate x time (c) principal x time ÷ rate
(b) principal x rate ÷ time (d) principal x time ÷ time A

24. Which of the following is best described as a balance sheet method?

(a) direct write-off method (c) percentage of receivables basis
(b) percentage of sales method (d) both (a) and (b) C

25. 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 B

26. 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 C

27. 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 C
28. At the end of its first year of operations, December 31, 2008, Solid Company had accounts
receivable of P500,000, which were net of related allowance for doubtful accounts. During
2008, Solid recorded charged to bad debt expense of P80,000 and wrote off uncollectible
accounts receivable of P20,000. What should Solid report on its balance sheet at December 31,
2008, as accounts receivable before the allowance for doubtful accounts?
(a) P500,000 (b) P520,000 (c) P560,000 (d) P600,000 C

Accounts receivable at 12/31/2008 P500,000

Allowance (80,000 – 20,000) 60,000
Accounts receivable bef. allow. at 12/31/2008 P560,000

29. B Corporation began operations in 2008. For the year ended December 31, 2008, B made
available the following information:
Total merchandise purchases for the year P350,000
Merchandise inventory at December 31, 2008 70,000
Collections from customers 200,000
All merchandise was marked to sell at 40% above cost. Assuming that all sales are on a credit
basis and all receivables are collectible, what should be the balance in accounts receivable at
December 31, 2008?
(a) P50,000 (b) P192,000 (c) P250,000 (d) P290,000 B

Total merchandise purchases for the year P350,000

Merchandise inventory at December 31, 2008 ( 70,000)
Cost of goods sold P280,000
Credit sales (280,000 x 1.40) P392,000
Collections from customers (200,000)
Accounts receivable, 12/31/2008 P192,000

30. The following accounts were abstracted from the December 31, 2008 trial balance of R
Company:
Debit Credit
Credit sales P750,000
Sales discounts P15,000
On January 1, 2008, allowance for doubtful accounts had a credit balance of P18,000. During
2008, P30,000 of uncollectible accounts receivable were written off. Past experience indicates
that 3% of gross sales prove to be uncollectible. What should be the allowance for doubtful
accounts at December 31, 2008 after provision is made for the current year?
(a) P10,050 (b) P10,500 (c) P22,050 (d) P34,500 B

Allowance for doubtful accounts, 1/1 P18,000

Uncollectible accounts written off (30,000)
Current provision (750,000 x 3%) 22,500
Allowance for doubtful accounts, 12/31 P10,500

31. Mart Corporation uses the allowance method for bad debts. During 2008, Mart charged
P30,000 to bad debts expense, and wrote off P25,000 of uncollectible accounts receivable.
These transactions resulted in decrease in working capital of:
(a) P 0 (b) P4,800 (c) P25,200 (d) P30,000 D

32. Regal Company reported revenue of P1,980,000 in its income statement for the year ended
December 31, 2008. Additional information was as follows:
12/31/2007 12/31/2008
Accounts receivable P415,000 P550,000
Allowance for doubtful 25,000 40,000
No uncollectible accounts were written off during 2008. Had the cash basis of accounting being
used instead, Regal would have reported receipts for 2008 of:
(a) P2,115,000 (b) P1,885,000 (c) P1,860,000 (d) P1,845,000 D

Reported revenue, accrual basis, 2008 P1,980,000

Accounts receivable, 12/31/2007 415,000
Accounts receivable ( 550,000)
Cash receipts for 2008 P1,845,000
33. Alpha Company’s account balances at December 31, 2008 for accounts receivable and the
related allowance for doubtful accounts were P800,000 and P40,000, respectively. An aging of
accounts receivable indicated that P71,100 of the December 31 receivables may be
uncollectible. The net realizable value of accounts receivable was:
(a) P688,900 (b) P728,900 (c) P760,000 (d) P768,900 B

Accounts receivable, 12/31/2008 P800,000

Accounts deemed to be uncollectible ( 71,100)
Net realizable value P728,900

34. Rex Corporation provides an allowance for its doubtful accounts receivable. At December 31,
2008, allowance account had a credit balance of P4,000. Each, Rex accrues bad debts expense
in an amount equal to 1% of sales on account. Total sales on account during 2008 amounted
to P1,000,000. During 2009, uncollectible accounts receivable totaling P16,000 were written off
against the allowance account. An aging of accounts receivable at December 31, 2009
indicates that an allowance of P20,000 should be provided for doubtful accounts as of that date.
Accordingly, bad debts expense previously accrued during 2009 should be increased by:
(a) P26,000 (b) P22,000 (c) P20,000 (d) P2,000 B

Allowance for doubtful per aging, 12/31/2009 P20,000

Uncollectible accounts written off 16,000
Allowance for doubtful, 12/31/2008 ( 4,000)
Provision for bad debt based on credit sales
(1,000,000 x 1%) (10,000)
Bad debt expense previously accrued should
be increased by P22,000

35. The following information is available for the Beta Company:

Credit sales during 2008 P200,000
Allowance for doubtful accounts at 12/31/2007 2,400
Accounts receivable deemed worthless and
written off during 2008 3,200
During 2008, Beta estimated that its bad debts expense should be 1% of all credit sales. As a
result of a review and aging of accounts receivable in early January 2009, it has been
determined that an allowance for doubtful accounts of P2,200 is needed at December 31, 2008.
What amount should Beta record as bad debts expense for the year ended December 31, 2008?
(a) P2,000 (b) P3,000 (c) P3,200 (d) P4,200 B

Required balance of allowance, 12/31/2008 P2,200

Accounts receivable written of 3,200
Allowance for doubtful accounts, 12/31/2007 (2,400)
Doubtful accounts expense, 12/31/2008 P3,000

36. Ready Company is developing a forecast of September 2008 cash receipts from credit sales.
Credit sales for September 2008 are estimated to be P320,000. The accounts receivable at
August 31, 2008 is P300,000; one-quarter of the balance represents July credit sales and the
remainder is from August sales. All accounts receivable from months prior to July 2008 have
been collected or written off. Ready’s history of accounts receivable collections is as follows:
In the month of sale 20%
In the first month after the month of sale 50%
In the second month after the month of sale 25%
Written off as uncollectible at the end of
the second month after month of sale 5%
Based on the above information, Ready is forecasting September 2008 cash receipts from credit
sales of:
(a) P176,500 (b) P195,250 (c) P253,769 (d) P267,125 D
 Estimated cash receipts from credit sales for September 2008:
In the month of sale (320,000 x 20%) P64,000
In the first month after the month of sale
(300,000 x 75%/ 80% x 50%) 140,625
In the second month after the month of sale
(300,000 x 25%/ 30% x 25%) 62,500
September cash receipts forecast P267,125

Percentage of collections should be converted to a 100% basis as follows:

August (300,000 x 75%)/ 80% P281,250
July (300,000 x 25%)/ 30% P250,000

37. Based upon its past collection experience, Alden Company provides for bad debts expense at
the rate of 2% of credit sales. On January 1, 2008, the allowance for doubtful accounts
balance was P10,000. During 2008, Alden wrote off P18,000 of uncollectible receivables and
recovered P5,000 of bad debts written off in prior years. If credit sales for 2008 totaled
P1,000,000, the allowance for doubtful accounts balance at December 31, 2008 should be:
(a) P12,000 (b) P17,000 (c) P20,000 (d) P30,000 B

Allowance for doubtful accounts, 1/1/2008 P10,000

Accounts written off (18,000)
Recovery of accounts previously written off 5,000
Provision for bad debts (1,000,000 x 2%) 20,000
Allowance for doubtful accounts, 12/31/2008 P17,000

38. Kriz Company is a leading educational institution with student population of more than 50,000.
Kriz continuously maintains goods quality education and a roster of qualified instructors. As a
result, Kriz continuously produces top graduates in several fields. As at December 31, 2008,
Kriz has an outstanding receivable balance of P23,250,000 broken down into: 0-60 days
outstanding, P9,000,000; 61-120 days outstanding, P6,750,000; and over 120 days
outstanding, P7,500,000. Estimated percent uncollectible of these accounts is 2%, 4% and
10%, respectively. Kriz wrote off P525,000 of its receivables and recovered P300,000 from
accounts previously written off in prior year. As at December 31, 2007, Kriz has an allowance
for uncollectible accounts of P650,000. Based on the aging analysis, Kriz should report an
allowance for doubtful accounts as at December 31, 2008 at:
(a) P1,200,000 (b) P1,500,000 (c) P775,000 (d) P675,000 A

(9,000,000 x 2%) P 180,000

(6,750,000 x 4%) 270,000
(7,500,000 x 10%) 750,000
Allowance, end. P1,200,000

39. From the inception of its operations in 2004, Susan Company carried no allowance for doubtful
accounts. Uncollectible receivables were expensed as written off and recoveries were credited
to income as collected. On March 1, 2008 (after the 2007 financial statements were issued),
management recognized that Susan’s accounting policy with respect to doubtful accounts was
not correct, and determined that an allowance for doubtful accounts was necessary. A policy
was established to maintain an allowance for doubtful accounts based on historical bad debt
loss percentage applied to year-end accounts receivable. The historical bad debt loss
percentage is to be recomputed each year based on all available past years up to a maximum
of five years.
Credit sales Writeoffs Recoveries
2004 P1,500,000 P15,000 P 0
2005 2,250,000 38,000 2,700
2006 2,950,000 52,000 2,500
2007 3,300,000 65,000 4,800
2008 4,000,000 83,000 5,000
Accounts receivable balances were P1,250,000 and P2,000,000 at December 31, 2007 and
December 31, 2008, respectively. Susan Company should report doubtful accounts expense for
the year 2008 in the amount of:
(a) P97,000 (b) P78,000 (c) P83,000 (d) P92,000 D
 Credit sales Writeoffs Recoveries
2004 P1,500,000 P15,000 P 0
2005 2,250,000 38,000 2,700
2006 2,950,000 52,000 2,500
2007 3,300,000 65,000 4,800
Total P10,000,000 P170,000 P10,000
2008 4,000,000 83,000 5,000
Total P14,000,000 P253,000 P15,000

Rate in 2007 = 170,000 – 10,000 = 0.016

10,000,000
Rate in 2008 = 253,000 – 15,000 = 0.017
14,000,000

40. Royce Company had the following information to its accounts receivable:
Accounts receivable at 12/31/2007 P1,300,000
Credit sales for 2008 5,400,000
Collections from customers for 2008, excluding
recovery 4,750,000
Accounts written off 9/30/2008 125,000
Collections of accounts written off in prior year
(customer credit was not reestablished) 25,000
Estimated uncollectible receivables per aging of
receivables at 12/31/2008 165,000
On December 31, 2008, the gross balance of accounts receivable should be:
(a) P1,825,000 (b) P1,850,000 (c) P1,950,000 (d) P1,990,000 A

Accounts receivable at 12/31/2007 P1,300,000

Credit sales for 2008 5,400,000
Collections from customers for 2008, excluding
recovery (4,750,000)
Accounts written off 9/30/2008 ( 125,000)
Accounts receivable at 12/31/2008 P1,825,000

41. North sells P6,000 accounts receivable to a factor and receives 94% of the value of the factored
accounts less 10% commission based on the gross amount of the factored accounts receivable.
After the journal entry to record this factoring transaction is made, the company’s assets will
be:
(a) increased by P5,040 (c) reduced by P600
(b) reduced by P960 (d) increased by P5,400 B

Cash (6,000 x 84%) P5,040

Factoring commission (6,000 x 10%) 600
Loss on factoring (6,000 x 6%) 360
Accounts receivable P6,000
The P6,000 accounts receivable was converted to P5,040 cash or a difference of P960.

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

Maturity value [300,000 + (300,000 x 12% x 6/12)] P318,000

Discount (318,000 x 15% x 6/12) ( 23,850)
Net proceeds P294,150
Principal (300,000)
Interest revenue P 5,850
For items 43 and 44:

On January 2, 2005, Win Company sold equipment with a carrying amount of P480,000 in
exchange for a P600,000 non-interest bearing note due January 2, 2008. There was no
established exchange price for the equipment. The prevailing rate of interest for a note of this
type on January 2, 2005 was 10%. The present value of 1 at 10% for 3 periods is 0.75.

43. In Win’s 2005 income statement, what amount should be reported as interest income?
(a) P9,000 (b) P45,000 (c) P50,000 (d) P60,000 B

Note receivable P600,000

Present value (600,000 x 0.75) (450,000)
Unearned interest income P150,000
Interest income – 2003 (450,000 x 10%) P45,000

44. In Win’s 2005 income statement, what amount should be reported as gain (loss) on sale of
equipment?
(a) (P30,000) (b) P30,000 (c) P120,000 (d) P270,000 A

Present value of note (correct sales price) P450,000

Carrying amount of equipment (480,000)
Loss on sale of equipment (P30,000)

45. On December 31, 2008, Brad Company received two P100,000 notes receivable from customers
in exchange for services rendered. On both notes, interest is calculated on the outstanding
principal balance at the annual rate of 3% and payable at maturity. The note from Bart
Corporation, made under customary trade terms, is due in 9 months and the note from Barn
Company is due in 5 years. The market interest rate for similar notes on December 31, 2008
was 8%. The compound interest factors to convert future values into present values at 8%
follow:
Present value of 1 due in 9 months 0.944
Present value of 1 due in 5 years 0.680
At what amount should these two notes receivable be reported in Brat’s December 31, 2008
balance sheet?
Bart Barn Bart Barn
(a) P94,400 P68,000 (c) P100,000 P68,000
(b) P96,520 P78,200 (d) P100,000 P78,200 D

Principal value P100,000

Interest for 5 years (100,000 x 3% x 5) 15,000
Maturity value P115,000
PV factor 0.68
Present value of note P 78,200

46. Grab Corporation discounted its own P500,000 one-year note at a bank, at a discounted rate of
12%, when the prime rate was 10%. In reporting the note on Grab’s balance sheet prior to the
note’s maturity, what rate should Grab use for the accrual of interest?
(a) 10% (b) 10.7% (c) 12% (d) 13.6% D

Note payable P500,000

Discount (500,000 x 12%) ( 60,000)
Net proceeds P440,000

Effective interest rate = 60,000/ 440,000 = 13.6%

Items 47 to 49:

On January 1, 2008, Wild Company sells its equipment with a carrying amount of P160,000.
The company receives a non-interest bearing note due in 3 years with a face value of
P200,000. There is no established market value for the equipment. The prevailing interest
rate for a note of this type is 12%.

47. What is the gain or loss to be recognized on the sale of the equipment?
(a) (P17,644) (b) P122 (c) P17,644 (d) P40,000 A

Sales Price (PV of note – 200,000 x 0.71178) 142,356

Carrying amount of equipment (160,000)
Loss on sales 17,644

48. The discount on notes receivable on January 1, 2008 is:

(a) P57,644 (b) P 0 (c) P40,000 (d) P17,644 A

Face value 200,000

PV of note (142,356)
Discount on notes 57,644

49. The discount amortization at the end of the third year using the effective interest method is:
(a) P13,333 (b) P19,215 (c) P21,428 (d) P 0 C

PV of note, Jan. 1, 2008 142,356

Interest income in 2008 (142,356 x 12%) 17,083
PV of note, Jan. 1, 2009 152,439
Interest income in 2009 (152,439 x 12%) 19,133
PV of note, Jan. 1, 2010 172,572
Face value of note 200,000
Discount amortization at the end of 3 rd year 21,428