SSS UE CENTER for REVIEW and SPECIAL STUDIES_

2219 C.M. Recto, Ave. Sampaloc Manila Tel Nos. 735-5602, 735-5471 loc. 332/331

Practical Accounting 1/Theory of Accounts M. B. Guia

Accounting for Receivables (Study Notes)

General Concept
Definition: Receivables are claims held against customers and others for money, goods, or
services.
Types of Receivables
1. As to nature
a. Accounts Receivable – Oral promises of the purchaser to pay for goods and
services sold.
b. Notes Receivable - Written promises to pay a sum of money on a specified future
date.
2. As to source
a. Trade Receivables
b. Non-Trade Receivables
i. Advances to officers and employees.
ii. Advances to subsidiaries.
iii. Deposits to cover potential damages or losses.
iv. Deposits as a guarantee of performance or payment.
v. Dividends and interest receivable.
vi. Claims against:
1. Insurance companies for casualties sustained.
2. Defendants under suit.
3. Governmental bodies for tax refunds.
4. Common carriers for damaged or lost goods.
5. Creditors for returned, damaged, or lost goods.
6. Customers for returnable items (crates, containers, etc.)

Accounts Receivable
Recognition: At the time of sale/delivery/rendering of services. Usually coincide with the
recognition of the unpaid revenues.
Initial Measurement
1. Trade Discounts
a. Reductions from the list price
b. Not recognized in the accounting records
c. Customers are billed net of discounts
2. Cash Discount (Sales Discount)
a. Inducements for prompt payment
b. Gross Method vs. Net Method
Gross Method Net Method
Sales of P 10,000 terms AR 10,000 AR 9,800
2/10, n/30 Sales Sales
10,000 9,800
Payment on P 4,000 Cash 3,920 Cash 3,920
within the disc. period Sales Disc. 80 AR 3,920
AR 4,000
Payment on P 6,000 Cash 6,000 Cash 6,000
beyond the disc. period AR AR 5,880
6,000 Sales Disc. Forfeited
120

Presentation
Classification: Current Asset regardless of the credit term since it is from trading transactions.
Measurement: At Net Realizable Value – Gross receivable less allowance for doubtful accounts,
sales returns and allowances, and impairments.
1. Doubtful Accounts – possibility of an account not being collected and is a loss of revenue
that requires a decrease in the asset accounts receivable and a related decrease in income
and shareholders’ equity.
a. Methods of Accounting for Uncollectible Accounts
i. Direct Write-Off – Theoretically undesirable:
1. No matching
2. Receivable not stated at cash realizable value
3. Not IFRS when material in amount
ii. Allowance Method – Losses are Estimated:
1. Method of Estimation:
a. Percentage-of-sales
i. Emphasis on the Income Statement, the amount
computed is equal to the expense for the period.
ii. Percentage based upon past experience and
anticipate credit policy.
iii. Achieves proper matching of costs with revenues.
iv. Existing balance in Allowance account not
considered.
b. Percentage-of-receivables
i. Emphasis on the Statement of Financial Position,
the amount computed is the balance of the
allowance account.
ii. Not matching.
iii. Reports receivables at cash realizable value.
iv. Companies may apply this method using
1. one composite rate, or
2. an aging schedule using different rates.
2. IFRS requires when material in amount
2. Impairment Evaluation Process
a. Companies assess their receivables for impairment each reporting period. Possible
loss events are:
i. Significant financial problems of the customer.
ii. Payment defaults.
iii. Renegotiation of terms of the receivable due to financial difficulty of the
customer.
iv. Decrease in estimated future cash flows from a group of receivables since
initial recognition, although the decrease cannot yet be identified with
individual assets in the group.
b. A receivable is considered impaired when a loss event indicates a negative impact
on the estimated future cash flows to be received from the customer. The IASB
requires that the impairment assessment should be performed as follows.
i. Receivables that are individually significant should be considered for
impairment separately.
ii. Any receivable individually assessed that is not considered impaired
should be included with a group of assets with similar credit-risk
characteristics and collectively assessed for impairment.
iii. Any receivables not individually assessed should be collectively assessed
for impairment.
De-recognition
1. Collection
2. Write-Off and Impairment
3. Discounts
4. Returns
5. Factoring without recourse
Other Issues: Receivable Financing
1. Pledging – The Company uses the whole account receivable balance as collateral – no
journal entries will be made; however, disclosure of such fact is required.
2. Assignment – The company uses a specific account as collateral for financing
transactions – a journal entry to specifically isolate the account used as collateral.
3. Factoring
a. Factors are finance companies or banks that buy receivables from businesses for a
fee.
b. Sale without Guarantee
i. Purchaser assumes risk of collection.
ii. Transfer is outright sale of receivable.
iii. Seller records loss on sale.
iv. Seller use Due from Factor (receivable) account to cover discounts,
returns, and allowances.
c. Sale with Guarantee
i. Seller guarantees payment to purchaser.
ii. Transfer is considered a borrowing—sometimes referred to as a failed
sale.

Notes Receivable
Recognition: Supported by a formal promissory note.
1. Promissory Note
a. A negotiable instrument.
b. Maker signs in favor of a Payee.
c. Interest-bearing (has a stated rate of interest) OR Zero-interest-bearing (interest
included in face amount).
2. Sources
a. Customers who need to extend payment period of an outstanding receivable.
b. High-risk or new customers.
c. Loans to employees and subsidiaries.
d. Sales of property, plant, and equipment.
e. Lending transactions (the majority of notes).
Initial Measurement:
1. Short-Term - Record at Face Value, less allowance
2. Long Term - Record at Present Value of cash expected to be collected
a. Interest Bearing – present value is equal to the face value
b. Non- interest value – present value is equal to the discounted value

Presentation
1. Classification
a. Short-term - reporting parallels that for trade accounts receivable.
b. Long-Term - impairment tests are often done on an individual assessment basis.
Impairment losses are measured as the difference between the carrying value of
the receivable and the present value of the estimated future cash flows discounted
at the original effective-interest rate.

De-Recognition
1. Collection
2. Dishonor – Re-classified as Accounts Receivable
3. Discounting of Notes Receivable

Fair Valuation of Receivables

1. Companies have the option to record fair value in their accounts for most financial assets
and liabilities, including receivables. The IASB believes that fair value measurement for
financial instruments provides more relevant and understandable information than
 historical cost because it reflects the current cash equivalent value of financial
instruments. (IAS 39)
2. Fair Value Measurement
a. Receivables are recorded at fair value.
b. Unrealized holding gains or losses reported as part of net income.
c. If a company elects the fair value option for a receivable, it must continue to use
fair value measurement for that receivable until the company no longer owns this
receivable.
SSS UE CENTER for REVIEW and SPECIAL STUDIES_
2219 C.M. Recto, Ave. Sampaloc Manila Tel Nos. 735-5602, 735-5471 loc. 332/331

Practical Accounting 1/Theory of Accounts M. B. Guia

Accounting for Receivables (Practice Problems)

Problem 1 (Accounts Receivable): The following information from Cebu Corporation’s first year
of operations is to be used in testing the accuracy of Accounts receivable. The December 31,
2013, balance is P28,300.
a. Collections from Customers, P48,000 d. Goods sell at 60% above cost.
b. Merchandise purchased, P74,000 e. All sales are on account.
c. Ending merchandise inventory, P31,500
Required:
1. Compute the balance that accounts receivable should show.
2. Determine the amount of any shortage or overage.

Problem 2 (Accounts Receivable): The following transactions affecting the accounts receivable
of Coron Corporation took place during the year ended January 31, 2013:
Sales (cash and credit) P591,050
Cash received from credit customers, all of whom took
advantage of the discount feature of the corporation’s credit 303,800
term 4/10, n/30
Cash received from cash customers 210,270
Accounts receivable written off as worthless 5,250
Credit memoranda issued to credit customers for sales returns
and allowances 63,800
Cash refunds given to cash customers for sales returns and
allowances 13,318
Recoveries on accounts receivable written off as uncollectible
in prior periods (not included in cash amount stated above) 8,290
The following two balances were taken from the January 31, 2012 statement of financial
position:
Accounts Receivable P 95,842
Allowance for Doubtful Accounts (Credit) 9,740
The corporation provides that its net uncollectible account losses by crediting Allowance for
Doubtful Accounts for 1.5% of net credit sales for the fiscal period.
Required: Determine the ending balance of the accounts receivable and allowance for doubtful
account.

Problem 3 (Accounts Receivable): On the December 31, 2012 balance sheet of Puerto Co., the current
receivables consisted of the following:
Trade accounts receivable P 60,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (November
2012) 3,000
Selling price of unsold goods sent by Puerto on consignment
at 130% of cost (not included in Puerto 's ending inventory) 26,000
Security deposit on lease of warehouse used for storing some
inventories 30,000
TOTAL P 117,000
Required: At December 31, 2012, the correct total of Puerto's current net receivables was

Problem 4 (Accounts Receivable): When examining the accounts of Zambales Corporation, you
ascertain that balances relating to both receivables and payables are included in a single
controlling account called receivables control that has a debit balance of P 9,700,000. An
analysis of the components of this account revealed the following:
Accounts Receivable - Customers P 15,600,000
Accounts Receivable – Officers 1,000,000
Debit Balances – creditors 600,000
Postdated checks from customers 800,000
Subscription Receivables 1,600,000
Accounts payable for merchandise 9,000,000*
Credit balances in customers’ accounts 400,000*
Cash received in advance from customers for goods not yet shipped 200,000*
Expected bad debts 300,000*
*with credit balances
After further analysis of the aged accounts receivable, you determined that the allowance for bad
debts should be P 400,000.
Required: What is the correct total of current net receivables?

Problem 5 (Sales Discount): On November 1, Mindoro Corporation sold goods on account for
P7,000. The terms of the sale were 3/10, n/40. Payment in satisfaction of P3,000 of this amount
was received on November 9. Payment in satisfaction of the remaining P4,000 was received on
December 9.
Required:
1. How much cash did Mindoro Company collect from this P7,000 account?
2. Using the gross method, what journal entries would Mindoro make on November 9 and
December 9?
3. Using the net method, what journal entries would Mindoro make on November 9 and
December 9?

Problem 6 (Sales Discount) On June 3, Patel Company sold to Pham Inc. merchandise having a
sale price of P 1,500 with terms of 2/10, n/60, F.O.B. Destination point. An invoice totaling P 45
was received and paid by Pham on June 8 from the John Booth Transport Service for the freight
cost.
Required:
1. How much is the total accounts receivable if the company is using the gross method?
2. How much is the total accounts receivable if the company is using the net method?
3. How much is the total accounts receivable if the company is using the gross method and
the shipping terms is FOB shipping point?

Problem 7 (Doubtful Accounts) Accounts Receivable of Bohol Corporation on December 31,

2013 had a balance of P550,000. Allowance for Doubtful Accounts had a P4,500 debit balance.
Sales in 2013 were P3,450,000 less sales discounts of P51,000.
Required: Give the adjusting entries for estimated Doubtful Account Expense under each of the
following independent assumptions.
1. Of 2013 net sales, 2.5% will probably never be collected.
2. Of outstanding accounts receivable, 4% are doubtful.
3. An aging schedule shows that P16,700 of the outstanding accounts receivable are
doubtful.

Problem 8 (Doubtful Accounts) Davao Corporation’s accounts receivable subsidiary ledger

reveals the following information:
Account
Invoice
Customers Balance Dates
Amounts
12/31/13
Abra P 8,795 3,500 12/6/13
5,295 11/29/13
Baguio 5,230 3,000 9/27/13
2,230 8/20/13
Benguet 7,650 5,000 12/8/13
 2,650 10/25/13
Manila 11,285 5,785 11/17/13
5,500 10/9/13
Romblon 7,900 4,800 12/12/13
3,100 12/2/13
Wawa 4,350 4,350 9/12/13
Davao Corporation’s receivable collection experience indicates that, on average, losses have
occurred as follows:
Uncollectible
Age of Accounts
Percentage
0-30 days 0.7%
21-60 days 1.4%
61-90 days 3.5%
91-120 days 10.2%
Over 120 days 60.0%
The Allowance for Doubtful accounts credit balance on December 31, 2013 was P2,245 before
adjustments.
Required:
1. Prepare an accounts receivable aging schedule
2. Using the aging schedule, compute the Allowance for Doubtful account balance as of
December 31, 2013.
3. Prepare the end-of-year adjusting entry.

Problem 9 (Doubtful Accounts): A trial balance before adjustment included the following:
Debit Credit
Accounts Receivable P 120,000
Allowance for doubtful accounts P 730
Sales 510,000
Sales Returns 8,000
Required: Give journal entries assuming that the estimate of uncollectibles is determined by
taking (1) 5% of gross accounts receivable and (2) 1% of net sales.

Problem 10 (Doubtful Accounts): Nueva Corporation sells to wholesalers on terms of 2/15, n/30.
Nueva has no cash sales and all customers take advantage of the discount. An analysis of
Nueva’s trade receivables balances at December 31, 2011 revealed the following:
Age Amount Collectible
0-15 days P 250,000 100%
16-30 days 130,000 95%
31-60 days 14,000 90%
Over 60 days 6,000 P 2,000

Required:
1. The company’s doubtful account expense for the year would amount to?
2. The net realizable value of Nueva’s accounts receivable at December 31, 2011 is?

Problem 11 (Assignment) On July 1, 2013, Leyte Corporation used receivables totaling P150,000
as collateral on a P100,000, 15% note from Philippine National Bank. The transaction is not
structured such that receivables are being sold. Leyte will continue to collect the assigned
receivables. In addition to the interest on the note, Philippine National bank also received a 2.5%
finance charge, deducted in advance on the P100,000 value of the note. Additional information
for Leyte Corporation is as follows:
a. July collections amounted to P91,000, less cash discounts of P575.
b. On August 1, paid bank the amount owed for July collections plus accrued interest on
note to August 1.
c. Leyte collected the remaining accounts during August except for P425 written off as
uncollectible.
 d. On September 1, paid bank the remaining amount owed plus accrued interest.
Required: Prepare the journal entries necessary to record the preceding information on the books
of Leyte Corporation.

Problem 12 (Assignment) Accounts receivable in the amount of P500,000 were assigned to the Petals
Finance Company by Maragondon, Inc., as security for a loan of P400,000. The finance company charged
a 4% commission on the face amount of the loan, and the note bears interest at 9% per year. During the
first month, Maragondon collected P260,000 on assigned accounts. This amount was remitted to the
finance company along with one month's interest on the note.
Required: Make all the entries for Maragondon Inc. associated with the transfer of the accounts
receivable, the loan, and the remittance to the finance company.

Problem 13 (Factoring) On July 15, Manila Corporation sold P600,000 in accounts receivable for
cash of P500,000. The factor withheld 10% of the cash proceeds to allow for possible customer
returns or account adjustments. An Allowance for Doubtful accounts of P80,000 had previously
been established by Manila in relation to these accounts.
Required:
1. Make the journal entry necessary on Manila’s books to record the sale of the accounts.
2. Make the journal entry necessary on Manila’s books to record final settlement of the
factoring arrangement. No customer returns or account adjustments occurred in relation
to the accounts.

Problem 14 (Factoring) On May 1, Laiya, Inc. factored P1,200,000 of accounts receivable with
Montalban Finance on a without recourse basis. Under the arrangement, Laiya was to handle disputes
concerning service, and Montalban Finance was to make the collections, handle the sales discounts, and
absorb the credit losses. Montalban Finance assessed a finance charge of 6% of the total accounts
receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.
Required:
1. Prepare the journal entry required on Laiya's books on May 1.
2. Prepare the journal entry required on Montalban Finance’s books on May 1.
3. Assume Laiya factors the P1,200,000 of accounts receivable with Montalban Finance on a with
recourse basis instead. The recourse provision has a fair value of P21,000. Prepare the journal
entry required on Laiya’s books on May 1.

Problem 15 (Factoring & Assignment) During its second year of operations, Samar Company
found itself in financial difficulties. Samar decided to use its accounts receivable as a means of
obtaining cash to continue operations. On July 1, 2013, Samar sold P75,000 of accounts
receivable for cash proceeds of P69,500. No bad debt allowance was associated with these
accounts. On December 17, 2013, Samar assigned the remaining of its accounts receivable,
P250,000 as of that date, as collateral on a P125,000, 12% annual interest rate loan from BDO
Financing Company. Samar received P125,000 less a 2% finance charge. Additional information
is as follows:
Allowance for Doubtful Accounts 12/31/13 P3,200 credit
Estimated Uncollectibles 12/31/13 3% of Accounts
Receivable
Accounts Receivable (not including factored and assigned accounts P50,000
12/31/13
None of the assigned accounts has been collected by the end of the year.
Required:
1. Prepare the journal entries to record the receipt of cash from the sale and assignment of
the accounts receivable.
2. Prepare the journal entries necessary to record the adjustment to allowance for doubtful
accounts.
3. Determine the net realizable value of the accounts receivable as of December 31, 2013.

Problem 16 (Notes Receivable-Interest Bearing) Laguna Corporation received from a customer a

one-year P 500,000 note bearing annual interest of 8% on March 1, 2012. Because of an
immediate need for cash, Laguna entered into a refinancing arrangement with the Bank of the
Philippine Islands. On September 1, 2012, Laguna discounted the note at an effective interest
rate of 10%.
Required: The amount of cash received by Laguna from the bank is?

Problem 17 (Notes Receivable): Sorsogon Corporation has a 10% note receivable dated June 30
2010 in the original amount of P 3,000,000. Payments of P 1,000,000 in principal plus accrued
interest are due annually every July 1, 2011, 2012 and 2013.
Required:
1. The accrued interest to be reported on December 31, 2012 statement of financial position
is?
2. The total interest income to be reported on December 31, 2012 statement of
comprehensive income?

Problem 18 (Notes Receivable) On January 2, 2012, Tarlac Corporation sold equipment costing
P 3,000,000 with accumulated depreciation of P 1,080,000 in exchange for a P 2,400,000 non-
interest bearing note due in three equal annual installments of P 800,000 each December 31.
There was no established exchange price for the equipment and the note. The prevailing interest
for a note of this type at January 2, 2012 was 12%. The first installment was collected on
December 31, 2012. The PV of 1 at 12% for 3 periods is 0.712 and the PV of an ordinary annuity
of 1 for 3 periods is 2.402.
Required:
1. The interest revenue to be reported in Tarlac Corporation’s 2012 income statement is?
2. The current portion of the note to be reported in the December 31, 2012 statement of
financial position is?

Problem 19 (Notes Receivable-Non-interest Bearing) Dipolog Corporation sells equipment with

a books value of P8,000, receiving a non-interest bearing note due in three years with a fact
amount of P10,000. There is no established market value for the equipment. The interest rate on
similar obligations is estimated at 12%.
Required:
1. Compute the gain or loss on the sale and the discount on notes receivable
2. Make the necessary entry to record the sale.
3. Make the entries to record the amortization of the discount at the end of the first, second
and third year using the effective-interest amortization.

Problem 20 (Notes Receivable – Below Market Interest Rate) On January 1, 2013, Dumaguete
Corporation sold land that originally cost P 400,000 to Bulacan Corporation. As payment,
Bulacan gave Dumaguete a P600,000 note. The note bears an interest rate of 4% and is to be
repaid in three annual installments of P200,000 (plus interest on the outstanding balance). The
first payment is due on December 31, 2013. The market price of the land is not reliably
determinable. The prevailing rate of interest for notes of this type is 14%.
Required: Prepare the entries required on Dumaguete’s books to record the land sale and the
receipt of each of the three payments. (Use the effective-interest method)

Problem 21 (Notes Receivable) On December 31, 2012, Malabon Company finished consultation services
and accepted in exchange a promissory note with a face value of P600,000, a due date of December 31,
2015, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the
services is not readily determinable and the note is not readily marketable. Under the circumstances, the
note is considered to have an appropriate imputed rate of interest of 10%.
Required:
1. Determine the present value of the note.
2. Prepare a Schedule of Note Discount Amortization for Malabon Company under the effective
interest method.

Problem 22 (Impairment of Receivable) Philippine National Bank has a P 5,000,000 loan to

Marikina Corporation. At December 31, 2011, accrued interest receivable on the loan amounted
to P 600,000 based on an interest rate of 12%. Marikina is requesting for a restructuring that
includes the following provisions:
  Payment of the accrued interest on the date of restructuring (December 31, 2011)
 Extension of the maturity date of the loan to December 31, 2013, with interest during the
extended term at 9% payable on December 31, 2012 and 2013.
Required:
1. How much is the impairment loss that Philippine National Bank would have to recognize
at December 31, 2011?
2. What is the balance of the Loans Receivable at December 31, 2011 that will be presented
in Philippine National bank’s statement of financial position?

Problem 23 (Impairment of Receivable) On December 31, 2013, the general ledger of

Meycauayan Corporation’s account receivable showed a balance of P2,200,000. Because of
continuing decrease in expected cash flows on its financial assets, Meycauayan has decided to
estimate the cash flows of the outstanding reeceivables. The estimates are based on the expected
peso amount to be received on the outstanding receivables. The details of the account receivable
are as follows:
Expected Time of
Amounts
Collections
P 800,000 1 year
600,000 2 years
500,000 3 years
300,000 4 years
The company will be using the discount rate of 10% and assume that the collection will be made
at the end of the year.
Required:
1. How much should the company report its accounts receivable in its December 31, 2013
statement of financial position?
2. What amount of impairment loss on receivables should the company recognize in its
December 31, 2013 statement of comprehensive income?

Problem 24 (Fair Value) Cavite Company sells large store-rack systems and frequently accepts notes
receivable from customers as payment. Cavite conducts a thorough credit check on its customers, and it
charges a fairly low interest rate (1/2 of 1% payable monthly) on these notes. Cavite has elected to use the
fair value option for one of these notes and has the following data related to the carrying and fair value for
its note
Carrying Value Fair Value
December 31, 2012 P 88,000 P 85,000
December 31, 2013 72,000 76,000
Required: Prepare the journal entry at December 31 (Cavite’s year-end) for 2012 and 2013, to record the
fair value option for these notes.
SSS UE CENTER for REVIEW and SPECIAL STUDIES_
2219 C.M. Recto, Ave. Sampaloc Manila Tel Nos. 735-5602, 735-5471 loc. 332/331

Practical Accounting 1/Theory of Accounts M. B. Guia

Accounting for Receivables (Quizzer)

1. Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers c. Dividends receivable
b. Receivables from subsidiaries d. None of these
2. What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets.
3. When a customer purchases merchandise inventory from a business organization, she may be
given a discount which is designed to induce prompt payment. Such a discount is called a(n)
a. trade discount c. enhancement discount.
b. nominal discount d. cash discount.
4. Trade discounts are
a. not recorded in the accounts; rather they are a means of computing a price.
b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different quantities purchased.
d. all of the above.
5. 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 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.
6. Why do companies provide trade discounts?
a. To avoid frequent changes in catalogs c. To easily alter prices for different customers.
b. To induce prompt payment d. Both a. and c.
7. The accounting for cash discounts and trade discounts are
a. the same c. not the same.
b. always recorded net d. tied to the timing of cash collections on the account.
8. Of the approaches to record cash discounts related to accounts receivable, which is more
theoretically correct?
a. Net approach c. Allowance approach.
b. Gross approach d. All three approaches are theoretically correct.
9. All of the following are problems associated with the valuation of accounts receivable except for
a. uncollectible accounts c. cash discounts under the net method.
b. Returns d. allowances granted.
10. Why is the allowance method preferred over the direct write-off method of accounting for bad
debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.
11. Which of the following concepts relates to using the allowance method in accounting for accounts
receivable?
a. Bad debt expense is an estimate that is based on historical and prospective information.
b. Bad debt expense is based on the actual amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
d. Bad debt expense is management's determination of which accounts will be sent to the
attorney for collection.
12. How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off.
b. Changing the percentage of sales recorded as bad debt expense.
 c. Using an aging of the accounts receivable balance to determine bad debt expense.
d. Reversing previous write-offs.
13. What is the normal journal entry for recording bad debt expense under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
14. What is the normal journal entry when writing-off an account as uncollectible under the
allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
15. Which of the following is included in the normal journal entry to record the collection of accounts
receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
16. Assuming that the ideal measure of short-term receivables 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.
17. Which of the following methods of determining bad debt expense does not properly match
expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable
under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
18. Which of the following methods of determining annual bad debt expense best achieves the
matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write-off
19. Which of the following is a generally accepted method of determining the amount of the
adjustment to bad debt 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 and not adjusted for the balance in the
allowance
20. The advantage of relating a company's bad debt expense to its outstanding accounts receivable is
that this approach
a. gives a reasonably correct statement of receivables in the balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
21. Why would a company sell receivables to another company?
a. To improve the quality of its credit granting process.
b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.
22. When should a transfer of receivables be recorded as a sale?
a. The transferred assets are isolated from the transferor.
 b. The transferor does not maintain effective control over the transferred assets through an
agreement to repurchase or redeem them prior to their maturity.
c. The transferee has the right to pledge or exchange the transferred assets.
d. All of the above.
23. What is "recourse" as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails
to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails
to pay
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor
returns the product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables
are collected.
24. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale,
depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection
period of the receivables.
25. Which of the following items should be included in accounts receivable reported on the balance
sheet?
a. Notes receivable c. Allowance for doubtful accounts
b. Interest receivable d. Advances to related parties and officers
26. AG Inc. made a P15,000 sale on account with the following terms: 1/15, n/30. If the company
uses the net method to record sales made on credit, how much should be recorded as revenue?
a. P14,700 b. P14,850 c. P15,000 d. P15,150.
27. AG Inc. made a P15,000 sale on account with the following terms: 1/15, n/30. If the company
uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry
to record the sale?
a. Debit Accounts Receivable for P14,850.
b. Debit Accounts Receivable for P14,850 and Sales Discounts for P150.
c. Debit Accounts Receivable for P15,000.
d. Debit Accounts Receivable for P15,000 and Sales Discounts for P150.
28. AG Inc. made a P15,000 sale on account with the following terms: 2/10, n/30. If the company
uses the net method to record sales made on credit, what is/are the debit(s) in the journal entry to
record the sale?
a. Debit Accounts Receivable for P14,700.
b. Debit Accounts Receivable for P14,700 and Sales Discounts for P300.
c. Debit Accounts Receivable for P15,000.
d. Debit Accounts Receivable for P15,000 and Sales Discounts for P300.
29. Wellington Corp. has outstanding accounts receivable totaling P1.27 million as of December 31
and sales on credit during the year of P6.4 million. There is also a debit balance of P3,000 in the
allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be
uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end
adjustment to record bad debt expense?
a. P12,700 b. P15,700 c. P61,000 d. P67,000.
30. Wellington Corp. has outstanding accounts receivable totaling P6.5 million as of December 31
and sales on credit during the year of P24 million. There is also a credit balance of P12,000 in the
allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables
will be uncollectible, what will be the amount of bad debt expense recognized for the year?
a. P 532,000 b. P 520,000 c. P1,920,000 d. P 508,000.
31. Wellington Corp. has outstanding accounts receivable totaling P5 million as of December 31 and
sales on credit during the year of P25 million. There is also a debit balance of P20,000 in the
allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables
will be uncollectible, what will be the balance in the allowance for doubtful accounts after the
year-end adjustment to record bad debt expense?
a. P2,000,000 b. P 380,000 c. P 400,000 d. P 420,000.
32. At the close of its first year of operations, December 31, 2012, Ming Company had accounts
receivable of P1,080,000, after deducting the related allowance for doubtful accounts. During
 2012, the company had charges to bad debt expense of P180,000 and wrote off, as uncollectible,
accounts receivable of P80,000. What should the company report on its balance sheet at
December 31, 2012, as accounts receivable before the allowance for doubtful accounts?
a. P1,340,000 b. P1,180,000 c. P980,000 d. P880,000
33. Before year-end adjusting entries, Dunn Company's account balances at December 31, 2012, for
accounts receivable and the related allowance for uncollectible accounts were P1,200,000 and
P90,000, respectively. An aging of accounts receivable indicated that P125,000 of the December
31 receivables are expected to be uncollectible. The net realizable value of accounts receivable
after adjustment is
a. P1,165,000 b. P1,075,000 c. P985,000 d. P1,110,000
34. During the year, Kiner Company made an entry to write off a P16,000 uncollectible account.
Before this entry was made, the balance in accounts receivable was P200,000 and the balance in
the allowance account was P18,000. The net realizable value of accounts receivable after the
write-off entry was
a. P200,000 b. P198,000 c. P166,000 d. P182,000
35. Black Corporation had a 1/1/12 balance in the Allowance for Doubtful Accounts of P18,000.
During 2012, it wrote off P12,960 of accounts and collected P3,780 on accounts previously
written off. The balance in Accounts Receivable was P360,000 at 1/1 and P432,000 at 12/31. At
12/31/12, Black estimates that 5% of accounts receivable will prove to be uncollectible. What
should Black report as its Allowance for Doubtful Accounts at 12/31/12?
a. P8,640 b. P8,820 c. P12,420 d. P21,600.
36. Shelton Company has the following account balances at year-end:
Accounts receivable P120,000
Allowance for doubtful accounts 7,200
Sales discounts 4,800
Shelton should report accounts receivable at a net amount of
a. P108,000 b. P112,800 c. P115,200 d. P120,000
37. Vasguez Corporation had a 1/1/12 balance in the Allowance for Doubtful Accounts of P30,000.
During 2012, it wrote off P21,600 of accounts and collected P6,300 on accounts previously
written off. The balance in Accounts Receivable was P600,000 at 1/1 and P720,000 at 12/31. At
12/31/12, Vasguez estimates that 5% of accounts receivable will prove to be uncollectible. What
is Bad Debt Expense for 2012?
a. P6,000 b. P21,300 c. P27,600 d. P36,000.
38. Lester Company received a seven-year zero-interest-bearing note on February 22, 2012, in
exchange for property it sold to Porter Company. There was no established exchange price for
this property and the note has no ready market. The prevailing rate of interest for a note of this
type was 7% on February 22, 2012, 7.5% on December 31, 2012, 7.7% on February 22, 2013,
and 8% on December 31, 2013. What interest rate should be used to calculate the interest revenue
from this transaction for the years ended December 31, 2012 and 2013, respectively?
a. 0% and 0% b. 7% and 7% c. 7% and 7.7% d. 7.5% and 8%
39. On December 31, 2012, Flint Corporation sold for P100,000 an old machine having an original
cost of P180,000 and a book value of P80,000. The terms of the sale were as follows:
P20,000 down payment
P40,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type
of transaction. What should be the amount of the notes receivable net of the unamortized discount
on December 31, 2012 rounded to the nearest peso? (The present value of an ordinary annuity of
1 at 9% for 2 years is 1.75911.)
a. P70,364 b. P90,364 c. P80,000 d. P140,728
40. Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price
of P600,000 to Arch Inc. Arch Inc. will pay P650,000 in one year. Royal Palm Corp. normally
sells this type of equipment for 90% of list price. How much should be recorded as revenue?
a. P540,000 b. P585,000 c. P600,000 d. P650,000
41. Equestrain Roads sold P80,000 of goods and accepted the customer's P80,000 10% 1-year note
receivable in exchange. Assuming 10% approximates the market rate of return, what would be the
debit in this journal entry to record the sale?
a. No journal entry until cash is collected c. Debit Notes Receivable for P80,000.
b. Debit Accounts Receivable for P80,000 d. Debit Notes Receivable for P72,000.
42. Equestrain Roads sold P80,000 of goods and accepted the customer's P80,000 10% 1-year note
payable in exchange. Assuming 10% approximates the market rate of return, how much interest
would be recorded for the year ending December 31 if the sale was made on June 30?
a. P0 b. P2,000 c. P4,000 d. P8,000
43. Equestrain Roads accepted a customer's P50,000 zero-interest-bearing six-month note payable in
a sales transaction. The product sold normally sells for P46,000. If the sale was made on June 30,
how much interest revenue from this transaction would be recorded for the year ending December
31?
a. P0 b. P2,000 c. P4,000 d. P5,000.
44. Assuming the market interest rate is 10% per annum, how much would Green Co. record as a
note payable if the terms of the loan with a bank are that it would have to make one P80,000
payment in two years?
a. P80,000 b. P72,563 c. P72,727 d. P66,116.
45. Sun Inc. factors P3,000,000 of its accounts receivables without recourse for a finance charge of
5%. The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. Sun estimates the fair value of the recourse liability at P115,000. What would be
recorded as a gain (loss) on the transfer of receivables?
a. Loss of P150,000 c. Loss of P565,000.
b. Gain of P265,000 d. Loss of P115,000.
46. Sun Inc. factors P3,000,000 of its accounts receivables with recourse for a finance charge of 3%.
The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. Sun estimates the fair value of the recourse liability at P150,000. What would be
recorded as a gain (loss) on the transfer of receivables?
a. Gain of P90,000 c. Gain of P540,000.
b. Loss of 240,000 d. Loss of P150,000.
47. Sun Inc assigns P3,000,000 of its accounts receivables as collateral for a P1 million 8% loan with
a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be
recorded as a gain (loss) on the transfer of receivables?
a. Loss of P30,000 c. Loss of P270,000.
b. Loss of P240,000 d. P0.
48. Moon Inc. factors P2,000,000 of its accounts receivables with recourse for a finance charge of
4%. The finance company retains an amount equal to 8% of the accounts receivable for possible
adjustments. Moon estimates the fair value of the recourse liability at P200,000. What would be
the debit to Cash in the journal entry to record this transaction?
a. P2,000,000 b. P1,920,000 c. P1,760,000 d. P1,560,000
49. Geary Co. assigned P800,000 of accounts receivable to Kwik Finance Co. as security for a loan
of P670,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the
note was 10%. During the first month, Geary collected P220,000 on assigned accounts after
deducting P760 of discounts. Geary accepted returns worth P2,700 and wrote off assigned
accounts totaling P5,960. The amount of cash Geary received from Kwik at the time of the
transfer was
a. P603,000 b. P654,000 c. P656,600 d. P670,000.
50. On February 1, 2012, Henson Company factored receivables with a carrying amount of P500,000
to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and retains
5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale
to be reported in the income statement of Henson Company for February. Assume that Henson
factors the receivables on a without recourse basis. The loss to be reported is
a. P0 b. P15,000 c. P25,000 d. P40,000.