Jizelle A. Biana Feb.

06, 2023
2001 FAR Prof. Aileen Mendoza

CHAPTER 4 ACCOUNTS RECEIVABLE

1. Define trade and nontrade receivables.

- Trade receivable is the amount that the customer owes to a business when selling a
product or by providing a service to customers.
2. Explain the classification of trade and nontrade receivables in the statement of financial
position.
- Trade receivable is classified as current asset when a cash is realized within the
normal operating cycle or in one year, while nontrade receivable is also classified as
current asset when a cash is realized within one year, it will become noncurrent
asset if it is collectible beyond one year.
3. Explain the treatment of customers’ credit balances.
- The customers’ credit balances are classified as current liabilities and cannot be
offset against other customers’ accounts that have debit balance.
4. Explain the initial and subsequent measurement of trade accounts receivable.
- The initial measurement of trade accounts receivable should be recognized initially
using the face amount or the original invoice amount, while the subsequent trade
accounts receivable is measured by the amortized cost which is the net realizable
value of accounts receivable.
5. Explain the amortized cost or net realizable value of accounts receivable.
- Amortized cost is the initial amount that is recognized and adjusted to reduce the
amount recoverable from the customer.
6. Explain the two methods of recording accounts receivable and credit sales.
- The two methods of recording accounts receivable are gross method and net
method. In the gross method, the accounts receivable and sales are recorded at
gross amount of the invoice. In the net method, the accounts receivable and sales
are recorded as the net amount of the invoice.
7. Explain the allowance method of accounting for bad debts.
- The allowance method is a deduction from accounts receivable and requires the
recognition of bad debts loss if the accounts are doubtful of collections.
8. Explain the direct write-off method of accounting for bad debts.
- The direct write-off method requires the recognition of a bad debt loss only when
the account is proved to be worthless or uncollectible. It is recorded by debiting the
bad debts and crediting accounts receivable, and if it is only doubtful, there will be
no adjustments.
9. Explain accounting for recoveries of accounts receivable previously written off as
worthless.
- The write-off method of accounting for bad debts is written off as uncollectible when
a collection is made on account. The custom procedure in this is to recharge the
customer’s account with the amount collected and with the entire amount
previously charged off.
10. Explain the presentation of doubtful accounts in the income statement.
- The presentation of doubtful accounts depends on who is in charge, if the sales
manager that is in charge, the doubtful accounts are considered as distribution cost
or selling expense, but if an officer other than the sales manager, the doubtful
accounts is considered as administrative expense.
CHAPTER 6 NOTES RECEIVABLE

1. Define notes receivable.

- Notes receivable is a formal promise to pay you in the form of notes. Promissory
notes are a good example of notes receivable because it is a written contract made
by one person known as the maker who promises to pay the other person who is
known as the payee.
2. Define a negotiable promissory note.
- A negotiable promissory note is an unconditional promise which is signed by the
maker which engages to pay on demand or at a fixed determinable future time.
3. Explain the treatment of dishonored notes receivable.
- Dishonored notes receivable is removed from the notes receivable account and are
transferred to accounts receivable.
4. Explain the initial measurement of short-term notes receivable.
- The initial measurement of short-term notes receivable is measured at face amount.
5. Explain the initial measurement of long-term notes receivable.
- The initial measurement of long-term notes receivable depends on whether the
notes are interest-bearing or noninterest bearing.
6. What is the meaning of noninterest bearing note receivable?
- A noninterest bearing note receivable is a note in which the interest is deducted
from the face value of the note when it is issued. It is also because all notes implicitly
contain interest which are included in the face amount rather than being stated as a
separate rate.
7. Explain the subsequent measurement of long-term notes receivable.
- Subsequent measurement of long-term notes receivable is measured at amortized
cost using the effective interest method and is recorded later.
8. Explain compounding of interest in relation to interest bearing notes receivable.
- Compounding of interest and interest-bearing notes receivable are in relation
because interest-bearing notes have a stated rate of interest that is payable in
addition to the face amount, which is the present value and compounding interest
also use the present value.
9. What is the meaning of the present value of notes receivable?
- The present value is the sum of all future cash flows discounted using the prevailing
market rate of interest for similar notes.
10. Explain the computation of present value of long-term notes receivable.
- The computation of present value of long-term notes receivable is the amortized
cost is the present value plus amortization of the discount, or the face amount
minus the unamortized unearned interest income.
CHAPTER 7 LOAN RECEIVABLE

1. Explain measurement of loan receivable.

- The measurement of loan receivable is measured at a fair value plus transaction
costs that are directly attributable to the acquisition of the asset.
2. Explain amortized cost in relation to loan receivable.
- A loan receivable is measured subsequently at amortized cost, when the initial
amount recognized is lower than the principal amount, the amortization of the
difference is added to the carrying amount, and when the initial amount recognized
is higher than the principal amount, the amortization of the difference is deducted
from the carrying amount.
3. Explain origination fees in relation to a loan.
- Lending activities usually precede the actual disbursement of funds and attract
potential borrowers to originate or create a loan and the bank charges fees (which is
known as origination fees) against the borrowers for the creation of the loan.
4. Explain direct origination costs.
- Direct origination costs are the origination fees that are not chargeable against the
borrower and are deferred and amortized over the term of the loan.
5. Explain the treatment of origination fees received from borrower and direct origination
costs incurred by the lender.
- The origination fees received from the borrower are recognized as unearned interest
income and amortized over the term of the loan while the direct origination costs
incurred by the lender recovers the costs from borrowers by charging them
origination fees which is usually expressed as a percentage of the principal amount
of the loan and are directly deducted from the loan proceeds released to the
borrower.
6. Explain the treatment of indirect origination costs incurred by the lender.
- Indirect origination costs are treated as outright expense.
7. Explain the measurement of impairment of loan.
- To measure the impairment of a loan, you must measure it as the difference
between the carrying amount and the present value of the estimated future cash
flows discounted at the original effective rate.
8. Explain credit risk.
- Credit risk is the risk that a party or group can cause a monetary loss for the other
party by failing to discharge an obligation.
9. Explain the three-stage approach of loan impairment.
- The three-stage approach of loan impairment is: first, it covers debt instruments
that have not declined significantly in credit quality since initial recognition or have
low credit risk. Second, it covers debt instruments that have declined significantly in
credit quality since initial recognition but do not have objective evidence of
impairment. Lastly, it covers debt instruments that have objective evidence of
impairment at the reporting date.
10. Explain objective evidence of impairment.
- Objective evidence of impairment is one or more events that have occurred and
have an impact on the expected future cash flows of the financial instruments.
Objective evidence of impairment has five objectives which is: first, significant
financial difficulty of the borrower. Second, breach of contract. Third, debt
restructuring. Fourth, the borrower enters bankruptcy or other financial
reorganization. Lastly, a measurable decrease in the estimated future cash flows
from the financial asset.