UL CPA REVIEW

FAR 4.2 Receivables

Receivables: Claims held against customers and others for money, goods, or services. Classified as either
trade or non-trade.

1. Accounts receivable are oral promises of the purchaser to pay for goods and services sold.
2. Notes receivable are written promises to pay a certain sum of money on a specified future date.
3. Non-trade receivables include such items as, advances to employees or subsidiaries and
dividends and interest receivable.

Accounts Receivable—Recognition Issues. These involve the concepts of timing and measurement.
Measurement is complicated by:

1. Trade Discounts. These reductions from the list price are not recognized in the accounting
records; customers are billed net of trade discounts.
2. Cash Discounts (Sales Discounts). These are inducements for prompt payment. Discuss the
gross and net methods of recording receivables.
a. Gross Method (more practical than the net method). Sales and receivables are recorded at
the gross amount. Sales discounts taken by customers are debited
to the Sales Discounts account which is reported in the income statement as
a reduction of sales.
b. Net Method. Sales and receivables are recorded at the net amount. Sales discounts not
taken by customers are credited to the Sales Discounts Forfeited account, which is reported
in the other expense and revenue section of the income statement.
3. Interest Element. Theoretically, receivables should be measured at their present value but the
accounting profession has chosen to ignore the implicit interest element in receivables which are
due within one year.

Accounts Receivable—Valuation Issues. Companies value and report receivables at cash realizable value
(the net amount they expect to receive in cash).

1. Methods of accounting for uncollectible accounts:

a. Direct write-off method—When a specific account is determined to be uncollectible (which may
not occur in the period of sale), Bad Debt Expense is debited and Accounts Receivable is
credited. This method is theoretically undesirable because it:
(1) makes no attempt to match revenues and expenses.
(2) does not result in receivables being stated at cash realizable value in the statement of
financial position.

b. Allowance method—At the end of each accounting period an estimate is made of expected
losses from uncollectible accounts. This estimate is debited to Bad Debt Expense and
credited to the Allowance for Doubtful Accounts. This method is justified because a
company has experienced a loss the moment customers receive goods or services that they
will never pay for. This is true even if the specific identity of such customers will not be
known for some time.

Methods of estimating bad debt expense under the allowance method.

(a) Percentage-of-Sales (Income Statement Approach). Bad debt expense is

estimated directly by multiplying a percentage times credit sales.
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FAR 4.2 Receivables
(b) Percentage-of-Receivables (Statement of Financial Position Approach):

(i) First the required ending balance in the Allowance for Doubtful Accounts is
estimated by multiplying a percentage (a single composite rate or an aging
schedule) times the ending outstanding receivables.

(ii) Then bad debt expense is equal to the difference between the required
ending balance and the existing balance in the Allowance account.

2. IFRS requirements for impairment assessment.

a. Receivables that are individually significant should be considered for impairment
individually. If impaired, recognize it. Receivables that are not individually significant may
also be assessed individually.
b. Any individual receivable assessed that is not impaired should be included with a group of
assets of similar credit-risk characteristics and collectively assessed for impairment.
c. Any receivables not individually assessed should be collectively assessed for impairment.

Notes Receivable—Recognition Issues. The present value of the future cash flows is the proper amount to
record for notes.

1. Terminology in accounting for notes:

a. Face value—The principal amount due that is stated on the face of the note.

b. Stated interest rate—The rate that is stated on the face of the note. This rate is used to
determine the amount of periodic interest payments. A note may be non-interest-bearing
(i.e. have a stated rate of zero).

c. Effective (market) rate of interest—This is the rate that is used to look up present value
factors in order to account for the note at the date of issuance.

d. Present value—At the date of issuance, a note is valued at the present value of the future
principal and interest cash flows, discounted at the market rate of interest. Changes in the
market rate of interest are ignored throughout the remainder of the life of the note.

e. Carrying amount of the note—This is the amount at which notes are reported on the
statement of financial position.

f. Effective-interest method—Amortization method which determines periodic interest revenue by

applying a constant interest rate to the net carrying amount of the note. The dollar amount
of interest revenue changes each period as the net carrying amount of the note changes.

2. Notes Bearing Interest Equal to the Effective Rate—The interest element is ignored for short-term
notes and therefore they are carried at face value. However, long-term notes are recorded at the
present value of the cash expected to be collected.

3. Zero Interest or Unreasonable Interest-Bearing Notes—An appropriate rate of interest must be

determined in order to compute the present value of the note.

a. The present value of the note can be determined by measuring the fair market value of the
cash or other property, goods, and services exchanged for the note.
b. If the fair market value of the note or other property is not determinable, an interest rate may
be imputed on the basis of the issuer’s credit standing, collateral, etc.
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FAR 4.2 Receivables

Valuation of Notes Receivable.

1. Recording bad debt expense and the related allowance for short-term notes receivable parallels
that for trade accounts receivable.

2. Companies use percentage-of-sales or percentage-of-receivables as a way to measure possible

impairments.

3. Long-term notes receivable measure impairment as the difference between the carrying value of
the note and the note’s present value, discounted at its original effective interest rate.

Special Issues Related to Receivables.

1. Fair value option

a. Notes should be reported at net realizable value although allowance for doubtful accounts
can be difficult to estimate for long-term notes.

b. Companies have the option of using fair value as the basis of measurement in the financial
statements.

(1) If companies choose the fair value option, receivables are recorded at fair value and
unrealized holding gains or losses are reported as part of net income.

(2) Unrealized holding gains or losses are the net change in the fair value of receivables from
one period to another, excluding recognized but unrecorded interest revenue.

2. Accounts and Notes Receivable—Derecognition Issues. In order to accelerate the receipt of cash
from receivables, they may be transferred to a third party for cash.

a. Secured Borrowing (Assigning or Pledging). The owner of the accounts receivable borrows
cash by writing a promissory note designating the accounts receivable as collateral.

(1) The borrower and lender agree as to the specific accounts that serve as security. The
assignor (borrower) typically makes collections on the assigned accounts and remits
the collections plus a finance charge (interest cost) to the lender.

(2) The borrower also recognizes all discounts, returns and allowances, and bad debts.

b. Sale (Factoring). These transfers of accounts and notes receivable may be without recourse
or with recourse.

(1) Sale Without Guarantee—The purchaser assumes the risk of collectibility and absorbs
any credit losses. This is an outright sale of receivables both in form and substance. A
loss on the sale is recognized for the excess of the face value of the receivables over
the cash proceeds reduced by any provision for probable adjustments.

(a) A Due From Factor account (reported as a receivable) is used to account for any
proceeds retained by the factor to cover probable sales discounts, sales returns,
and sales allowances.

(b) Derecognize the receivables.

(c) The factor maintains a corresponding “Due To” account (reported as a liability).

(2) Sale With Guarantee—The seller guarantees payment to the purchaser for those
receivables which become uncollectible.
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FAR 4.2 Receivables

(a) The transfer is considered a borrowing—or a failed sale.

(b) A Due From Factor account is maintained as indicated in a sale without recourse.

(c) A Liability to Factor account is used to recognize the probable payment to the
factor for uncollectible accounts.

(d) Instead of a loss, a finance charge is recognized.

Presentation and analysis of receivables.

1. General classification rules:

a. Segregate the carrying amounts of the different categories of receivables.

b. Indicate the receivables classified as current and non-current in the statement of financial
position.

c. Appropriately offset the valuation accounts for receivables that are impaired, including a
discussion of individual and collectively determined impairments.

d. Disclose the fair value of receivables in such a way that permits it to be compared with its
carrying amount.

e. Disclose information to assess the credit risk inherent in the receivables by providing
information on:

(i) receivables that are neither past due nor impaired,

(ii) the carrying amount of receivables that would otherwise be past due or impaired,
whose terms have been renegotiated,
(iii) receivables that are either past due or impaired, an analysis of the age of receivables
that are past due.

f. Disclose any receivables pledged as collateral, and

g. Disclose all significant concentrations of credit risk arising from receivables.

2. Accounts receivable turnover ratio: measures the number of times, on average, receivables are
collected during the period.

Net Sales
a. A/R Turnover =
Average Trade Receivables (net)

365
b. Days to Collect =
A/R Turnover

QUIZZER:
1. The category "trade receivables" includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. None of these answer choices are correct.

2. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers
b. Receivables from subsidiaries
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FAR 4.2 Receivables
c. Dividends receivable
d. None of these answer choices are correct.

3. What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies
on a statement of financial position?
a. As offsets to equity
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

4. Which of the following statement is incorrect regarding receivables on the statement of financial position?
a. Receivables are a financial asset.
b. Receivables are financial instruments.
c. Non-trade receivables are generally reported as separate items in the statement of financial position.
d. Accounts receivable are written promises of the purchaser to pay for goods or services.

5. 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.
b. nominal discount.
c. enhancement discount.
d. cash discount.

6. 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 these answer choices are correct.

7. 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 income and 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.

8. Why do companies provide trade discounts?

a. To avoid frequent changes in catalogs only
b. To induce prompt payment
c. To easily alter prices for different customers only
d. To avoid frequent changes in catalogs and to easily alter prices

9. Of the approaches to record cash discounts related to accounts receivable, which is more theoretically
correct?
a. Net approach
b. Gross approach
c. Allowance approach
d. All three approaches are theoretically correct.

10. All of the following are problems associated with the valuation of accounts receivable except for
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.

11. 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

12. Which of the following concepts relates to using the allowance method in accounting for accounts
receivable?
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FAR 4.2 Receivables
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.

13. 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

14. 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

15. 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

16. 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

17. Assuming that the ideal measure of short-term receivables in the statement of financial position is the
discounted value of the cash to be received in the future, failure to follow this practice usually does not make
the statement of financial position misleading because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.

18. 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

19. 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

20. 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
UL CPA REVIEW
FAR 4.2 Receivables
21. 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 statement of financial position.
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.

22. Under IFRS, which of the following is not permitted for accounting for material amounts of uncollectable
accounts receivable?
a. Percentage of receivables, allowance method
b. Percentage of sales, allowance method
c. Direct write-off method
d. All of these answer choices are acceptable under IFRS

23. Which of the following statement is incorrect regarding how the IASB requires that the impairment
assessment be performed?
a. Receivables that are individually significant should be considered for impairment separately, if impaired,
the company recognizes it.
b. Receivables that are not individually significant are assessed individually. If impaired, the company
recognizes it.
c. 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.
d. Any receivables not individually assessed should be collectively assessed for impairment.

24. At the beginning of 2014, Gannon Company received a three-year zero-interest-bearing P1,000 trade note.
The market rate for equivalent notes was 8% at that time. Gannon reported this note as a P1,000 trade note
receivable on its 2014 year-end statement of financial position and P1,000 as sales revenue for 2014. What
effect did this accounting for the note have on Gannon’s net earnings for 2014, 2015, 2016, and its retained
earnings at the end of 2016, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these answer choices are correct.

25. What is imputed interest?

a. Interest based on the stated interest rate
b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the coupon rate

26. 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

27. 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.

28. Which of the following statements is incorrect regarding the classification of accounts and notes receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes receivable
transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.
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FAR 4.2 Receivables
29. Which of the following statements is incorrect when a company chooses the fair value option for its
receivables?
a. Receivables are recorded at fair value in the statement of financial position.
b. Unrealized holding gains and losses from fair value adjustments are reported as a component of
comprehensive income.
c. The International Accounting Standards Board believes that fair value measurement for financial
instruments provides more relevant and understandable information than historical cost.
d. An unrealized holding gain or loss is the net change in the fair value of the receivable from one period
to another, exclusive of interest revenue recognized but not recorded.

30. Morley Manufacturing has notes receivable that have a fair value of P810,000 and a carrying amount of
P620,000. Morley decides on December 31, 2015, to use the fair value option for these recently-acquired
receivables. Which of the following statements is correct regarding the election of the fair value option by
Morley?
a. Morley can elect to use the fair value option or amortized cost for these notes at each statement of
financial position date.
b. Morley reports the receivables at fair value, with any unrealized holding gains and losses reported as a
separate component of comprehensive income.
c. The unrealized holding gain is the difference between the fair value and the carrying amount.
d. All of the choices are correct regarding the fair value option.
31. Under IFRS Morley Manufacturing will derecognize its receivables in all of the following cases except
a. When Morley elects to use the fair value option for a receivable.
b. When the contractual rights to the cash flows of the receivable no longer exist; for example when one of
Morley’s customers declares bankruptcy.
c. When Morley collects a receivable when due.
d. All of these answer choices require Morley Manufacturing to derecognize its receivables.
32. On December 31, 2015, Hunter Corporation has elected to use the fair value option for one of its notes
receivable. The note was accepted in late September, 2015 from a customer who was unable to pay its
accounts receivable. The transaction with the customer had been delivery of accounting services valued at
P25,000. The customer made a partial payment, resulting in a carrying value for the note of P22,000. At
year-end, Hunter Corporation estimates the fair value of the note to be P17,500. Which of the following is
incorrect regarding this note?
a. Hunter will report the note on its statement of financial position at P17,500.
b. Hunter will report an unrealized loss of P7,500 in its income statement for the year ended December
31, 2015.
c. Hunter will be required to use the fair value option for this note for the duration of its existence.
d. In 2016, Hunter will calculate the unrealized holding gain or loss as the net change in the fair value of
the receivable from 2015 to 2016, exclusive of interest revenue recognized but not recorded.
33. IFRS requires all of the following when classifying receivables except
a. Indicate the receivables classified as current and non-current in the statement of financial position.
b. Disclose any receivables pledged as collateral.
c. Disclose all significant concentrations of credit risk arising from receivables.
d. All of these answer choices are required by IFRS when classifying receivables.
34. Which of the following is correct regarding differences between IFRS and U.S. GAAP with regard to
receivables?
a. Under IFRS de-recognition of a receivable is determined by using lack of control as the primary
criterion.
b. U.S. GAAP permits the reversal of impairment losses, with the reversal limited to the asset‘s amortized
cost before the impairment.
c. Under IFRS the fair value option is subject to certain qualifying criteria not in U.S. GAAP.
d. All of these answer choices are differences between IFRS and U.S. GAAP for receivables.

35. The accounts receivable turnover measures the

a. number of times the average balance of accounts receivable is collected during the period.
b. percentage of accounts receivable turned over to a collection agency during the period.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period.
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FAR 4.2 Receivables
36. If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to
what effective annual rate of interest (assuming a 360-day year)?
a. 1%
b. 12%
c. 18%
d. 30%

37. AG Inc. made a P10,000 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 sales revenue?
a. P 9,800
b. P 9,900
c. P10,000
d. P10,100

38. AG Inc. made a P10,000 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 P9,900
b. Debit Accounts Receivable for P9,900 and Sales Discounts for P100
c. Debit Accounts Receivable for P10,000
d. Debit Accounts Receivable for P10,000 and Sales Discounts for P100

39. AG Inc. made a P10,000 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 P9,800
b. Debit Accounts Receivable for P9,800 and Sales Discounts for P200
c. Debit Accounts Receivable for P10,000
d. Debit Accounts Receivable for P10,000 and Sales Discounts for P200

40. Rosalie Co. uses the gross method to record sales made on credit. On June 10, 2015, it made sales of
P100,000 with terms 2/10, n/30 to Finley Farms, Inc. On June 19, 2015, Rosalie received payment for 1/2
the amount due from Finley Farms. Rosalie’s fiscal year end is on June 30, 2015. What amount will be
reported in the statement of financial position for the accounts receivable due from Finley Farms, Inc.?
a. P49,000
b. P50,000
c. P48,000
d. P51,000
41. Vivian, Inc had net sales in 2015 of P700,000. At December 31, 2015, before adjusting entries, the balances
in selected accounts were: accounts receivable P125,000 debit, and allowance for doubtful accounts P1,200
credit. Vivian estimates that 2% of its net sales will prove to be uncollectable. What is the cash realizable
value of the receivables reported on the statement of financial position at December 31, 2015?
a. P112,200
b. P122,500
c. P111,000
d. P109,800

42. Vivian, Inc had net sales in 2015 of P700,000. At December 31, 2015, before adjusting entries, the balances
in selected accounts were: accounts receivable P125,000 debit, and allowance for doubtful accounts P1,200
debit. Vivian estimates that 2% of its net accounts receivable will prove to be uncollectable. What is the cash
realizable value of the receivables reported on the statement of financial position at December 31, 2015?
a. P112,200
b. P122,500
c. P111,000
d. P109,800

43. Rosalie Corporation is located in Los Angeles but does business throughout Europe. The company builds
and sells equipment used in manufacturing pharmaceuticals. On December 31, 2015, Rosalie’s accounts
receivable are as follows:

Individually significant receivables

Finley Company P 80,000
Rios, Inc. 200,000
Rafael Co. 120,000
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FAR 4.2 Receivables
Hunter, Inc. 100,000
All other receivables 500,000
Total P1,000,000

Rosalie Corporation determines that Finley Company’s receivable is impaired by P40,000 and Hunter, Inc.’s
receivable is totally impaired. The other receivables from Rafael and Rios are not considered impaired.
Rosalie determines that a composite rate of 2% is appropriate to measure impairment on all other
receivables. What is the total impairment of receivables for Rosalie Corporation for 2015?
a. P156,400
b. P140,000
c. P150,000
d. P123,600

44. Wave Crest Hotels is located in Canada, but manages an extensive network of boutique hotels in the United
States. Wave Crest has significant receivables from 3 customers, P480,000 due from Stephanie Inn,
P900,000 due from Warren House, and P760,000 due from Hallmark Hotels. Wave Crest has other
receivables totaling P440,000.

Wave Crest determines that the Warren House receivable is impaired by P160,000 and the Hallmark Hotels
receivable is impaired by P200,000. The receivable from the Stephanie Inn is not considered impaired.
Wave Crest determines that a composite rate of 5% is appropriate to measure impairment on all other
receivables. What is the total impairment of receivables for Wave Crest for 2015?

a. P382,000
b. P314,000
c. P406,000
d. P360,000

45. Wellington Corp. has outstanding accounts receivable totaling P2.54 million as of December 31 and sales
on credit during the year of P12.8 million. There is also a debit balance of P6,000 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. P 25,400
b. P 31,400
c. P122,000
d. P134,000

46. 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

47. Wellington Corp. has outstanding accounts receivable totaling P3 million as of

December 31 and sales on credit during the year of P15 million. There is also a debit 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 balance in the allowance for doubtful accounts after the year-end adjustment
to record bad debt expense?
a. P1,200,000
b. P 228,000
c. P 240,000
d. P 252,000

48. At the close of its first year of operations, December 31, 2015, Ming Company had accounts receivable of
P540,000, after deducting the related allowance for doubtful accounts. During 2015, the company had
charges to bad debt expense of P90,000 and wrote off, as uncollectible, accounts receivable of P40,000.
What should the company report on its statement of financial position at December 31, 2015, as accounts
receivable before the allowance for doubtful accounts?
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FAR 4.2 Receivables
a. P670,000
b. P590,000
c. P490,000
d. P440,000

49. Before year-end adjusting entries, Dunn Company’s account balances at December 31, 2015, for accounts
receivable and the related allowance for uncollectible accounts were P600,000 and P45,000, respectively.
An aging of accounts receivable indicated that P62,500 of the December 31 receivables are expected to be
uncollectible. The cash realizable value of accounts receivable after adjustment is
a. P582,500.
b. P537,500.
c. P492,500.
d. P555,000.

50. During the year, Kiner Company made an entry to write off a P4,000 uncollectible account. Before this entry
was made, the balance in accounts receivable was P50,000 and the balance in the allowance account was
P4,500. The cash realizable value of accounts receivable after the write-off entry was
a. P50,000.
b. P49,500.
c. P41,500.
d. P45,500.

51. The following information is available for Murphy Company:

Allowance for doubtful accounts at December 31, 2014 P 8,000
Credit sales during 2015 400,000
Accounts receivable deemed worthless and written off during 2015 9,000
As a result of a review and aging of accounts receivable in early January 2016, however, it has been
determined that an allowance for doubtful accounts of P5,500 is needed at December 31, 2015. What
amount should Murphy record as "bad debt expense" for the year ended December 31, 2015?
a. P4,500
b. P5,500
c. P6,500
d. P13,500

Use the following information for questions 52 and 53.

A trial balance before adjustments included the following:

Debit Credit
Sales P425,000
Sales returns and allowance P14,000
Accounts receivable 43,000
Allowance for doubtful accounts 760

52. If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is
a. P6,700.
b. P8,220.
c. P8,500.
d. P9,740.

53. If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the
adjustment is
a. P3,540.
b. P4,300.
c. P4,224.
d. P5,060.

54. Lankton Company has the following account balances at year-end:

Accounts receivable P60,000
Allowance for doubtful accounts 3,600
Sales discounts 2,400
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FAR 4.2 Receivables
Lankton should report accounts receivable at a net amount of
a. P54,000.
b. P56,400.
c. P57,600.
d. P60,000.

55. Smithson Corporation had a 1/1/15 balance in the Allowance for Doubtful Accounts of P10,000. During
2015, it wrote off P7,200 of accounts and collected P2,100 on accounts previously written off. The balance
in Accounts Receivable was P200,000 at 1/1 and P240,000 at 12/31. At 12/31/15, Smithson estimates that
5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2015?
a. P2,000
b. P7,100
c. P9,200
d. P12,000

56. Black Corporation had a 1/1/15 balance in the Allowance for Doubtful Accounts of P12,000. During 2015, it
wrote off P8,640 of accounts and collected P2,520 on accounts previously written off. The balance in
Accounts Receivable was P240,000 at 1/1 and P288,000 at 12/31. At 12/31/15, Black estimates that 5% of
accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful
Accounts at 12/31/15?
a. P5,760
b. P5,880
c. P8,280
d. P14,400

57. Shelton Company has the following account balances at year-end:

Accounts receivable P80,000
Allowance for doubtful accounts 4,800
Sales discounts 3,200
Shelton should report accounts receivable at a net amount of
a. P72,000.
b. P75,200.
c. P76,800.
d. P80,000.

58. Vasguez Corporation had a 1/1/15 balance in the Allowance for Doubtful Accounts of P20,000. During 2015,
it wrote off P14,400 of accounts and collected P4,200 on accounts previously written off. The balance in
Accounts Receivable was P400,000 at 1/1 and P480,000 at 12/31. At 12/31/15, Vasguez estimates that 5%
of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2015?
a. P4,000
b. P14,200
c. P18,400
d. P24,000

59. McGlone Corporation had a 1/1/15 balance in the Allowance for Doubtful Accounts of P15,000. During
2015, it wrote off P10,800 of accounts and collected P3,150 on accounts previously written off. The balance
in Accounts Receivable was P300,000 at 1/1 and P360,000 at 12/31. At 12/31/15, McGlone estimates that
5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for
Doubtful Accounts at 12/31/15?
a. P7,200
b. P7,350
c. P10,350
d. P18,000

60. Lester Company received a seven-year zero-interest-bearing note on February 22, 2015, 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, 2015,
7.5% on December 31, 2015, 7.7% on February 22, 2016, and 8% on December 31, 2016. What interest
rate should be used to calculate the interest revenue from this transaction for the years ended December
31, 2015 and 2016, respectively?
a. 0% and 0%
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FAR 4.2 Receivables
b. 7% and 7%
c. 7% and 7.7%
d. 7.5% and 8%

61. On December 31, 2015, Flint Corporation sold for P75,000 an old machine having an original cost of
P135,000 and a book value of P60,000. The terms of the sale were as follows:
P15,000 down payment
P30,000 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, 2015 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for
2 years is 1.75911.)
a. P52,773
b. P67,773
c. P60,000
d. P105,546

62. Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of P800,000
to Arch Inc. Arch Inc. will pay P850,000 in one year. Royal Palm Corp. normally sells this type of equipment
for 90% of list price. How much should be recorded as sales revenue?
a. P720,000
b. P765,000
c. P800,000
d. P850,000

63. Equestrain Roads sold P50,000 of goods and accepted the customer’s P50,000 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
b. Debit Notes Receivable for P50,000
c. Debit Accounts Receivable for P50,000
d. Debit Notes Receivable for P45,000

64. Equestrain Roads sold P50,000 of goods and accepted the customer’s P50,000 10%
1-year note 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. P1,250
c. P2,500
d. P5,000

65. Equestrain Roads accepted a customer’s P50,000 zero-interest-bearing six-month note 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

66. 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 P60,000 payment in two years?
a. P60,000
b. P54,422
c. P54,545
d. P49,587

67. Sun Inc. factors P2,000,000 of its accounts receivables without guarantee (recourse) for a finance charge of
5%. The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. What would be recorded by Sun as a gain (loss) on the transfer of receivables?
a. Loss of P100,000
b. Gain of P100,000
c. Loss of P300,000
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FAR 4.2 Receivables
d. Loss of P200,000

68. Sun Inc. factors P2,000,000 of its accounts receivables with guarantee (recourse) for a finance charge of
3%. The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. What would be recorded as a gain (loss) on the transfer of receivables?
a. Gain of P60,000
b. Loss of P60,000
c. Loss of P260,000
d. P0

69. Sun Inc assigns P2,000,000 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 P20,000
b. Loss of P160,000
c. Loss of P180,000
d. P0

70. Moon Inc. factors P1,000,000 of its accounts receivables with guarantee (recourse) for a finance charge of
4%. The finance company retains an amount equal to 8% of the accounts receivable for possible
adjustments. What would be the debit to Cash in the journal entry to record this transaction?
a. P1,000,000
b. P960,000
c. P880,000
d. P780,000

71. Moon Inc assigns P1,500,000 of its accounts receivables as collateral for a P1 million loan with a bank. The
bank assesses a 3% finance fee and charges interest on the note at 6%. What would be the journal entry to
record this transaction?
a. Debit Cash for P970,000, debit Interest Expense for P30,000, and credit Notes Payable for P1,000,000.
b. Debit Cash for P970,000, debit Interest Expense for P30,000, and credit Accounts Receivable for
P1,000,000.
c. Debit Cash for P970,000, debit Interest Expense for P30,000, debit Due from Bank for P500,000, and
credit Accounts Receivable for P1,500,000.
d. Debit Cash for P910,000, debit Interest Expense for P90,000, and credit Notes Payable for P1,000,000.

Use the following information for questions 72 and 73.

Geary Co. assigned P400,000 of accounts receivable to Kwik Finance Co. as security for a loan of P335,000. 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 P110,000 on assigned accounts after deducting P380 of discounts. Geary accepted returns worth
P1,350 and wrote off assigned accounts totaling P2,980.

72. The amount of cash Geary received from Kwik at the time of the transfer was
a. P301,500.
b. P327,000.
c. P328,300.
d. P335,000.

73. Entries during the first month would include a

a. debit to Cash of P110,380.
b. debit to Bad Debt Expense of P2,980.
c. debit to Allowance for Doubtful Accounts of P2,980.
d. debit to Accounts Receivable of P114,710.

Use the following information for questions 74 and 75.

On February 1, 2015, Henson Company factored receivables with a carrying amount of P300,000 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.
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FAR 4.2 Receivables
74. Assume that Henson factors the receivables on a without guarantee (recourse) basis. The loss to be
reported is
a. P0.
b. P9,000.
c. P15,000.
d. P24,000.

75. Assume that Henson factors the receivables on a with guarantee (recourse) basis. The amount of cash
received is
a. P285,000.
b. P276,000.
c. P291,000.
d. P300,000.

76. Maxwell Corporation factored, with guarantee (recourse), P100,000 of accounts receivable with Huskie
Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and
sales allowances. What amount of cash would Maxwell receive on the sale of receivables?
a. P97,000
b. P95,000
c. P92,000
d. P100,000

77. Wilkinson Corporation factored, with guarantee (recourse), P400,000 of accounts receivable with Huskie
Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and
sales allowances. What amount of cash would Wilkinson receive on the sale of receivables?
a. P388,000
b. P380,000
c. P368,000
d. P400,000