9 Accounting for

Receivables
Learning Objectives
1 Explain how companies recognize accounts receivable.

Describe how companies value accounts receivable

2 and record their disposition.

3 Explain how companies recognize notes receivable.

Describe how companies value notes receivable, record

4 their disposition, and present and analyze receivables.

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LEARNING Explain how companies recognize
1
OBJECTIVE accounts receivable.

Amounts due from individuals and other companies that are

expected to be collected in cash.

Amounts owed by Written promise for Nontrade receivables

customers on amounts to be such as interest,
account that result received. Normally loans to officers,
from the sale of requires the advances to
goods and collection of employees, and
services. interest. income taxes.

Accounts
Accounts Notes
Notes Other
Other
Receivable
Receivable Receivable
Receivable Receivables
Receivables

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 Types of Receivables

Amounts due from individuals and other companies

that are expected to be collected in cash.

Illustration 9-1
Receivables as a percentage
of assets

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 Types of Receivables

Three accounting issues:

1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.

Recognizing Accounts Receivable

 Service organization records a receivable when it
performs service on account.
 Merchandiser records accounts receivable at the point
of sale of merchandise on account.

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 Recognizing Accounts Receivables

Illustration: Assume that Jordache Co. on July 1, 2017, sells

merchandise on account to Polo Company for $1,000 terms
2/10, n/30. Prepare the journal entry to record this transaction
on the books of Jordache Co.

Jul. 1 Accounts Receivable 1,000

Sales Revenue
1,000

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 Recognizing Accounts Receivables

Illustration: On July 5, Polo returns merchandise worth $100

to Jordache Co.

Jul. 5 Sales Returns and Allowances 100

Accounts Receivable
100

Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due.

Jul. 11 Cash 882

Sales Discounts ($900 x .02) 18
Accounts Receivable
900
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DO IT! 1 Recognizing Accounts Receivable

On May 1, Wilton sold merchandise on account to Bates for $50,000

terms 3/15, net 45. On May 4, Bates returns merchandise with a
sales price of $2,000. On May 16, Wilton receives payment from
Bates for the balance due. Prepare journal entries to record the May
transactions on Wilton’s books.

May 1 Accounts Receivable—Bates 50,000

Sales Revenue 50,000
4 Sales Returns and Allowances 2,000
Accounts Receivable—Bates 2,000
16 Cash ($48,000 - $1,440) 46,560
Sales Discounts ($48,000 x .03) 1,440
Accounts Receivable—Bates 48,000
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LEARNING Describe how companies value accounts
2
OBJECTIVE receivable and record their disposition.

Valuing Accounts Receivables

Alternative Terminology
 Current asset. You will sometimes see
Bad Debt Expense called
 Valuation (cash realizable value). Uncollectible Accounts
Expense.

Uncollectible Accounts Receivable

 Sales on account raise the possibility of accounts not
being collected.
 Companies record credit losses as debits to Bad Debt
Expense.

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 Valuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
 No matching.  Better matching.
 Receivable not stated at  Receivable stated at cash
cash realizable value. realizable value.
 Not acceptable for financial  Required by GAAP.
reporting.

Cash (Net) realizable value is the net amount the company expects to receive in cash
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 Valuing Accounts Receivable

How are these accounts presented on the Balance Sheet?

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

25 End.
End. 500

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 Valuing Accounts Receivable

ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657

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 Valuing Accounts Receivable
Alternate
ABC Corporation Presentation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
Total current assets 1,657

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 Valuing Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

25 End.
End. 500

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 Valuing Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

25 End.
End. 600

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 Valuing Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

25 End.
End. 600

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 Valuing Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

25 End.
End. 267

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 Valuing Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

25 End.
End. 267

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 Valuing Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

40 End.
End. 267

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 Valuing Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful Accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

40 End.
End. 267

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 Valuing Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful Accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10

30 End.
End. 257

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 Valuing Accounts Receivable

ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
Total current assets 1,409

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 Valuing Accounts Receivable

DIRECT WRITE-OFF METHOD FOR

UNCOLLECTIBLE ACCOUNTS
Illustration: Assume that Warden Co. writes off M. E. Doran’s
$200 balance as uncollectible on December 12. Warden’s
entry is:

Bad Debt Expense 200

Accounts Receivable—M. E. Doran
200
Theoretically undesirable:
 No matching.
 Receivable not stated at cash realizable value.
 Not acceptable for financial reporting.
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 Accounts Receivable

ALLOWANCE METHOD FOR UNCOLLECTIBLE

ACCOUNTS
1. Companies estimate uncollectible accounts receivable.

2. Debit Bad Debt Expense and credit Allowance for

Doubtful Accounts (a contra-asset account).

3. Companies debit Allowance for Doubtful Accounts and

credit Accounts Receivable at the time the specific
account is written off as uncollectible.

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 ALLOWANCE METHOD

RECORDING ESTIMATED UNCOLLECTIBLES

Illustration: Hampson Furniture has credit sales of
$1,200,000 in 2017, of which $200,000 remains uncollected at
December 31. The credit manager estimates that $12,000 of
these sales will prove uncollectible.

Dec. 31 Bad Debt Expense 12,000

Allowance for Doubtful Accounts 12,000

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 RECORDING UNCOLLECTIBLES
Illustration 9-3
Presentation of allowance
for doubtful accounts

The amount of $188,000 represents the expected cash realizable value of

the accounts receivable at the statement date.
Companies don’t close Allowance for Doubtful Accounts at the end of the fiscal year.

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 ALLOWANCE METHOD

RECORDING WRITE-OFF OF AN UNCOLLECTIBLE

ACCOUNT
Illustration: The vice-president of finance of Hampson Furniture on
March 1, 2018, authorizes a write-off of the $500 balance owed by
R. A. Ware. The entry to record the write-off is:

Mar. 1 Allowance for Doubtful Accounts 500

Accounts Receivable—R. A. Ware 500

Illustration 9-4 General ledger balances after write-off

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 ALLOWANCE METHOD

RECOVERY OF AN UNCOLLECTIBLE ACCOUNT

Illustration: On July 1, R. A. Ware pays the $500 amount that
Hampson had written off on March 1. Hampson makes these
entries:

July 1 Accounts Receivable—R. A. Ware 500

Allowance For Doubtful Accounts 500

1 Cash 500
Accounts Receivable—R. A. Ware 500

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 ALLOWANCE METHOD

ESTIMATING THE ALLOWANCE Illustration 9-6

Comparison of bases for
estimating uncollectibles

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 ALLOWANCE METHOD

ESTIMATING THE ALLOWANCE Illustration 9-6

Comparison of bases for
estimating uncollectibles

Management estimates
what percentage of credit
sales will be uncollectible.
This percentage is based
on past experience and
anticipated credit policy.

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 ALLOWANCE METHOD

Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2017 are
$800,000, the adjusting entry is:

Dec. 31 Bad Debt Expense 8,000 *

Allowance For Doubtful Accounts
8,000

* $800,000 x 1%

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 ALLOWANCE METHOD

Percentage-of-Sales
 Emphasizes matching of expenses with revenues.
 Adjusting entry to record bad debts disregards the existing
balance in Allowance for Doubtful Accounts.

Illustration 9-7 Bad debt accounts after posting

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 ALLOWANCE METHOD

ESTIMATING THE ALLOWANCE Illustration 9-6

Comparison of bases for
estimating uncollectibles

Management establishes a
percentage relationship
between the amount of
receivables and expected
losses from uncollectible
accounts.

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 ALLOWANCE METHOD Helpful Hint Where appropriate,
companies may use only a single
percentage rate.

Aging the accounts receivable - customer balances are

classified by the length of time they have been unpaid.
Illustration 9-8

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 ALLOWANCE METHOD
2- percentage of Receivables

Illustration: Assume the unadjusted trial balance shows Allowance

for Doubtful Accounts with a credit balance of $528. Prepare the
adjusting entry assuming $2,228 is the estimate of uncollectible
receivables from the aging schedule.

Dec. 31 Bad Debt Expense 1,700

Allowance For Doubtful Accounts 1,700

Illustration 9-9
Bad debts accounts
after posting

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 Disposing of Accounts Receivables

Companies sell receivables for two major reasons.

1. Receivables may be the only reasonable source of

cash.

2. Billing and collection are often time-consuming and

costly.

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 Disposing of Accounts Receivables

SALE OF RECEIVABLES
Factor
 Finance company or bank.
 Buys receivables from businesses and then collects the
payments directly from the customers.
 Typically charges a commission to the company that is
selling the receivables.
 Fee ranges from 1-3% of the receivables purchased.

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 SALE OF RECEIVABLES

Illustration: Assume that Hendredon Furniture factors

$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of receivables
sold. The journal entry to record the sale by Hendredon Furniture
is as follows.
($600,000 x 2% = $12,000)

Cash 588,000
Service Charge Expense 12,000
Accounts Receivable

600,000

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 Disposing of Accounts Receivables

CREDIT CARD SALES

 Recorded the same as cash sales.
 Retailer pays card issuer a fee of 2 to 6% for processing
the transactions.

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 CREDIT CARD SALES

Illustration: Anita Ferreri purchases $1,000 of compact discs

for her restaurant from Karen Kerr Music Co., using her Visa
First Bank Card. First Bank charges a service fee of 3%. The
entry to record this transaction by Karen Kerr Music is as follows.

Cash 970
Service Charge Expense 30
Sales Revenue

1,000

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 DO IT! 2 Uncollectible Accounts Receivable

Brule Co. has been in business five years. The ledger at the end of
the current year shows:
Accounts Receivable $30,000 Dr.
Sales Revenue $180,000 Cr.
Allowance for Doubtful Accounts $2,000 Dr.
Bad debts are estimated to be 10% of receivables. Prepare the entry
to adjust Allowance for Doubtful Accounts.

Solution:

Bad Debt Expense 5,000 *

Allowance for Doubtful Accounts 5,000

* [(0.1 x $30,000) + $2,000]

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LEARNING Explain how companies recognize notes
3
OBJECTIVE receivable.

Companies may grant credit in exchange for a promissory

note. A promissory note is a written promise to pay a
specified amount of money on demand or at a definite time.

Promissory notes may be used

1. when individuals and companies lend or borrow money,

2. when amount of transaction and credit period exceed

normal limits, or

3. in settlement of accounts receivable.

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 Notes Receivable

To the Payee, the promissory note is a note receivable.

To the Maker, the promissory note is a note payable.
Illustration 9-11

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 Notes Receivable

Determining the Maturity Date

Note expressed in terms of
 Months
 Days

Computing Interest Illustration 9-14

Formula for
computing interest

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 Notes Receivable

Computing Interest
When counting days, omit the date the note is issued,
but include the due date.
Illustration 9-15

Helpful Hint
The interest rate specified is
the annual rate.

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 Recognizing Notes Receivable

Illustration: Calhoun Company wrote a $1,000, two-month, 12%

promissory note dated May 1, to settle an open account. Prepare
entry would Wilma Company makes for the receipt of the note.

May 1 Notes Receivable 1,000

Accounts Receivable 1,000

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 DO IT! 3 Recognizing Notes Receivable

Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 6% note

dated May 10 in settlement of Leonard’s overdue account. (a) What
is the maturity date of the note? (b) What is the interest payable at
the maturity date?

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 Describe how companies value notes receivable,
LEARNING
OBJECTIVE
4 record their disposition, and present and analyze
receivables.

Valuing Notes Receivable

 Report short-term notes receivable at their cash
(net) realizable value.

 Estimation of cash realizable value and bad debt

expense are done similarly to accounts receivable.

 Allowance for Doubtful Accounts is used.

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 Notes Receivable

Disposing of Notes Receivable

1. Notes may be held to their maturity date.

2. Maker may default and payee must make an

adjustment to the account.

3. Holder speeds up conversion to cash by selling the

note receivable.

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 Disposing of Notes Receivable

HONOR OF NOTES RECEIVABLE

 Maker pays it in full at its maturity date.

DISHONOR OF NOTES RECEIVABLE

 Not paid in full at maturity.
 No longer negotiable.

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 HONOR OF NOTES RECEIVABLE

Illustration: Wolder Co. lends Higley Co. $10,000 on June 1,

accepting a five-month, 9% interest note. If Wolder presents the
note to Higley Co. on November 1, the maturity date, Wolder’s
entry to record the collection is:

Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Revenue 375

($10,000 x 9% x 5/12 = $375)

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 ACCRUAL OF INTEREST RECEIVABLE

Illustration: Suppose instead that Wolder Co. prepares financial

statements as of September 30. The adjusting entry by Wolder is
for four months ending Sept. 30. Illustration 9-16
Timeline of interest earned

Sept. 30 Interest Receivable 300

Interest Revenue 300
($10,000 x 9% x 4/12 = $300)

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 ACCRUAL OF INTEREST RECEIVABLE

Illustration: Prepare the entry Wolder’s would make to record

the honoring of the Higley note on November 1.

Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Receivable 300
Interest Revenue 75

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 DISHONOR OF NOTES RECEIVABLE

Illustration: Assume that Higley Co. on November 1 indicates

that it cannot pay at the present time. If Wolder Co. does expect
eventual collection, it would make the following entry at the time
the note is dishonored (assuming no previous accrual of interest).

Nov. 1 Accounts Receivable 10,375

Notes Receivable 10,000

Interest Revenue 375

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 Statement Presentation and Analysis

PRESENTATION
 Identify in the balance sheet or in the notes each major
type of receivable.

B/S  Report short-term receivables as current assets.

 Report both gross amount of receivables and allowance
for doubtful account.
 Report bad debt expense and service charge expense
as selling expenses.
I/S
 Report interest revenue under “Other revenues and
gains.”

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 Statement Presentation and Analysis

ANALYSIS
Illustration: In 2013 Cisco Systems had net sales of $38,029
million for the year. It had a beginning accounts receivable (net)
balance of $4,369 million and an ending accounts receivable (net)
balance of $5,470 million. Assuming that Cisco’s sales were all on
credit, its accounts receivable turnover is computed as follows.

Illustration 9-17
Accounts receivable turnover
and computation
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 Statement Presentation and Analysis

ANALYSIS
Illustration: Variant of the accounts receivable turnover ratio is
average collection period in terms of days.
Illustration 9-17

Illustration 9-18

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 DO IT! 4 Analysis of Receivables
In 2017, Phil Mickelson Company has net credit sales of $923,795
for the year. It had a beginning accounts receivable (net) balance of
$38,275 and an ending accounts receivable (net) balance of
$35,988. Compute Phil Mickelson Company’s (a) accounts
receivable turnover and (b) average collection period in days.

(a)

(b)

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 A Look at IFRS

LEARNING Compare the accounting for receivables under

OBJECTIVE
5 GAAP and IFRS.

Key Points
Similarities
 The recording of receivables, recognition of sales returns and
allowances and sales discounts, and the allowance method to record
bad debts are the same between GAAP and IFRS.
 Both IFRS and GAAP often use the term impairment to indicate that
a receivable or a percentage of receivables may not be collected.

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 A Look at IFRS

Key Points
Similarities
 The FASB and IASB have worked to implement fair value
measurement (the amount they currently could be sold for) for
financial instruments, such as receivables. Both Boards have faced
bitter opposition from various factions.
Differences
 Although IFRS implies that receivables with different characteristics
should be reported separately, there is no standard that mandates
this segregation.

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 A Look at IFRS

Key Points
Differences
 IFRS and GAAP differ in the criteria used to determine how to record
a factoring transaction. IFRS uses a combination approach focused
on risks and rewards and loss of control. GAAP uses loss of control
as the primary criterion. In addition, IFRS permits partial
derecognition of receivables; GAAP does not.

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 A Look at IFRS

Looking to the Future

The question of recording fair values for financial instruments will continue to
be an important issue to resolve as the Boards work toward convergence.
Both the IASB and the FASB have indicated that they believe that financial
statements would be more transparent and understandable if companies
recorded and reported all financial instruments at fair value.

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 A Look at IFRS

IFRS Self-Test Questions

Which of the following statements is false?

a. Receivables include equity securities purchased by the
company.
b. Receivables include credit card receivables.
c. Receivables include amounts owed by employees as a
result of company loans to employees.
d. Receivables include amounts resulting from transactions
with customers.

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 A Look at IFRS

IFRS Self-Test Questions

Under IFRS:
a. the entry to record estimated uncollected accounts is the
same as GAAP.
b. it is always acceptable to use the direct write-off method.
c. all financial instruments are recorded at fair value.
d. None of the above.

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