06 Receivable

FINANCIAL ACCOUNTING
THEORY & PRACTICE

RECEIVABLES
(Accounts Receivable, Notes Receivable, Loans Receivable and Receivable Financing)
QUIZZER
Accounts Receivable
ACCOUNTS RECEIVABLE
1. Define receivables and enumerate the classes of receivables.
Receivables are financial assets because they represent a contractual right to receive cash
or another financial asset from another entity.
For retailers or manufacturers, receivables are classified into trade receivables and nontrade
receivables.
Trade receivables refer to claims arising from sale of merchandise or services in the ordinary
course of business operations. The usual types are accounts receivable and notes
receivable.
Accounts receivable are open accounts or those not supported by promissory notes.
Other names of accounts receivable are customers' accounts, trade debtors, and trade
accounts receivable.
Notes receivable are those supported by formal promises to pay in the form of notes.
Nontrade receivables represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business.
For banks and other financial institutions, receivables result primarily from loans to
customers.
The loans are made to heterogeneous customers and the repayment periods are frequently
longer or over several years.
2. Explain the classification of receivables in the statement of financial position.
Trade receivables which are expected to be realized in cash within the normal operating cycle
or one year, whichever is longer, are classified as current assets.
Nontrade receivables which are expected to be realized in cash within one year, the length
of the operating cycle notwithstanding, are classified as current assets.
If collectible beyond one year, nontrade receivables are classified as noncurrent assets.
Essay Questions – Accounts Receivable Page 1

Trade receivables and nontrade receivables which are currently collectible shall be presented
as one line item called "trade and other receivables".
3. Explain the "initial measurement" of receivables.
PFRS 9, paragraph 5.1.1, provides that when a financial asset is recognized initially, an entity
shall measure it at fair value plus transaction costs that are directly attributable to the
acquisition.
The fair value of a financial asset is usually the transaction price, meaning, the fair value of
the consideration given.
For short-term receivables, the fair value is equal to the face value or original invoice amount.
Cash flows relating to short-term receivables are not discounted because the effect of
discounting is usually immaterial.
Thus, accounts receivable shall be measured initially at face value.
For long-term receivables that are interest-bearing, the fair value is equal to the face value.
However, for long-term receivables that are noninterest-bearing, the fair value is equal to the
present value of all future cash flows discounted using the prevailing market rate of interest
for similar receivables.
Thus, initially, long-term interest-bearing notes receivable shall be measured at face value
and long-term noninterest-bearing notes receivable shall be measured at present value.
4. Explain the measurement of accounts receivable.
Accounts receivable shall be measured initially at face value or original invoice amount.
However, subsequently the accounts receivable shall be measured at net realizable value,
meaning the amount of cash expected to be collected or the estimated recoverable amount.
The initial amount recognized for accounts receivable shall be reduced by adjustments which
in the ordinary course of business will reduce the amount receivable from the customer.
This is based on the established principle that assets shall not be carried at an amount above
their recoverable amount.

Accounts Receivable
Accordingly, in estimating the net realizable value of trade accounts receivable, the following
deductions are made:
a. Allowance for freight charge

b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts
5. What are customers' credit balances?
Customers' credit balances are credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments from customers.
Customers' credit balances are classified as current liabilities and shall not be offset against
the debit balances in other customers' accounts.
However, when the amount is not material, only the net accounts receivable may be
presented in the statement of financial position.
6. Explain the two methods of accounting for bad debts.
The two methods of accounting for bad debts are the allowance method and direct writeoff
method.
The allowance method requires recognition of bad debt loss if the accounts are doubtful of
collection.
The doubtful accounts are recorded by debiting doubtful accounts and crediting allowance
for doubtful accounts.
Generally accepted accounting principles require the use of the allowance method because
it conforms with the matching principle.
Moreover, accounts receivable will be properly measured at net realizable value.
The direct writeoff method requires recognition of a bad debt loss only when the accounts
are worthless or uncollectible.
Worthless accounts are recorded by debiting bad debts and crediting accounts receivable.

This approach is often used by small businesses because it is simple to apply.
As a matter of fact, the Bureau of Internal Revenue recognizes only this method for income
tax purposes.
7. What is the treatment of "recoveries of accounts previously written off?
If a collection is made on account previously written off, the customary procedure is to

recharge the customer's account with the amount collected and possibly with the entire
amount previously charged off if it is now expected that collection will be received in full.
In other words, the recovery is recorded by reversing the entry of writeoff by debiting accounts
receivable and crediting allowance for doubtful accounts.
The collection is then normally recorded by debiting cash and crediting accounts receivable.
8. What are the three methods of estimating doubtful accounts?
Doubtful accounts are recognized when the loss is probable and the amount can be
estimated reliably.
The three methods of estimating doubtful accounts are aging, percentage of accounts
receivable and percentage of sales.
Aging method
The aging method involves an analysis of the accounts whether not due or past due. Past
due accounts are further classified in terms of the length of the period past due.
The required allowance for doubtful accounts is then determined by multiplying the total of
each classification by the rate of loss experienced by the entity for each category.
The major argument for this method is the more accurate and scientific computation of
allowance for doubtful accounts.
Consequently, the accounts receivable would be fairly presented at net realizable value.
Thus, this method is a statement of financial position approach.

Accounts Receivable
Percent of accounts receivable method
A certain rate is multiplied by the ending accounts receivable balance in order to get the
required allowance balance. The rate used is usually determined from past experience of the
entity.
This procedure has also the advantage of presenting the accounts receivable at estimated
net realizable value.
This method is also a statement of financial position approach because it favors the statement
of financial position.
Percent of sales method
The amount of sales for the year is multiplied by a certain rate to get the doubtful accounts
expense. The rate may be applied on credit sales or total sales.
When this method is used, proper matching is achieved because doubtful accounts are
directly related to sales from which they arise, and are reported in the same year of sale.
Thus, this method is an income statement approach because it favors the income statement.
9. How would you classify doubtful accounts in the income statement?
1. Distribution cost — If the granting of credit and collection of accounts are under the
charge of the sales manager, doubtful accounts shall be considered as distribution cost.
2. Administrative expense - If the granting of credit and collection of accounts are under the
charge of an officer other than sales manager, doubtful accounts shall be considered as
administrative expense.
In the absence of any contrary statement, doubtful accounts shall be classified as

administrative expense.
10. Explain impairment of accounts receivable.
Many entities record allowance for doubtful accounts using aging, percentage of accounts
receivable and percentage of sales. The approach is relatively direct and uncomplicated.
Actually, accounts receivable considered uncollectible are deemed to be "impaired".

PFRS 9, paragraph 5.2.2, provides that an entity shall apply the impairment requirements in
paragraphs 58 to 65 of PAS 39 for financial asset measured at amortized cost.
PAS 39, paragraph 58, provides that an entity shall assess at every year-end whether there
is an objective evidence that a financial asset or group of financial assets is impaired.
Paragraph 59 provides that a financial asset or group of financial assets is impaired if there
is objective evidence of impairment as a result of one or more "loss events" having an impact
on the estimated cash flows of the financial asset that can be measured reliably.
In other words, an account receivable is considered impaired if a loss event indicates a

"negative effect" on the estimated cash flows to be received from the customer.
11. What are the "loss events" that would indicate impairment of accounts receivable?
Paragraph 59 provides that the following loss events may indicate evidence of impairment of
accounts receivable:
a. Significant financial difficulty of the customer.

b. Breach of contract, such as default in payment of principal and interest.
c. Restructuring or renegotiation of the terms of the accounts receivable due to the financial
distress of the customer.
d. Measurable decrease in the estimated cash flows from a group of accounts receivable,
although the decrease cannot yet be identified with individual accounts receivable.
12. Explain the assessment whether accounts receivable should be considered impaired.
PAS 39, paragraph 64, provides the following detailed guideline in assessing whether
accounts receivable should be considered impaired:
a. Individually significant accounts receivable should be considered for impairment
separately and if impaired, the impairment loss is recognized.
b. Accounts receivable not individually significant should be collectively assessed for
impairment.
c. Accounts receivable not considered impaired should be included with other accounts
receivable with similar credit-risk characteristics and collectively assessed for
impairment.

Notes Receivable
NOTES RECEIVABLE
1. Define notes receivable.
Notes receivable are claims supported by formal promises to pay usually in the form of notes.
A negotiable promissory note is an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand or at a fixed determinable future
time a sum certain in money to order or to bearer.
Simply stated, a promissory note is a written contract in which one person, known as the
maker, promises to pay another person, known as the payee, a definite sum of money.
The note may be payable on demand or at a definite future date.
Standing alone, the term "notes receivable" represents only claims arising from sale of
merchandise or service in the ordinary course of business.
Thus, notes received from officers, employees, shareholders and affiliates shall be
designated separately.
2. Explain the treatment of "dishonored notes".
When a promissory note matures and is not paid, it is said to be dishonored.
Theoretically, dishonored notes shall be removed from the notes receivable account and
transferred to accounts receivable at an amount to include, if any, interest and other charges.
The journal entry to record dishonored notes is:

Accounts receivable xx
Notes receivable xx
Interest income xx
Such approach is defended on the ground that the overdue note has lost part of its status as
a negotiable instrument and really represents only an ordinary claim against the maker.
3. Explain the initial measurement of notes receivable.
Conceptually, notes receivable shall be measured initially at present value.
Essay Questions – Notes Receivable Page 7

The present value is the sum of all future cash flows discounted using the prevailing market
rate of interest for similar notes.
The prevailing market rate of interest is actually the effective interest rate.
However, short-term notes receivable are measured at face value.
Cash flows relating to short-term notes receivable are not discounted because the effect of
discounting is usually not material.
The initial measurement of long-term notes depends on whether the notes are interest-
bearing or noninterest-bearing
Interest bearing long-term notes are measured at face value which is actually the present
value upon issuance.
Noninterest-bearing long-term notes are measured at present value which is the discounted
value of the future cash flows using the effective interest rate.
Actually, the term "noninterest-bearing" is a misnomer because all notes implicitly contain
interest.
It is simply a case of the "interest being included in the face amount" rather than being stated
as a separate rate.
4. Explain the subsequent measurement of notes receivable.
Subsequent to initial recognition, long-term notes receivable shall be measured at amortized

cost using the effective interest method.
The "amortized cost" is the amount at which the note receivable is measured initially minus
principal repayment, plus or minus the cumulative amortization of any difference between the
initial carrying amount and the principal maturity amount minus reduction for impairment or
uncollectibility.
For long-term noninterest-bearing notes receivable, the amortized cost is the present value
plus amortization of the discount, or the face value minus the unamortized unearned interest
income.
Essay Questions – Notes Receivable Page 8

Loans Receivable
LOAN RECEIVABLE
Essay Questions
1. Define loan receivable.
A loan receivable is a financial asset arising from a loan granted by a bank or other financial
institution to a borrower or client. The term of the loan may be short-term but in most cases,
the repayment periods cover several years.
2. Explain the initial- measurement of loan receivable.
At initial recognition, an entity shall measure a loan receivable at fair value plus transaction
costs that are directly attributable to the acquisition of the financial asset.
The fair value of the loan receivable at initial recognition is normally the transaction price,
meaning, the amount of the loan granted.
Transaction costs that are directly attributable to the loan receivable include origination fees.
Direct origination costs should be included in the initial measurement of the loan receivable.
3. Explain the subsequent measurement of loan receivable.
PFRS 9, paragraph 4.1.2, provides that if the business model in managing financial asset is
to collect contractual cash flows on specified dates and the contractual cash flows are solely
payments of principal and interest, the financial asset shall be measured at amortized cost.
Accordingly, a loan receivable is subsequently measured at amortized cost using the effective
interest method.
The "amortized cost" is the amount at which the receivable is measured initially minus
principal repayment, plus or minus the cumulative amortization of any difference between the
initial amount recognized and the principal maturity amount, minus reduction for impairment
or uncollectibility.
4. Explain "origination fees" in relation to a loan receivable.
Lending activities usually precede the actual disbursement of funds and generally include
efforts to identify and attract potential borrowers and to originate a loan.
Essay Questions – Loans Receivable Page 9

The fees charged by the bank against the borrower for the creation of the loan are known as
"origination fees".
Origination fees include compensation for activities such as evaluating the borrower's
financial condition, evaluating guarantees, collateral and other security, negotiating the terms
of the loan, preparing and processing documents and closing the loan transaction.
5. What is the treatment of origination fees?
The origination fees received from borrower are recognized as unearned interest income and
amortized over the term of the loan.
If the origination fees are not chargeable against the borrower, the fees are known as "direct
origination costs".
The direct origination costs are deferred and also amortized over the term of the loan.
Preferably, the direct origination costs are offset directly against any origination fees received.
If the origination fees received exceed the direct origination costs, the difference is unearned
interest income and the amortization will increase interest income.
If the direct origination costs exceed the origination fees received, the difference is charged
to "direct origination costs" and the amortization will decrease interest income.
Accordingly, the origination fees received and the direct origination Costs are included in the
measurement of the loan receivable.
6. Explain impairment of loan receivable.
PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 58, provides that an entity
shall assess at every end of reporting period whether there is objective evidence that a
financial asset or group of financial assets is impaired.
If such evidence exists, the entity shall determine and recognize the amount of any
impairment loss.
Objective evidence of impairment may result from the following "loss events" occurring after
the initial recognition of the financial asset:
Essay Questions – Loans Receivable Page 10

Receivable Financing
1. Significant financial difficulty of the issuer or obligor.

2. Breach of contract, such as default or delinquency in interest or principal payment.
3. Debt restructuring
The lender, for economic or legal reason relating to the borrower's financial difficulty,
grants to the borrower a concession that the lender would not otherwise consider.
4. Probability that the borrower will enter bankruptcy or other financial reorganization.
5. The disappearance of an active market for the financial asset because of financial
difficulty.
6. Measurable decrease in the estimated future cash flows from a group of financial assets
since the initial recognition, although the decrease cannot yet be identified with the
individual financial assets in the group.
7. Explain the measurement of impairment loss on loan receivable.
PFRS 9, paragraph 5.2.2, provides that if there is evidence that an impairment loss on loan
receivable carried at amortized cost has been incurred, the amount of the loss is measured
as the "difference between the carrying amount of the loan receivable and the present value
of estimated future cash flows discounted at the original effective rate of the loan."
The carrying amount of the loan receivable shall be reduced either directly or through the use
of an allowance account.
The amount of the impairment loss shall be recognized in profit or loss.
RECEIVABLE FINANCING
Essay Questions
1. Explain receivable financing.
Receivable financing is the financial flexibility or capability of an entity to raise money out of
the receivables.
The common forms of receivable financing are pledge, assignment, factoring of accounts
receivable and discounting of notes receivable.
2. Explain pledge of accounts receivable.
When loans are obtained from the bank or any lending institution, the accounts receivable
may be pledged as collateral security for the payment of the loan.
Essay Questions – Receivable Financing Page 11

Normally, the borrowing entity makes the collections of the pledged accounts but may be
required to turn over the collections to the bank in satisfaction for the loan.
No complex problems are involved in this form of financing except the accounting for the
loan. The loan is recorded by debiting cash and discount on note payable if loan is
discounted, and crediting note payable.
The subsequent payment of the loan is recorded by debiting note payable and crediting cash.
With respect to the pledged accounts, no' entry would be necessary. It is sufficient that
disclosure is made in a note to financial statement.
3. Explain assignment of accounts receivable.
In substance, assignment of accounts receivable means that a borrower called the assignor
transfers its rights in some of its accounts receivable to a lender called the assignee in
consideration for a loan.
Actually, assignment is a more formal type of pledging of accounts receivable. It is evidenced

by a financing agreement and a promissory note both of which the assignor signs.
However, pledging is general because all accounts receivable serve as collateral security for
the loan.
On the other hand, assignment is specific because specific accounts receivable serve as
collateral security for the loan.
4. Explain factoring of accounts receivable.
Factoring is a sale of accounts receivable on a without recourse, notification basis. In a

factoring arrangement, an entity sells its accounts receivable to a bank or finance entity called
a factor.
Accordingly, a gain or loss is recognized for the difference between the proceeds received
and the carrying amount of the accounts receivable factored.
Factoring differs from an assignment in that an entity actually transfers ownership of the
accounts receivable to the factor.
Thus, the factor assumes responsibility for uncollectible factored accounts. In assignment,
the assignor retains ownership of the accounts assigned.

Because of the nature of the transaction, the customers whose accounts are factored are
notified and required to pay directly to the factor.
The factor has then the responsibility of keeping the receivable records and collecting the
accounts.
5. Explain discounting of note receivable.
Legally, discounting is a transfer or endorsement of a promissory note by the payee in favor

of another party, usually a bank.
Thus, to discount the note, the payee must endorse it.
The payee legally becomes an endorser and the bank becomes an endorsee.
Endorsement may be with recourse which means that the endorser shall pay the endorsee if
the maker dishonors the note. This is the contingent liability of the endorser.
Endorsement may be without recourse which means that the endorser avoids future liability
even if the maker refuses to pay the endorsee on the date of maturity.
In the absence of contrary statement, endorsement is assumed to be with recourse.
6. Define the following terms in connection with discounting, of note receivable:

1. Net proceeds
2. Maturity value
3. Discount
1. Net proceeds refer to the discounted value of the note received by the endorser from the
endorsee.
The formula is as follows:
Net proceeds = Maturity value minus Discount
2. Maturity value is the amount due on the note at the date of maturity.
Principal plus interest equals the maturity value.
3. Discount is the amount of interest deducted by the bank in advance.

Discount is equal to maturity value times discount rate times discount period.
Discount rate is the rate used by the bank in computing the discount.
Discount period is the period of time from date of discounting to maturity date. It is the
unexpired term of the note.
7. Explain the treatment of accounts receivable pledged.
Accounts receivable pledged or hypothecated against borrowing should still be included in

total accounts receivable but the amount of accounts receivable involved should be properly
disclosed.
8. Explain the treatment of accounts receivable assigned.

Accounts receivable assigned should also be included in total accounts receivable but
disclosure is necessary.
The reason is that assignment of accounts receivable is a secured borrowing and not a sale
of accounts receivable.
The assignor should disclose its "equity in the assigned accounts" which is equal to the
accounts receivable assigned minus note payable to the bank.
9. Explain the treatment of accounts receivable factored.
Accounts receivable factored should be excluded from total accounts receivable.
The reason is that factoring is an absolute sale of accounts receivable and therefore the
accounts receivable factored should be derecognized.
If the factor withholds a certain portion or percentage of the accounts receivable purchased,
the portion retained by the purchaser should be included in receivables by the seller.
The amount withheld by the factor is known as "factor's holdback" which is actually an amount
due from the factor.
10. Explain the treatment of notes receivable discounted.
Notes receivable discounted without recourse shall be excluded from total notes receivable
without separate disclosure.

Notes receivable discounted with recourse shall be excluded from total notes receivable but
the contingent liability shall be appropriately disclosed.
Some believe that if a note receivable is discounted with recourse, the transaction shall be
accounted for as a secured borrowing.
Accordingly, an entity shall not derecognize the note receivable discounted but instead shall
record an accounting liability for an amount equal to the face amount of the note discounted.

MCQ – Theories: Accounts Receivable

Measurement
1. All of the following are problems associated with the measurement of accounts receivable,
except
A. Returns
B. Allowances granted
C. Uncollectible accounts
D. Cash discounts under the net method FA © 2014
2. Accounts receivable shall be recognized initially at

A. Current value C. Face value
B. Discounted value D. Maturity value TOA © 2013
3. If the ideal measure of short-term receivables in the statement of financial position is the
discounted amount 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. The amount of the discount is not material.
B. Most receivables can be sold to a bank or factor.
C. Most short-term receivables are not interest-bearing.
D. The allowance for doubtful accounts includes a discount element. FA © 2014
Presentation & disclosure

4. Which of the following should be recorded in accounts receivable?
A. Dividends receivable C. Receivables from subsidiaries
B. Receivables from officers D. Sales on account FA © 2014
5. Trade receivables are classified as current assets if they are reasonably expected to be
collected
A. Within one year.
B. Within the normal operating cycle.
C. Within one year or within the operating cycle, whichever is longer.
D. Within one year or within the operating cycle, whichever is shorter. FA © 2014
6. Where the operating cycle extends beyond one year because of normal credit terms as in
the case of installment sales of household appliances
A. The receivables are not recognized.
B. The entire receivables are shown as noncurrent assets.
C. The portion due in one year is shown as current and the balance as noncurrent.
D. It is proper to classify the entire receivables as current assets with disclosure of the
amount not realizable within one year, if material. FA © 2014
MCQ – Theory: Accounts Receivable Page 16

Accounts Receivable
7. Nontrade receivables are classified as current assets only if they are reasonably expected to
be realized in cash
A. Within the normal operating cycle.
B. Within one year, the length of the operating cycle notwithstanding
C. Within one year or within the operating cycle, whichever is longer.
D. Within one year or within the operating cycle, whichever is shorter. FA © 2014
8. Which of the following statements is true in relation to presentation of receivables in the

statement of financial position?
A. Nontrade receivables are presented as noncurrent assets
B. Trade receivables and nontrade receivables are shown separately
C. Trade accounts receivable and trade notes receivable shall be presented separately
D. Trade receivables and nontrade receivables which are currently collectible shall be
presented as one line item called "trade and other receivables" TOA © 2013
9. Long-term notes receivable which nominally bear no interest or an interest which is

unreasonably low shall be recognized initially at
A. Current value C. Maturity value
B. Face value D. Present value TOA © 2013
10. In the case of long-term installments receivable (real estate installment sales) where a major
portion of the receivables will be collected beyond the normal operating cycle
A. The entire receivables are shown as noncurrent.
B. Only the portion currently due is shown as current and the balance as noncurrent.
C. The entire receivables are shown as current with disclosure of the amount not currently
due.
D. The entire receivables are shown as current without disclosure of the amount not
currently due. FA © 2014
11. Credit balances in accounts receivable shall be classified as

A. Current liabilities C. Long term liabilities
B. Deduction from accounts receivable D. Part of accounts payable FA © 2014
12. Receivables from subsidiaries shall be classified as

A. Current assets
B. Noncurrent assets
C. Partly current and partly noncurrent
D. Either as current or noncurrent depending on the expectation of realizing them within
one year or over one year FA © 2014

13. All of the following are required when classifying receivables, except
A. Disclose any receivables pledged as collateral.
B. Indicate the receivables classified as current and noncurrent.
C. Disclose all significant concentrations of credit risk arising from receivables.
D. All of these are required. FA © 2014
Bad debts
14. Which of the following statements is incorrect regarding how the impairment assessment of
accounts receivable is to be performed?
A. Any accounts receivable not individually assessed should be collectively assessed for
impairment.
B. Not individually significant accounts receivable should be assessed individually and if
impaired, the impairment loss is recognized.
C. Individually significant accounts receivable should be considered for impairment
D. Any account 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. TOA © 2013
Direct write-off method

15. Which of the following is not permitted in accounting for uncollectible accounts receivable?
A. Direct writeoff method
B. Percentage of sales, allowance method
D. Percentage of accounts receivable, allowance method
C. All of the choices are acceptable under PFRS FA © 2014
16. Which of the following methods of determining bad debt expense does not match expense
and revenue?
A. Charging bad debts as accounts are written off as uncollectible
B. Charging bad debts with a percentage of sales under the allowance method
C. Charging bad debts with a percentage of accounts receivable under the allowance
method
D. Charging bad debts with an amount derived from aging the accounts receivable under
the allowance method FA © 2014
17. Which of the following is not acceptable in estimating uncollectible accounts receivable?
A. The estimate of uncollectible accounts is based on an aging schedule.
B. The estimate of uncollectible accounts is based on a percentage of sales for the period.
C. The estimate of uncollectible accounts is based on a percentage of the accounts
receivable at the end of a period.

Accounts Receivable
D. No estimate of uncollectible accounts is made but accounts are written off when it is
determined they cannot be collected. FA © 2014
18. When the direct writeoff method of recognizing bad debt expense is used, the entry to write
off a specific customer account would
A. Increase net income
B. Have no effect on net income
C. Increase accounts receivable and increase net income
D. Decrease accounts receivable and decrease net income FA © 2014
Allowance method
19. Which method of recording bad debt loss is consistent with accrual accounting?
A. Allowance method C. Percent of accounts receivable method
B. Direct writeoff method D. Percent of sales method FA © 2014
20. Which accounting principle primarily supports the use of allowance for doubtful accounts?
A. Conservatism C. Full disclosure principle
B. Continuity principle D. Matching principle FA © 2014
21. Why is the allowance method preferred over the direct writeoff method of accounting for bad
debts?
A. Estimates are used.
B. The allowance method is used for tax purposes.
C. Improved matching of bad debt expense with revenue is achieved. FA © 2014
D. Determining worthless accounts under direct writeoff method is difficult to do.
22. When the allowance method of recognizing bad debt expense is used, the allowance for
doubtful accounts would decrease when
A. Specific account receivable is collected
B. Account previously written off is collected
C. Specific uncollectible account is written off
D. Account previously written off becomes collectible TOA © 2013
23. When the allowance method of recognizing bad debt expense is used, the journal entry to
record the writeoff of a specific uncollectible account would decrease
A. Net income
B. Working capital
C. Allowance for doubtful accounts
D. Net realizable value of accounts receivable FA © 2014

24. An entity uses the allowance method for recognizing doubtful accounts. The journal entry to
record the writeoff of a specific uncollectible account
A. Affects neither net income nor working capital
B. Decreases both net income and working capital
C. Affects neither net income nor accounts receivable
D. Decreases both net income and accounts receivable FA © 2014
25. When the allowance method of recognizing doubtful accounts is used, the entry to record the
writeoff of a specific account would
A. Increase both accounts receivable and the allowance for doubtful accounts
B. Decrease both accounts receivable and the allowance for doubtful accounts
C. Decrease accounts receivable and increase allowance for doubtful accounts FA © 2014
D. Increase accounts receivable and decrease the allowance for doubtful accounts
26. A debit balance in the allowance for doubtful accounts

A. Should never occur.
B. May occur before the end-of-period adjustment for uncollectible accounts.
C. May exist even after the end-of-period adjustment for uncollectible accounts.
D. Is always the result of management not providing a large enough allowance in order to
manage earnings. FA © 2014
27. Which of the following concepts relates to the allowance method in accounting for
uncollectible accounts receivable?
A. Bad debt expense is an estimate that is based only on aging.
B. Bad debt expense is based on the actual amount determined to be uncollectible.
C. Bad debt expense is an estimate that is based on historical and prospective information.
D. Bad debt expense is management determination of which accounts will be sent to the
attorney for collection. FA © 2014
% of credit sales method

28. A method of estimating bad debts that focuses on the income statement rather than the
statement of financial position is the allowance method based on
A. Credit sales
B. Direct writeoff
C. Aging the trade accounts receivable
D. The balance in the trade accounts receivable FA © 2014

Accounts Receivable
29. The estimate of uncollectible accounts receivable based on a percentage of sales

A. Is only acceptable for tax purposes.
B. Emphasizes measurement of total assets.
C. Emphasizes measurement of bad debt expense. FA © 2014
D. Emphasizes measurement of the net realizable value of accounts receivable.
30. Which of the following methods of determining bad debt expense most closely matches
expense to revenue?
A. Charging bad debts with a percentage of sales for that period.
B. Charging bad debts only as accounts are written off as uncollectible. FA © 2014
C. Estimating the allowance for doubtful accounts by aging the accounts receivable.
D. Estimating the allowance for doubtful accounts as a percentage of accounts receivable.
% of A/R method
31. The advantage of relating an entity's bad debt experience to accounts receivable is that this
approach
A. Relates bad debt expense to the period of sale.
B. Makes estimates of uncollectible accounts unnecessary.
C. Is the only generally accepted method for measuring accounts receivable.
D. Gives a reasonably accurate measurement of receivables in the statement of financial
position. FA © 2014
Aging method
32. A method of estimating uncollectible accounts that emphasizes asset valuation rather than
income measurement is the allowance method based on
A. Gross sales
B. Direct writeoff
C. Aging the receivables
D. Credit sales less returns and allowances FA © 2014
33. When an accounts receivable aging schedule is prepared, a series of computations is made
to determine the estimated uncollectible accounts. The resulting amount from this aging
schedule
A. Is the amount of doubtful accounts expense for the year
B. Is the amount of desired credit balance of the allowance for doubtful accounts to be
reported at year-end
C. Is the amount that should be added to the beginning allowance for doubtful accounts to
get the doubtful accounts expense for the year
D. When added to the total accounts written off during the year is the desired credit balance
of the allowance for doubtful accounts at year-end FA © 2014

Journal entries
34. When the allowance method of recognizing bad debt expense is used, the entry to record the
writeoff of a specific uncollectible account would decrease
A. Net income
B. Working capital
C. Allowance for doubtful accounts
D. Net realizable value of accounts receivable TOA © 2013
35. When the allowance method of recognizing uncollectible accounts is used, the entry to record
the writeoff of a specific account would
A. Decrease both accounts receivable and net income. TOA © 2013
B. Increase the allowance for uncollectible accounts and decrease net income.
C. Decrease both accounts receivable and the allowance for Uncollectible accounts.
D. Decrease accounts receivable and increase the allowance for uncollectible accounts.
36. The entry debiting accounts receivable and crediting allowance for doubtful accounts would
be made when
A. A customer defaults on its account.
B. A customer pays its account balance.
C. Estimated uncollectible receivables are too low.
D. A previously defaulted customer pays its outstanding balance. FA © 2014
Effect of transactions
37. When a specific customer's account receivable is written off as uncollectible, what will be the
effect on net income under the allowance and direct writeoff method?
A. No effect under both allowance method and direct writeoff method FA © 2014
B. Decrease under both allowance method and direct writeoff method
C. No effect under allowance method and decrease under direct writeoff method
D. Decrease under allowance method and no effect under direct writeoff method
38. When an entity uses the allowance method for recognizing uncollectible accounts, the entry
to record the writeoff of a specific uncollectible account
A. Affects neither net income nor working capital
B. Decreases both net income and working capital
C. Affects neither net income nor accounts receivable
D. Decreases both net income and accounts receivable TOA © 2013

Accounts Receivable
39. When the allowance method of recognizing bad debt expense is used, the entries at the time
of collection of an account previously written off would
A. Increase net income
B. Have no effect on net income
C. Decrease the allowance for doubtful accounts
D. Have no effect on the allowance for doubtful accounts FA © 2014
40. An entity uses the allowance method to recognize doubtful accounts expense. What is the
effect of a collection of an account previously written off? FA © 2014
A. No effect on both allowance for doubtful accounts and doubtful accounts expense
B. Increase in allowance for doubtful accounts and no effect on doubtful accounts expense
C. Increase in allowance for doubtful accounts and decrease in doubtful accounts expense
D. No effect on allowance for doubtful accounts and decrease in doubtful accounts expense
Gross method & net method

41. Of the methods to record cash discounts related to accounts receivable, which is more
theoretically correct?
A. Net method
B. Gross method
C. Allowance method
D. All three methods are theoretically correct FA © 2014
Impairment of receivables
42. Which of the following statements is incorrect regarding how the impairment assessment is
to be performed?
A. Any accounts receivable not individually assessed should be collectively assessed for
impairment.
B. Not individually significant accounts receivable should be assessed individually and if
impaired, the impairment loss is recognized.
C. Individually significant accounts receivable should be considered for impairment
D. Any account 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. FA © 2014

Comprehensive
43. Which of the following statements is incorrect regarding receivables?
A. Receivables are financial assets.
B. Receivables are financial instruments.
C. Accounts receivable are written promises of the purchaser to pay for goods or services.
D. Nontrade receivables are may be reported as separate items in the statement of financial
position. FA © 2014
MCQ – Theory: Short-term Notes Receivable

Basic concepts
1. Accounting for the interest in a noninterest bearing note receivable is an example of what
aspect of accounting theory?
A. Form over substance C. Substance over form
B. Matching D. Verifiability FA © 2014
2. 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 bank prime interest rate FA © 2014
Initial recognition
3. On July 1 of the current year, an entity received a one-year note receivable bearing interest
at the market rate. The face amount of the note receivable and the entire amount of the
interest are due in one year. When the note receivable was recorded on July 1, which of the
following was debited?
A. Interest receivable
B. Unearned discount on note receivable
C. Both interest receivable and unearned discount on note receivable
D. Neither interest receivable nor unearned discount on note receivable FA © 2014
4. On August 15 of the current year, an entity sold goods for which it received a note bearing
the market rate of interest on that date. The four-month note was dated July 15 of the current
year. Note principal, together with all interest, is due November 15 of the current year. When
the note was recorded on August 15, which of the following accounts increased?
A. Interest receivable C. Prepaid interest
B. Interest revenue D. Unearned discount FA © 2014
MCQ – Theory: Notes Receivable Page 24

Notes Receivable
Interest receivable
interest are due on June 30 of next year. On December 31 of the current year, the entity
should report in the statement of financial position
A. No interest receivable
B. A deferred credit for interest applicable to next year
C. Interest receivable for the interest accruing this year FA © 2014
D. Interest receivable for the entire amount of the interest due on June 30 of next year
6. On October 1 of the current year, an entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire amount of
the interest are due on September 30 of next year. The interest receivable on December 31
of the current year would consist of an amount representing
A. Nine months of accrued interest income
B. Three months of accrued interest income
C. Twelve months of accrued interest income FA © 2014
D. The excess on October 1 of the present value of the  note receivable over its face
amount
interest are due in one year. The interest receivable account would show a balance on [1]
A. July 1 and December 31 C. December 31 but not July 1 FA © 2014
B. July 1 but not December 31 D. Neither July 1 nor December 31
interest are due on June 30 of next year. On December 31 of the current year, the entity
should report in the statement of financial position [2]
A. No interest receivable
B. A deferred credit for interest applicable to next year
C. Interest receivable for the interest accruing in the  current year TOA © 2013
D. Interest receivable for the entire amount of the interest due on June 30 of next year
Journal entries
9. On August 15, an entity sold goods for which it received a note bearing the market rate of
interest on that date. The four-month note was dated July 15. Note principal, together with all
interest, is due November 15. When the note was recorded on August 15, which of the

following accounts increased? [3]

A. Interest receivable C. Prepaid interest
B. Interest revenue D. Unearned discount TOA © 2013
interest are due in one year. When the note receivable was recorded on July 1, which of the
following was debited? [4]
I. Interest receivable
II. Unearned discount on note receivable
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013
MCQ – Theory: Long-term Notes Receivable

Interest revenue
11 An entity received a seven-year zero interest-bearing note on February 1, 2013 in exchange
for property sold. There was no established exchange price for the property and the note has
no ready market. The prevailing rate of interest for a note of this type was 7% on February 1,
2013, 6% on December 31, 2013, 8% on February 1, 2014, and 9% on December 31, 2014.
What interest rate should be used to calculate the interest revenue from the transaction for
the years ended December 31, 2013 and 2014, respectively? [5]
A. 0% and 0% C. 7% and 7%
B. 6% and 9% D. 7% and 9% FA © 2014
Interest receivable
12. On July 1 of the current year, an entity obtained a two-year 8% note receivable for services
rendered. At that time, the market rate of interest was 10%. The face amount of the note and
the entire amount of interest are due on the date of maturity. Interest receivable on December
31 of the current year is FA © 2014
A. 4% of the face amount of the note C. 5% of the face amount of the note
B. 4% of the present value of the note D. 5% of the present value of the note
Installment notes receivable – carrying amount

13. An entity uses the installment sales method to recognize revenue. Customers pay the
installment notes in 24 equal monthly amounts which include 12% interest. What is the
installment notes receivable balance six months after the sale?
A. 75% of the original sales price.
B. Less than 75% of the original sales price.
C. The present value of the remaining monthly payments  discounted at 12%. FA © 2014
D. Less than the present value of the remaining monthly  payments discounted at 12%.

Loans Receivable
MCQ – Theory: Loan Receivable

Initial measurement
1. A loan receivable is initially measured at
A. Fair value C. Fair value plus transaction cost
B. Fair value minus transaction cost D. Present value FA © 2014
Carrying amount
2. In calculating the carrying amount of loan receivable, the lender adds to the principal
I. Direct origination cost
II. Indirect origination cost
III. Origination fee charged to borrower
A. I only C. I and III only
B. I and II only D. I, II and III TOA © 2013
3. In calculating the carrying amount of loan receivable, the lender adds to the principal
A. Interest incurred by the borrower
B. Loan origination fee charged to the borrower
C. Direct loan origination cost incurred by the lender
D. Indirect loan origination cost incurred by the lender FA © 2014
4. Subsequent to initial recognition, a loan receivable shall be measured at

A. Cost
B. Fair value
C. Amortized cost using the straight line method
D. Amortized cost using the effective interest method FA © 2014
5. The "amortized cost" of loan receivable is the amount at which

A. The loan receivable is measured initially.
B. The loan receivable is measured initially minus  principal repayment.
C. The loan receivable is measured initially minus  principal repayment, plus or minus the
cumulative  amortization of any difference between the initial  amount recognized and
the principal maturity  amount.
D. The loan receivable is measured initially minus  principal repayment, plus or minus the
cumulative  amortization of any difference between the initial  amount recognized and
the principal maturity  amount, minus reduction for impairment. TOA © 2013
MCQ – Theory: Loans Receivable Page 27

Impairment
6. Which of the following is not an objective evidence of impairment of a financial asset?
A. Significant financial difficulty of the issuer. FA © 2014
B. A decline in the fair value of the financial asset below  the previous carrying amount.
C. A breach of contract, such as a default or delinquency  in interest or principal payment.
D. The lender, for economic or legal reason relating to  the borrower's financial difficulty,
grants to the  borrower a concession that the lender would not  otherwise consider.
7. If there is evidence that an impairment loss on loan receivable has been incurred, the loss is
equal to the
A. Excess of the principal amount of the loan over the  carrying amount.
B. Excess of the carrying amount of the loan over the  principal amount of the loan.
C. Excess of the present value of cash flows related to  the loan over the carrying amount
of the loan  receivable.
D. Excess of the carrying amount of the loan receivable  over the present value of the cash
flows related to  the loan. FA © 2014
MCQ – Theory: Receivable Financing

Basic concepts
1. Which of the following is a method to generate cash from  accounts receivable?
I. Assignment
II. Factoring
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013
2. Which of the following is a method to generate cash from accounts receivable?

A. Factoring
B. Assignment
C. Assignment and factoring
D. Assignment, factoring and discounting FA © 2014
3. The practice of realizing cash from trade receivables prior  to maturity date is widespread. A
term which is not  associated with this practice is
A. Defalcation C. Hypothecation
B. Factoring D. Pledging FA © 2014
MCQ – Theory: Receivable Financing Page 28

Pledged receivables
4. If accounts receivable are pledged against borrowing, the amount of accounts receivable
pledged shall be
A. Included in total receivables with disclosure
B. Excluded from total receivables with disclosure
C. Included in total receivables without disclosure
D. Excluded from total receivables without disclosure FA © 2014
5. If receivables are hypothecated against borrowings, the amount of receivables involved

should be
A. Disclosed in the notes
B. Excluded from the total receivables with disclosure
C. Excluded from the total receivables with no disclosure
D. Excluded from the total receivables and a gain or loss is  recognized between the face
amount and the amount of  borrowings FA © 2014
Assignment
6. It is a financing arrangement whereby one party formally transfers its rights to accounts
receivable to another party in consideration for a loan.
A. Assignment C. Factoring
B. Discounting D. Pledge FA © 2014
Factoring
7. It is a financing arrangement that is usually done on a "without recourse, notification basis".
A. Assignment C. Factoring
B. Discounting D. Pledge FA © 2014
8. When the accounts receivable of an entity are sold outright to a bank which normally buys
accounts receivable, the accounts receivable have been
A. Assigned C. Factored
B. Collateralized D. Pledged FA © 2014
9. Which of the following is used to account for probable sales discounts, sales returns and
sales allowances?
A. Due from factor
B. Recourse liability
C. Both due from factor and recourse liability
D. Neither due from factor nor recourse liability FA © 2014

10. When accounts 'receivable are factored

A. Payable to factor is credited
B. Accounts receivable shall be credited
C. A contingent liability is ordinarily created
D. The factoring is accounted for as a borrowing TOA © 2013
11. It is a predetermined amount withheld by a factor as a protection against customer returns,

allowances and other special adjustments.
A. Equity in assigned accounts C. Loss on factoring
B. Factor's holdback D. Service charge FA © 2014
12. Why would an entity sell accounts receivable to another entity?

A. To limit its legal liability
B. To comply with customer agreements
C. To accelerate access to amount collected
D. To improve the quality of its credit granting process FA © 2014
13. All but one of the following are required before a transfer of accounts receivable can be
recorded as a sale.
A. The transferor maintains continuing involvement.
B. The transferee can pledge or sell the transferred  accounts receivable.
C. The transferred accounts receivable are beyond the  reach of the transferor and the
creditors.
D. The transferor has not kept effective control over the  transferred accounts receivable
through a repurchase  agreement. TOA © 2013
Without recourse
14. An entity factored accounts receivable without recourse with a bank. The entity received cash
as a result of the transaction which is best described as
A. Bank loan collateralized by the entity's accounts  receivable.
B. Bank loan to be repaid by the proceeds from the entity's  accounts receivable.
C. Sale of the entity's accounts receivable to the bank, with risk of uncollectible accounts
retained by the entity.
D. Sale of the entity's accounts receivable to the bank, with  the risk of uncollectible
accounts transferred to the bank. FA © 2014

15. Which of the following statements is true when accounts receivable are factored without
recourse?
A. The financing cost should be recognized ratably over  the collection period.
B. The accounts receivable are used as collateral for a  promissory note issued to the
factor.
C. The factor assumes the risk of collectibility and absorbs  any credit losses in collecting
the accounts receivable.
D. The transaction may be accounted for either as secured  borrowing or sale, depending
upon the substance of  transaction. FA © 2014
Discounting notes receivable

16. A 90-day 15% interest-bearing note receivable is sold to a bank with recourse after being
held for 30 days. The proceeds are calculated using a 12% interest rate. The note receivable
has been
A. Discounted C. Discounted and pledged
B. Discounted and assigned D. Factored TOA © 2013
17. After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted
at a bank at 15%. What is the formula for the proceeds received from the bank? TOA ©
2013
A. Face value less the discount at 12% C. Maturity value less the discount at 12%
B. Face value less the discount at 15% D. Maturity value less the discount at 15%
With recourse
18. If a note receivable is discounted with recourse
A. Note receivable must be credited.
B. A contingent liability does not exist.
C. Note receivable discounted is credited.
D. Liability for note receivable discounted is credited. TOA © 2013
19. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the
date of the discounting transaction, the note receivable discounted account should be
A. Increased by the face amount of the note
B. Decreased by the face amount of the note
C. Increased by the proceeds from the discounting  transaction
D. Decreased by the proceeds from the discounting  transaction TOA © 2013

20. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. The note
receivable discounted account was appropriately credited. The note receivable discounted
account should be reported as
A. Liability account for the face amount of the note
B. Contra asset account for the face amount of the note
C. Liability account for the proceeds from the discounting  transaction
D. Contra asset account for the proceeds from the  discounting transaction TOA © 2013
Without recourse
21. If a note receivable is discounted without recourse
A. Note receivable shall be credited
B. Liability for note receivable discounted shall be credited
C. The transaction shall be accounted for as a secured  borrowing as opposed to a sale
D. The contingent liability may be disclosed in either a  contra account to note receivable
or in a note to the  financial statements TOA © 2013
22. A 90-day 15% interest-bearing note receivable is sold to a bank without recourse after being
held for 60 days. The proceeds are calculated using a 12% interest rate. The amount credited
to note receivable at the date of the discounting transaction would be TOA © 2013
A. Less than the face value of the note C. The maturity value of the note
B. The face value of the note D. The same as the cash proceeds
23. Note receivable discounted without recourse shall be

A. Included in total receivables with disclosure of contingent liability
B. Included in total receivables without disclosure of contingent liability
C. Excluded from total receivables with disclosure of contingent liability
D. Excluded from total receivables without disclosure of  contingent liability TOA © 2013
Transfer of financial assets

24. Which of the following is not an objective in accounting for transfer of financial asset?
A. To recognize liability when incurred.
B. To derecognize liability when extinguished.
C. To derecognize asset when control is gained.
D. To derecognize asset when control is given up. FA © 2014
25. If financial assets are exchanged for cash and other consideration but the transfer does not
meet the criteria for a sale, the transferor and the transferee should account for the
transaction as

A. Secured borrowing
B. Pledge of collateral
C. Both secured borrowing and pledge of collateral
D. Neither secured borrowing nor pledge of collateral FA © 2014
26. An entity transferred financial asset to another entity. The transfer meets the conditions to be
accounted for as a sale. The transferor should do each of the following, except
A. Recognize any gain or loss on the sale.
B. Measure the asset received and liability incurred at cost. TOA © 2013
C. Remove the asset sold from the statement of financial  position.
D. Record the asset received and liability incurred as  proceeds from the sale.
27. All but one of the following are required before a transfer of accounts receivable can be
recorded as a sale.
A. The transferor maintains continuing involvement.
B. The transferee can pledge or sell the transferred accounts receivable.
C. The transferred accounts receivable are beyond the reach of the transferor and the
creditors.
D. The transferor has not kept effective control over the transferred accounts receivable
through a repurchase agreement. FA © 2014

MCQ - Problems: Accounts Receivable

Accounts receivable - gross
6. Roxy Company provided the following information relating to accounts receivable for 2014:
Accounts receivable on January 1 1,300,000
Credit sales 5,400,000
Collections from customers, excluding recovery 4,750,000
Accounts written off 125,000
Collection of accounts written off in prior year
(customer credit was not reestablished) 25,000
Estimated uncollectible receivables per aging of receivables
at December 31 165,000
On December 31,2014, what is the balance of accounts receivable, before allowance for
doubtful accounts?
A. 1,825,000 C. 1,950,000
B. 1,850,000 D. 1,990,000 P1 © 2014
7. Faith Company provided the following information relating to current operations:

Accounts receivable, January 1 4,000,000
Accounts receivable collected 8,400,000
Cash sales 2,000,000
Inventory, January 1 4,800,000
Inventory, December 31 4,400,000
Purchases 8,000,000
Gross margin on sales 4,200,000
What is the balance of accounts receivable on December 31 ?
A. 2,000,000 C. 6,200,000
B. 4,200,000 D. 8,200,000 P1 © 2014
8. On December 31,2014, Honduras Company revealed a balance of P8,200,000 in the

accounts receivable control account. An analysis of the accounts receivable showed the
following:
Accounts known to be worthless 100,000
Advance payments to creditors on purchase orders 400,000
Advances to affiliated companies 1,000,000
Customers' accounts reporting credit balances arising from sales returns (600,000)
Interest receivable on bonds 400,000
Trade accounts receivable - unassigned 2,000,000
Subscription receivable due in 30 days ' 2,200,000
MCQ – Problems: Accounts Receivable Page 34

Accounts Receivable
Trade accounts receivable - assigned (Finance

Company's equity in assigned accounts is P500,000) 1,500,000
Trade installments receivable due 1-18 months,
including unearned finance charge of P50,000 850,000
Trade accounts receivable from officers, due currently 150,000
Trade accounts on which postdated checks are held
(no entries were made on receipt of checks) 200,000
Total 8,200,000
What amount should be reported as trade accounts receivable on December 31,2014?
A. 4,050,000 C. 4,650,000
B. 4,150,000 D. 4,700,000 P1 © 2014
Accounts receivable - net

9. Jay Company provided the following data relating to accounts receivable for 2014:
Accounts receivable, January 1 650,000
Sales returns 75,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31 per aging 110,000
What amount should be reported as net realizable value of accounts receivable on December
31, 2014?
A. 925,000 C. 1,125,000
B. 1,085,000 D. 1,200,000 P1 © 2014
10. Infra Company provided the following data for the year ended December 31,2014:
Sales on account 3,600,000
Notes received to settle accounts 400,000
Provision for doubtful accounts 90,000
Accounts receivable determined to be worthless 25,000
Purchases on account 3,900,000
Payments to creditors 3,200,000
Discounts allowed by creditors 260,000
Merchandise returned by customer 15,000
Collections received to settle accounts 2,450,000
Notes given to creditors in settlement of accounts 250,000
Merchandise returned to suppliers 70,000
Payments on notes payable 100,000

Discounts taken by customers 40,000

Collections received in settlement of notes 180,000
What is the net realizable value of accounts receivable on December 31, 2014?
A. 605,000 C. 825,000
B. 670,000 D. 890,000 P1 © 2014
11. Katherine Company provided the following information for 2014:

January 1 December-31
Accounts receivable 1,200,000
Allowance for doubtful accounts 60,000
Sales 8,000,000
Cash collected from customers 7,000,000
The cash collections included a recovery of P10,000 from a customer whose account had
been written off as worthless in prior year. During 2014, it was necessary to recognize
doubtful accounts expense of P100,000 and write off worthless customers' accounts of
P30,000. On December 1, 2014, a customer settled an account by issuing a 12%, six-month
note for P400,000. What is the net realizable value of accounts receivable on December 31,
2014?
A. 1,630,000 C. 1,670,000
B. 1,640,000 D. 1,780,000 P1 © 2014
12. Von Company provided the following data for the current year in relation to accounts
receivable:
Debits
January 1 balance after deducting credit balance of P30,000 530,000
Charge sales 5,250,000
Charge for goods out on consignment 50,000
Shareholders' subscriptions 200,000
Accounts written off but recovered 10,000
Cash paid to customer for January 1 credit balance 25,000
Goods shipped to cover January 1 credit balance 5,000
Deposit on contract 120,000
Claim against common carrier 15,000
Advances to supplier 155,000
Credits
Collections from customers, including overpayment of P50,000 5,200,000
Write-off 35,000
Merchandise returns 25,000

Accounts Receivable
Allowances to customers for shipping damages 15,000

Collection on carrier claim 10,000
Collection on subscription 50,000
What is the balance of accounts receivable on December 31 ?
A. 495,000 C. 565,000
B. 545,000 D. 595,000 P1 © 2014
13. On January 1,2013, the statement of financial position of Square Company showed accounts
receivable of P450,000 and allowance for doubtful accounts of P9,000. During the current
year, the transactions were:
 Sales on account, P4,800,000.
 Cash collections of accounts receivable totaled P3,920,000, after discounts of P80,000
were allowed for prompt payment.
 Bad accounts previously written off in prior year amounting to P5,000 were recovered.
 The entity decided to provide P26,000 for doubtful accounts at the end of the year.
 Accounts receivable of P700,000 have been pledged to a local bank on a loan of
P400,000. Collections of PI50,000 were made on such accounts receivable (not included
in the collections previously given).
What is the net realizable value of accounts receivable on December 31,2014?
A. 1,060,000 C. 1,070,000
B. 1,065,000 D. 1,074,000 P1 © 2014
14. Germany Company started business at the beginning of current year. The entity established
an allowance for doubtful accounts estimated at 5% of credit sales. During the year, the entity
wrote off P50,000 of uncollectible accounts. Further analysis showed that merchandise
purchased amounted to P9,000,000 and ending merchandise inventory was P1,500,000.
Goods were sold at 40% above cost. The total sales comprised 80% sales on account and
20% cash sales. Total collections from customers, excluding cash sales, amounted to
P6,000,000. What is net realizable value of accounts receivable at year-end?
A. 1,930,000 C. 2,350,000
B. 1,980,000 D. 2,400,000 P1 © 2014
Trade & Other Receivables

15. When examining the accounts of Brute Company, it is ascertained that balances relating to
both receivables and payables are included in a single controlling account called "receivables
control" that has a debit balance of P4,850,000. An analysis of the make-up of this account
revealed the following:

Debit Credit
Accounts receivable - customers 7,800,000
Accounts receivable - officers 500,000
Debit balances - creditors 300,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Accounts payable for merchandise 4,500,000
Credit balances in customers' accounts 200,000
Cash received in advance from customers
for goods not yet shipped 100,000
Expected bad debts 150,000
After further analysis of the aged accounts receivable, it is determined that the allowance for
doubtful accounts should be P200,000. What amount should be reported as "trade and other
receivables" under current assets?
A. 8,600,000 C. 8,850,000
B. 8,800,000 D. 8,950,000 P1 © 2014
16. On December 31,2014, Miami Company reported that the current receivables consisted of
the following:
Trade accounts receivable 930,000
Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit (November 2014) 30,000
Selling price of unsold goods sent by
Miami on consignment at 130% of cost
(not included in Miami's ending inventory) 260,000
Security deposit on lease of warehouse used for storing some inventories 300,000
Total 1,500,000
On December 31, 2014, what total amount should be reported as trade and other receivables
under current assets?
A. 940,000 C. 1,240,000
B. 1,200,000 D. 1,500,000 P1 © 2014
Impairment loss
17. Sheraton Hotel manages an extensive network of boutique hotels in the country. The entity
has significant accounts receivable from three customers, namely:
Bacolod lnn 5,000,000
Chicken House 9,000,000
Landmark Hotel 8,000,000
Other accounts receivable not individually significant 4,500,000

Accounts Receivable
The entity has determined that the Chicken House receivable is impaired by P1,500,000 and
the Landmark Hotel receivable is impaired by P2,000,000. The receivable from the Bacolod
Inn is not impaired. The entity has also determined that a composite rate of 5% is appropriate
to measure impairment on all other accounts receivable. What is the total impairment loss of
accounts receivable?
A. 3,500,000 C. 3,975,000
B. 3,725,000 D. 4,825,000 P1 © 2014
18. On December 31, 2014, Celaica Company reported accounts receivable as follows:
Trisha Company 800,000
Jerard Company 2,000,000
Marc Company 1,500,000
Francis Company 1,000,000
The entity determined that Trisha Company receivable is impaired by P500,000 and Francis
Company receivable is totally impaired. The other accounts receivable from Jerard Company
and Marc Company are not considered impaired. The entity also determined that a composite
rate of 4% is appropriate to measure impairment on all other accounts receivable. What is
the total impairment loss of accounts receivable?
A. 1,500,000 C. 1,840,000
B. 1,700,000 D. 1,912,000 P1 © 2014
Allowance for sales discount

19. Delta Company sells to wholesalers on terms 2/15, net 30. The entity has no cash sales but
50% of the customers take advantage of the discount. The entity used the gross method of
recording sales and accounts receivable. An analysis of the trade accounts receivable on
December 31,2014 revealed the following:
Age Amount Collectible
0-15 days 2,000,000 100%
16-30 days 1,200,000 95%
31-60 days 100,000 90%
Over 60 days 50,000 50%
3,350,000
In the December 31, 2014 statement of financial position, what amount should be reported
as allowance for sales discount?
A. 20,000 C. 33,500
B. 32,400 D. 40,000 P1 © 2014

Allowance method – in general

20. Roanne Company used the allowance method of accounting for uncollectible accounts.
During 2014, the entity had charged P800,000 to bad debt expense, and wrote off accounts
receivable of P900,000 as uncollectible. What was the decrease in working capital?
A. 0 C. 800,000
B. 100,000 D. 900,000 P1 © 2014
21. Mill Company's allowance for doubtful accounts was P1,000,000 at the end of 2014 and
P900,000 at the end of 2013. For the year ended December 31,2014, the entity reported
doubtful accounts expense of P160,000 in the income statement. What amount was debited
to the appropriate account to write off uncollectible accounts in2014?
A. 60,000 C. 160,000
B. 100,000 D. 260,000 P1 © 2014
22. Boholano Company used the statement of financial position approach in estimating
uncollectible accounts expense. The entity prepared an adjusting entry to recognize this
expense at the end of the year. During the year, the entity wrote off a P100,000 receivable
and made no recovery of previous writeoff. After the adjusting entry for the" year, the credit
balance in the allowance for doubtful accounts was P250,000 larger than it was on January
1. What amount of uncollectible account expense was recorded for the year?
A. 100,000 C. 250,000
B. 150,000 D. 350,000 P1 © 2014
23. Seiko Company reported the following balances after adjustment at year-end:
2014 2013
Accounts receivable 5,250,000 4,800,000
Net realizable value 5,100,000 4,725,000
During 2014, the entity wrote off accounts totaling P160,000 and collected P40,000 on
accounts written off in previous year. What amount should be recognized as doubtful
accounts expense for the year ended December 31,2014?
A. 120,000 C. 160,000
B. 150,000 D. 195,000 P1 © 2014
Percent of sales method

24. At year-end, Barr Company reported net sales of P7,100,000 and allowance for doubtful
accounts with debit balance of P16,000 before adjustment. The entity estimated the
uncollectible accounts receivable at 2% of net sales. What is the allowance for doubtful
accounts at year-end?

Accounts Receivable
A. 126,000 C. 144,500
B. 142,000 D. 158,000 P1 © 2014
25. Ladd Company provided the following data for the current year:
Allowance for doubtful accounts - January 1 180,000
Sales 9,500,000
Sales returns and allowances 800,000
Sales discounts 200,000
Accounts written off as uncollectible 200,000
The entity provided for doubtful accounts expense at the rate of 3% of net sales. What is the
allowance for doubtful accounts at year-end?
A. 235,000 C. 265,000
B. 241,000 D. 435,000 P1 © 2014
26. Capetown Company began operations on January 1, 2013. The entity has found that the
estimated bad debt expense has been consistently higher than actual bad debts.
Management proposed lowering the percentage from 3% of credit sales to 2%. Credit sales
for 2014 totaled P5,000,000, and accounts written off as uncollectible during 2014 totaled
P550,000. What is the bad debt expense for 2014?
A. 100,000 C. 240,000
B. 150,000 D. 550,000 P1 © 2014
27. Oriental Company followed the procedure of debiting bad debt expense for 2% of all new
sales.
Sales Allowance for bad debts
2012 3,000,000 40,000
2013 2,800,000 60,000
2014 3,500,000 80,000
What was the amount of accounts written off in 2014?
A. 10,000 C. 70,000
B. 50,000 D. 86,000 P1 © 2014
Questions 28 thru 30 are based on the following information. P1 © 2014

Easy Company sells directly to retail customers. On January 1, 2014, the balance of the accounts
receivable was P2,070,000 while the allowance for doubtful accounts was a credit of P78,000. The
following data are gathered:
Credit sales Writeoffs Recoveries
2011 11,100,000 260,000 22,000
2012 12,250,000 295,000 37,000

2013 14,650,000 300,000 36,000

2014 15,000,000 310,000 42,000
Doubtful accounts are provided for as a percentage of credit sales. The entity calculated the
percentage annually by using the experience of the three years prior to the current year.
28. What is the percentage of credit sales to be used in computing doubtful accounts expense
for 2014?
A. Two percent C. Six percent
B. Four percent D. Eight percent
29. What amount should be reported as doubtful accounts expense for 2014?
A. 222,000 C. 310,000
B. 300,000 D. 378,000
30. What amount should be reported as allowance for doubtful accounts on December 31, 2014?
A. 110,000 C. 378,000
B. 300,000 D. 478,000
Percent of accounts receivable method

31. Manchester Company provided the following accounts abstracted from the unadjusted trial
balance on December 31, 2014:
Debit Credit
Net credit sales 20,000,000
The entity estimated that 3% of the gross accounts receivable will become uncollectible. What
amount should be recognized as doubtful accounts expense for 2014?
A. 110,000 C. 190,000
B. 150,000 D. 600,000 P1 © 2014
32. From inception of operations, Axis Company carried no allowance for doubtful accounts.
Uncollectible accounts were expensed as written off and recoveries were credited to income
as collected.
During 2014, management recognized that the accounting policy with respect to doubtful
accounts was not correct and determined that an allowance for doubtful accounts was
necessary.
A policy was established to maintain an allowance for doubtful accounts based on historical
bad debt loss percentage applied to year-end accounts receivable.

Accounts Receivable
The historical bad debt loss percentage is to be recomputed each year based on all available
past years up to a maximum of five years.
The entity provided the following information:
Year Credit sales Write-offs Recoveries
2010 1,500,000 15,000 0
2011 2,250,000 38,000 2,700
2012 2,950,000 52,000 2,500
2013 3,300,000 65,000 4,800
2014 4,000,000 83,000 5,000
The entity reported accounts receivable of P 1,250,000 and P2,000,000 on December 31,
2013 and December 31, 2014, respectively. What amount should be reported as doubtful
accounts expense for 2014?
A. 78,000 C. 92,000
B. 83,000 D. 97,000 P1 © 2014
Questions 33 & 34 are based on the following information. P1 © 2014

Wonder Company provided the following transactions affecting accounts receivable during the year
ended December 31,2014:
Sales (cash and credit) 5,900,000
Cash received from credit customers, all of whom took advantage
of the discount feature of the entity's credit terms 4/10,n/30 3,024,000
Cash received from cash customers 2,100,000
Accounts receivable written off as worthless 50,000
Credit memorandum issued to credit customers
for sales returns and allowances 250,000
Cash refunds given to cash customers for sales returns and allowances 20,000
Recoveries on accounts receivable written off as uncollectible in
prior periods (not included in cash amount stated above) 80,000
The following balances were taken from the January 1, 2014 statement of financial position:
Accounts receivable 950,000
The entity provided for uncollectible account losses by crediting allowance for doubtful accounts in
the amount of P70,000 for the current year.
33. What is the balance of accounts receivable on December 31, 2014?

A. 1,220,000 C. 1,300,000
B. 1,280,000 D. 1,426,000
34. What is the balance of allowance for doubtful accounts on December 31,2014?

A. 120,000 C. 200,000
B. 170,000 D. 250,000
Aging of receivables
35. Tara Company provided the following information pertaining to accounts receivable on
December 31,2014:
Days Estimated Estimated
outstanding Amount uncollectible
0- 60 1,200,000 1%
61 - 120 900,000 2%
Over 120 1,000,000 60,000
3,100,000
During 2014, the entity wrote off P70,000 in accounts receivable and recovered P40,000 that
had been written off in prior years. On January 1, 2014, the allowance for uncollectible
accounts was P 100,000. Under the aging method, what amount of allowance for
uncollectible accounts should be reported on December 31,2014?
A 90,000 C. 130,000
B. 100,000 D. 190,000 P1 © 2014
36. Orr Company prepared an aging of accounts receivable on December 31,2014 and
determined that the net realizable value of the accounts receivable was P2,500,000.
Allowance for doubtful accounts on January 1 280,000
Accounts written off as uncollectible 230,000
Accounts receivable on December 31 2,700,000
Uncollectible accounts recovery 50,000
For the year ended December 31, 2014, what amount should be recognized as doubtful
accounts expense?
A. 100,000 C. 200,000
B. 150,000 D. 230,000 P1 © 2014
37. Marian Company used the allowance method of accounting for bad debts. The following
summary schedule was prepared from an aging of accounts receivable outstanding on
December 31 of the current year:
Number of days Probability
outstanding Amount of collection
0-30 days 5,000,000 .98
31 -60 days 2,000,000 .90
Over 60 days 1,000,000 .80

Accounts Receivable
The following additional information is available for the current year:

Net credit sales for the year 40,000,000
Allowance for doubtful accounts:
Balance, January 1 450,000 (cr)
Balance before adjustment, December 31 20,000 (dr)
The entity based the estimate of doubtful accounts on the aging of accounts receivable. What
amount should be recognized as doubtful accounts expense for the current year?
A. 470,000 C. 500,000
B. 480,000 D. 520,000 P1 © 2014
38. Effective with the year ended December 31, 2014, Hall Company adopted a new accounting
method for estimating the allowance for doubtful accounts at the amount indicated by the
year-end aging of accounts receivable. The following data are available:
Allowance for doubtful accounts, January 1 250,000
Provision for doubtful accounts during the current year
(2% of credit sales of P10,000,000) 200,000
Estimated uncollectible accounts per aging on December 31 220,000
After year-end adjustment, what is the doubtful accounts expense for current year?
A. 175,000 C. 205,000
B. 200,000 D. 220,000 P1 © 2014
39. Brain Company prepared the following schedule on December 31, 2014 and the uncollectible
accounts experience for the previous five years.
0-30 days 4,500,000
31-60 days 1,500,000
61-90 days 800,000
91-120 days 200,000
Over 120 days 100,000
7,100,000
Year-end 0-30 31-60 61-90 91-120 Over

Year receivables days days days days 120 days
2013 7,800,000 3% 9% 17.4% 52.1% 84.1%
2012 7,500,000 5 8 18.0 49.2 80.3
2011 6,800,000 4 11 19.0 53.7 82.0
2010 6,900,000' 4 10 19.8 51.3 78.5
2009 7,200,000 2 11 17.8 49.9 85.2
The unadjusted allowance for bad debts on December 31, 2014 is P300,000.

What is the correct balance of the allowance for bad debts based on the average loss
experience for the last 5 years? The average rate is determined by adding all the rates for
each category divided by 5.
A. 300,000 C. 597,500
B. 340,700 D. 640,700 P1 © 2014
40. Sigma Company began operations on January 1, 2013. On December 31,2013, the entity
provided for uncollectible accounts based on 1% of annual credit sales.
On January 1,2014, the entity changed the method of determining the allowance for
uncollectible accounts by applying certain percentages to the accounts receivable aging as
follows:
Days past invoice date Percent uncollectible
0- 30 1
31 - 90 5
91 - 180 20
Over 180 80
In addition, the entity wrote off all accounts receivable that were over 1 year old. The following
additional information related to the years ended December 31,2014 and 2013:
2014 2013
Credit sales 3,000,000 2,800,000
Collections, including recovery 2,915,000 2,400,000
Accounts written off 27,000 none
Recovery of accounts previously written off 7,000 none
Days past invoice date at December 31
0- 30 300,000 250,000
31 - 90 80,000 90,000
91 - 180 60,000 45,000
Over 180 25,000 15,000
What is the amount of uncollectible accounts expense for 2014?
A. 11,000 C. 38,000
B. 31,000 D. 39,000 P1 © 2014

From inception of operations, Murr Company provided for uncollectible accounts expense under
the allowance method, provisions were made monthly at 2% of credit sales, bad debts written off
were charged to the allowance account, recoveries of bad debts previously written off were credited
to the allowance account, and no year-end adjustments to the allowance account were made.
The usual credit terms are net 30 days. The allowance for doubtful accounts was P120,000 on
January 1, 2014.

Accounts Receivable
During the current year, credit sales totaled P9,000,000, interim provisions for doubtful accounts
were made at 2% of credit sales, P90,000 of bad debts were written off, and recoveries of accounts
previously written off amounted to P15,000.
The entity prepared an aging of accounts receivable for the first time on December 31,2014.
Classification Balance Uncollectible
November - December 2,000,000 2%
July - October 600,000 10%
January - June 400,000 25%
Prior to January 1,2014 200,000 75%
3,200,000
Based on the review of collectibility of the account balances in the "prior to January 1, 2014" aging
category, additional accounts totaling P60,000 are to be written off on December 31, 2014.
Effective with the year ended December 31, 2014, the entity adopted a new accounting method for
estimating the allowance for doubtful accounts at the amount indicated by the year-end aging
analysis of accounts receivable.
41. What is the required allowance for doubtful accounts on December 31,2014?
A. 305,000 C. 425,000
B. 350,000 D. 470,000
42. What amount was recorded as doubtful accounts expense for 2014?
A. 90,000 C. 270,000
B. 180,000 D. 300,000
43. What amount should be reported as doubtful accounts expense in the income statement for
2014?
A. 180,000 C. 260,000
B. 185,000 D. 320,000
44. What is the year-end adjustment to the allowance for doubtful accounts on December 31,
2014?
A. 140,000 C. 305,000
B. 180,000 D. 320,000

MCQ – Problems: Short-term Notes Receivable

Interest income
45. On June 30,2014, Green Company accepted a customer's P2,500,000 noninterest-bearing
one-year note in a sale transaction. The product sold normally sells for P2,300,000. What
amount should be reported as interest revenue for the year end December 31,2014?
A. 0 C. 200,000
B. 100,000 D. 250,000 P1 © 2014
46. On June 30, 2014, Pink Company sold goods for P5,000,000 and accepted the customer's
10% one-year note in exchange. The 10% interest rate approximates the market rate of
return. What amount should be reported as interest income for the year ended December 31,
2014?
A. 0 C. 250,000
B. 125,000 D. 500,000 FA © 2014
47. Touch Company sold a piece of machinery with a list price of PI ,600,000 to Archer Company
on January 1,2014. Archer Company issued a noninterest bearing note of P1,700,000 due in
one year. Touch ' Company normally sells this type of machinery for 90% of list price. What
amount should be recorded as interest revenue?
A. 0 C. 160,000
B. 100,000 D. 260,000 P1 © 2014
MCQ – Problems: Long-term Notes Receivable

Sales revenue
48. On January 1, 2014, Ott Company sold goods to Fox Company. Fox signed a noninterest-
bearing note requiring payment of P600,000 annually for seven years. The first payment was
made on January 1,2014. The prevailing rate of interest for this type of note at date of
issuance was 10%. Information on present value factors is as follows:
Present value Present value of
Period of 1 at 10% ordinary annuity of 1 at 10%
6 .56 4.36
7 .51 4.87
What amount should be recorded as sales revenue in January 2014?
A. 2,142,000 C. 2,922,000
B. 2,616,000 D. 3,216,000 FA © 2014
MCQ – Problems: Notes Receivable Page 48

Notes Receivable
Gain on sale
49. On December 27, 2014, Lily Company sold a building, receiving as consideration a
P4,000,000 noninterest bearing note due in three years. The building had a cost of
P3,800,000 and the accumulated depreciation was P1,600,000 at the date of sale. The
prevailing rate of interest for a note of this type was 12%. The present value of 1 for three
periods at 12%o is 0.712. In the 2014 income statement, what amount of gain should be
reported on the sale?
A. 0 C. 648,000
B. 200,000 D. 1,800,000 FA © 2014
Interest income
50. Jeah Company purchased from Carmina Company a P2,000,000,8%, five-year note that
required five equal annual year-end payments of P5O0,P00. The note was discounted to
yield a 9% rate to Jean Company. At the date of purchase, Jean Company recorded the note
at the present value of P1,948,500. What is the total interest revenue earned by Jean
Company over the life of this note?
A. 504,500 C. 800,000
B. 556,000 D. 900,000 P1 © 2014
51. Pasadena Company sold machinery to Rodac Company on January 1, 2014 for which the
cash selling price was P7,582,000. Rodac entered into an installment sale contract with
Pasadena at an interest rate of 10%. The contract required payments of P2,000,000 a year
over five years with the first payment due on December 31,2014. What amount of interest
income should be reported in 2014?
A. 0 C. 758,200
B. 634,020 D. 1,000,000 P1 © 2014
52. On January 1,2014, Mill Company sold a building and received as consideration P1,000,000
cash and a P4,000,000 noninterest bearing note due on January 1, 2017. There was no
established exchange price for the building, and the note had no ready market. The prevailing
rate of interest for a note of this type on January 1, 2014 was 10%. The present value of 1 at
10% for three periods is 0.75. What amount of interest revenue should be included in the
2015 income statement?
A. 300,000 C. 370,000
B. 330,000 D. 400,000 P1 © 2014
Interest receivable
53. Frame Company has an 8% note receivable dated June 30, 2014, in the original amount of
P1,500,000. Payments of P500,000 in principal plus accrued interest are due annually on

July 1, 2015, 2016 and 2017. hi the June 30,2016 statement of financial position, what
amount should be reported as a current asset for interest on the note receivable?
A. 0 C. 80,000
B. 40,000 D. 120,000 P1 © 2014
54. On June 1, 2014, Yola Company loaned Dale P500,000 on a 12% note, payable in five annual
installments of PI 00,000 beginning January 1, 2015.
In connection with this loan, Dale was required to deposit P5,000 in a noninterest-bearing
escrow account. The amount held in escrow is to be returned to Dale after all principal and
interest payments have been made.
Interest on the note is payable on the first day of each month beginning July 1, 2014. Dale
made timely payments through November 1, 2014. On January 1, 2015, Yola received
payment of the first principal installment plus all interest due.
On December 31,2014, what is the accrued interest receivable on the loan?
A. 0 C. 10,000
B. 5,000 D. 15,000 P1 © 2014
Carrying amount
55. Alamo Company sold a factory on January 1,2014 for P7,000,000. The entity received a cash
down payment of P1,000,000 and a 4-year, 12% note for the balance. The note is payable in
equal annual payments of principal and interest of P1,975,400 payable on December 31 of
each year until 2017. What is the carrying amount of the note receivable on December
31,2014?
A. 4,025,600 C. 4,624,600
B. 4,500,000 D. 4,744,600 FA © 2014
56. On December 31, 2014, Park Company sold used equipment and received a noninterest-
bearing note requiring payment of P500,000 annually for ten years. The first payment is due
December 31,2015 and the prevailing rate of interest for this type of note at date of issuance
is 12%. The present value of an ordinary annuity of 1 at 12% for 10 periods is 5.65. On
December 31,2014, what is the carrying amount of the note receivable?
A. 1,610,000 C. 2,825,000
B. 2,175,000 D. 5,000,000 FA © 2014
57. On December 31, 2014, Chang Company sold a machine in the ordinary course of business
to Door Company in exchange for a noninterest bearing note requiring ten annual payments
of P100,000. Door made the first payment on December 31, 2014. The market interest rate
for similar notes at date of issuance was 8%. Information on present value factors is:

Notes Receivable
Period 9 10
Present value of 1 at 8% .50 .46
Present value of ordinary annuity of 1 at 8% 6.25 6.71
On December 31, 2014, what is the carrying amount of the note receivable?
A. 450,000 C. 625,000
B. 460,000 D. 671,000 P1 © 2014
58. On December 31,2014, Jet Company received two P1,000,000 notes receivable from
customers in exchange for services rendered. On both notes, interest is calculated on the
outstanding principal balance at the annual rate of 3% and payable at maturity. The note from
Hart Company, made under customary trade terms, is due in nine months and the note from
Maxx Company is due in five years. The market interest rate for similar notes on December
31,2014 was 8%. The compound interest factors to convert future value into present value at
8% follow:
Present value of 1 due in nine months .944
Present value of 1 due in five years .680
What is the carrying amount of notes receivable in the December 31, 2014 statement of
financial position?
FA © 2014 A B. C. D.
Hart 944,000 965,200 1,000,000 1,000,000
Maxx 680,000 782,000 680,000 782,000
Comprehensive
59. Ayala Company sold an equipment with a carrying amount of P800,000, receiving a
noninterest-bearing note due in three years with a face amount of P1,000,000. There is no
established market value for the equipment. The interest rate on similar obligations is
estimated at 12%. The present value of 1 at 12% for three periods is .712. What amount
should be reported as gain or loss on the sale and interest income for the first year?
FA © 2014 B. C. D. A.
Gain (loss) (88,000) (88,000) 200,000 200,000
Interest income 85,440 120,000 96,000 288,000
Questions 60 & 61 are based on the following information. FA © 2014

On January 1,2014, Emme Company sold equipment with a carrying amount of P4,800,000 in
exchange for a P6,000,000 noninterest bearing note due January 1, 2017. There was no
established exchange price for the equipment. The prevailing rate of interest for a note of this type
on January 1, 2014 was 10%. The present value of 1 at 10% for three periods is 0.75.

60. In the 2014 income statement, what amount should be reported as interest income?
A. 90,000 C. 500,000
B. 450,000 D. 600,000
61. In the 2014 income statement, what amount should be reported as gain or loss on sale of
equipment?
A. 300,000 loss C. 1,200,000 gain
B. 300,000 gain D. 2,700,000 gain

On December 31, 2014, Flirt Company sold for P3,000,000 an old equipment having an original
cost of P5,400,000 and carrying amount of P2,400,000. The terms of the sale were P600,000 down
payment and P1,200,000 payable each year on December 31 of the next two years. The sale
agreement made no mention of interest. However, 9% would be a fair rate for this type of
transaction. The present value of an ordinary annuity of 1 at 9% for two years is 1.76.
62. What is the interest income for 2015?

A. 106,000 C. 190,080
B. 108,000 D. 216,000
63. What is the carrying amount of the note receivable on December 31, 2015?
A. 1,009,920 C. 1,200,000
B. 1,102,080 D. 2,302,080

On January 1, 2014, Ryan Company reported the following balances:
Note receivable from sale of building 7,500,000
Note receivable from an officer 2,000,000
The P7,500,000 note receivable is dated May 1,201,3, bears interest at 9%. Principal payments of
P2,500,000 plus interest are due annually beginning May 1, 2014.
The P2,000,000 note receivable is dated December 31,2011, bears interest at 8%, and is due on
December 31,2016. Interest is payable annually on December 31, and all interest payments were
made through December 31,2014.
On July 1, 2014, Ryan Company sold a parcel of land to Barr Company for P4,000,000 under an
installment sale contract. Barr Company made a P1,200,000 cash down payment on July 1,2014,
and signed a 4-year 10% note for the P2,800,000 balance. The equal annual payments of principal
and interest on the note totaled P880,000, payable on July 1 of each year from 2015 through 2018.

Loans Receivable
64. What is the total amount of notes receivable including accrued interest that should be
classified as current assets on December 31, 2014?
A. 2,940,000 C. 3,540,000
B. 3,080,000 D. 3,820,000
65. What is the total amount of notes receivable that should be classified as noncurrent assets
on December 31, 2014?
A. 4,500,000 C. 6,700,000
B. 6,420,000 D. 7,300,000
Questions 66 thru68 are based on the following information. FA © 2014

Pangasinan Company is a dealer in equipment. On December 31,2014, the entity sold an
equipment in exchange for a noninterest bearing note requiring five annual payments of P500,000.
The first payment was made on December 31,2015. The market interest for similar notes was 8%.
The PV of 1 at 8% for 5 periods is .68, and the PV of an ordinary annuity of 1 at 8% for 5 periods
is 3.99.
66. On December 31,2014, what is the carrying amount of the note receivable?
A. 1,495,000 C. 1,995,000
B. 1,700,000 D. 2,500,000
67. What interest income should be reported for 2015?

A. 101,000 C 159,600
B. 119,600 D. 505,000
68. What is the carrying amount of the note receivable on December 31, 2015?
A. 1,495,000 C. 2,000,000
B. 1,654,600 D. 2,154,600
MCQ – Problems: Loan Receivable

Loans receivable
Questions 69 & 70 are based on the following information. FA © 2014
National Bank granted a 10-year loan to Abbo Company in the amount of P1,500,000 with a stated
interest rate of 6%. Payments are due monthly and are computed to be PI6,650. National Bank
incurred P40,000 of direct loan origination cost and P20,000 of indirect loan origination cost. In
addition, National Bank charged Abbo Company a 4-point nonrefundable loan origination fee.
69. What is the initial carrying amount of the loan receivable on the part of National Bank?
A. 1,440,000 C. 1,500,000
B. 1,480,000 D. 1,520,000
MCQ – Problems: Loans Receivable Page 53

70. What is the initial carrying amount of the loan payable on the part of Abbo Company?
A. 1,440,000 C. 1,500,000
B. 1,480,000 D. 1,520,000

On December 1, 2014, Nicole Company gave Dawn Company a P200,000, 12% loan. Nicole
Company paid proceeds of PI 94,000 after the deduction of a P6,000 nonrefundable loan
origination fee. Principal and interest are due in sixty monthly installments of P4,450, beginning
January 1,2015. The repayments yield an effective interest rate of 12% at a present value of
P200,000 and 13.4% at a present value of P194,000.
71. What amount of interest income should be reported in 2014?

A. 1,940 C. 2,166
B. 2,000 D. 2,233
72. What amount should be reported as accrued interest receivable on December 31,2014?
A. 0 C. 4,450
B. 2,000 D. 6,000

Appari Bank granted a loan to a borrower on January 1,2014. The interest rate on the loan is 10%
payable annually starting December 31,2014. The loan matures in five years on December
31,2018. The data related to the loan are:
Principal amount 4,000,000
Origination fee received from borrower 350,000
Direct origination cost incurred 61,500
The effective rate on the loan after considering the direct origination cost incurred and origination
fee received is 12%.
73. What is the carrying amount of the loan receivable on January 1, 2014?
A. 3,711,500 C. 4,411,500
B. 4,000,000 D. 4,650,000

A. 400,000 C. 529,380
B. 445,380 D. 558,000
75. What is the carrying amount of the loan receivable on December 31, 2014?
A. 3,600,000 C. 4,000,000
B. 3,756,880 D. 4,243,120

Loans Receivable

National Bank granted a loan to a borrower on January 1,2014. The interest on the loan is 10%
payable annually starting December 31, 2014. The loan matures in three years on December 31,
2016. The data related to the loan are:
Origination fee charged against the borrower 342,100
After considering the origination fee charged against the borrower and the direct origination cost
incurred, the effective rate on the loan is 12%.
A. 3,657,900 C. 4,000,000
B. 3,807,900 D. 4,150,000

A. 380,900 C. 456,948
B. 400,000 D. 480,000
A. 3,750,932 C. 3,864,848
B. 3,807,900 D. 4,000,000

A. 386,485 C. 463,782
B. 400,000 D. 480,000

Philippine Bank granted a loan to a borrower on January 1,2014. The interest on the loan is 8%
payable annually starting December 31,2014. The loan matures in three years on December
31,2016. The data related to the loan are:
Origination fee charged against the borrower 100,000
After considering the origination fee charged to the borrower and the direct origination cost
incurred, the effective rate on the loan is 6%.
A. 2,900,000 C. 3,160,300
B. 3,000,000 D. 3,260,300


A. 180,000 C. 240,000
B. 189,618 D. 252,824
A. 3,000,000 C. 3,160,300
B. 3,109,918 D. 3,210,682

A. 180,000 C. 240,000
B. 186,595 D. 248,793
Loan impairment loss

84. On December 31,2014, Macedon Bank has a 5-year loan receivable with a face value of
P5,000,000 dated January 1,2013 that is due on December 31, 2017. Interest on the loan is
payable at 9% every December 31.
The borrower paid the interest that was due on December 31,2013 but informed the bank
that interest accrued in 2014 will be paid at maturity date. There is a high probability that the
remaining interest payments will not be paid because of financial difficulty.
The prevailing market rate of interest on December 31,2014 is 10%>. The PV of 1 for three
periods is .772 at 9%, and .751 at 10%.
What is the loan impairment loss to be recognized on December 31, 2014?
A. 1,242,600 C. 1,590,000
B. 1,357,050 D. 1,695,000 P1 © 2014
85. On December 31, 2014, Solid Bank has a loan receivable of P4,000,000 from a borrower that
it is carrying at face value and is due on December 31, 2019. Interest on the loan is payable
at 9% each December 31. The borrower paid the interest due on December 31, 2014 but
informed the bank that it would probably miss the next two years'interest payments.
After that, the borrower is expected to resume the annual interest payment but it would make
the principal payment one year late, with interest paid for that additional year at the time of
principal payment.
The PV of 1 at 9% is .772 for three periods, .708 for four periods, .650 for five periods, and
.596 for six periods.
What is the loan impairment loss for 2014?

A. 634,640 C. 721,960
B. 720,000 D. 913,120 P1 © 2014

Loans Receivable

On January 1,2014, Oceanic Bank made a PI,000,000, 8% loan. The P80,000 interest is receivable
at the end of each year, with the principal amount to be received at the end of five years. At the
end of 2014, the first year's interest of P80,000 has not yet been received because the borrower is
experiencing financial difficulties. The borrower negotiated a restructuring of the loan. The payment
of all of the interest for 5 years will be delayed until the end of the 5-year loan term. In addition, the
amount of principal repayment will be dropped from PI,000,000 to P500,000. The PV of 1 at 8%
for 4 periods is .735. No interest revenue has been recognized in 2014 in connection with the loan.
86. What is the loan impairment loss on December 31, 2014?

A. 238,500 C. 338,500
B. 288,000 D. 388,000

A. 0 C. 52,920
B. 48,960 D. 80,000

Beach Bank loaned Boracay Company P7,500,000 on January 1, 2012. The terms of the loan were
payment in full on January 1, 2016 plus annual interest payment at 11%. The interest payment was
made as scheduled on January 1,2013. However, due to financial setbacks, Boracay Company
was unable to make the 2014 interest payment. Beach Bank considered the loan impaired and
projected the cash flows from the loan on December 31, 2014. The bank accrued the interest on
December 31, 2013, but did not continue to accrue interest for 2014 due to the impairment of the
loan. The projected cash flows are:
Date of cash flow Amount projected on December 31, 2014
December 31, 2015 500,000
December 31, 2016 1,000,000
December 31, 2017 2,000,000
December 31, 2018 4,000,000
The PV of 1 at 11% is 0.90 for one period, 0.81 for two periods, 0.73 for three periods, and 0.66
for four periods.
88. What is the loan impairment loss on December 31,2013?
A. 2,140,000 C. 2,965,000
B. 2,240,000 D. 5,360,000
A. 534,600 C. 599,456
B. 589,600 D. 825,000

A. 4,860,000 C. 5,949,600
B. 5,449,600 D. 7,000,000

Kalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2012. The terms of the loan
require principal payments of PI,000,000 each year for 5 years plus interest at 8%. The first
principal and interest payment is due on January 1,2013. Caticlan Company made the required
payments during 2013 and 2014.
However, during 2014 Caticlan Company began to experience financial difficulties, requiring Kalibo
Bank to reassess the collectibility of the loan.
On December 31,2014, Kalibo Bank has determined that the remaining principal payment will be
collected but the collection of the interest is unlikely. Kalibo Bank did not accrue the interest on
December 31, 2014.
The present value of 1 at 8% is as follows:
For one period 0.926
For two periods 0.857
For three periods 0.794
91. What is the loan impairment loss on December 31,2014?

A. 0 C. 222,000
B. 217,000 D. 423,000

A. 0 C. 142,640
B. 126,160 D. 240,000
A. 1,640,360 C. 1,925,640
B. 1,783,000 D. 2,000,000

On December 31, 2014, Oregon Bank recorded an investment of P5,000,000 in a loan granted to
a client. The loan has a 10% effective interest rate payable annually every December 31. The
principal is due in full at maturity on December 31,2017. Unfortunately, the borrower is
experiencing significant financial difficulty and will have difficult time in making full payment.
The bank projected that the entire principal will be paid at maturity and 4% interest or P200,000
will be paid annually on December 31 of the next three years. There is no accrued interest on
December 31,2014.

Loans Receivable
The present value of 1 at 10% for three periods is 0.75, and the present value of an ordinary annuity
of 1 at 10% for three periods is 2.49.
94. What is the loan impairment loss for 2014?

A. 250,000 C. 748,000
B. 600,000 D. 752,000

A. 200,000 C. 424,800
B. 224,800 D. 500,000
A. 3,750,000 C. 4,672,800
B. 4,472,800 D. 5,000,000

On December 31,2014, London Bank granted a P5,000,000 loan to a borrower with 10% stated
rate payable annually and maturing in 5 years. The loan was discounted at the market interest rate
of 12%. Unfortunately, the financial condition of the borrower worsened because of lower revenue.
On December 31,2016, the bank determined that the borrower would pay back only P3,000,000 of
the principal at maturity. However, it was considered likely that interest would continue to be paid
on the P5,000,000 loan.
The present value of 1 at 12% is .57 for five periods and .71 for three periods. The present value
of an ordinary annuity of 1 at 12% is 3.60 for five periods and 2.40 for three periods.
97. What is the amount of cash paid to the borrower on December 31, 2014?
A. 4,400,000 C. 4,650,000
B. 4,500,000 D. 5,000,000
A. 4,650,000 C. 4,772,960
B. 4,720,000 D. 4,790,000
99. What is the impairment loss to be recognized on December 31, 2016?

A. 1,442,960 C. 1,922,960
B. 1,670,000 D. 2,000,000

Diane Company sold loans with a P2,200 fair value and a carrying amount of P2,000. The entity
obtained an option to purchase similar loans and assumed a recourse obligation to repurchase
loans. The entity also agreed to provide a floating rate of interest to the transferee. The fair values
are as follows.
Cash proceeds 2,100
Interest rate swap 140
Call option 80
Recourse obligation ( 120)
100. What is the gain (loss) on the sale?

A. (100) C. 200
B. 120 D. 320
101. What is included in the journal entry to record the transfer on the books of Diane Company?
A. A debit to call option C. A credit to cash
B. A debit to loans D. A credit to interest rate swap
102. Assume that Diane Company agreed to service the loans without explicitly stating the
compensation. The fair value of the service is P50. What are the net proceeds and the gain
(loss) on the sale, respectively?
A. 2,150 and 150 C. 2,200 and 200
B. 2,200 and (250) D. 2,250 and 250
MCQ – Problems: Receivable Financing

Assignment
103. Star Company assigned P4,000,000 of accounts receivable as collateral for a P2,000,000
6% loan with a bank. The entity also paid a finance fee of 5% on the transaction upfront.
What amount should be recorded as a gain or loss on the transfer of accounts receivable?
A. 0 C. 200,000 loss
B. 100,000 loss D. 240,000 gain FA © 2014
104. Camia Company sold accounts receivable without recourse for P5,300,000. The entity
received P5,000,000 cash immediately from the factor. The remaining P300,000 will be
received once the factor verifies that none of the accounts receivable is in dispute. The
accounts receivable had a face amount of P6,000,000. The entity had previously established
an allowance for bad debts of P250,000 in connection with such accounts. What amount of
loss on factoring should be recognized?
A. 300,000 C. 700,000
B. 450,000 D. 750,000 P1 © 2014
MCQ – Problems: Receivable Financing Page 60

105. During the second year of operations, Shark Company found itself in financial difficulties. The
entity decided to use the accounts receivable as a means of obtaining cash to continue
operations.
On July 1,2014, the entity sold P1,500,000 of accounts receivable for cash proceeds of
P1,390,000. No bad debt allowance was associated with these accounts.
On December 15,2014, the entity assigned the remainder of its accounts receivable,
P5,000,000 as of that date, as collateral on a P2,500,000,12% annual interest rate loan from
Finance Company. The entity received P2,500,000 less a 2% finance charge. None of the
assigned accounts had been collected by the end of the year.
Allowance for bad debts before adjustment, 12/31/2014 65,000
Estimated uncollectible, 12/31/2014 3% of accounts receivable
Accounts receivable excluding factored and
assigned accounts, 12/31/2014 1,000,000
What amount should be recognized as bad debt expense for 2014?
A. 30,000 C. 115,000
B. 95,000 D. 180,000 P1 © 2014
106. Moon Company assigned P3,000,000 of accounts receivable as collateral for a P2,000,000
loan with a bank. The bank assessed a 4% finance fee and charged 6% interest on the note
at maturity. What would be the journal entry to record the transaction?
A. Debit cash P1,880,000, debit finance charge P120,000, and credit note payable
P2,000,000.
B. Debit cash P1,920,000, debit finance charge P80,000, and credit note payable
P2,000,000
C. Debit cash P1,920,000, debit finance charge P80,000, and credit accounts receivable
P2,000,000.
D. Debit cash P 1,920,000, debit finance charge P80,000, debit due from bank P1,000,000,
and credit accounts receivable P3,000,000. FA © 2014
Questions 107 thru 109 are based on the following information. FA © 2014
On December 1, 2014, Bamboo Company assigned specific accounts receivable totaling
P2,000,000 as collateral on a P1,500,000,12% note from a certain bank. The entity will continue to
collect the assigned accounts receivable. In addition to the interest on the note, the bank also
charged a 5% finance fee deducted in advance on the PI,500,000 value of the note. The December
collections of assigned accounts receivable amounted to P1,000,000 less cash discounts of
P50,000. On December 31,2014, the entity remitted the collections to the bank in payment for the
interest accrued on December 31, 2014 and the note payable.

107. What amount of cash was received from the assignment of accounts receivable on December
1, 2014?
A. 1,425,000 C. 1,900,000
B. 1,500,000 D. 2,000,000
108. What is the carrying amount of note payable on December 31, 2014?
A. 500,000 C. 565,000
B. 550,000 D. 730,000
109. What amount should be disclosed as the equity of Bamboo Company in assigned accounts
on December 31,2014?
A. 270,000 C. 450,000
B. 435,000 D. 500,000
Factoring
110. Crater Company factored without recourse P2,000,000 of accounts receivable with a bank.
The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns and
sales allowances. What amount of cash was received on the sale of accounts receivable?
A. 1,840,000 C. 1,940,000
B. 1,900,000 D. 2,000,000 FA © 2014
111. Mazda Company sold P5,800,000 in accounts receivable for cash of P5,000,000. The factor
withheld 10% of the cash proceeds to allow for possible customer returns and other
adjustments. An allowance for bad debts of P600,000 had previously been established by
the entity in relation to these accounts. What is the loss on factoring that should be
recognized?
A. 200,000 C. 700,000
B. 500,000 D. 800,000 P1 © 2014
112. Flora Company factored P5,000,000 of accounts receivable. The transfer is recorded as a
sale by Flora Company. The factor retained 8% for sales adjustments and charged P300,000
as a financing fee. For simplicity, the estimated and actual amounts of the following items are
equal:
Sales adjustments 250,000
Uncollectible accounts 100,000
What is the loss or financing expense to be recognized on the transfer?
A. 300,000 C. 400,000
B. 350,000 D. 650,000 FA © 2014

113. Earth Company factored P4,000,000 of accounts receivable without guarantee for a finance
charge of 5%. The finance entity retained an amount equal to 10% of the accounts receivable
for possible adjustments. What amount should be recorded as gain or loss on the transfer of
accounts receivable?
A. 200,000 gain C. 600,000 gain
B. 200,000 loss D. 600,000 loss FA © 2014
Daisy Company sold accounts receivable without recourse with face amount of P6,000,000. The
factor charged 15% commission on all accounts receivable factored and withheld 10% of the
accounts factored as protection against customer returns and other adjustments. The entity had
previously established an allowance for doubtful accounts of P200,000 for these accounts. By year-
end, the entity had collected the factor's holdback there being no customer returns and other
adjustments.
114. What amount of cash was initially received from factoring?

A. 4,500,000 C. 5,400,000
B. 5,100,000 D. 6,000,000
115. What is the loss on factoring?

A. 0 C. 700,000
B. 200,000 D. 900,000
Zeus Company factored P6,000,000 of accounts receivable to a finance entity on October 1,2014.
Control was surrendered by Zeus Company. The factor assessed a fee of 3% and retained a
holdback equal to 5% of the accounts receivable. In addition, the factor charged 15% interest
computed on a weighted average time to maturity of the accounts receivable of 54 days.
116. What is the amount of cash initially received from the factoring?
A. 5,296,850 C. 5,476,850
B. 5,386,850 D. 5,556,850
117. If all accounts are collected, what is the cost of factoring the accounts receivable?
A. 180,000 C. 433,150
B. 313,150 D. 613,150

Freeway Company provides financing to other entities by purchasing their accounts receivable on
a nonrecourse basis. Freeway charges clients a commission of 15% on all receivables factored.
In addition, Freeway withholds 10% of receivables factored as protection against sales returns and
other adjustments.
Freeway credits the 10% withheld to Clients Retainer account and makes payments to clients at
the end of each month so that the balance in the retainer is equal to 10% of unpaid receivables at
the end of the month.
Experience has led Freeway to establish an allowance for doubtful accounts of 4% of all unpaid
receivables purchased.
On December 1, 2014, Freeway purchased receivables from Motorway Company totaling
P3,000,000. Motorway had previously established an allowance for doubtful accounts for these
receivables at P100,000.
By December 31, 2014, Freeway had collected P2,500,000 on these receivables.
118. What is the amount of cash initially received by Motorway Company from Freeway Company?
A. 2,250,000 C. 2,700,000
B. 2,550,000 D. 3,000,000
119 What is the loss on factoring to be recognized by Motorway

Company?
A. 350,000 C. 650,000
B. 450,000 D. 750,000
Discounting of notes receivable

Interest rate
120. Brooke Company discounted its own P5,000,000 one-year note at a discount rate of 12%,
when the prime rate was 10%. In reporting the note prior to maturity, what rate should be
used for the recording of interest expense?
A. 10.0% C. 12.0%
B. 10.7% D. 13.6% P1 © 2014
Proceeds
121. Roth Company received from a customer a one-year, P500,000 note bearing annual interest
of 8%. After holding the note for six months, the entity discounted the note without recourse
at 10%. What amount of cash was received from the bank?
A. 495,238 C. 523,810
B. 513,000 D. 540,000 P1 © 2014

122. On July 1,2014, Kay Company sold equipment to Mando Company for PI,000,000. Kay
accepted a 10%> note receivable for the entire sales price. This note is payable in two equal
installments of P500,000 plus accrued. interest on December 31,2014 and December
31,2015. On July 1,2015, the entity discounted the note at a bank at an interest rate of 12%.
What is the amount received from the discounting of note receivable?
A. 484,000 C. 503,500
B. 493,500 D. 517,000 FA © 2014
Interest expense
123. On August 31, 2014, Sunflower Company discounted with recourse a note at the bank at
discount rate of 15%. The note was received from the customer on August 1, 2014, is for 90
days, has a face value of P5,000,000, and carries an interest rate of 12%. The customer
paid the note to the bank on October 30, 2013, the date of maturity.
If the discounting is accounted for as a secured borrowing, what is the interest expense to be
recognized on August 31, 2014?
A. 21,250 C. 28,750
B. 25,000 D. 50,000 P1 © 2014
Carrying amount
124. On August 1, 2014, Vann Company's P5,000,000 one-year, non-interest-bearing note due
July 31, 2015 was discounted at Homestead Bank at 10.8%. The entity used the straight line
method of amortizing discount. What is the carrying amount of the note payable on December
31,2014?
A. 4,460,000 C. 4,775,000
B. 4,685,000 D. 5,000,000 P1 © 2014
Contingent liability
125. On November 1,2014, Davis Company discounted with recourse at 10% a one-year,
noninterest bearing, P2,050,000 note receivable maturing on January 31,2015. The
discounting of the note receivable is accounted for as a conditional sale with recognition of a
contingent liability. What amount of contingent liability for this note must be disclosed in the
financial statements for the year ended December 31, 2014?
A. 0 C. 2,033,333
B. 2,000,000 D. 2,050,000 P1 © 2014
Comprehensive
On July 1, 2014, Lee Company sold goods in exchange for P2,000,000, 8-month, noninterest-
bearing note receivable. At the time of the sale, the market rate of interest was 12%. The entity

discounted the note at 10% on September 1, 2014?

126. What is the cash received from discounting?
A. 1,880,000 C. 1,938,000
B. 1,900,000 D. 1,940,000
127. What is the loss on note receivable discounting?

A. 0 C. 75,000
B. 25,000 D. 100,000
Apex Company accepted from a customer P1,000,000 face amount, 6-rp.dhth, 8% note dated April
15,2014. On the same date, the entity discounted the note without recourse at a 10% discount rate.
128. What amount of cash was received from the discounting?

A. 972,000 C. 990,000
B. 988,000 D. 1,040,000

A. 12,000 C. 50,000
B. 40,000 D. 52,000
On June30,2014, Ray Company discounted at the bank a customer P6,000,000,6-month, 10%
note receivable dated April 30,2014. The bank discounted the note at 12% without recourse.
130. What is the amount received from the note receivable discounting?
A. 5,640,000 C. 6,048,000
B. 5,760,000 D. 6,174,000

A. 48,000 C. 152,000
B. 52,000 D. 252,000
Rand Company accepted from a customer a P4,000,000,90-day, 12% interest-bearing note dated
August 31,2014. On September 30, 2014, the entity discounted the note with recourse at the Apex
State Bank at 15%.
However, the proceeds were not received until October 1,2014. The discounting with recourse is
accounted for as a conditional sale with recognition of a contingent liability.

132. What is the amount received from the discounting of note receivable?
A. 3,965,500 C. 4,103,000
B. 4,017,000 D. 4,120,000

A. 17,000 C. 23,000
B. 20,000 D. 40,000
On January 1, 2014, Cactus Company sold land with carrying amount of PI,500,000 in exchange
for a 9-month, 10% note with face value of P2,000,000. The 10% rate properly reflects the time
value of money for this type of note.
On April 1,2014, the entity discounted the note with recourse. The bank discount rate is 12%. The
discounting transaction is accounted for as a secured borrowing.
On October 1, 2014, the maker dishonored the note receivable. The entity paid the bank the
maturity value of the note plus protest fee of P 10,000.
On December 31,2014, the entity collected the dishonored note in full plus 12% annual interest on
the total amount due.
134. What is the amount received from the discounting of note receivable?
A. 1,921,000 C. 2,050,000
B. 2,021,000 D. 2,150,000
135. What is the interest expense to be recognized on April 1, 2014?

A. 21,000 C. 29,000
B. 25,000 D. 50,000
136. What is the amount collected from the customer on December 31,2014?
A. 2,150,000 C. 2,214,500
B. 2,160,000 D. 2,224,800

ANSWER KEY – THEORY

1.D 21.C 41.A 3.C 15.C
2.C 22.C 42.B 4.D 16.A
3.A 23.C 43.C 5.D 17.D
4.D 24.A ---------------------- 6.B 18.C
5.C 25.B 1.C 7.D 19.A
6.D 26.B 2.B ---------------------- 20.B
7.B 27.C 3.D 1.C 21.A
8.D 28.A 4.A 2.C 22.B
9.D 29.C 5.C 3.A 23.D
10.B 30.A 6.B 4.A 24.C
11.A 31.D 7.C 5.A 25.C
12.D 32.C 8.C 6.A 26.B
13.D 33.B 9.A 7.C 27.A
14.B 34.C 10.D 8.C
15.A 35.C 11.C 9.A
16.A 36.D 12.A 10.B
17.D 37.C 13.C 11.B
18.D 38.A ---------------------- 12.C
19.A 39.B 1.A 13.A
20.D 40.B 2.A 14.D
Answer Key Page 68

Receivable
ANSWER KEY – PROBLEMS

1. 26.A 51.C 76.B 101.A 126.B
2. 27.B 52.B 77.C 102.A 127.D
3. 28.A 53.C 78.C 103.A 128.B
4. 29.B 54.C 79.C 104.B 129.A
5. 30.A 55.D 80.C 105.C 130.C
6.A 31.C 56.C 81.B 106.B 131.B
7.C 32.C 57.C 82.B 107.A 132.B
8.C 33.C 58.D 83.B 108.C 133.C
9.A 34.C 59.B 84.A 109.B 134.B
10.A 35.A 60.B 85.A 110.A 135.C
11.B 36.A 61.A 86.C 111.A 136.D
12.D 37.D 62.C 87.C 112.A
13.A 38.A 63.B 88.C 113.B
14.B 39.D 64.C 89.B 114.A
15.B 40.B 65.C 90.B 115.C
16.A 41.A 66.C 91.B 116.B
17.C 42.B 67.C 92.C 117.B
18.C 43.D 68.B 93.C 118.A
19.A 44.A 69.B 94.D 119.A
20.C 45.B 70.A 95.C 120.D
21.A 46.C 71.C 96.B 121.B
22.D 47.D 72.B 97.C 122.D
23.D 48.D 73.A 98.C 123.C
24.A 49.C 74.B 99.A 124.B
25.A 50.B 75.B 100.C 125.D
Answer Key Page 69

Answer Explanations & Solutions Page 70

Receivable
ANSWER EXPLANATION
1. Answer is (C). The accrued interest receivable on December 31 is for the period July 1 to
December 31 of the current year.
2. Answer is (C). There is an accrued interest receivable from July 1 to December 31 of the
current year.
3. Answer is (A). Since the note was dated July 15 and it was received on August 15, there is
an accrued interest receivable for one month from July 15 to August 15.
4. Answer is (D). On July 1, when the note was received, there is no accrued interest receivable
as yet. Also, there is no unearned discount because the note receivable is interest bearing.
5. Answer is (C). The interest revenue should be computed based on the prevailing rate of
interest on the date of issue, February 1, 2013.
6. Answer is (A).
Accounts receivable - January 1 1,300,000
Add: Credit sales 5,400,000
Total 6,700,000
Less: Collection from customers 4,750,000
4,875,000
Accounts receivable - December 31 1,825,000
The recovery of accounts written off does not affect the balance of accounts receivable
because the effect is offsetting.
7. Answer is (C).
Inventory - January 1 4,800,000
Purchases 8,000,000
Goods available for sale 12,800,000
Inventory - December 31 (4,400,000)

Cost of goods sold 8,400,000

Gross margin on sales 4,200,000
Gross sales 12,600,000
Cash sales ( 2,000,000)
Credit sales 10,600,000'
Accounts receivable – January 1 4,000,000
Total 14,600,000
Accounts receivable collected ( 8,400,000)
Accounts receivable – December 31 6,200,000
8. Answer is (C).
Accounts receivable - unassigned 2,000,000
Accounts receivable - assigned 1,500,000
Trade installments receivable (850,000 - 50,000) 800,000
Accounts receivable from officers 150,000
Accounts on which postdated checks are held 200,000
Total trade accounts receivable 4,650,000
9. Answer is (A).
Accounts receivable. - January 650,000
Total 3,350,000
Less: Collections from customers 2,150,000
Sales returns 75,000 2,265,000
The net realizable value of accounts receivable is computed as follows:
Less: Allowance for doubtful accounts 110,000
Allowance for sales returns 50,000 160,000
Net realizable value 925,000
10. Answer is (A).

Notes received to settle accounts ( 400,000)
Accounts determined to be worthless ( 25,000)
Merchandise returned by customer (15,000)
Collections received to settle accounts (2,450,000)
Discounts taken by customers ( 40,000)

Receivable
Accounts receivable 670,000

Allowance for doubtful accounts (90,000-25,000) (65,000)
Net realizable value 605,000
11. Answer is (B).

Accounts receivable - January 1 1,200,000
Sales 8,000,000
Total 9,200,000
Cash collections (7,000,000 - 10,000) (6,990,000)
Writeoff ( 30,000)
Note received in settlement of account ( 400,000)
Allowance for doubtful accounts – January 1 60,000
Recovery of accounts written off 10,000
Doubtful accounts expense 100,000
Total 170,000
Writeoff ( 30,000)
Allowance for doubtful accounts - December 31 140,000
Net realizable value (1,780,000- 140,000) 1,640,000
12. Answer is (D).

Accounts receivable - January 1 (530,000 + 30,000) 560,000
Charge sales 5,250,000
Accounts written off but recovered 10,000
Total 5,820,000
Collections from customers (5,200,000-50,000) (5,150,000)
Writeoff ( 35,000)
Merchandise returns ( 25,000)
Allowance to customers for shipping damages ( 15,000)
Accounts receivable - December 31 595,000
13. Answer is A). (1,100,000-40,000) 1,060.000

Accounts receivable - January 1 450,000
Collections (3,920,000)
Sales discounts ( 80,000)
Collections of pledged accounts ( 150,000)


Provision for doubtful accounts 26,000
Allowance balance - December 31 40,000
14. Answer is (B).

Goods available for sale 9,000,000
Ending inventory (1,500,000)
Cost of sales 7,500,000
Sales (7,500,000x140%) 10,500,000

Cash sales (10,500,000x20%) (2,100,000)
Collections (6,000,000)
Accounts written off ( 50,000)
Credit sales (10,500,000x80%) 8,400,000
Provision for doubtful accounts (8,400,000 x 5%) 420,000


Allowance for doubtful accounts ( 370,000)
Net realizable value 1,980,000
15. Answer is (B).

Accounts receivable – customers (7,800,000 + 400,000) 8,200,000
Allowance for doubtful accounts ( 200,000)
Accounts receivable-officers 500,000
Debit balances - creditors 300,000
Total trade and other receivables 8,800,000
16. Answer is (A).

Trade accounts receivable 930,000
Allowance for uncollectible accounts ( 20,000)
Claim receivable 30,000
Total trade and other receivables 940,000
The selling price of goods on consignment is excluded from accounts receivable because the

Receivable
goods are still unsold. The cost of the consigned goods of P200,000 (260,000 /130%) should
be included in inventory. The security deposit is a noncurrent receivable.
17. Answer is (C).

Chicken House 1,500,000
Landmark Hotel 2,000,000
All other accounts receivable (5% x 9,500,000) 475,000
Total impairment loss 3,975,000
Bacolod Inn 5,000,000
All other accounts receivable 9,500,000
Note that the receivable from Bacolod Inn is not impaired but it is included in the computation
of the impairment loss. PFRS 9, paragraph 5.2.2, mandates that individually significant
unimpaired accounts receivable shall be included in other accounts receivable not individually
significant for collective assessment of impairment.
18. Answer is (C).

Trisha Company 500,000
Francis Company 1,000,000
All other accounts receivable (4% x 8,500,000) 340,000
Total impairment loss 1,840,000
Jerard Company 2,000,000

Marc Company 1,500,000
All other accounts receivable 8,500,000
Note again that accounts receivable from Jerard Company and Marc Company are not
impaired but included in the other accounts receivable not individually significant for collective
assessment of impairment.
19. Answer is (A). The discount is 2% if accounts are paid in 15 days. Thus, of the total accounts
receivable, only the amount of P2,000,000 within the "0-15 days" category is still subject to
cash discount. The available discount is 2% times P2,000,000 or P40,000. Since, only 50%
of the customers take advantage of the discounts, the cash discount to be recognized is 50%
of P40,000 or P20,000.
The journal entry to record the sales discount is:
Sales discount 20,000
Allowance for sales discount 20,000

20. Answer is (C). Only the bad debt expense decreases working capital. The writeoff does not
affect anymore the working capital because the effect is offsetting.
21. Answer is (A).

Allowance for doubtful accounts -12/31/2013 900,000
Total 1,060,000
Accounts written off (SQUEEZE) (60,000)
Allowance for doubtful accounts - 12/31/2014 1,000,000
22. Answer is (D).

Writeoff 100,000
Excess of ending allowance over beginning allowance 250,000
Uncollectible accounts expense 350,000
23. Answer is (D).

Allowance- 12/31/2013 (4,800,000-4,725,000) 75,000
Recovery of accounts written off in previous year 40,000
Doubtful accounts expense for 2014 (SQUEEZE) 195,000
Total 310,000
Accounts written off in 2014 (160,000)
Allowance-12/31/2014 (5,250,000-5,100,000) 150,000
24. Answer is (A).

Allowance for doubtful accounts (debit balance) ( 16,000)
Doubtful accounts expense (7,100,000 x 2%) 142,000
Allowance for doubtful accounts, December 31 126,000
25. Answer is (A).

Doubtful accounts expense (9,500,000-800,000-200,000 x 3%) 255,000
Total 435,000
Accounts written off (200,000)
Under the percentage of sales method, the amount computed represents the doubtful
accounts expense.
26. Answer is (A). Bad debt expense for 2014 (2% x 5,000,000) 100,000

Receivable
27. Answer is (B).

Allowance for bad debts - December 31, 2013 60,000
Bad debt expense for 2014 (2% x 3,500,000) 70,000
Total 130,000
Allowance for bad debts - December 31, 2014 80,000
Accounts written off in 2014 50,000
28. Answer is (A).

Credit sales Writeoffs Recoveries
2011 11,100,000 260,000 22,000
2012 12,250,000 295,000 37,000
2013 14,650,000 300,000 36,000
38,000,000 855,000 95,000
855,000 – 95,000
Rate = 38,000,000 = .02
29. Answer is (B).

Doubtful accounts expense for 2014 (2%x 15,000,000) 300,000
30. Answer is (A).

Allowance for doubtful accounts - 1/1/2014 78,000
Doubtful accounts expense for 2014 300,000
Recoveries in 2014 42,000
Total 420,000
Write-offs in 2014 (310,000)
Allowance for doubtful accounts- 12/31/2014 110,000
31. Answer is (C).

Required allowance for doubtful accounts on December 31,2014 (3% x 5,000,000)
150,000
If the percentage of accounts receivable method is used, the amount computed represents
the required ending allowance for doubtful accounts.
Incidentally, the doubtful accounts expense is determined as follows:
Allowance for doubtful accounts, December 31,2014 150,000
Add: Debit balance in allowance account before adjustment 40,000
Doubtful accounts expense
190,000

32. Answer is (C).

Year Credit sales Write-offs Recoveries
2010 1,500,000 15,000
2011 2,250,000 38,000 2,700
2012 2,950,000 52,000 2,500
2013 3,300,000 65,000 4,800
Total 10,000,000 170,000 10,000
2014 4,000,000 83,000 5,000
Total 14,000,000 253,000 15,000
170,000 – 10,000
Rate in 2013 = 10,000,000 = .016
253,000 – 15,000
Rate in 2014 = 14,000,000 = .017
Allowance-12/31/2013 (1,250,000x.016) 20,000

Recoveries in 2014 5,000
Doubtful accounts expense for 2014 (SQUEEZE) 92,000
Total 117,000
Writeoffs in 2014 (83,000)
Allowance-12/31/2014 (2,000,000x.017) 34,000
The doubtful accounts expense is "squeezed" from the December 31, 2014 required
allowance for doubtful accounts.
33. Answer is (C).

Accounts receivable - January 1 950,000
Credit sales (5,900,000 - 2,100,000) 3,800,000
Total 4,750,000
Cash received from credit customers (3,024,000)
Sales discounts (3,024,000/96% = 3,150,000-3,024,000) ( 126,000)
Accounts receivable written off ( 50,000)
Sales returns and allowances ( 250,000)
34. Answer is (C).

Question 2 Answer b
Doubtful accounts expense for 2014 - 70,000

Receivable
Total 250,000
Allowance for doubtful accounts – December 31 200,000
35. Answer is (A).

0- 60 (1,200,000x1%) 12,000
61 - 120 ( 900,000x2%) 18,000
Over 120 60,000
Allowance for uncollectible accounts - December 31 90,000
Under the aging method, the amount computed represents the required ending allowance for
uncollectible accounts.
36. Answer is (A).

Allowance - January 1 280,000
Doubtful accounts expense (SQUEEZE) 100,000
Total 430,000
Allowance-December 31 200,000
Since the December 31, 2014 accounts receivable balance is P2,700,000 and the net
realizable value is P2,500,000, the December 31,2014 allowance for doubtful accounts
should be P200,000.
The doubtful accounts expense is "squeezed" by working back from the December 31,2014
allowance for doubtful accounts of P200,000.
37. Answer is (D).

0-30 days (5,000,000 x 2%) 100,000
31 - 60 days (2,000,000 x 10%) 200,000
Over 60 days (1,000,000 x 20%) 200,000
Required allowance - December 31 500,000
Add: Debit balance in allowance 20,000
38. Answer is (A).

Total 425,000

Correct doubtful accounts expense 175,000

Recorded doubtful accounts expense 200,000
Overstatement of doubtful accounts expense ( 25,000)
Adjusting journal entry

39. Answer is (D).

Amount Average rate Required allowance
0-30 days 4,500,000 3.60% 162,000
31-60 days 1,500,000 9.80% 147,000
61-90 days 800,000 18.40% 147,200
91-120 days 200,000 51.24% . 102,480
Over 120 days 100,000 82.02% 82,020
7,100,000 640,700
40. Answer is (B).

0- 30 (300,000 x 1%) 3,000
31 - 90 (80,000 x 5%) 4,000
91 - 180 (60,000 x 20%) 12,000
Over 180 (25,000 x 80%) 20,000
Required allowance - December 31, 2014 39,000
Allowance-December 31, 2013 (2,800,000 x 1%) 28,000

Recovery in 2014 7,000
Uncollectible accounts expense for 2014 (SQUEEZE) 31,000
Total 66,000
Write-off in 2014 (27,000)
41. Answer is (A).

November - December (2,000,000 x 2%) 40,000
July-October (600,000 x 10%) 60,000
January - June (400,000 x 25%) 100,000
Prior to January 1,2014 ( 200,000 - 60,000 x 75%) 105,000

Receivable
42. Answer is (B).

Recorded doubtful accounts expense (2% x 9,000,000) 180,000
43. Answer is (D).

Allowance for doubtful accounts - January 1, 2014 120,000
Recoveries 15,000
Total 455,000
Writeoffs (90,000 + 60,000) (150,000)
44. Answer is (A).

Correct doubtful accounts expense 320,000
Recorded amount (2% x 9,000,000) 180,000
Increase in doubtful accounts expense 140,000
The year-end adjustment to recognize the increase in doubtful accounts expense is as
follows:
Doubtful accounts 140,000
45. Answer is (B).

Note receivable - noninterest 2,500,000
Cash price 2,300,000
Implied interest revenue 200,000
Interest revenue from July 1 to December 31, 2014 (200,000 x 6/12) 100,000
46. Answer is (C).

Interest income from July 1 to Dec. 31, 2014 (10% x 5,000,000x6/12) 250,000
47. Answer is (D).

Note receivable 1,700,000
Present value equal to cash price (1,600,000 x 90%) 1,440,000
Interest revenue 260,000
48. Answer is (D).

First payment on January 1,2014 600,000
Present value of remaining six payments (600,000 x 4.36) 2,616,000
Correct sales revenue 3,216,000
Note receivable (600,000 x 6) 3,600,000

Less: Present value of remaining six payments 2,616,000

Unearned interest income 984,000
Since the note is long-term and noninterest-bearing, the sales revenue is equal to the present
value of the seven annual payments of P600,000.
Journal entry
Cash 600,000
Sales 3,216,000
49. Answer is (C).

Present value of note (4,000,000 x .712) 2,848,000
Carrying amount of building (3,800,000 - 1,600,000) (2,200,000)
Gain on sale 648,000
50. Answer is (B).

Total payments (500,900x5) 2,504,500
Present value of the note (1,948,500)
Total interest revenue 556,000
51. Answer is (C).

Installment receivable - January 1,2014 7,582,000
Payment on December 31,2014 2,000,000
Interest income for 2014 (7,582,000 x 10%) 758,200 1,241,800
Carrying amount - December 31, 2014 6,340,200
52. Answer is (B).

Less: Present value (4,000,000 x .75) 3,000,000
Unearned interest income 1,000,000
The unearned interest income is amortized over 3 years using the effective interest method
as follows:
Present value, January 1, 2014 3,000,000
Interest income for 2014 (10% x 3,000,000) 300,000
Present value, December 31,2014 3,300,000
Present value, December 31, 2015 3,630,000
Interest income for 2016 (1,000,000 - 630,000) 370,000
Present value, December 31,2016 4,000,000

Receivable
Interest income for 2014 300,000

Interest income for 2015 330,000
Interest income for 2016 (simply the remainder) 370,000
Total interest income 1,000,000
53. Answer is (C).

Note receivable, June 30, 2014 1,500,000
Payment on July 1, 2015 ( 500,000)
Balance, July 1,2015 1,000,000
Since the next payment is on July 1,2016, the accrued interest is for one year from July 1,
2015 to June 30, 2016, or PI,000,000 x 8% equals P80,000.
Problem 20-5 (AICPA Adapted)
54. Answer is (C).

November 2014 (500,000 x 1%) 5,000
December 2014 (500,000 x 1%) 5,000
Accrued interest receivable on December 31, 2014 10,000
The interest is 1 % per month because the annual rate is 12%>.
55. Answer is (D).

Note receivable - January 1,2014 (7,000,000 - 1,000,000) 6,000,000
Principal payment on December 31, 2014:
Annual payment 1,975,400
Interest (12% x 6,000,000) ( 720,000) 1,255,400
Carrying amount - December 31,2014 4,744,600
56. Answer is (C).

The note receivable is shown at present value on December 31, 2014.
Present value of note (500,000 x 5.65) 2,825,000
57. Answer is (C).

The note receivable is shown at present value on December 31, 2014.
Face value - remaining nine payments (100,000 x 9) 900,000
Present value (100,000 x 6.25) 625,000
Journal entry
Cash 100,000
Note receivable 900,000

Sales 725,000
First payment on December 31,2014 100,000

Present value of remaining payments 625,000
Total sales revenue 725,000
58. Answer is (D).

The note receivable from Hart is reported at the face amount of P1,000,000 because it is due
within one year or short-term and made under customary trade terms despite the fact that
the 3% interest rate of the note is lower than the 8%> prevailing interest rate.
The note receivable from Maxx is reported at the present value of the principal and interest
because the 3% stated interest rate is lower than the 8% prevailing market interest rate and
the note is long-term, due in 5 years.
Principal 1,000,000
Interest for 5 years (1,000,000 x 3% x 5) 150,000
Maturity value 1,150,000
Multiply by present value factor .680
Present value of note 782,000
59. Answer is (B).

Present value of note receivable (1,000,000 x .712) 712,000
Carrying amount of equipment 800,000
Loss on sale ( 88,000)
Interest income for first year (12% x 712,000) 85,440
60. Answer is (A).

Less: Present value (6,000,000 x .75) 4,500,000
Unearned interest income 1,500,000
The unearned interest income is amortized as interest income over 3 years using the effective
interest method. Thus, the interest income for 2014 is 10% times P4,500,000 or P450,000.
61. Answer is (A).

Present value of note (correct sale price) 4,500,000
Less: Carrying amount of equipment 4,800,000
Loss on sale of equipment ( 300,000)

Receivable
62. Answer is (C).

Note receivable - December 31, 2014 2,400,000
Present value (1,200,000 x 1.76) 2,112,000
63. Answer is (B).

Note receivable - December 31, 2015 1,200,000
Unearned interest income-12/31/2015 (288,000-190,080) ( 97,920)
64. Answer is (C).

Note receivable from sale of building due 5/1/2015 2,500,000
Accrued interest on note receivable from sale of building from
5/1/2014 to 12/31/2014 (5,000,000 x 9% x 8/12) 300,000
Principal payment of note receivable from sale of land due on 7/1/2015:
Annual installment 880,000
Interest from 7/1/2014 to 7/1/2015 (10% x 2,800,000) (280,000) 600,000
Accrued interest on NR from sale of land from
7/1/2014 to 12/31/2014(1/2x280,000) 140,000
Total current receivables - December 31, 2014 3,540,000
65. Answer is (C).

NR from sale of building due May 1, 2016 2,500,000
NR from officer due December 31, 2016 2,000,000
NR from sale of land - noncurrent portion:
Principal 2,800,000
Due July 1, 2015 - current portion (600,000) 2,200,000
Total noncurrent notes receivable - December 31, 2014 6,700,000
66. Answer is (C).

Present value of note receivable (500,000 x 3.99) 1,995,000
67. Answer is (C).

68. Answer is (B).

Note receivable - 12/31/2015 (2,500,000 - 500,000) 2,000,000
Unearned interest income - 12/31/2015

(2,500,000 - 1,995,000 = 505,000 - 159,600) (345,400)

Carrying amount -12/31/2015 1,654,600
69. Answer is (B).

Loan receivable 1,500,000
Direct origination cost 40,000
Total 1,540,000
Origination fee received from borrower (1,500,000 x 4%) ( 60,000)
Carrying amount 1,480,000
The indirect origination cost incurred by the bank is an outright expense.
70. Answer is (A).

Loan payable 1,500,000
Origination fee charged by the bank (60,000)
71. Answer is (C).

Interest income for 2014 (194,000 x 13.4% x 1/12) 2,166
72. Answer is (B).

Accrued interest receivable (200,000 x 12% x 1/12) 2,000
73. Answer is (A).

Origination fee received 350,000
Direct origination cost (61,500)

Unearned interest income (288,500)
Carrying amount - January 1,2014 3,711,500
The origination fee may be charged against the borrower. If not, the origination fee is known
as "direct origination cost". The origination fee received from the borrower is recognized as
unearned interest income to be amortized over the term of the loan. The direct origination
cost is a deferred charge and also amortized over the term of the loan. Preferably, the two
are offset against the other.

Receivable
74. Answer is (B).

Interest income for 2014 (3,711,500 x 12%) 445,380
Journal entries on December 31, 2014
Cash (10% x 4,000,000) 400,000
Interest income 400,000


Interest received 400,000
Amortization of unearned interest income 45,380
75. Answer is (B)

Unearned interest income - 12/31/2014 (288,500-45,380) ( 243,120)
Carrying amount -12/31/2014 3,756,800
76. Answer is (B).

Origination fee received 342,100
Direct origination cost incurred (150,000)

Unearned interest income ( 192,100)
Carrying amount - January 1, 2014 3,807,900
77. Answer is (C).

Interest received for 2014 (10% x 4,000,000) 400,000
Amortization of unearned interest income 56,948

78. Answer is (C).

Loan receivable 4,000,000-
Unearned interest income - December 31, 2014
(192,100-56,948) ( 135,152)
79. Answer is (C).

80. Answer is (C).

Origination fee received (100,000)
Net direct origination cost 160,300
Carrying amount of loan receivable - January 1, 2014 3,160,300
81. Answer is (B).

Interest received for 2014 (8% x 3,000,000) 240,000
Amortization of direct origination cost 50,382
82. Answer is (B).

Direct origination cost-12/31/2014 (160,300 - 50,382) 109,918
83. Answer is (B).

84. Answer is (A).

Accrued interest receivable (9% x 5,000,000) 450,000
Present value of cash inflows (5,450,000 x .772) 4,207,400

Receivable
Impairment loss 1,242,600

The PV factor applicable to the original effective rate of 9% is used in computing the present
value of the loan. The remaining term of the loan is three years from December 31,2014 to
December 31,2017.
85. Answer is (A).

Schedule of cash flows
December 31, 2015 No interest payment
December 31, 2016 No interest payment
December 31,2017 Interest payment (9% x 4,000,000) 360,000
December 31, 2018 Interest payment 360,000
December 31,2019 Interest payment 360,000
December 31, 2020 Interest payment 3 60,000
December 31, 2020 Principal payment 4,000,000
Present value of cash flows
December 31, 2017 (360,000 x .772) 277,920
December 31, 2018 (360,000 x .708) 254,880
December 31, 2019 (360,000 x .650) 234,000
December 31, 2020 (4,360,000 x .596) 2,598,560
Total present value of loan 3,365,360
Present value of loan 3,365,360
Loan impairment loss 634,640
86. Answer is (C).

Present value of principal (500,000 x .735) 367,500
Present value of interest (80,000 x 5 = 400,000 x .735) 294,000
Total present value of loan 661,500

Present value of loan 661,500
Loan impairment loss 338,500

87. Answer is (C).

Interest income for 2015 (8% x 661,500) 52,920
88. Answer is (C).

December 31, 2015 (500,000x.90) 450,000
December 31, 2016 (1,000,000 x.81) 810,000
December 31, 2017 (2,000,000x.73) 1,460,000
December 31,2018 (4,000,000 x .66) 2,640,000
Accrued interest receivable (7,500,000 x 11 %) 825,000
Present value of loan 5,360,000
PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 63, provides that the
impairment loss on loan receivable is measured as the difference between the carrying amount
of loan receivable and the present value of the loan using the original effective rate.
89. Answer is (B).

Allowance for loan impairment (2,965,000 - 825,000) (2,140,000)
Carrying amount of loan receivable - December 31, 2014 5,360,000
The impairment loss is P2,965,000 but the allowance for impairment is credited only for
P2,140,000 net of the accrued interest of P825,000.
90. Answer is (B).

Journal entries on December 31,2015
Cash 500,000
Loan receivable 500,000
Allowance for loan impairment 589,600

Receivable
Loan receivable (7,500,000-500,000) 7,000,000

Allowance for loan impairment (2,140,000 - 589,600) (1,550,400)
Carrying amount - December 31, 2015 5,449,6,00
91. Answer is (B).

January 1,2015 collection (1,000,000 x 1.000) 1,000,000
January 1,2016 collection (1,000,000 x .926) 926,000
January 1,2017 collection (1,000,000 x .857) 857,000
Present value of loan* 2,783,000
Impairment loss 217,000
Journal entry to record the impairment loss

Allowance for loan impairment 217,000
92. Answer is (C).

Collection on January 1,2015 (1,000,000)
Loan receivable - January 1, 2015 2,000,000
Allowance for loan impairment ( 217,000)
Carrying amount - January 1, 2015 1,783,000
93. Answer is (C).

Loan receivable - December 31, 2015 2,000,000
Allowance for loan impairment - December 31, 2015(217,000 - 142,640) ( 74,360)
94. Answer is (D).

PV of principal (5,000,000 x .75) 3,750,000
PV of interest (200,000 x 2.49) 498,000
Total present value 4,248,000


Journal entry
Allowance for impairment 752,000
95. Answer is (C).

Interest received ( 4% x 5,000,000) 200,000
Amortization of allowance for impairment 224,800
Journal entry
Cash 200,000
Allowance for impairment 224,800
96. Answer is (B).

Allowance for impairment (752,000 - 224,800) ( 527,200)
97. Answer is (C).

PV of principal (5,000,000 x .57) 2,850,000
PV of interest (10% x 5,000,000 x 3.60) 1,800,000
Cash paid to borrower 4,650,000
Principal 5,000,000
Present value 4,650,000
Journal entry
Cash 4,650,000

Receivable
98. Answer is (C).

10% 12%
Date Interest Interest Amortizatio Present
received income n value
12/31/2014 4,650,000
12/31/2015 500,000 558,000 58,000 4,708,000
12/31/2016 500,000 564,960 64,960 4,772,960

Unearned interest income (350,000 - 58,000 - 64,960) (227,040)
99. Answer is (A).

PV of principal (3,000,000 x .71) 2,130,000
PV of interest ( 500,000 x 2.40) 1,200,000
Total present value 3,330,000
100. Answer is (C).

Cash proceeds 2,100
Call option 80
Net proceeds - sale price equal to fair value 2,200
Carrying amount (2,000)
Gain on sale 200
101. Answer is (A).

Cash 2,100
Interest rate swap receivable 140
Call option 80

Loan receivable 2,000

Recourse obligation 120
Gain on sale 200
102. Answer is (A).

Cash proceeds 2,100
Call option 80
Fair value of the service (50)
Net proceeds =- net sale price 2,150
Carrying amount (2,000)
Gain on sale 150
103. Answer is (A). No gain or loss is recognized because assignment of accounts receivable is
a secured borrowing and not a sale.
104. Answer is (B).

Sale price 5,300,000
Carrying amount of accounts receivable (6,000,000-250,000) 5,750,000
Loss on factoring ( 450,000)
105. Answer is (C).

Accounts receivable - unassigned 1,000,000
Accounts receivable - assigned 5,000,000
Total accounts receivable 6,000,000
Required allowance- 12/31/2014 (3% x 6,000,000) 180,000

Allowance for bad debts before adjustment 65,000
Bad debt expense for 2014 115,000
106. Answer is (B).

Face amount of loan 2,000,000
Finance fee (4% x 2,000,000) ( 80,000)

Receivable
Cash received 1,920,000
107. Answer is (D).

Note payable 1,500,000
Finance fee (5% x 1,500,000) (75,000)
Cash received on December 1 1,425,000
108. Answer is (C).

Principal payment:
Remittance 950,000
Interest (1,500,000 x 12% x 1/12) ( 15,000) 935,000
Note payable - December 31 565,000
109. Answer is (B).

Accounts receivable - assigned (2,000,000 - 1,000,000) 1,000,000
Note payable (565,000)
Equity of Bamboo Company in assigned accounts 435,000
110. Answer is (A).

Finance charge (3% x 2,000,000) ( 60,000)
Factor's holdback (5% x 2,000,000) ( 100,000)
Cash received from factoring 1,840,000
111. Answer is (A).

Sale price 5,000,000
Carrying amount of accounts receivable (5,800,000-600,000) 5,200,000
Loss on factoring (200,000)
112. Answer is (A). Loss on factoring - finance fee 300,000
113. Answer is (B). Loss on factoring - equal to finance fee (5% x 4,000,000) 200,000

114. Answer is (C).

Factor's holdback (1.0% x 6,000,000) ( 600,000)
Commission (15% x 6,000,000) ( 900,000)
Cash received 4,500,000
115. Answer is (C).

Accounts receivable factored 6,000,000
Commission ( 900,000)
Net sale price 5,100,000
Carrying amount of AR (6,000,000 - 200,000) 5,800,000
116. Answer is (B)

Factor's holdback (6,000,000 x 5%) (300,000)
Factoring fee (6,000,000 x 3%) (180,000)
Interest (6,000,000 x 15% x 54/365) (133,150)
Cash initially received from factoring 5,386,850
117. Answer is (B).

Factoring fee 180,000
Interest 133,150
Total cost of factoring 313,150
118. Answer is (A).

Commission (15% x 3,000,000) ( 450,000)
Holdback (10% x 3,000,000) ( 300,000)
Cash initially received 2,250,000
119. Answer is (A).

Commission ( 450,000)

Receivable
Net sale price 2,550,000

Carrying amount of accounts receivable (3,000,000 - 100,000) 2,900,000
Entry on the books of Motorway Company

Cash 2,250,000
Loss on factoring 350,000
Due from factor 300,000
Entry on the books of the factor, Freeway Company

Cash 2,250,000
Commission income 450,000
Clients retainer 300,000
120. Answer is (D).

Discount (5,000,000 x 12%) ( 600,000)
Net proceeds 4,400,000
Effective interest rate = Discount/Net proceeds
= 600,000/4,400,000
= 13.6%
121. Answer is (B).

Principal 500,000
Add: Interest (500,000 x 8%) 40,000
Maturity value 540,000
Less: Discount (540,000 x 10% x 6/12) 27,000
Ne+ proceeds 513,000
Principal 500,000
Accrued interest receivable (500,000 x 8% x 6/12) 20,000
Carrying amount of note receivable 520,000

Net proceeds 513,000

Carrying amount of note receivable (520,000)
Loss on note receivable discounting ( 7,000)
Maturity value = Principal plus interest for the "full" term of the note. Interest = Principal
times interest rate times the full term of the note. Discount - Maturity value times
discount rate x discount period.
122. Answer is (D).

Principal 500,000
Add: Interest (500,000 x 10%) 50,000
Maturity value 550,000
Less: Discount (550,000 x 12% x 6/12) 33,000
Only the balance of P500,000 on December 31, 2014 was discounted because the first
installment of P500,000 was paid on said date. This balance of P500,000 matures on
December 31, 2015 and therefore the corresponding interest is for one year from December
31,2014 to December 31, 2015. However, the discount period is only 6 months because the
note was discounted on July 1, 2015.
123. Answer is (C).

Principal 5,000,000
Interest (5,000,000 x 12% x 90/360) 150,000
Discount (5,150,000 x 15% x 60/360) 128,750
Principal 5,000,000
Accrued interest receivable (5,000,000 x 12% x 30/360) 50,000
Carrying amount of note receivable 5,050,000

Carrying amount of note receivable (5,050,000)
Interest expense ( 28,750)

Receivable
Journal entry
Cash 5,021,250
Interest expense 28,750
Liability for note discounted 5,000,000
124. Answer is (B).

Less: Discount (5,000,000 x 10.8%) 540,000
Actually, Vann Company borrowed from the bank and issued a note for the loan. Thus, this
is a case of "discounting own note".
Journal entries
1. To record the loan on August 1,2014:
Cash 4,460,000
Discount on note payable 540,000
2. To amortize the discount as interest expense for 5 months from August 1 to December
31, 2014:
Interest expense (540,000 x 5/12) 225,000
Discount on note payable 225,000
On December 31,2014, the discount on note payable is reported as a deduction from

note payable.
Discount on note payable (540,000-225,000) (315,000)
Carrying amount - December 31,2014 4,685,000
125. Answer is (D). The contingent liability is equal to the principal or face value of the note
receivable discounted.

126. Answer is (B).

Principal - maturity value 2,000,000
Less: Discount (2,000,000x10% x 6/12) 100,000
The note is dated July 1,2014 and it was discounted on September 1, 2014 and
therefore, 2 months already expired. Since the term of the note is 8 months, the
unexpired term is 6 months.
127. Answer is (D).

The carrying amount of the note receivable is equal to the principal because the note
is noninterest-bearing.
128. Answer is (B).

Principal 1,000,000
Add: Interest (1,000,000 x 8% x 6/12) 40,000
Less: Discount (1,040,000 x 10% x 6/12) 52,000
129. Answer is (A).

Carrying amount of note receivable - equal to principal (1,000,000)
Loss on note receivable discounting (12,000)
Journal entry
Cash 988,000
Loss on note receivable discounting 12,000

Receivable
130. Answer is (C).

Principal 6,000,000
Add: Interest (6,000,000 x 10% x 6/12) 300,000
Less: Discount (6,300,000 x 12% x 4/12) 252,000
The note is dated April 30,2014 and it was discounted June 30,2014. Therefore, two months
already expired. The original term is 6 months: and accordingly, the unexpired term is 4
months.
131. Answer is (B).

Principal 6,000,000
Accrued interest (6,000,000 x 10% x 2/12) 100,000
Net proceeds 6,048,00,0
132. Answer is (C).

Principal 4,000,000
Interest (4,000,000 x 12% x 90/360) 120,000
Less: Discount (4,120,000 x 15% x 60/360) 103,000
The note is dated August 3.1,2014 and it was discounted on September 30, 2014 and
therefore, 30 days already expired. Accordingly, the discount period or unexpired term is 60
days.
133. Answer is (C).

Principal 4,000,000
Accrued interest receivable (4,000,000 x 12% x 30/360) 40.000

134. Answer is (B).

Principal 2,000,000
Interest (2,000,000 x 10% x 9/12) 150,000
Discount (2,150,000 x 12% x 6/12) ( 129,000)
135. Answer is (C).

Principal 2,000,000
Accrued interest receivable (2,000,000 x 10% x 3/12) 50,000

Interest expense ( 29,000)
136. Answer is (D).

Protest fee 10,000
Total amount due 2,160,000
Interest' (2,160,000 x 12% x 3/12) 64,800
Amount collected from customer 2,224,800

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FINANCIAL ACCOUNTING

THEORY & PRACTICE

2. Explain the classification of receivables in the statement of financial position.

Essay Questions – Accounts Receivable Page 1

3. Explain the "initial measurement" of receivables.

Thus, accounts receivable shall be measured initially at face value.

4. Explain the measurement of accounts receivable.

Essay Questions – Accounts Receivable Page 2

a. Allowance for freight charge

5. What are customers' credit balances?

6. Explain the two methods of accounting for bad debts.

Moreover, accounts receivable will be properly measured at net realizable value.

Essay Questions – Accounts Receivable Page 3

This approach is often used by small businesses because it is simple to apply.

7. What is the treatment of "recoveries of accounts previously written off?

If a collection is made on account previously written off, the customary procedure is to

8. What are the three methods of estimating doubtful accounts?

Essay Questions – Accounts Receivable Page 4

Percent of accounts receivable method

Percent of sales method

9. How would you classify doubtful accounts in the income statement?

In the absence of any contrary statement, doubtful accounts shall be classified as

10. Explain impairment of accounts receivable.

Actually, accounts receivable considered uncollectible are deemed to be "impaired".

Essay Questions – Accounts Receivable Page 5

In other words, an account receivable is considered impaired if a loss event indicates a

a. Significant financial difficulty of the customer.

Essay Questions – Accounts Receivable Page 6

A negotiable promissory note is an unconditional promise in writing made by one person to

The note may be payable on demand or at a definite future date.

2. Explain the treatment of "dishonored notes".

When a promissory note matures and is not paid, it is said to be dishonored.

The journal entry to record dishonored notes is:

3. Explain the initial measurement of notes receivable.

Conceptually, notes receivable shall be measured initially at present value.

Essay Questions – Notes Receivable Page 7

However, short-term notes receivable are measured at face value.

4. Explain the subsequent measurement of notes receivable.

Subsequent to initial recognition, long-term notes receivable shall be measured at amortized

Essay Questions – Notes Receivable Page 8

2. Explain the initial- measurement of loan receivable.

3. Explain the subsequent measurement of loan receivable.

4. Explain "origination fees" in relation to a loan receivable.

Essay Questions – Loans Receivable Page 9

5. What is the treatment of origination fees?

6. Explain impairment of loan receivable.

Essay Questions – Loans Receivable Page 10

1. Significant financial difficulty of the issuer or obligor.

7. Explain the measurement of impairment loss on loan receivable.

The amount of the impairment loss shall be recognized in profit or loss.

2. Explain pledge of accounts receivable.

Essay Questions – Receivable Financing Page 11

3. Explain assignment of accounts receivable.

Actually, assignment is a more formal type of pledging of accounts receivable. It is evidenced

4. Explain factoring of accounts receivable.

Factoring is a sale of accounts receivable on a without recourse, notification basis. In a

Essay Questions – Receivable Financing Page 12

5. Explain discounting of note receivable.

Legally, discounting is a transfer or endorsement of a promissory note by the payee in favor

Thus, to discount the note, the payee must endorse it.

In the absence of contrary statement, endorsement is assumed to be with recourse.

6. Define the following terms in connection with discounting, of note receivable:

Net proceeds = Maturity value minus Discount