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True or False (1-10). Instruction: Write true if the statement is correct and false if the statement
is incorrect.
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1. Factoring is a financing arrangement whereby one party formally transfers its rights to
accounts receivable to another party in consideration for a loan.
Answer: False
Source: Theory of Accounts Volume I by Conrado Valix
Topic: Receivable Financing
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2. Assignment is a financial arrangement that is usually done on a “without recourse,
$
notification basis”.
Answer: False
Email Topic: Receivable Financing
3. If a note receivable is discounted with recourse, note receivable discounted is credited.
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Answer: True
4. If a note receivable is discounted without recourse, note receivable is debited.

Answer: False
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5. Note receivable discounted without recourse shall be excluded from total receivables
without disclosure of contingent liability.
Answer: True
6. Trade receivables are classified as current assets if they are reasonably expected to be
collected within one year or within the operating cycle, whichever is shorter.
Answer: False
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Topic: Trade and Other Receivables
7. A credit sale is a method of estimating bad debts that focuses on the income statement
rather than the statement of financial position.
Answer: True
Topic: Allowance for Bad Debts
8. Direct writeoff is a method of estimating uncollectible accounts that emphasizes asset

valuation rather than income measurement.
Answer: False
9. Imputed interest is based on the stated interest rate.

Answer: False
10. Subsequent to initial recognition, a loan receivable shall be measured at amortized cost
using the straight line method.
Answer: False
Multiple Choices (11-90). Instruction: Choose the letter of your best answer before the number.
11. If accounts receivable are pledged against borrowing, the amount of accounts receivable
pledged shall be
a. Excluded from total receivables with disclosure
b. Excluded from total receivables without disclosure
c. Included in total receivables with disclosure
d. Included in total receivables without disclosure

12. When account receivable are factored
a. Accounts receivable shall be credited
b. Payable to factor is credited
c. A contingent liability is ordinarily created
d. The factoring is accounted for as borrowing

13. It is a predetermined account withheld by a factor as a protection against customer

returns, allowances and other special adjustments.
a. Equity in assigned accounts
b. Service charge
c. Factor’s holdback
d. Loss on factoring

14. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements

15. Which of the following is a method to generate cash from accounts receivable?
I. Assignment
II. Factoring
a. I only
b. II only
c. Both I and II
d. Neither I nor II

16. 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. Hypothecation
b. Factoring
c. Defalcation
d. Pledging

17. 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

18. 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?
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face value less the discount at 12%
d. Face value less the discount 15%

19. A note receivable bearing a reasonable interest rate is sold for a bank with recourse. At
the date of the discounting transaction, the note receivable account should be
a. Decreased by the proceeds from the discounting transaction
b. Increased by the proceeds from the discounting transaction
c. Increased by the face amount of the note
d. Decreased by the face amount of the note

20. 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
b. Discounted and pledged
c. Discounted and assigned
d. Factored

21. Nontrade receivables are classified as current assets only if they are reasonably
expected to be realized in cash
a. Within one year or within the operating cycle, whichever is shorter
b. Within one year or within the operating cycle, whichever is longer
c. Within the normal operating cycle
d. Within one year, the length of the operating cycle notwithstanding

22. Accounts receivable shall be recognized initially at

a. Face value
b. Discounted value
c. Maturity value
d. Current value

23. Credit balances in accounts receivable

a. Current liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts receivable

24. Which method of recording bad debt loss is consistent with accrual accounting?
a. Allowance method
b. Direct writeoff method
c. Percent of sales method
d. Percent of accounts receivable method

25. The advantage of relating an entity’s bad debt experience to accounts receivable is that
this approach
a. Makes estimates of uncollectible accounts unnecessary
b. Gives a reasonably accurate measurement of receivables in the statement of
financial position
c. Relates bad debt expense to the period of sale
d. Is the only generally accepted method for measuring accounts receivable

26. 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
b. Decrease under both allowance 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

27. 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. Affects neither net income nor accounts receivable
c. Decreases both net income and accounts receivable
d. Decreases both net income and working capital

28. Which of the following methods of determining bad debt expense most closely matches
expense to revenue?
a. Charging bad debts only as accounts are written off as uncollectible
b. Charging bad debts with a percentage of sales for that period
c. Estimating the allowance for doubtful accounts as a percentage of accounts
receivable
d. Estimating allowance for doubtful accounts by aging the accounts receivable

29. Why is the allowance method preferred over the direct writeoff method of accounting for
bad debts?
a. The allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under direct writeoff method is difficult to do
d. Improved matching of bad debt expense with revenue is achieved

30. Which of the following is not permitted in accounting for uncollectible accounts
receivable?
a. Percentage of account receivable, allowance method

b. Percentage of sales, allowance method
c. Direct writeoff method
d. All of the choices are acceptable under PFRS

31. Accounting for the interest in a noninterest bearing note receivable is an example of
what aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance

32. 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
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note

33. 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 yea. When the note receivable was recorded on
July 1. Which is the following was debited?
I. Interest receivable
II. Unearned discount on note receivable
a. I only
b. Both I and II
c. Neither I nor II
d. II only

34. Which of the following statements is true in relation to presentation of receivables in the
statement of financial position?
a. Trade receivables and nontrade receivables are shown separately
b. Nontrade receivables are presented as noncurrent assets
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”

35. Receivables from subsidiaries shall be classified as

a. Current assets
b. Noncurrent assets
c. Either as current or noncurrent depending on the expectation of realizing them within
one year or over one year
d. Partly current and partly noncurrent

36. The amortized cost of loan receivable is the amount at which

a. 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.
b. The loan receivable is measured initially minus principal payment, plus or minus the
cumulative amortization of any difference between the initial amount recognized and
the principal maturity amount.
c. The loan receivable is measured initially
d. The loan receivable is measured initially minus principal repayment

37. 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
b. I and II only
c. I and III only
d. I,II and III

38. Which of the following is not an objective evidence of impairment of a financial asset?
a. Significant financial difficulty of the issuer
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

39. If there is evidence that an impairment loss on loan receivable has been incurred, the
loss is equal to the
a. Excess of the carrying amount of the loan receivable over the present value of the
cash flows related to the loan
b. Excess of the present value of cash flows related to the loan over the carrying
amount of the loan receivable
c. Excess of the carrying amount of the loan over the principal amount of the loan
d. Excess of the principal amount of the loan over the carrying amount
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40. All of the following are problems associated with the measurement of accounts
receivable, except
a. Uncollectible accounts
b. Returns
c. Cash discounts under the net method
d. Allowances granted

41. Jungkook Company assigned P 4,000,000 of accounts receivable as collateral for a P

2,000,000 6% of 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. 200,000 loss
b. 100,000 loss
c. 240,000 gain
d. 0
Source: Practical Accounting Volume I by Conrado Valix

Solution:
No gain or loss is recognized because assignment of accounts receivable is a secured
borrowing financing and not a sale.
42. Suga Company sold accounts receivable without recourse for P 5,300,000. The entity
received P 5,000,000 cash immediately from the factor. The remaining P 300,000 will be
received once the factor verifies that none of the accounts receivable is in dispute. The
accounts receivable had a face amount of P 6,000,000. The entity had previously
established an allowance for bad debts of P 250,000 in connection with such accounts.
What amount of loss on factoring should be recognized?
a. 700,000
b. 450,000
c. 750,000
d. 300,000

Solution:
Sale price 5,300,000
Carrying amount of accounts receivable (6,000,000-250,000) 5,750,000
Loss on factoring (450,000)
43. V Company sold P 5,800,000 in accounts receivable for cash of P 5,000,000. The factor
withheld 10% of the cash proceeds to allow for possible customer returns and other
adjustments. An allowance for bad debts of P 600,000 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
b. 700,000
c. 500,000
d. 800,000

Solution:
Sale price 5,000,000
Carrying amount of accounts receivable (5,800,000-600,000) 5,200,000
Loss on factoring (200,000)
44. Jhope Company factored P 4,000,000 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 loss
b. 200,000 gain
c. 600,000 loss
d. 600,000 gain

Solution:
Loss on factoring-equal to finance fee (5% x 4,000,000) 200,000
45. Rapmon Company factored without recourse P 2,000,000 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
a. 1,940,000
b. 1,900,000
c. 1,840,000
d. 2,000,000

Solution:
Accounts receivable 2,000,000
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
46. Jin Company assigned P 3,000,000 of accounts receivable as collateral for a P

2,000,000 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 P 1,920,000, debit finance charge P 80,000, and credit note payable P
2,000,000
b. Debit cash P 1,920,000, debit finance charge P 80,000, and credit accounts
receivable P 2,000,000
c. Debit cash P 1,920,000, debit finance charge P 80,000, debit due from bank P
1,000,000, and credit accounts receivable P 3,000,000
d. Debit cash P 1,880,000, debit finance charge P 120,000, and credit note payable P
2,000,000

Solution:
Face amount of loan 2,000,000
Finance fee (4% x 2,000,000) (80,000)
Cash received 1,920,000
(For Numbers 47-48) Hanbin Company factored P 750,000 of accounts receivable at year-
end. Control was surrendered. The factor accepted the accounts receivable subject to
recourse for nonpayment. The factor assessed a fee of 2% and retained a holdback equal to
4% of the accounts receivable. In addition, the factor charged 12% interest computed on a
weighted-average time to maturity of fifty-one days. The fair value of the recourse obligation
is P 15,000.
47. What is the amount of cash initially received from the factoring?
a. 692,425
b. 720,000
c. 722,425
d. 705,000

Solution:
Accounts receivable 750,000
Factor’s holdback (4% x 750,000) (30,000)
Factoring fee (2% x 750,000) (15,000)
Interest (750,000 x 12% x 51/365) (12,575)
Cash initially received from factoring 692,425
48. Assuming all accounts receivable are collected, what is the cost of factoring the
a. 12,575
b. 15,000
c. 27,575
d. 42,575

Solution:
Factoring fee 15,000
Interest 12,575
Total cost of factoring 27,575
(For numbers 49-50) On July 1, 2015, Yunhyeong Company sold goods in exchange for P
2,000,000, 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, 2015.
49. What is the cash received from discounting?

a. 1,940,000
b. 1,938,000
c. 1,900,000
d. 1,880,000

Solution:
Principal-maturity value 2,000,000
Less: Discount ( 2,000,000 x 10% x 6/12) 100,000
Net proceeds 1,900,000
50. What is the loss on note receivable discounting?

a. 100,000
b. 75,000
c. 25,000
d. 0

Solution:
Net proceeds 1,900,000
Carrying amount of note receivable (2,000,000)
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3. If a note receivable is discounted with recourse, note receivable discounted is credited.

Did you find this document useful?

4. If a note receivable is discounted without recourse, note receivable is debited.

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Source: Theory of Accounts Volume I by Conrado Valix

8. Direct writeoff is a method of estimating uncollectible accounts that emphasizes asset

9. Imputed interest is based on the stated interest rate.

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

13. It is a predetermined account withheld by a factor as a protection against customer

Source: Theory of Accounts Volume I by Conrado Valix

14. Why would an entity sell accounts receivable to another entity?

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

22. Accounts receivable shall be recognized initially at

Source: Theory of Accounts Volume I by Conrado Valix

23. Credit balances in accounts receivable

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

a. Percentage of account receivable, allowance method

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

35. Receivables from subsidiaries shall be classified as

Source: Theory of Accounts Volume I by Conrado Valix

36. The amortized cost of loan receivable is the amount at which

d. The loan receivable is measured initially minus principal repayment

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

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Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

41. Jungkook Company assigned P 4,000,000 of accounts receivable as collateral for a P

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

46. Jin Company assigned P 3,000,000 of accounts receivable as collateral for a P

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

49. What is the cash received from discounting?

Source: Practical Accounting Volume I by Conrado Valix