QUESTIONS

CHAPTER 4

1. Define receivables.
A receivable is created any time money is owed to a firm for services
rendered or products provided that have not yet been paid.

2. Explain the classification and presentation of receivables in the statement

of financial position
Accounts receivable balance under the 'current assets' section on your
balance sheet or general ledger. Accounts receivable are classified as
an asset because they provide value to your company

3. Explain the treatment of customers' credit balances.

A “credit balance” refers to an amount that a business owes to a
customer. It's when a customer has paid you more than the current
invoice stipulates.

4. Explain the initial and subsequent measurement of trade accounts

receivable.
One simple method of measuring the quality of accounts receivables is
with the accounts receivable-to-sales ratio.

5. Explain the two methods of recording accounts receivable and credit sales.
Net method: The business entity reports credit sales after adjusting the
discount allowed under net method.

6. Explain the allowance method of accounting for bad debts.

The allowance method involves setting aside a reserve for bad debts
that are expected in the future. The reserve is based on a percentage
of the sales generated in a reporting period, possibly adjusted for the
risk associated with certain customers.

7. Explain the direct writeoff method of accounting for bad debts.

The direct write-off method involves writing off a bad debt expense
directly against the corresponding receivable account. Therefore, under
the direct write-off method, a specific dollar amount from a customer
account will be written off as a bad debt expense.

8. Give the proforma entry under the allowance method for each of the
following:
a. Doubtful accounts
Doubtful accounts are an asset. The amount is reflected on a
company's balance sheet as “Allowance For Doubtful Accounts”,
in the assets section, directly below the “Accounts Receivable”
line item.
b. Accounts receivable proved to be worthless
Under the allowance method, if a specific customer's accounts
receivable is identified as uncollectible, it is written off by
removing the amount from Accounts Receivable.
 c. Recovery of accounts previously written off
Reverse the original write-off by crediting the bad debts expense
account and debiting accounts receivable with the amount
received. 

9. Give the proforma entry under the direct writeoff method for each of the
following:
a. Doubtful accounts
When it is determined that an account cannot be collected, the
receivable balance should be written off.
b. Accounts receivable proved to be worthless
Under the direct write off method, when a small business
determines an invoice is uncollectible they can debit the Bad
Debts Expense account and credit Accounts Receivable
immediately. 
c. Recovery of accounts previously written off
To record the bad debt entry in your books, debit your Bad
Debts Expense account and credit your Accounts Receivable
account.

10. Explain the presentation of doubtful accounts in the income statement.

A doubtful account or doubtful debt is an account receivable that might
become a bad debt at some point in the future. If customers purchase
on credit, establishing an allowance of doubtful accounts is an
important tool for your balance sheet and income statement.

CHAPTER 5

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

There are three methods of estimating doubtful accounts, namely:
1. Aging the accounts receivable or "statement of financial position
approach"
2. Percent of accounts receivable or also statement of financial
position approach.
3. Percent of sales or "income statement approach"

2. Explain the aging method of estimating doubtful accounts.

This method has the advantage of presenting fairly the accounts
receivable in the statement of financial position at net realizable value.
The objection to the aging method is that it violates the matching
process. Moreover, this method could become prohibitively time
consuming if a large number of accounts are involved.

3. Explain the percentage of accounts receivable method of estimating

doubtful accounts.
The percentage of receivables method is used to derive the bad debt
percentage that a business expects to experience. The technique is
used to populate the allowance for doubtful accounts, which is a contra
account that offsets the accounts receivable asset.
4. Explain why the aging method and percentage of accounts receivable are
known as "statement of financial approach".
Thus, these method is an income statement approach because it
favors the financial statement.

5. Explain the percentage of sales method of estimating doubtful accounts.

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.

6. Explain why the percentage of sales method is known as "income

statement approach".
Thus, this method is an income statement approach because it favors
the income statement.

7. When is an account past due?

A debt becomes “past due” if you fail to make a payment as of the due
date.

8. Explain the treatment of an inadequate or excessive allowance for doubtful

accounts.
Where the allowance is inadequate or excessive, a question arises as
to the proper treatment of the discrepancy, whether to consider it as an
error or a component of profit or loss.
When the allowance is excessive, there is a corollary problem when
the discrepancy is more than the debit balance in the doubtful accounts
expense account.

9. Is a debit balance in the allowance for doubtful accounts possible?

The allowance for doubtful accounts normally has a credit balance.
However, in certain instances, it may have a debit balance because it
may be the policy of the entity to adjust the allowance at the end of the
period and record accounts written off during the year.

10. What does a debit balance in the allowance for doubtful accounts
indicate?
The debit balance does not indicate that the allowance is inadequate
because the accounts written off during the year and charged to the
allowance may have arisen from current year sales.

CHAPTER 6

1. Define notes receivable.

Notes receivable are claims supported by formal promises to pay
usually in the form of notes. It represents only claims arising from sale
of merchandise or service in the ordinary course of business.

2. Define a negotiable promissory note.

 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.

3. Explain the treatment of dishonored notes receivable.

When a promissory note matures and is not paid, it is said to be
dishonored. Theoretically, dishonored notes receivable should be
removed from the notes receivable account and transferred to
accounts receivable.

4. Explain the initial measurement of short-term notes receivable.

Short-term notes receivable shall be measured at face amount. Cash
flows relating to short-term notes receivable are not discounted
because the effect of discounting is usually not material.

5. Explain the initial measurement of long-term notes receivable.

The initial measurement of long-term notes will depend on whether the
notes are interest-bearing or noninterest bearing.

6. What is the meaning of non interest bearing note receivable?

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.

7. Explain the subsequent measurement of long-term notes receivable.

Notes Receivable are later recorded at amortized cost. Amortized cost
is the initial value of the Notes Receivable (which were initially
recorded at Fair Value) less any principal repayments and then
adjusted for amortization of the premium and any impairment.

8. Explain compounding of interest in relation to interest bearing notes

receivable.
When interest is "compounded", in the mathematical parlance this
means that any accrued interest receivable also earns interest.

9. What is the meaning of the present value of notes receivable?

The present value is the sum of all future cash flows discounted using
the prevailing market rate of interest for similar notes.

10. Explain the computation of present value of long-term notes receivable.

For long-term noninterest-bearing notes receivable, the amortized cost
is the present value plus amortization of the discount, or the face
amount minus the unamortized unearned interest income.

CHAPTER 7

1. Define loan receivable.

 The amount of money owed by a debtor to a creditor is known as a
loan receivable (typically a bank or credit union). In the creditor's
accounts, it is listed as a "loan receivable."

2. Explain the initial measurement of loan receivable.

At the time of initial recognition, a loan receivable must be measured at
fair value plus transaction costs that are directly related to the purchase
of the financial asset.

3. Explain the subsequent measurement of loan receivable.

The effective interest method is used to calculate a loan receivable's
amortized cost.

4. What is the amortized cost in relation to loan receivable?

The initial measurement of the receivable less the principal payment,
plus or minus the cumulative amortization of any difference between
the initial amount recognized and the principal maturity amount, less
any reduction for impairment or uncollectibility, is the amount used to
calculate amortized cost.

5. What are origination fees in relation to a loan?

A mortgage lender will charge you a fee called a loan origination fee in
order to process your loan. Normally, it represents 1% of your overall
loan debt. To cover the expense of processing, underwriting, and
carrying out your loan, almost all lenders impose origination fees.

6. Explain the accounting for origination fees.

The fees that the bank assessed to the borrower in order to create the
loan. It entails payment for tasks including assessing the borrower's
financial situation, assessing guarantees, collateral, and other security,
negotiating the loan's terms, putting together and processing
paperwork, and concluding the loan transaction.

7. Explain direct origination costs.

Costs associated with reviewing the potential borrower's financial
performance, creating and processing loan documents, and paying
workers directly involved in the transaction are just a few examples of
direct loan origination costs.

8. Explain the treatment of origination fees received from borrower and direct
origination costs incurred by the lender.
A lender normally charges an origination fee of 0.5% to 1% of the loan
amount in exchange for processing a loan application. Although
origination fees are occasionally negotiable, doing so typically results in
a higher interest rate over the course of the loan.

9. Explain the treatment of indirect origination costs incurred by the lender.

Indirect origination costs should be considered an expense in and of
themselves. Origination fees are accounted for as unearned interest
revenue and amortized over the course of the loan. They are received
from the borrower.
10. Explain the measurement of impairment of loan.
Loans are deemed impaired when it is likely that the creditor won't be
able to collect all interest and principal payments due in accordance
with the terms of the loan arrangement, based on the information and
circumstances at hand.

11. What is the computation of the carrying amount of the loan receivable
subsequent to impairment?

12. Explain the meaning of credit risk.

An indicator of a borrower's creditworthiness is credit risk. Lenders
estimate their chances of recovering the full amount of their principal
and interest when providing a loan by evaluating credit risk. Lower
interest rates are applied to borrowers who are deemed to pose a low
credit risk.

13. Define credit loss,

A loss that a corporation or financial institution registers as a result of
customers failing to pay what they owe: The business keeps reserves
for anticipated potential credit losses.

14. Distinguish 12-month expected credit loss and lifetime expected credit
loss.
The 12-Month Expected Credit Loss is the portion of the Lifetime
Expected Credit Losses that represents the expected credit losses due
to default events on a financial instrument that are likely to occur within
the next 12 months of the reporting date. Intuitively, the phrase "12-
month estimated credit losses" may sound like a contingency for the
cash deficits a company anticipates in the upcoming year. That is not
the situation. According to IFRS 9, the lifetime cash shortages that will
come from those potential default events that may happen in the 12
months after the reporting date are represented by the 12-month
expected credit losses, which are a fraction of the lifetime expected
credit losses.

15. Explain the three-stage approach of loan impairment.

Stage 1
A loss allowance is established and ECLs for potential default
events that could occur during the following 12 months are
recognized when a loan is originated or purchased (12-month
ECL). The 12-month ECL also applies to ongoing loans with no
appreciable increase in credit risk since their initial detection on
subsequent reporting dates. Interest revenue is computed on
the loan’s gross carrying amount (that is, without deduction for
ECLs) (that is, without deduction for ECLs).
A bank must evaluate the change, if any, in the risk of default
during the estimated life of the loan (that is, the change in the
probability of default, as opposed to the amount of ECLs) in
order to determine if a significant increase in credit risk has
occurred since initial recognition.
Stage 2
 Lifetime ECLs are recognized when the credit risk of a loan has
materially increased since initial recognition and is no longer
regarded as low. Similar to Stage 1, interest revenue is
determined using the same formula.
Stage 3
Interest income is calculated using the loan's amortised cost
(i.e., the gross carrying amount less the loss allowance) if the
loan's credit risk rises to the point where it is deemed credit-
impaired. As in Stage 2, lifetime ECLs are recognized.

MULTIPLE CHOICE THEORIES

(CHAPTER 4)

Problem 4-19 Multiple choice (IAA) 

1. Trade receivables are classified as current assets if 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 shorter.

d. Within one year or within the operating cycle, whichever is longer.

2. Nontrade receivables are classified as current assets only if

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

3. Credit balances in accounts receivable are classified as

a. Current liabilities

b. Part of accounts payable

c. Long term liabilities

d. Deduction from accounts receivable

4. Which of the following does not change the balance in accounts

receivable?

a. Return on credit anton

b. Collection from customers

c. Bad debt expense adjusting entry

d) Writeoff

5. Which is recorded by a credit to accounts receivable?

a. Sale of inventory on account

b. Estimating the allowance for doubtful accounts

c. Estimating annual sales returns

d. Writeoff of accounts receivable

6. Which accounting principle primarily supports the use of allowance

for doubtful accounts?

a. Continuity principle

b. Full disclosure principle

c. Matching principle.

d. Conservatism

7. Why is the allowance method preferred over the direct writeoff

method of accounting for bad debts?

a. 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

8. The entry debiting accounts receivable and crediting allowance for

doubtful accounts would be made when

a. A customer pays an account balance.

b. A customer defaults on the account.

c. A previously defaulted customer pays the balance.

d. Estimated uncollectible accounts are too low.

9. In recording 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

10. 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. Allowance granted

Problem 4-20 Multiple choice (AICPA Adapted) 

1. 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

2. When the allowance method is used, the entry to record the writeoff of
a specific account would

a. Decrease both accounts receivable and the allowance

b. Decrease accounts receivable and increase allowance

c. Increase both accounts receivable and the allowance

d. Increase accounts receivable and decrease the allowance

3. Under the allowance method, the journal 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 working capital

d. Decreases both net income and accounts receivable

4. Under the allowance method, the entries at the time of collection of an

account previously written off would

a. Decrease the allowance for doubtful accounts

b. Increase net income

c. Have no effect on the allowance for doubtful accounts

d. Have no effect on net income

5. Collection of accounts receivable previously written off results in an

increase in cash and an increase in

a. Accounts receivable

b. Allowance for doubtful accounts

c. Bad debt expense

d. Retained earnings

(CHAPTER 5)

Problem 5-24 Multiple choice (AICPA Adapted)

1. 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. Direct writeoff

b. Aging the trade accounts receivable

c. Credit sales

d. Trade sccounts receivable

2. A method of estimating uncollectible accounts that emphasizes asset

valuation rather than income measurement is the allowance method
based on

a. Aging of accounts receivable

b. Direct writeoff
c. Gross sales

d. Credit sales less returns and allowances

3. The advantage of relating the bad debt experience to accounts

receivable is that this approach

a. Gives a reasonably accurate measurement of accounts receivable in the

statement of financial position.

b. Relates bad debt expense to the period of sale.

c. Is the only generally accepted method for measuring accounts receivable.

d. Makes estimates of uncollectible accounts unnecessary.

4. Which is an accurate method of determining the amount of the

adjustment to bad debt expense?

a. A percentage of sales adjusted for the balance in the allowance

b. A percentage of sales not adjusted for the balances in the allowance

c. A percentage of accounts receivable not adjusted for the balance in the

allowance

d. An amount derived from aging accounts receivable and not adjusted for the
balance in the allowance

5. An entity uses the allowance method to recognize doubtful Accounts

expense. What is the effect of a collection of an account previously
written off?

a. No effect on both allowance for doubtful accounts and doubtful accounts

expense

b. No effect on allowance for doubtful accounts and decrease in doubtful

accounts expense

c. Increase in allowance for doubtful accounts and no effect on doubtful

accounts expense

d. Increase in allowance for doubtful accounts and decrease in doubtful

accounts expense

6. 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. 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.

b. Is the amount of doubtful accounts expense for the year

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. Is the amount of desired credit balance of the allowance for doubtful

accounts to be reported at year-end

7. When an aging approach is used for estimating uncollectible

accounts

a. Bad debt expense is measured indirectly and the allowance for

uncollectible accounts is measured directly

b. Bad debt expense is measured indirectly and the allowance for

uncollectible accounts is measured indirectly.

c. Bad debt expense in measured directly and the allowance for uncollectible
accounts is measured directly

d. Bad debt expense is measured directly and the allowance for uncollectible
accounts is measured indirectly

8. Which concept relates to the allowance method in accounting for

uncollectible accounts receivable?

a. Bad debt expense is an estimate based on historical and prospective

information.

b. Bad debt expense is the actual amount determined to be uncollectible.

c. Bad debt expense is an estimate based only on aging of accounts

receivable.

d. Bad debt expense is management determination of which accounts are

considered doubtful.

9. Which of the following is not acceptable in estimating uncollectible

accounts receivable?

a. The estimate of uncollectible accounts is based on a percentage of sales

for the period.

b. The estimate of uncollectible accounts is based on a percentage of the

accounts receivable at the end of a period.

c. The estimate of uncollectible accounts is based on an aging schedule.

d. No estimate of uncollectible accounts is made but accounts are written off

when it is determined that the accounts cannot be collected.

10. The estimate of uncollectible accounts receivable based on a

percentage of sales
a. Emphasizes measurement of the net realizable value of accounts
receivable.

b. Emphasizes measurement of bad debt expense

c. Emphasizes measurement of total assets.

d. Is only acceptable for tax purposes.

Problem 5-25 Multiple choice (IAA)

1. Which method of determining bad debt expense does not match

expense and revenue?

a. Charging bad debts with a percentage of sales under the allowance method

b. Charging bad debts with a percentage of accounts receivable under the

allowance method

c. Charging bad debts with an amount derived from aging the accounts
receivable under the allowance method

d. Charging bad debts as accounts are written off as uncollectible

2. Which method 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 of that period.

c. Estimating the allowance for doubtful accounts as a percentage of accounts

receivable.

d. Estimating the allowance for doubtful accounts by aging the accounts

receivable.

3. A debit balance in the allowance for doubtful accounts

a. Should never occur.

b. Is always the result of management not providing a large enough allowance

in order to manage earnings.

c. May occur before the year-end adjustment for uncollectible accounts.

d. May exist even after the year-end adjusts for uncollectible accounts.
4. Which is not permitted in accounting for uncollectible accounts
receivable?

a. Percentage of accounts receivable

b. Percentage of sales

c. Direct writeoff method

d. Aging of accounts receivable

(CHAPTER 6)

Problem 6-19 Multiple choice (AICPA Adapted)

1. 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. Three months of accrued interest income

b. Nine months of accrued interest income

c. Twelve months of accrued interest income

d. The excess on October 1 of the present value of the note receivable over
the face amount

2. 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. 6% of the present value of the note

d. 4% of the present value of the note

3. An entity uses the installment method to recognize revenue from

installment sales. Customers pay the installment notes in 24 equal
monthly amounts which include 12% interest. What is the carrying
amount of the installment notes receivable 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 payment discounted at 12%.

d. Less than the present value of the remaining monthly payments discounted
at 12%.

4. What is imputed interest?

a. Interest based on the stated interest rate

b. Interest based on the implicit interest

c. Interest based on the average interest rate

d. Interest based on the bank prime interest rate

5. Accounting for the interest in a non-interest bearing note receivable is

an example of what aspect of accounting theory?

a. Relevance

b. Verifiability

c. Substance over form

d. Form over substance

6. 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.
The interest receivable account would show a balance on

a.July 1 but not December 31

b. December 31 but not July 1

c. July 1 and December 31

d. Neither July 1 nor December 31

7. On July 1 of the current year, an entity received a one-year nota

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. Interest receivable and unearned discount on note receivable

d. Neither interest receivable nor unearned discount on note receivable

8. On August 15, an entity sold goods for which it received 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 16.
When the note was recorded on August 15, which of the following
accounts increased?

a. Unearned discount

b. Interest receivable

c. Prepaid interest

d. Interest revenue

9. 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 on June 30
of text year. On December 31 of the current year, the entity should report
in the statement of financial position

a. A deferred credit for interest applicable to next year

b. No interest receivable

c. Interest receivable for the entire amount of the interest due on June 30 of
next year

d. Interest receivable for the interest accruing in the current year

10. An entity received a seven-year zero interest-bearing note on

February 1, 2021 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, 2021, 6% on December 31, 2021, 8% on February 1, 2022,
and 9% on December 31, 2022. What interest rate should be d calculate
the interest revenue from the transaction for the yours ended December
31, 2021 and 2022, respectively?

a. 80% and 0%

b. 7% and 7%

c. 7% and 9%

d. 6% and 9%