SCORE:

CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

Name: ________________________________________ Date: _____________

FAR QUIZ NO. 2

Part I – Theories
Instruction: Kindly encircle your answers.

1. In the case of long term-real estate instalment sales

a. The entire receivables are shown as current
b. The entire receivables are shown as non-current
c. Only the portion currently due is shown as current and the balance is non-current
d. The entire receivables are not recorded

2. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under direct write-off method is difficult to do
d. Improved matching of bad debts expense with revenue

3. 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

4. The 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 debts expense
d. Retained earnings

5. When a specific customer account receivable is written off as uncollectible, what will be the effect on
net income under the allowance and direct write-off method?
a. No effect under both allowance method and direct write-off
b. Decrease under both allowance method and direct write-off method
c. No effect under allowance method and decrease under direct write-off method
d. Decrease under allowance method and no effect under direct write-off method

6. When aging approach is used for estimating uncollectible accounts

a. Bad debts expense is measured indirectly and the allowance for uncollectible accounts is
measured directly
b. Bad debts expense is measured indirectly and the allowance for uncollectible accounts is
measured indirectly
c. Bad debts expense is measured directly and the allowance for uncollectible accounts is
measured directly
d. Bad debts expense is measured directly and the allowance for uncollectible accounts is
measured indirectly

7. Which is an accurate method of determining the amount of the adjustment to bad debts expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance

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8. 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

9. Which concept relates to the allowance method in accounting for uncollectible accounts receivable?
a. Bad debts expense is an estimate based on historical and prospective information
b. Bad debts expense is the actual amount determined to be uncollectible
c. Bad debts expense is an estimate based only on aging of accounts receivable
d. Bad debts expense is management determination of which accounts are considered doubtful

10. 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 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 its face amount

11. An entity uses the instalment method to recognize revenue from instalment sales. Customers pay
instalment notes in 24 equal monthly amounts which include 12% interest. What is the instalment 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%
d. Less than the present value of the remaining monthly payments discounted at 12%

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

13. On August 15 the entity sold goods for which it received a note bearing the market rate of interest on
the 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 amount is increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest revenue

14. Which of the following is a method to generate cash from accounts receivable?
a. Assignment
b. Factoring
c. Assignment and Factoring
d. Assignment, factoring and discounting

15. If note receivable is discounted without recourse

a. The contingent liability may be disclosed
b. Liability for note receivable discounted is credited
c. Note receivable is credited
d. The transaction is secured borrowing

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16. Note receivable discounted with recourse should be

a. Excluded from total receivables without disclosure
b. Excluded from total receivables with disclosure
c. Included in the total receivable without disclosure
d. Included in the total receivables with disclosure

17. After being held for 40 days, a 120-day 12% interest bearing note receivable was discounted at a
bank at 15%. The net proceeds from discounting are equal to
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face amount less the discount at 12%
d. Face amount less the discount at 15%

18. For banks and financial institutions, receivables arise primarily from
a. Loans
b. Deposits
c. Withdrawals
d. Credit sales

19. Subscription receivable is:

a. Classified as a trade receivable if collectible within 12 months from the reporting date
b. Classified as current nontrade receivable if collectible within 12 months from the reporting date
c. Classified as a noncurrent nontrade receivable if collectible beyond 12 months from the reporting
date
d. Both A and C

20. Theoretically, the amount estimated future returns and allowance on credit sales should be recorded
during the period of sales so as not to overstate sales and ending accounts receivable. In practice these
estimates are rarely recorded because:
a. The amount of such returns and allowances is usually not material
b. Such estimates are not allowed according to generally accepted accounting principles
c. The amount of such returns and allowances tend to fluctuate to greatly from period to period
d. There is too much uncertainty surrounding such estimates

21. Accounts receivable usually in the statement of financial position

a. As either current assets or non-current assets, depending on whether the allowance method or
the direct write-off method to account for uncollectible accounts
b. Only if the balance sheet method of estimating uncollectible accounts is used
c. As current assets, immediately after cash and cash equivalents
d. As current assets, combined with cash and cash equivalents

22. Which of the following is correct? If the note is issued at a discount, the interest income to be
recognized every period is..
a. Higher than the amount of cash received for interest
b. Lower than the amount of cash received for interest
c. Equal to the amount of cash received for interest
d. Either higher or lower than the amount of cash received for interest depending on the amount of
the discount

23. The amortization of discount on notes receivable is:

a. An addition to interest income
b. An addition to accrued interest receivable
c. A deduction from interest income
d. A deduction from accrued interest receivable

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24. How are direct origination costs incurred by a financial institution accounted for in relation to the initial
measurement of a loan receivable?
a. Added to the initial measurement of the loan receivable
b. Deducted from the initial measurement of the loan receivable
c. Ignored
d. A or B if direct loan origination cost is at least 10% of the principal amount of the loan

25. The recoverable amount of a loan or note receivable is

a. The sum of principal plus interests
b. The present value of the estimated future cash flows to be received over the remaining life of the
receivable discounted at current interest rate
c. The present value of the estimated future cash flows to be received over the remaining life of the
receivable discounted at the original effective interest rate
d. The present value of the estimated future cash flows to be received over the remaining life of the
receivable discounted at the original effective interest rate or current interest rate, whichever is
more clearly determinable

26. If there are any rights and obligations created or retained in the transfer of financial asset, they should
be:
a. Evaluated first by comparing the entity’s exposure before derecognizing the financial asset
b. Recognized separately as assets or liabilities
c. Derecognized immediately
d. None of the foregoing

27. What appropriate treatment for receivable assignment transaction?

a. Note disclosure only
b. They are accounted for by segregating the assigned receivable from the other receivables
through a journal entry
c. Give rise to receivables from factor
d. B and C

28. A loss on receivables is recorded when the sale is

a. With recourse
b. Without recourse
c. With or without recourse
d. A secured borrowing

29. The amount of accounts receivable is included in the total receivables with appropriate disclosures
when
Pledged Assigned Factored
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes Yes

30. A 240-day, 6% interest-bearing note was discounted at a bank at 8% after being held for 150 days.
The proceeds received from the bank upon discounting would be the
a. Maturity value less the discount at 6% for 90 days
b. Maturity value less the discount at 8% for 90 days
c. Maturity value less the discount at 8% for 150 days
d. Face value less the discount at 6% for 90 days

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 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

Part II – Problem Computation

Instruction: Kindly encircle your answers and present your solution on a separate sheet of paper.

From inception of operations, Axis company carried no allowances for doubtful accounts. Uncollectible
accounts were expensed as written off and recoveries were credited to income as collected.

During 2022, management recognized that the accounting policy with respect to doubtful accounts was
not correct and determined that an allowance for doubtful accounts was not correct and determined that
the 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 receivable.

The historical bad debt loss percentage is to be recomputed each year based on all available past years
up to maximum of five years.

Year Credit Sales Write-offs Recoveries

2018 1,500,000 15,000 0
2019 2,250,000 38,000 2,700
2020 2,950,000 52,000 2,500
2021 3,300,000 65,000 4,800
2022 4,000,000 83,000 5,000

Balances of Accounts Receivable:

December 31, 2021 1,250,000
December 31, 2022 2,000,000

31. What is the allowance for doubtful accounts on December 31, 2021
a. 20,000
b. 21,250
c. 22,500
d. 25,000

32. What is the allowance for doubtful accounts on December 31, 2022
a. 32,000
b. 34,000
c. 36,000
d. 40,000

33. What amount should be reported as doubtful accounts expense for 2022?
a. 97,000
b. 78,000
c. 83,000
d. 92,000

Flappable Company began operations on January 01, 2018. The entity provided for doubtful accounts
based on 5% of annual credit sales in prior years. On January 01, 2021 the entity changed the method of
determining the allowance for doubtful accounts using and aging schedule:

2021 2020 2019 2018

Credit Sales 15,000,000 9,500,000 8,000,000 6,000,000
Collections excluding recovery 11,700,000 8,200,000 6,700,000 4,500,000
Accounts written off 200,000 120,000 80,000 None
Recovery of accounts written off 100,000 40,000 35,000 None

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Days Account Outstanding Amount Probability of Collection

30 days or less 3,000,000 95%
31-60 days 1,500,000 80%
61-180 days 1,200,000 75%
181-365 days 1,200,000 50%
More than 365 days – to be written off 100,000 0%

34. What amount should be reported as allowance for doubtful accounts on December 31, 2021?
a. 1,350,000
b. 1,450,000
c. 1,250,000
d. 1,000,000

35. What amount should be reported as doubtful accounts expense for 2021?
a. 500,000
b. 600,000
c. 700,000
d. 400,000

36. What is the net realizable value of accounts receivable on December 31, 2021?
a. 6,900,000
b. 7,000,000
c. 5,550,000
d. 5,650,000

On November 01, 2023, Boyce Company assigned on a non-notification basis accounts receivable of
P1,600,000 to a bank in consideration for a 24% interest bearing loan. The loan value was 80% of the
receivables assigned and a 5% service fee on the accounts assigned was charged by the finance
company.

Boyce Company collected assigned accounts of P600,000 and P400,000 in November and December,
respectively, and remitted the collections to the finance company on a monthly basis in partial payment
for the loan. The finance company applied first the collection to the interest and the balance to the
principal.

37. What is the balance of accounts receivable – assigned as of December 2023?

a. 280,000
b. 344,000
c. 600,000
d. 664,000

38. In its December 31, 2023, statement of financial position, Boyce Company should report a note
payable as current liability at?
a. 331,000
b. 344,000
c. 319,200
d. 319,712

39. What is the equity in assigned accounts to be disclosed in the notes to financial statement on
December 31, 2023?
a. 256,000
b. 268,800
c. 280,288
d. 332,800

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During the second-year operations, Shark Company found itself in financial difficulties. The entity decided
to use the accounts receivable a means of obtaining cash to continue operations.

On July 01, 2021 the entity sold P1,500,000 of accounts receivable for cash proceeds of P1,400,000. No
allowance for doubtful accounts was associated with these accounts.

On December 15, 2021, the entity assigned the remainder of 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 les a 2% finance charge.

None of the assigned accounts had been collected by the end of the year. It is estimated that 10% of
accounts receivable would be uncollectible.

The entity revealed the following data on December 31, 2021:

Accounts receivable, excluding factored and assigned accounts 1,000,000
Accounts receivable – assigned 5,000,000
Accounts receivable – factored 1,500,000
Allowance for doubtful accounts before adjustment 100,000

40. What total amount was received from the financing of accounts receivable?
a. 3,900,000
b. 3,850,000
c. 3,950,000
d. 4,000,000

41. What is the net realizable value of accounts receivable on December 31, 2021?
a. 4,500,000
b. 5,400,000
c. 6,000,000
d. 5,000,000

42. What amount should be recognized as doubtful accounts expense for 2021?
a. 600,000
b. 500,000
c. 650,000
d. 0

On December 31, 2021 Chang Company sold a machine in the ordinary course of business to Door
Company in exchange for a noninterest bearing note requiring ten annual payment of P1,000,000.

The entity made the first payment on December 31, 2021. The market interest rate for similar notes at
date of issuance was 8%.

PV of an ordinary annuity of 1 at 8% for 9 periods 6.25

PV of an ordinary annuity of 1 at &% for 10 periods 6.71

43. What amount should be recognized as sales revenue?

a. 7,250,000
b. 5,000,000
c. 6,250,000
d. 8,000,000

44. On December 31, 2021, what is the carrying amount of the note receivable?
a. 4,500,000
b. 4,600,000
c. 6,250,000

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d. 6,710,000

45. What amount should be reported as interest income for 2022?

a. 580,000
b. 720,000
c. 500,000
d. 625,000

46. What is the carrying amount of the note receivable on December 31, 2022?
a. 8,000,000
b. 6,750,000
c. 5,250,000
d. 5,750,000

Beach bank loaned Boracay Company P7,500,000 on January 01, 2021. The terms of the loan ware
payment in full on December 31, 2025 plus annual interest payment at 11%. The interest payment was
made as scheduled on December 31, 2021. However, due to financial setbacks, Boracay company was
unable to make the 2022 interest payment.

Beach bank considered the loan impaired and projected the cash flows from the loan on December 31,
2022. The bank accrued the interest on December 31, 2022. The projected cash flows are:

Date of Cash Flow Amount Projected on December 31, 2022

December 31, 2023 500,000
December 31, 2024 1,000,000
December 31, 2025 2,000,000
December 31, 2026 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.

47. What amount should be reported as loan impairment loss for 2022?
a. 2,965,000
b. 2,240,000
c. 5,360,000
d. 2,140,000

48. What amount should be reported as interest income for 2023?

a. 589,600
b. 534,600
c. 825,000
d. 599,456

49. What is the carrying amount of the loan receivable on December 31, 2023?
a. 7,000,000
b. 5,449,600
c. 4,860,000
d. 5,949,600

Jay Company provided the following data for the current year

Accounts receivable, January 01 650,000

Credit Sales 2,700,000
Sales Returns 75,000
Accounts written off 40,000
Collections from customers 2,150,000

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Estimated future sales return at December 31 50,000

Estimated uncollectible accounts at 12/31 per aging 110,000

50. What is the amortized cost of accounts receivable on December 31?

a. 1,200,000
b. 1,125,000
c. 1,085,000
d. 925,000

“Keep dreaming even if it breaks your heart” – Eric Pasley and Will Hoge

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