(HAPTER 20 cco UNTS RECEIvapy py ypstI0N 20-2 sl the ciemaeation Of receivables in the statement of Boel IR 20-1 WER 2 receivables which are expected to be realized in cash sade ‘the normal operating eyele ace, year, whichever is wit or, are classified as current assets. , receivables which are ex ecte: i rade Twoar, the length ef tie operating oe ealized in eash erating cyele notwithstanding, ified as current assets. trade receivables are classified jain the measurement of accounts receivable. ISWER 20-2 unts receivable shall be measured initially at face amount original invoice amount. ever, subsequently the accounts receivable shalt be ured at net realizable value, meaning the amount of cash id to be collected or the estimated recoverable amount. timating the net realizable value of trade accounts, ble, the following deductions are made: Allowance for freight charge ance for sales return ‘ance for sales discount ‘ance for doubtful accounts 2QUESTION 20-3 Explain the allowance method of accounting for bad debts ANSWER 20-3 for bad debts are the allowanog The two methods of Soe iba L method and direct writeoff The allowance method requires recognition of bad debt loss ig the accounts are doubifiu of collection. The doubtful accounts are recorded by debiting doubtfy accounts and crediting allowance for doubtful accounts. unting principles require the use of the acco f Pee ee rms with the matching allowance method because it confor principle. Moreover, accounts receivable will be properly measured at net realizable value. QUESTION 20-4 Explain the direct writecff method of accounting for bad debts. ANSWER 20-4 The direct writeoff method requires recognition of a bad debt loss only when the accounts are worthless or uncollectidle. 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. 282js the treatment of “recoveries ‘previ ia i ee of accounts Previously w SWER 20-5 collection is made on account Previously writ mary procedure p to scharge the customer's Sea unt collected and possibly with the enti e am shared off it entire amount ously charg 1 18 now expected that i i f vn collection will a in other words, the recovery is recorded by reversi if writeoff by dedbiting accounts receivable a: ing the entry allowance for doubiftl accounts nd crediting collection is then normally Ic xecorded by debiti crediting accounts: receivable, ¥ debiting cash and QUESTION 20-8 Explain the aging method of estimating doubtful accounts, ANSWER 20-6 Doubtful accounts are recognized when the loss is probable and the amount can be estimated reliably. There are three methods of estimating doubtful accounts, namely aging of accounts receivable, Percentage of accounts receivable and percentage of sales, 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. This method is a statement of financial position approach. 283 ypsTiON 20-5QUESTION 20-7 ceivable methog of Explain the perceniage of accounts re estimting doubtful accounts. ANSWER 20-7 Under the percentage of accounts receivable method, » cert.iy rate is multiplied by the ending accounts receivable in oro, to get the required allowance balance. The rate used is ueually determined from past experience 9 the entity. This procedure has also the udvantage of presenting tig accounts receivable at estimated net realizable value. This method is also a statement of financial position approach, because it favors the statement ef financial position. QUESTION 20-8 Explain the percentage of sales method of estimating cloubttul accounts, ANSWER 20-8 Under the percentage of sales methced, the amount of sales fo. the year is multiplied by a certain rate to get the doubtful accounts expense. > The rate may be applied on credit sales or total salcs. When this method is used, proper matching is achieved because doubtful accounts are directly related to sales from which they exise, and are reported in the same year of sale. This method is an income statement approach because it favors the income statement.gf10N 20-9 are customers’ credit balances? R 20-9 - credit balances are credit balances in accounts rable resulting from overpayments, returns and 3, and advance payments from customers. ers’ credit balances are classified as current liabilities custom ji not be offset against the debit balances in othe: shal 7 ems accounts, awevels when the amount is not material, only the net f How nis receivable may be presented in the statement of a cial position. yESTION 20-10 ow would you classify doubtful accounts in the’ income _ gatement? ANSWER 20-10 1, Distribution cost Ifthe granting of credit and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as distribution cost. Administrative expense {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. Inthe absence of any contrary statement, doubtful accounts shall be classified as administrative expense.ple choice (IAA) QUESTION 20-11 Multi fied as current assets if the, 1. Trade receivables are classified af tte are reasonably expected to a. Within one year. . _ Within the normal operating cycle. / a 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 these are reasonably expected to be realized in cash a. Within one year or within the operating cycle, whichever is shorter. | Within one year or within the operating cycle whichever is longer. . c. Within the normal operating cycle. | Within one year, the length of the operating cycle d. notwithstanding b. 3. Which statement is true in relation to presentation of receivables in the statement of financial position? Trade receivables and nontrade receivables must be shown separately Nontrade receivables are presented as noncurrent Trade accounts receivable and trade notes receivable must be presented separately Trade receivables and nontrade receivables which are currently collectible may be presented as one line item called “trade and other receivables” a. 4. 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 286“ay ceivables from subsidiaries are Classified ag Ret ts urrent asset a Concurrent assets " pither as current or Noncurrent depending on the © expectation of realizing them Within one year or over one ar 4 Partly current and partly noncurrent Where the operating cycle extends be: ormal credit terms as in neehold appliances ‘yond one year because the case of installment sales of It is proper to classify the entire receivables as current e agsets with disclosure of the amount not realizable within one year, if material, pb, The entire receivables al ” The portion due in one y ; balance as noncurrent, d. The receivables are not Tecognized, re shown as non current assets, ear is shown as current and the In the case of long-term installments Teceivable as in real F state installment sales where 4 major portion is collected beyond the normal Operating cycle a. The entire receivables are shown as current without " disclosure of the amount not currently due, b. The entire receivables are shown as noncurrent, le. Only the portion currently due is shown ag current and the balance as noncurrent, : d. The entire receivables are shown as current with disclosure of the amount not currently due. ANSWER 20-11ice (AICPA Adapted) QUESTION 20-12 Multiple cho’ f recording bad debt loss is consistent wit}, 1. Which method of accrual accounting? a. Allowance method b. Direct writeoff method c. Percent of sales method d. Percent of accounts rece! ddebts that focuses on the income e statement of financial position vable method 2. A method of estimating ba statement rather than th is the allowance method based on Direct writeoff Aging the trade Credit sales | ‘The balance in the trade accounts receivable accounts receivable Boop . 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 The advantage of relating the bad debt experience to accounts receivable is that this approach a. Gives a reasonably accurate measurement of receivables in the statement of financial position. Relates bad debt expense to the period of sale. Is the only generally accepted method for measuring accounts receivable. Makes estimates of uncollectible accounts unnecessary.specific customer account ye a collectible, what will be the wn 5 gee the allowance and direct wri der wa receivable is written effect on net income iteoff method? effect under both allowance method and direct ethod . eeoft methor writtase under both allow 3 eter! method we effect under allowance metho ¢ | der direct writeoff method “ ease under allowance method and é Breet weiteoff method ance method and direct d and decrease no effect under the allowance method of reco og g is used, the entry to rec account would enizing uncollectible i ord the writeoff of a count specific Decrease both accounts receiy, * for uncollectible accounts. Decrease accounts receivable and increase the » allowance for uncollectible accounts, Increase the allowance for uncollectible accounts and r decrease net income. Decrease both accounts receivable and net income. able and the allowance eo 1, When an entity uses the allowance method for i uncollectible accounts, the entry to record ofa specific uncollectible account recognizing the writeoff a, Affects neither net income nor working capital b, Affects neither net income nor accounts receivable ¢. Decreases both net income and accounts receivable 4. Decreases both net income and working capital 288a aa od of recognizing bad debt expe 8. When the allow thod me of collection of an pte! is used, the entrt id previously written off would the allowance for doubtful accounts a. Decrease Tnereage net income , Baines he allowance for doubtful account, c. Have no effect on the 4 : d. Have no effect on net income uses the allowance method to recognize doubify e, What is the effect of a collection of an ly written off! 2° An entity accounts expens' account previous! a. No effect on both allowance for doubtful accounts ang doubtful accounts expense b, No effect on allowance for doubtful accounts ang decrease in doubtful accounts expense allowance for doubtful accounts and no effect c. Increase in ‘on doubtful accounts expense d. Increase in allowance for doubtful accounts and decrease in doubtful accounts expense ts receivable aging schedule is prepared, a to determine the estimated Iting amount from this aging 10. When an accoun series of computations is made uncollectible accounts. The resu! 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 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 ANSWER 20-12 loa 6. a 2 Toa 3. a 8. d 4. a 9 ¢ 5. 10. djON 20-18 Multiple choice (IAA) method of determining bad debt expense does not ich nse and revenue? ch @XPE arging bad debts with a percentage of sales under he allowance method l parging bad debts with a percentage of accounts ch@vable under the allowance method ne ging bad debts with an amount derived from aging fhe accounts receivable under the allowance method Charging bad debts as accounts are weitten off as uncollectible ich method of determining bad debt expense most oy matches expense to revenue? o Charging bad debts only as accounts are written off r as uncollectible. : 4, Charging bad debts with a percentage of sales for that . riod. ‘ Feimating the allowance for doubtful accounts as a : percentage of accounts receivable. “4. Estimating the allowance for doubtful accounts by aging the accounts receivable. Which concept relates to the allowance method in unting for uncollectible accounts receivable? 4 Bad debt expense is an estimate based on historical and prospective information. », Bad debt expense is the actual amount determined to be uncollectible. ¢. Bad debt expense is an estimate based only on aging of accounts receivable. 4 Bad debt expense is management determination of which accounts are considered doubtful. 2944. Why is the allowance method preferred over the qi, writeoff method of accounting for bad debts? a. The allowance method is used for tax purposes b. Estimates are used. Determining worthless accounts under direct writers method is difficult to do. ; fF d. Improved matehing of bad debt expense with reveny. is achieved. e cs Which of the following is not acceptable in estimating uncollectible accounts receivable? a. The estimate of uncollectible accounts is based on , percentage of sales for the period. The estimate of uncollectible accounts is based b. percentage of the accounts receivable at the end of period. 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. . The estimate of uncollectible accounts receivable based on a percentage of sales Emphasizes measurement of the net realizable value of accounts receivable. b. Emphasizes measurement of bad debt expense. Emphasizes measurement of total assets. c. d. Is only acceptable for tax purposes. 7. The entry.debiting accounts receivable and crediting allowance for doubtful accounts would be made when a. a. A customer pays an account balance. b. A customer defaults.on an account. c. A previously defaulted customer pays the outstanding balance. d. Estimated uncollectible receivables are too low. 292entt palance in the allowance for doubtful accounts ' je! ould never occur. Shot vaye the result of management not providing a b oree enough allowance in order to manage earnings. lar occur before the end-of-period adjustment for c ncollectible accounts. Ma exist even alter the end-of-period adjustment for 4 MMilectible accounts, ich is not permitted in accounting for uncollectible 4 5 receivable? gccount percentage of accounts receivable " percentage of sales - Direct writeoff method i Aging of accounts receivable 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 ¢. Increase both accounts receivable and net income d. Decrease both accounts receivable and net income ANSWER 20-13 Ld 6. b ub Tac ha 8 oc Ad % ¢ ud 10. d 293| QUESTION 20-14 Multiple choice (LAA) 1. What is the theoretically correct method of Tecordin, cash discounts related to accounts receivable? 8 a. Net method b. Gross method c. Allowance method . d. All three methods are theoretically correct 2. All of the following are problems associated with the measurement of accounts receivable, except a. Uncollectible accounts . Sales returns ¢. Cash discounts under the net method d. Sales allowances 3. 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 ¢. Account previously written off becomes collectible d. Specific uncollectible account is written off 4. Which item should be included in accounts receivable? a. Note receivable b. Interest receivable c. Allowance for doubtful accounts d. -Advances to related parties ANSWER 20-14 lia 20¢ 3. d dic 294