06 Receivable (1)

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

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FINANCIAL ACCOUNTING 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.

Essay Questions – Accounts Receivable

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Accounts Receivable Accordingly, in estimating the net realizable value of trade accounts receivable, the following deductions are made: a. b. c. d. 5.

Allowance for freight charge Allowance for sales return Allowance for sales discount Allowance for doubtful accounts

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.

Essay Questions – Accounts Receivable

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FINANCIAL ACCOUNTING 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.

Essay Questions – Accounts Receivable

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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". Essay Questions – Accounts Receivable

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FINANCIAL ACCOUNTING 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.

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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 Interest income

xx 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

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FINANCIAL ACCOUNTING 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 interestbearing 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.

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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.

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FINANCIAL ACCOUNTING 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

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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.

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FINANCIAL ACCOUNTING 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.

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Receivable Financing 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.

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FINANCIAL ACCOUNTING 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. Essay Questions – Receivable Financing

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Receivable Financing 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.

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FINANCIAL ACCOUNTING 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. 3.

Accounts receivable shall be recognized initially at A. Current value C. Face value B. Discounted value D. Maturity value TOA © 2013 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

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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 MCQ – Theory: Accounts Receivable

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FINANCIAL ACCOUNTING 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 separately and if impaired, the impairment loss is recognized. 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. MCQ – Theory: Accounts Receivable

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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 MCQ – Theory: Accounts Receivable

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FINANCIAL ACCOUNTING 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

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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 MCQ – Theory: Accounts Receivable

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FINANCIAL ACCOUNTING 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

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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 separately and if impaired, the impairment loss is recognized. 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

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FINANCIAL ACCOUNTING 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

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Notes Receivable Interest receivable 5. 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 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

7.

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 [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

8.

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 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 MCQ – Theory: Notes Receivable

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FINANCIAL ACCOUNTING following accounts increased? [3] A. Interest receivable C. Prepaid interest B. Interest revenue D. Unearned discount TOA © 2013 10. 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? [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%. MCQ – Theory: Notes Receivable

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Loans Receivable MCQ – Theory: Loan Receivable Initial measurement 1. A loan receivable is initially measured at A. Fair value B. Fair value minus transaction cost

C. Fair value plus 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

5.

FA © 2014

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

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FINANCIAL ACCOUNTING 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

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Receivable Financing 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

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FINANCIAL ACCOUNTING 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

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Receivable Financing 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

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FINANCIAL ACCOUNTING 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 MCQ – Theory: Receivable Financing

Page 32

Receivable Financing A. B. C. D.

Secured borrowing Pledge of collateral Both secured borrowing and pledge of collateral 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

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FINANCIAL ACCOUNTING 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

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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 Credit sales 2,700,000 Sales returns 75,000 Accounts written off 40,000 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 MCQ – Problems: Accounts Receivable

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FINANCIAL ACCOUNTING 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 Collections from customers, including overpayment of P50,000 Write-off Merchandise returns MCQ – Problems: Accounts Receivable

Credits 5,200,000 35,000 25,000 Page 36

Accounts Receivable Allowances to customers for shipping damages Collection on carrier claim Collection on subscription What is the balance of accounts receivable on December 31 ? A. 495,000 C. 565,000 B. 545,000 D. 595,000

15,000 10,000 50,000 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: MCQ – Problems: Accounts Receivable

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FINANCIAL ACCOUNTING 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 MCQ – Problems: Accounts Receivable

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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 Other accounts receivable not individually significant 5,000,000 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

MCQ – Problems: Accounts Receivable

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FINANCIAL ACCOUNTING 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? MCQ – Problems: Accounts Receivable

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Accounts Receivable A. 126,000 B. 142,000

C. 144,500 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 MCQ – Problems: Accounts Receivable

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FINANCIAL ACCOUNTING 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 Accounts receivable 5,000,000 Allowance for doubtful accounts 40,000 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. MCQ – Problems: Accounts Receivable

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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 Allowance for doubtful accounts 100,000 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? MCQ – Problems: Accounts Receivable

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FINANCIAL ACCOUNTING A. 120,000 B. 170,000

C. 200,000 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 MCQ – Problems: Accounts Receivable

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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 Accounts written off 205,000 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 Year receivables days days days days 2013 7,800,000 3% 9% 17.4% 52.1% 2012 7,500,000 5 8 18.0 49.2 2011 6,800,000 4 11 19.0 53.7 2010 6,900,000' 4 10 19.8 51.3 2009 7,200,000 2 11 17.8 49.9 The unadjusted allowance for bad debts on December 31, 2014 is P300,000. MCQ – Problems: Accounts Receivable

Over 120 days 84.1% 80.3 82.0 78.5 85.2 Page 45

FINANCIAL ACCOUNTING 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 Questions 41 thru 44 are based on the following information. 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. MCQ – Problems: Accounts Receivable

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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

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FINANCIAL ACCOUNTING 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 noninterestbearing 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

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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 MCQ – Problems: Notes Receivable

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FINANCIAL ACCOUNTING 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 noninterestbearing 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: MCQ – Problems: Notes Receivable

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Notes Receivable Period 9 Present value of 1 at 8% .50 Present value of ordinary annuity of 1 at 8% 6.25 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

10 .46 6.71 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.

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FINANCIAL ACCOUNTING 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 Questions 62 & 63 are based on the following information. P1 © 2014 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 B. 108,000

C. 190,080 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 Questions 64 & 65 are based on the following information. On January 1, 2014, Ryan Company reported the following balances: Note receivable from sale of building Note receivable from an officer

P1 © 2014 7,500,000 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. MCQ – Problems: Notes Receivable

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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

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FINANCIAL ACCOUNTING 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 Questions 71 & 72 are based on the following information. P1 © 2014 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 Questions 73 thru 75 are based on the following information. P1 © 2014 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 74. What is the interest income for 2014? 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 MCQ – Problems: Loans Receivable

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Loans Receivable Questions 76 thru 79 are based on the following information. P1 © 2014 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: Principal amount 4,000,000 Origination fee charged against the borrower 342,100 Direct origination cost incurred 150,000 After considering the origination fee charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 12%. 76. What is the carrying amount of the loan receivable on January 1, 2014? A. 3,657,900 C. 4,000,000 B. 3,807,900 D. 4,150,000 77. What is the interest income for 2014? A. 380,900 B. 400,000

C. 456,948 D. 480,000

78. What is the carrying amount of the loan receivable on December 31, 2014? A. 3,750,932 C. 3,864,848 B. 3,807,900 D. 4,000,000 79. What is the interest income for 2015? A. 386,485 B. 400,000

C. 463,782 D. 480,000

Questions 80 thru 83 are based on the following information. P1 © 2014 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: Principal amount 3,000,000 Origination fee charged against the borrower 100,000 Direct origination cost incurred 260,300 After considering the origination fee charged to the borrower and the direct origination cost incurred, the effective rate on the loan is 6%. 80. What is the carrying amount of the loan receivable on January 1, 2014? A. 2,900,000 C. 3,160,300 B. 3,000,000 D. 3,260,300 MCQ – Problems: Loans Receivable

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FINANCIAL ACCOUNTING 81. What is the interest income for 2014? A. 180,000 B. 189,618

C. 240,000 D. 252,824

82. What is the carrying amount of the loan receivable on December 31, 2014? A. 3,000,000 C. 3,160,300 B. 3,109,918 D. 3,210,682 83. What is the interest income for 2015? A. 180,000 B. 186,595

C. 240,000 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 B. 720,000 MCQ – Problems: Loans Receivable

C. 721,960 D. 913,120

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Loans Receivable Questions 86 & 87 are based on the following information. P1 © 2014 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 87. What is the interest income for 2015? A. 0 B. 48,960

C. 52,920 D. 80,000

Questions 88 thru 90 are based on the following information. P1 © 2014 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 89. What is the interest income for 2015? A. 534,600 C. 599,456 B. 589,600 D. 825,000 MCQ – Problems: Loans Receivable

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FINANCIAL ACCOUNTING 90. What is the carrying amount of the loan receivable on December 31, 2015? A. 4,860,000 C. 5,949,600 B. 5,449,600 D. 7,000,000 Questions 91 thru 93 are based on the following information. P1 © 2014 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 92. What is the interest income for 2015? A. 0 B. 126,160

C. 142,640 D. 240,000

93. What is the carrying amount of the loan receivable on December 31, 2015? A. 1,640,360 C. 1,925,640 B. 1,783,000 D. 2,000,000 Questions 94 thru 96 are based on the following information. P1 © 2014 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. MCQ – Problems: Loans Receivable

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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 B. 600,000

C. 748,000 D. 752,000

95. What is the interest income for 2015? A. 200,000 B. 224,800

C. 424,800 D. 500,000

96. What is the carrying amount of the loan receivable on December 31, 2015? A. 3,750,000 C. 4,672,800 B. 4,472,800 D. 5,000,000 Questions 97 thru 99 are based on the following information. P1 © 2014 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 98. What is the carrying amount of the loan receivable on December 31, 2016? 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

MCQ – Problems: Loans Receivable

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FINANCIAL ACCOUNTING Questions 100 thru 102 are based on the following information. P1 © 2014 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

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Receivable Financing 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. MCQ – Problems: Receivable Financing

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FINANCIAL ACCOUNTING 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 MCQ – Problems: Receivable Financing

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Receivable Financing 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 Questions 114 & 115 are based on the following information. P1 © 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 yearend, 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 B. 200,000

C. 700,000 D. 900,000

Questions 116 & 117 are based on the following information. P1 © 2014 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

MCQ – Problems: Receivable Financing

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FINANCIAL ACCOUNTING Questions 118 & 119 are based on the following information. P1 © 2014 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 MCQ – Problems: Receivable Financing

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Receivable Financing 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 Questions 126 & 127 are based on the following information. P1 © 2014 On July 1, 2014, Lee Company sold goods in exchange for P2,000,000, 8-month, noninterestbearing note receivable. At the time of the sale, the market rate of interest was 12%. The entity MCQ – Problems: Receivable Financing

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FINANCIAL ACCOUNTING 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 Questions 128 & 129 are based on the following information. P1 © 2014 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. 1,040,000 129. What is the loss on note receivable discounting? A. 12,000 C. 50,000 B. 40,000 D. 52,000 Questions 130 & 131 are based on the following information. P1 © 2014 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. 6,174,000 131. What is the loss on note receivable discounting? A. 48,000 C. 152,000 B. 52,000 D. 252,000 Questions 132 & 133 are based on the following information. P1 © 2014 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. MCQ – Problems: Receivable Financing

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Receivable Financing 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. 4,120,000 133. What is the loss on note receivable discounting? A. 17,000 C. 23,000 B. 20,000 D. 40,000 Questions 134 thru 136 are based on the following information. P1 © 2014 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

MCQ – Problems: Receivable Financing

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FINANCIAL ACCOUNTING ANSWER KEY – THEORY 1.D 21.C 2.C 22.C 3.A 23.C 4.D 24.A 5.C 25.B 6.D 26.B 7.B 27.C 8.D 28.A 9.D 29.C 10.B 30.A 11.A 31.D 12.D 32.C 13.D 33.B 14.B 34.C 15.A 35.C 16.A 36.D 17.D 37.C 18.D 38.A 19.A 39.B 20.D 40.B

Answer Key

41.A 42.B 43.C ---------------------1.C 2.B 3.D 4.A 5.C 6.B 7.C 8.C 9.A 10.D 11.C 12.A 13.C ---------------------1.A 2.A

3.C 4.D 5.D 6.B 7.D ---------------------1.C 2.C 3.A 4.A 5.A 6.A 7.C 8.C 9.A 10.B 11.B 12.C 13.A 14.D

15.C 16.A 17.D 18.C 19.A 20.B 21.A 22.B 23.D 24.C 25.C 26.B 27.A

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Receivable ANSWER KEY – PROBLEMS 1. 26.A 2. 27.B 3. 28.A 4. 29.B 5. 30.A 6.A 31.C 7.C 32.C 8.C 33.C 9.A 34.C 10.A 35.A 11.B 36.A 12.D 37.D 13.A 38.A 14.B 39.D 15.B 40.B 16.A 41.A 17.C 42.B 18.C 43.D 19.A 44.A 20.C 45.B 21.A 46.C 22.D 47.D 23.D 48.D 24.A 49.C 25.A 50.B

Answer Key

51.C 52.B 53.C 54.C 55.D 56.C 57.C 58.D 59.B 60.B 61.A 62.C 63.B 64.C 65.C 66.C 67.C 68.B 69.B 70.A 71.C 72.B 73.A 74.B 75.B

76.B 77.C 78.C 79.C 80.C 81.B 82.B 83.B 84.A 85.A 86.C 87.C 88.C 89.B 90.B 91.B 92.C 93.C 94.D 95.C 96.B 97.C 98.C 99.A 100.C

101.A 102.A 103.A 104.B 105.C 106.B 107.A 108.C 109.B 110.A 111.A 112.A 113.B 114.A 115.C 116.B 117.B 118.A 119.A 120.D 121.B 122.D 123.C 124.B 125.D

126.B 127.D 128.B 129.A 130.C 131.B 132.B 133.C 134.B 135.C 136.D

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FINANCIAL ACCOUNTING

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 Add: Credit sales Total Less: Collection from customers Accounts written off

1,300,000 5,400,000 6,700,000 4,750,000 125,000 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 Purchases Goods available for sale Inventory - December 31

Answer Explanations & Solutions

4,800,000 8,000,000 12,800,000 (4,400,000) Page 71

FINANCIAL ACCOUNTING Cost of goods sold Gross margin on sales Gross sales Cash sales Credit sales Accounts receivable – January 1 Total Accounts receivable collected Accounts receivable – December 31 8.

9.

Answer is (C). Accounts receivable - unassigned Accounts receivable - assigned Trade installments receivable (850,000 - 50,000) Accounts receivable from officers Accounts on which postdated checks are held Total trade accounts receivable Answer is (A). Accounts receivable. - January Credit sales Total Less: Collections from customers 2,150,000 Accounts written off 40,000 Sales returns 75,000 Accounts receivable - December 31 The net realizable value of accounts receivable is computed as follows: Accounts receivable Less: Allowance for doubtful accounts 110,000 Allowance for sales returns 50,000 Net realizable value

10. Answer is (A). Sales on account Notes received to settle accounts Accounts determined to be worthless Merchandise returned by customer Collections received to settle accounts Discounts taken by customers Answer Explanations & Solutions

8,400,000 4,200,000 12,600,000 ( 2,000,000) 10,600,000' 4,000,000 14,600,000 ( 8,400,000) 6,200,000 2,000,000 1,500,000 800,000 150,000 200,000 4,650,000 650,000 2,700,000 3,350,000 2,265,000 1,085,000 1,085,000 160,000 925,000 3,600,000 ( 400,000) ( 25,000) (15,000) (2,450,000) ( 40,000) Page 72

Receivable Accounts receivable Allowance for doubtful accounts Net realizable value

(90,000-25,000)

670,000 (65,000) 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) Accounts receivable - December 31 1,780,000 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) Charge sales Accounts written off but recovered Total Collections from customers (5,200,000-50,000) Writeoff Merchandise returns Allowance to customers for shipping damages Accounts receivable - December 31

560,000 5,250,000 10,000 5,820,000 (5,150,000) ( 35,000) ( 25,000) ( 15,000) 595,000

13. Answer is A). (1,100,000-40,000) 1,060.000 Accounts receivable - January 1 Sales on account Collections Sales discounts Collections of pledged accounts Accounts receivable - December 31

450,000 4,800,000 (3,920,000) ( 80,000) ( 150,000) 1,100,000

Answer Explanations & Solutions

Page 73

FINANCIAL ACCOUNTING Allowance for doubtful accounts - January 1 Provision for doubtful accounts Recovery of accounts written off Allowance balance - December 31

9,000 26,000 5,000 40,000

14. Answer is (B). Goods available for sale Ending inventory Cost of sales

9,000,000 (1,500,000) 7,500,000

Sales Cash sales Collections Accounts written off Accounts receivable - December 31

(7,500,000x140%) 10,500,000 (10,500,000x20%) (2,100,000) (6,000,000) ( 50,000) 2,350,000

Credit sales

(10,500,000x80%) 8,400,000

Provision for doubtful accounts (8,400,000 x 5%) 420,000 Accounts written off ( 50,000) Allowance for doubtful accounts - December 31 370,000 Accounts receivable Allowance for doubtful accounts Net realizable value 15. Answer is (B). Accounts receivable – customers Allowance for doubtful accounts Accounts receivable-officers Debit balances - creditors Total trade and other receivables

2,350,000 ( 370,000) 1,980,000 (7,800,000 + 400,000)

8,200,000 ( 200,000) 500,000 300,000 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 Answer Explanations & Solutions

Page 74

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 Other accounts receivable not individually significant 4,500,000 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 Francis Company All other accounts receivable (4% x 8,500,000) Total impairment loss

500,000 1,000,000 340,000 1,840,000

Jerard Company 2,000,000 Marc Company 1,500,000 Other accounts receivable not individually significant 5,000,000 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 Answer Explanations & Solutions

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FINANCIAL ACCOUNTING 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 Doubtful accounts expense Total Accounts written off (SQUEEZE) Allowance for doubtful accounts - 12/31/2014

900,000 160,000 1,060,000 (60,000) 1,000,000

22. Answer is (D). Writeoff Excess of ending allowance over beginning allowance Uncollectible accounts expense

100,000 250,000 350,000

23. Answer is (D). Allowance- 12/31/2013 (4,800,000-4,725,000) Recovery of accounts written off in previous year Doubtful accounts expense for 2014 (SQUEEZE) Total Accounts written off in 2014 Allowance-12/31/2014 (5,250,000-5,100,000)

75,000 40,000 195,000 310,000 (160,000) 150,000

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

( 16,000) 142,000 126,000

25. Answer is (A). Allowance for doubtful accounts - January 1 180,000 Doubtful accounts expense (9,500,000-800,000-200,000 x 3%) 255,000 Total 435,000 Accounts written off (200,000) Allowance for doubtful accounts - December 31 235,000 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) Answer Explanations & Solutions

100,000 Page 76

Receivable 27. Answer is (B). Allowance for bad debts - December 31, 2013 Bad debt expense for 2014 (2% x 3,500,000) Total Allowance for bad debts - December 31, 2014 Accounts written off in 2014 28. Answer is (A).

Credit sales 11,100,000 12,250,000 14,650,000 38,000,000

2011 2012 2013

Rate =

855,000 – 95,000 38,000,000

29. Answer is (B). Doubtful accounts expense for 2014

Writeoffs 260,000 295,000 300,000 855,000

60,000 70,000 130,000 80,000 50,000 Recoveries 22,000 37,000 36,000 95,000

= .02 (2%x 15,000,000)

30. Answer is (A). Allowance for doubtful accounts - 1/1/2014 Doubtful accounts expense for 2014 Recoveries in 2014 Total Write-offs in 2014 Allowance for doubtful accounts- 12/31/2014

300,000 78,000 300,000 42,000 420,000 (310,000) 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 Answer Explanations & Solutions

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FINANCIAL ACCOUNTING 32. Answer is (C). Year 2010 2011 2012 2013 Total 2014 Total

Credit sales Write-offs 1,500,000 15,000 2,250,000 38,000 2,950,000 52,000 3,300,000 65,000 10,000,000 170,000 4,000,000 83,000 14,000,000 253,000 170,000 – 10,000 Rate in 2013 = = .016 10,000,000 Rate in 2014

=

253,000 – 15,000 14,000,000

=

Recoveries 2,700 2,500 4,800 10,000 5,000 15,000

.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 Credit sales (5,900,000 - 2,100,000) Total Cash received from credit customers Sales discounts (3,024,000/96% = 3,150,000-3,024,000) Accounts receivable written off Sales returns and allowances Accounts receivable - December 31 34. Answer is (C). Question 2 Answer b Allowance for doubtful accounts - January 1 Recovery of accounts written off Doubtful accounts expense for 2014 Answer Explanations & Solutions

950,000 3,800,000 4,750,000 (3,024,000) ( 126,000) ( 50,000) ( 250,000) 1,300,000

100,000 80,000 - 70,000 Page 78

Receivable Total Accounts written off Allowance for doubtful accounts – December 31

250,000 (50,000) 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 Recovery of accounts written off 50,000 Doubtful accounts expense (SQUEEZE) 100,000 Total 430,000 Accounts written off ( 230,000) 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%) 31 - 60 days (2,000,000 x 10%) Over 60 days (1,000,000 x 20%) Required allowance - December 31 Add: Debit balance in allowance Doubtful accounts expense 38. Answer is (A). Allowance for doubtful accounts - January 1 Doubtful accounts expense (SQUEEZE) Total Accounts written off Allowance for doubtful accounts - December 31 Answer Explanations & Solutions

100,000 200,000 200,000 500,000 20,000 520,000 250,000 175,000 425,000 (205,000) 220,000 Page 79

FINANCIAL ACCOUNTING Correct doubtful accounts expense Recorded doubtful accounts expense Overstatement of doubtful accounts expense Adjusting journal entry Allowance for doubtful accounts Doubtful accounts expense 39. Answer is (D). 0-30 days 31-60 days 61-90 days 91-120 days Over 120 days

Amount 4,500,000 1,500,000 800,000 200,000 100,000 7,100,000

175,000 200,000 ( 25,000) 25,000

Average rate Required allowance 3.60% 162,000 9.80% 147,000 18.40% 147,200 51.24% . 102,480 82.02% 82,020 640,700

40. Answer is (B). 0- 30 (300,000 x 1%) 31 - 90 (80,000 x 5%) 91 - 180 (60,000 x 20%) Over 180 (25,000 x 80%) Required allowance - December 31, 2014 Allowance-December 31, 2013 (2,800,000 x 1%) Recovery in 2014 Uncollectible accounts expense for 2014 (SQUEEZE) Total Write-off in 2014 Required allowance - December 31, 2014 41. Answer is (A). November - December (2,000,000 x 2%) July-October (600,000 x 10%) January - June (400,000 x 25%) Prior to January 1,2014 ( 200,000 - 60,000 x 75%) Required allowance - December 31, 2014

Answer Explanations & Solutions

25,000

3,000 4,000 12,000 20,000 39,000 28,000 7,000 31,000 66,000 (27,000) 39,000 40,000 60,000 100,000 105,000 305,000

Page 80

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 Recoveries Doubtful accounts expense (SQUEEZE) Total Writeoffs (90,000 + 60,000) Required allowance - December 31, 2014

120,000 15,000 320,000 455,000 (150,000) 305,000

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 Allowance for doubtful accounts 140,000 45. Answer is (B). Note receivable - noninterest Cash price Implied interest revenue Interest revenue from July 1 to December 31, 2014 46. Answer is (C). Interest income from July 1 to Dec. 31, 2014

(200,000 x 6/12)

2,500,000 2,300,000 200,000 100,000

(10% x 5,000,000x6/12)

250,000

47. Answer is (D). Note receivable Present value equal to cash price (1,600,000 x 90%) Interest revenue 48. Answer is (D). First payment on January 1,2014 Present value of remaining six payments Correct sales revenue Note receivable Answer Explanations & Solutions

(600,000 x 4.36) (600,000 x 6)

1,700,000 1,440,000 260,000 600,000 2,616,000 3,216,000 3,600,000 Page 81

FINANCIAL ACCOUNTING 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 Note receivable 3,600,000 Sales 3,216,000 Unearned interest income 984,000 49. Answer is (C). Present value of note Carrying amount of building Gain on sale 50. Answer is (B). Total payments Present value of the note Total interest revenue

(4,000,000 x .712) (3,800,000 - 1,600,000)

(500,900x5)

51. Answer is (C). Installment receivable - January 1,2014 Payment on December 31,2014 Interest income for 2014 (7,582,000 x 10%) Carrying amount - December 31, 2014

2,000,000 758,200

2,848,000 (2,200,000) 648,000 2,504,500 (1,948,500) 556,000 7,582,000 1,241,800 6,340,200

52. Answer is (B). Note receivable 4,000,000 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 Interest income for 2015 (10% x 3,300,000) 330,000 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 Answer Explanations & Solutions

Page 82

Receivable Interest income for 2014 Interest income for 2015 Interest income for 2016 (simply the remainder) Total interest income

300,000 330,000 370,000 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%) December 2014 (500,000 x 1%) Accrued interest receivable on December 31, 2014 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) Principal payment on December 31, 2014: Annual payment 1,975,400 Interest (12% x 6,000,000) ( 720,000) Carrying amount - December 31,2014

5,000 5,000 10,000

6,000,000 1,255,400 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) Present value (100,000 x 6.25) Unearned interest income Journal entry Cash Note receivable Answer Explanations & Solutions

900,000 625,000 275,000

100,000 900,000 Page 83

FINANCIAL ACCOUNTING Sales Unearned interest income

725,000 275,000

First payment on December 31,2014 Present value of remaining payments Total sales revenue

100,000 625,000 725,000

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 Carrying amount of equipment Loss on sale Interest income for first year

(1,000,000 x .712) (12% x 712,000)

712,000 800,000 ( 88,000) 85,440

60. Answer is (A). Note receivable 6,000,000 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) Less: Carrying amount of equipment Loss on sale of equipment

Answer Explanations & Solutions

4,500,000 4,800,000 ( 300,000)

Page 84

Receivable 62. Answer is (C). Note receivable - December 31, 2014 Present value (1,200,000 x 1.76) Unearned interest income Interest income for 2015 (9% x 2,112,000) 63. Answer is (B). Note receivable - December 31, 2015 Unearned interest income-12/31/2015 Carrying amount - December 31, 2015

2,400,000 2,112,000 288,000 190,080

(288,000-190,080)

64. Answer is (C). Note receivable from sale of building due 5/1/2015 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) 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) Accrued interest on NR from sale of land from 7/1/2014 to 12/31/2014(1/2x280,000) Total current receivables - December 31, 2014 65. Answer is (C). NR from sale of building due May 1, 2016 NR from officer due December 31, 2016 NR from sale of land - noncurrent portion: Principal Due July 1, 2015 - current portion Total noncurrent notes receivable - December 31, 2014 66. Answer is (C). Present value of note receivable (500,000 x 3.99) 67. Answer is (C). Interest income for 2015 (8% x 1,995,000) 68. Answer is (B). Note receivable - 12/31/2015 Unearned interest income - 12/31/2015 Answer Explanations & Solutions

1,200,000 ( 97,920) 1,102,080 2,500,000 300,000 600,000 140,000 3,540,000 2,500,000 2,000,000

2,800,000 (600,000)

2,200,000 6,700,000

1,995,000

159,600 (2,500,000 - 500,000)

2,000,000 Page 85

FINANCIAL ACCOUNTING (2,500,000 - 1,995,000 = 505,000 - 159,600) Carrying amount -12/31/2015 69. Answer is (B). Loan receivable Direct origination cost Total Origination fee received from borrower (1,500,000 x 4%) Carrying amount The indirect origination cost incurred by the bank is an outright expense. 70. Answer is (A). Loan payable Origination fee charged by the bank Carrying amount 71. Answer is (C). Interest income for 2014 72. Answer is (B). Accrued interest receivable 73. Answer is (A). Origination fee received Direct origination cost Unearned interest income

(345,400) 1,654,600

1,500,000 40,000 1,540,000 ( 60,000) 1,480,000

1,500,000 (60,000) 1,440,000

(194,000 x 13.4% x 1/12)

2,166

(200,000 x 12% x 1/12)

2,000

350,000 (61,500) 288,500

Note receivable 4,000,000 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. Answer Explanations & Solutions

Page 86

Receivable 74. Answer is (B). Interest income for 2014 Journal entries on December 31, 2014 Cash (10% x 4,000,000) Interest income

(3,711,500 x 12%)

Unearned interest income Interest income

400,000 400,000 45,380 45,380

Interest income 445,380 Interest received Amortization of unearned interest income 75. Answer is (B) Loan receivable Unearned interest income - 12/31/2014 Carrying amount -12/31/2014

400,000 45,380

4,000,000 (288,500-45,380) ( 243,120) 3,756,800

76. Answer is (B). Origination fee received Direct origination cost incurred Unearned interest income Loan receivable Unearned interest income Carrying amount - January 1, 2014 77. Answer is (C). Interest income for 2014 (12% x 3,807,900) Interest received for 2014 (10% x 4,000,000) Amortization of unearned interest income

Answer Explanations & Solutions

445,380

342,100 (150,000) 192,100 4,000,000 ( 192,100) 3,807,900

456,948 400,000 56,948

Page 87

FINANCIAL ACCOUNTING 78. Answer is (C). Loan receivable Unearned interest income - December 31, 2014 (192,100-56,948) Carrying amount - December 31, 2014 79. Answer is (C). Interest income for 2015

(12% x 3,864,848)

80. Answer is (C). Direct origination cost incurred Origination fee received Net direct origination cost Loan receivable Carrying amount of loan receivable - January 1, 2014

4,000,000( 135,152) 3,864,848

463,782

260,300 (100,000) 160,300 3,000,000 3,160,300

81. Answer is (B). Interest income for 2014 (6% x 3,160,300) Interest received for 2014 (8% x 3,000,000) Amortization of direct origination cost

189,618 240,000 50,382

82. Answer is (B). Loan receivable Direct origination cost-12/31/2014 (160,300 - 50,382) Carrying amount - December 31, 2014

3,000,000 109,918 3,109,918

83. Answer is (B). Interest income for 2015 84. Answer is (A). Loan receivable Accrued interest receivable Carrying amount - December 31, 2014 Present value of cash inflows Answer Explanations & Solutions

(6% x 3,109,918)

(9% x 5,000,000) (5,450,000 x .772)

186,595

5,000,000 450,000 5,450,000 4,207,400 Page 88

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) December 31, 2018 Interest payment December 31,2019 Interest payment December 31, 2020 Interest payment December 31, 2020 Principal payment Present value of cash flows December 31, 2017 (360,000 x .772) December 31, 2018 (360,000 x .708) December 31, 2019 (360,000 x .650) December 31, 2020 (4,360,000 x .596) Total present value of loan Loan receivable Present value of loan Loan impairment loss 86. Answer is (C). Present value of principal Present value of interest Total present value of loan Loan receivable Present value of loan Loan impairment loss

Answer Explanations & Solutions

(500,000 x .735) (80,000 x 5 = 400,000 x .735)

360,000 360,000 360,000 3 60,000 4,000,000 277,920 254,880 234,000 2,598,560 3,365,360 4,000,000 3,365,360 634,640

367,500 294,000 661,500 1,000,000 661,500 338,500

Page 89

FINANCIAL ACCOUNTING 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 Total present value of loan 5,360,000 Loan receivable 7,500,000 Accrued interest receivable (7,500,000 x 11 %) 825,000 Carrying amount 8,325,000 Present value of loan 5,360,000 Impairment loss 2,965,000 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). Loan receivable 7,500,000 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. Interest income for 2015 (5,360,000 x 11%) 589,600 90. Answer is (B). Journal entries on December 31,2015 Cash Loan receivable Allowance for loan impairment Interest income

Answer Explanations & Solutions

500,000 500,000 589,600 589,600

Page 90

Receivable Loan receivable (7,500,000-500,000) Allowance for loan impairment (2,140,000 - 589,600) Carrying amount - December 31, 2015 91. Answer is (B). January 1,2015 collection January 1,2016 collection January 1,2017 collection Total present value of loan Loan receivable Present value of loan*

(1,000,000 x 1.000) (1,000,000 x .926) (1,000,000 x .857)

Impairment loss Journal entry to record the impairment loss Impairment loss Allowance for loan impairment

7,000,000 (1,550,400) 5,449,6,00

1,000,000 926,000 857,000 2,783,000 3,000,000 2,783,000 217,000

217,000 217,000

92. Answer is (C). Loan receivable Collection on January 1,2015 Loan receivable - January 1, 2015 Allowance for loan impairment Carrying amount - January 1, 2015 Interest income for 2015 (1,783,000 x 8%)

3,000,000 (1,000,000) 2,000,000 ( 217,000) 1,783,000 142,640

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) Carrying amount - December 31, 2015 1,925,640 94. Answer is (D). PV of principal PV of interest Total present value Answer Explanations & Solutions

(5,000,000 x .75) (200,000 x 2.49)

3,750,000 498,000 4,248,000 Page 91

FINANCIAL ACCOUNTING Carrying amount Impairment loss

5,000,000 752,000

Journal entry Impairment loss Allowance for impairment

752,000 752,000

95. Answer is (C). Interest income for 2015 (10% x 4,248,000) Interest received ( 4% x 5,000,000) Amortization of allowance for impairment Journal entry Cash Allowance for impairment Interest income

200,000 224,800 424,800

96. Answer is (B). Loan receivable - December 31, 2015 Allowance for impairment Carrying amount - December 31, 2015 97. Answer is (C). PV of principal PV of interest Cash paid to borrower

(752,000 - 224,800)

(5,000,000 x .57) (10% x 5,000,000 x 3.60)

Principal Present value Unearned interest income Journal entry Loan receivable Cash Answer Explanations & Solutions

424,800 200,000 224,800

5,000,000 ( 527,200) 4,472,800

2,850,000 1,800,000 4,650,000 5,000,000 4,650,000 350,000

5,000,000 4,650,000 Page 92

Receivable Unearned interest income

350,000

98. Answer is (C). Date 12/31/2014 12/31/2015 12/31/2016

10% Interest received 4,650,000 500,000 500,000

12% Interest income

Amortizatio n

Present value

558,000 564,960

58,000 64,960

4,708,000 4,772,960

Loan receivable - December 31, 2016 Unearned interest income Carrying amount - December 31, 2016

(350,000 - 58,000 - 64,960)

99. Answer is (A). PV of principal PV of interest Total present value Carrying amount - December 31, 2016 Impairment loss

(3,000,000 x .71) ( 500,000 x 2.40)

100. Answer is (C). Cash proceeds Interest rate swap Call option Recourse obligation Net proceeds - sale price equal to fair value Carrying amount Gain on sale 101. Answer is (A). Cash Interest rate swap receivable Call option Answer Explanations & Solutions

5,000,000 (227,040) 4,772,960

2,130,000 1,200,000 3,330,000 4,772,960 1,442,960

2,100 140 80 ( 120) 2,200 (2,000) 200

2,100 140 80 Page 93

FINANCIAL ACCOUNTING Loan receivable Recourse obligation Gain on sale 102. Answer is (A). Cash proceeds Interest rate swap Call option Recourse obligation Fair value of the service Net proceeds =- net sale price Carrying amount Gain on sale

2,000 120 200

2,100 140 80 ( 120) (50) 2,150 (2,000) 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 Accounts receivable - assigned Total accounts receivable Required allowance- 12/31/2014 (3% x 6,000,000) Allowance for bad debts before adjustment Bad debt expense for 2014 106. Answer is (B). Face amount of loan Finance fee (4% x 2,000,000) Answer Explanations & Solutions

1,000,000 5,000,000 6,000,000 180,000 65,000 115,000

2,000,000 ( 80,000) Page 94

Receivable Cash received

1,920,000

107. Answer is (D). Note payable Finance fee Cash received on December 1

(5% x 1,500,000)

108. Answer is (C). Note payable Principal payment: Remittance Interest (1,500,000 x 12% x 1/12) Note payable - December 31

1,500,000 950,000 ( 15,000)

109. Answer is (B). Accounts receivable - assigned (2,000,000 - 1,000,000) Note payable Equity of Bamboo Company in assigned accounts 110. Answer is (A). Accounts receivable Finance charge Factor's holdback Cash received from factoring 111. Answer is (A). Sale price Carrying amount of accounts receivable Loss on factoring 112. Answer is (A). Loss on factoring - finance fee

(3% x 2,000,000) (5% x 2,000,000)

(5,800,000-600,000)

935,000 565,000

1,000,000 (565,000) 435,000

2,000,000 ( 60,000) ( 100,000) 1,840,000

5,000,000 5,200,000 (200,000)

300,000

113. Answer is (B). Loss on factoring - equal to finance fee (5% x 4,000,000)

Answer Explanations & Solutions

1,500,000 (75,000) 1,425,000

200,000

Page 95

FINANCIAL ACCOUNTING 114. Answer is (C). Accounts receivable Factor's holdback Commission Cash received

6,000,000 (1.0% x 6,000,000) ( 600,000) (15% x 6,000,000) ( 900,000) 4,500,000

115. Answer is (C). Accounts receivable factored Commission Net sale price Carrying amount of AR (6,000,000 - 200,000) Loss on factoring 116. Answer is (B) Accounts receivable Factor's holdback (6,000,000 x 5%) Factoring fee (6,000,000 x 3%) Interest (6,000,000 x 15% x 54/365) Cash initially received from factoring 117. Answer is (B). Factoring fee Interest Total cost of factoring 118. Answer is (A). Accounts receivable Commission Holdback Cash initially received 119. Answer is (A). Accounts receivable Commission Answer Explanations & Solutions

6,000,000 ( 900,000) 5,100,000 5,800,000 ( 700,000)

6,000,000 (300,000) (180,000) (133,150) 5,386,850

180,000 133,150 313,150

(15% x 3,000,000) (10% x 3,000,000)

3,000,000 ( 450,000) ( 300,000) 2,250,000

3,000,000 ( 450,000) Page 96

Receivable Net sale price Carrying amount of accounts receivable Loss on factoring

2,550,000 (3,000,000 - 100,000) 2,900,000 ( 350,000)

Entry on the books of Motorway Company Cash Allowance for doubtful accounts Loss on factoring Due from factor Accounts receivable

2,250,000 100,000 350,000 300,000 3,000,000

Entry on the books of the factor, Freeway Company Accounts receivable Cash Commission income Clients retainer

3,000,000

120. Answer is (D). Note payable Discount (5,000,000 x 12%) Net proceeds Effective interest rate = Discount/Net proceeds = 600,000/4,400,000 = 13.6% 121. Answer is (B). Principal Add: Interest Maturity value Less: Discount Ne+ proceeds Principal Accrued interest receivable Carrying amount of note receivable Answer Explanations & Solutions

2,250,000 450,000 300,000

5,000,000 ( 600,000) 4,400,000

(500,000 x 8%) (540,000 x 10% x 6/12)

(500,000 x 8% x 6/12)

500,000 40,000 540,000 27,000 513,000 500,000 20,000 520,000 Page 97

FINANCIAL ACCOUNTING 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 Net proceeds 517,000 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 Interest Maturity value Discount Net proceeds

(5,000,000 x 12% x 90/360) (5,150,000 x 15% x 60/360)

Principal Accrued interest receivable (5,000,000 x 12% x 30/360) Carrying amount of note receivable Net proceeds Carrying amount of note receivable Interest expense

Answer Explanations & Solutions

5,000,000 150,000 5,150,000 128,750 5,021,250 5,000,000 50,000 5,050,000 5,021,250 (5,050,000) ( 28,750)

Page 98

Receivable Journal entry Cash Interest expense Liability for note discounted Interest income

5,021,250 28,750 5,000,000 50,000

124. Answer is (B). Note payable 5,000,000 Less: Discount (5,000,000 x 10.8%) 540,000 Net proceeds 4,460,000 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 Note payable 5,000,000 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. Note payable 5,000,000 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.

Answer Explanations & Solutions

Page 99

FINANCIAL ACCOUNTING 126. Answer is (B). Principal - maturity value 2,000,000 Less: Discount (2,000,000x10% x 6/12) 100,000 Net proceeds 1,900,000 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). Net proceeds 1,900,000 Carrying amount of note receivable (2,000,000) Loss on note receivable discounting ( 100,000) The carrying amount of the note receivable is equal to the principal because the note is noninterest-bearing. 128. Answer is (B). Principal Add: Interest (1,000,000 x 8% x 6/12) Maturity value Less: Discount (1,040,000 x 10% x 6/12) Net proceeds 129. Answer is (A). Net proceeds Carrying amount of note receivable - equal to principal Loss on note receivable discounting Journal entry Cash Loss on note receivable discounting Note receivable

Answer Explanations & Solutions

1,000,000 40,000 1,040,000 52,000 988,000

988,000 (1,000,000) (12,000)

988,000 12,000 1,000,000

Page 100

Receivable 130. Answer is (C). Principal 6,000,000 Add: Interest (6,000,000 x 10% x 6/12) 300,000 Maturity value 6,300,000 Less: Discount (6,300,000 x 12% x 4/12) 252,000 Net proceeds 6,048,000 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 Accrued interest (6,000,000 x 10% x 2/12) Carrying amount of note receivable Net proceeds Carrying amount of note receivable Loss on note receivable discounting

6,000,000 100,000 6,100,000 6,048,00,0 (6,100,000) ( 52,000)

132. Answer is (C). Principal 4,000,000 Interest (4,000,000 x 12% x 90/360) 120,000 Maturity value 4,120,000 Less: Discount (4,120,000 x 15% x 60/360) 103,000 Net proceeds 4,017,000 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 Accrued interest receivable (4,000,000 x 12% x 30/360) Carrying amount of note receivable Net proceeds Carrying amount of note receivable Answer Explanations & Solutions

4,000,000 40.000 4,040,000 4,017,000 (4,040,000) Page 101

FINANCIAL ACCOUNTING Loss on note receivable discounting 134. Answer is (B). Principal Interest Maturity value Discount Net proceeds

(2,000,000 x 10% x 9/12) (2,150,000 x 12% x 6/12)

135. Answer is (C). Principal Accrued interest receivable (2,000,000 x 10% x 3/12) Carrying amount of note receivable Net proceeds Carrying amount of note receivable Interest expense 136. Answer is (D). Maturity value Protest fee Total amount due Interest' (2,160,000 x 12% x 3/12) Amount collected from customer

Answer Explanations & Solutions

( 23,000)

2,000,000 150,000 2,150,000 ( 129,000) 2,021,000

2,000,000 50,000 2,050,000 2,021,000 (2,050,000) ( 29,000)

2,150,000 10,000 2,160,000 64,800 2,224,800

Page 102