Aklan Catholic College

Archbishop Gabriel M. Reyes St.

5600 Kalibo, Aklan, Philippines
Tel. Nos.: (036)268-4152; 268-9171
Fax No.: (036)268-4010
Website: http://www.acc.edu.ph
E-mail Add: [email protected]

TRADE AND OTHER RECEIVABLES

1. On December 31, 2013, the accounts receivable of Harem Company had a balance of
P8,200,000. 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 entities 1,000,000
Customers’ accounts reporting credit balances arising from
sales return (600,000)
Interest receivable on bonds 400,000
Trade accounts receivable 3,500,000
Subscription receivable due in 30 days 2,200,000
Trade installment 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

What is the correct balance of trade accounts receivable?

a. 4,650,000 c. 4,150,000
b. 4,700,000 d. 4,050,000

Notes:
 Receivables are financial assets that represent a contractual right to receive cash or
another financial asset from another entity.
 Receivable are classified into two, namely:
a. Trade receivables – claims arising from sale of merchandise or services in the
ordinary course or business. Includes accounts receivable and notes receivable.
b. Non-trade receivables – claims arising from sources other than the sale of
merchandise or services in the ordinary course of business.

 Examples on nontrade receivables:

a. Advances to or from shareholders, directors, officers or employees. If collectible in
one year, such advances or receivables should be classified as current assets.
Otherwise, classified as noncurrent assets.
b. Advances to affiliates are usually treated as long-term investments.
c. Advances to suppliers for the acquisition of merchandise are current assets.
d. Subscription receivables are current assets if collectible within one year. Otherwise,
should be shown preferably as a deduction from subscribed share capital.
e. Creditor’s accounts may have a debit balances as a result of overpayment or returns
and allowances. These are classified as current assets. If the debit balance is not
material, an offset may be made against the creditors’ accounts with credit balances
and only the net accounts payable may be presented.
f. Special deposits on contract bids normally are classified as noncurrent assets
because such deposits are likely to remain outstanding for a considerable long
period of time. However, deposits that are collectible currently should be classified
as current assets.
g. Accrued income such as dividends receivable, accrued rent income, accrued royalty
income and accrued interest on bond investments are usually classified as current
assets.
h. Claims receivable such as claims against common carriers for losses or damages,
claim for rebates and tax refunds. Claims from insurance entities, are normally
classified as current assets.

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2. In the December 31, 2013 statement of financial position of Valiant Company, the current
receivables consisted of the following:

Trade accounts receivables 2,000,000

Allowance for doubtful accounts ( 100,000)
Claims against shipper for goods lost
in transit in November 2012 300,000
Selling price of unsold goods sent by
Valiant on consignment at 150% of cost
(not included in ending inventory) 600,000
Security deposit on lease of warehouse 200,000
Total 3,000,000

What total amount should be reported as current trade and other receivables?
a. 2,200,000 c. 2,300,000
b. 2,400,000 d. 3,000,000

Note:
 Classification
a. 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.
b. Nontrade receivables which are expected to be realized in cash within one year, the
length of operating notwithstanding, are classified as current assets.
c. Nontrade receivables, if collectible beyond one year, are classified as noncurrent
assets.

 Presentation
Trade receivables and nontrade receivables which are currently collectible shall
be presented on the face of the statement of financial positions as one line item called
trade and other receivables. However, the details of the total trade and other
receivables shall be disclosed in the notes to financial statement.

3. Rapture Company had the following information for 2013 relating to accounts receivable:

Accounts receivable at January 1 1,300,000

Credit sales 5,400,000
Collections from customers, excluding recovery 4,750,000
Accounts receivable 125,000

Collection of accounts written off in prior year

(customer credit was not reestablished) 25,000
Estimated uncollectible receivables per aging
at December 31 165,000

What is the balance of accounts receivable, before allowance for doubtful accounts, on
December 31, 2013?
a. 1,825,000 c. 1,950,000
b. 1,850,000 d. 1,990,000

Note:
 Initial measurement of receivables
PFRS 9, paragraph 5.1.1 provides that a financial asset shall be recognized
initially at fair value plus transaction costs that are directly attributable to the
acquisition.

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 For short-term receivables, the fair value is equal to the face value or original
invoice amount. They are not discounted because the effect of discounting is
usually immaterial.

For long-term receivables that are interest-bearing, the fair value is equal to the
face value.

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.

4. Jinx Company provided the following information for 2013 in relation to accounts
receivable:
Accounts receivable, January 1 1,300,000
Credit sales 5,500,000
Sales return 150,000
Accounts written off 100,000
Collections from customers 5,000,000
Estimated future sales return on December 31 50,000
Estimated uncollectible accounts per aging at year-end 250,000

What amount should be reported as net realizable value of accounts receivable on December
31, 2013?
a. 1,550,000 c. 1,300,000
b. 1,250,000 d. 1,500,000

Note:
 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 recoverable from the
customer.

Accordingly, in estimating the net realizable value of trade accounts receivable, the
following deductions are made:
a. Allowance for freight charge
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts

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 shorter.
d. Within one year or within the operating cycle.

6. Which of the following statement s is true concerning presentation of receivables in the

statement of financial position?
a. Trade receivables and nontrade receivables are shown separately.
b. Nontrade receivables are presented as noncurrent assets.
c. Trade accounts receivable and trade notes receivable shall be presented separately.
d. Trade receivables and nontrade receivable s which are currently collectible shall be
presented as one line item called “trade and other receivables.”

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7. Which of the following statements is incorrect regarding receivables?
a. Receivables are financial assets.
b. Receivables are financial instruments.
c. Nontrade receivables may be reported as separate item in the statement of financial
position.
d. Accounts receivable are written promises of the purchaser to pay for goods or services.

8. In the case of long-term installments receivable (real estate installment sales) where a major
portion of the receivables would be collected beyond the normal operating cycle
a. The entire receivables are shown as current without disclosure of the amount not
currently due.
b. The entire receivables are shown as noncurrent.
c. Only the portion currently due is shown as current and the balance as noncurrent.
d. The entire receivables are shown as current with disclosure of the amount not currently
due.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

9. On January 1, 2013, Malice Company’s allowance for doubtful accounts had a credit balance
of P300,000. During the current year, the entity charged P650,000 to doubtful accounts
expense, wrote off P450,000 of uncollectible accounts receivable, and unexpectedly
recovered P100,000 of the bad debts written off in the prior year. What is the allowance for
doubtful accounts on December 31, 2013?
a. 500,000 c. 650,000
b. 600,000 d. 950,000

Note:
 Allowance method
The allowance method requires recognition of bad debt loss if the accounts are
doubtful of collection.

Transaction Journal Entry

Recognition of doubtful Doubtful accounts xxx
accounts Allowance for doubtful accounts xxx
Write-off of doubtful accounts Allowance of doubtful accounts xxx
deemed as worthless Accounts Receivable xxx
Recoveries of accounts written- Accounts Receivable xxx
off Allowance for doubtful accounts xxx
To reverse the entry made to write-off

Collection of recovered Cash xxx

accounts receivable Accounts Receivable xxx
To record the cash collected from the account
previously written off.

The “allowance for doubtful accounts” is a deduction from accounts receivable in order
to arrive at its net realizable value.

If a collection is made on account previously written off as uncollectible, the customary

procedure is first recharge the customer’s account (or to simply reverse the original entry
made for writing off) for the amount collected and subsequently followed by an entry to
record the receipt of cash in the usual manner of recording.

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10. Omega Company prepared an aging of accounts receivable on December 31, 2013 and
determined that the net realizable value of the accounts receivable was P2,500,000.

Allowance for uncollectible 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
What is the uncollectible accounts expense for 2013?
a. 230,000 c. 150,000
b. 200,000 d. 100,000

Note:
 Net realizable value of accounts receivable
The NRV of accounts receivable is the initial amount recognized for accounts
receivable reduced by adjustments which in the ordinary course of business will reduce
the amount recoverable from the customer, for instance, allowance for doubtful accounts.

 T-accounts
Using T-accounts, the following can be observed from the T-account for
“allowance for doubtful accounts”
Allowance for DA

xxx Beginning balance

Write-off of doubtful accounts xxx
xxx Recognition of doubtful accounts
Ending balance xxx
xxx Recovery of write-offs

11. On December 31, 2013, Ludicrous Company reported before any year-end adjustments
accounts receivable of P6,000,000 and allowance for doubtful accounts of P300,000.

Outstanding Accounts receivable Probability of collection

Under 15 days 3,000,000 .96
16 – 30 days 2,000,000 .90
31 – 45 400,000 .80
46 – 60 300,000 .70
61 – 75 200,000 .65
Over 75 days 100,000 .00

The accounts which have been outstanding over 75 days and have zero profitability of
collection would be written off immediately. What is the appropriate balance for the
allowance for doubtful accounts on December 31, 2013?
a. 560,000 c. 260,000
b. 660,000 d. 360,000

Notes:
 Methods of estimating doubtful accounts:
Statement of financial position approach
a. Aging of accounts receivable
b. Percentage of accounts receivable

Income statement approach

c. Percent of sales

It is so called “Statement of financial position approach” because the data that is

primarily used is a financial position element which is the “accounts receivable” and

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 that the output is also a financial position element which is the “allowance for doubtful
accounts” required (ending balance).

It is so called “Income statement approach” because the data that is primarily used is an
income statement element which is the “sales” and that the output is also an income
statement element which is the “doubtful accounts expense”.

 Aging of accounts receivable involves an analysis where the accounts are classified into
not due and past due. The allowance (required of ending balance) is then determined by
multiplying the total of each classification by the rate or percent of loss experienced by
the entity for each category.

Using this method, the accounts receivable are fairly presented in the statement of
financial position at net realizable value, though it violates the matching process.

12. The following accounts receivable were abstracted from Namesake Company’s unadjusted
trial balance on December 31, 2013.

Debit Credit
Accounts receivable 3,000,000
Allowance for doubtful accounts 10,000
Net credit sales 8,000,000

The entity estimated that 3% of the gross accounts receivable will become uncollectible.
What amount should be reported as doubtful accounts expense for 2013?
a. 240,000 c. 90,000
b. 100,000 d. 80,000

Notes:
 Percentage of accounts receivable
A certain rate is multiplied by the open accounts receivable at the end of the
period in order to get the required allowance balance. The rate used is usually
determined from past experience of the entity.

It has also the advantage of presenting accounts receivable at net realizable value but also
violates the matching principle of matching bad debts loss against sales revenue, just like
the aging approach. Also, the loss experience rate may be difficult to obtain and may not
be reliable.

13. Castaway Company provided the following information for the current year:

Allowance for doubtful accounts – January 1 200,000

Sales – all on credit 9,500,000
Sales discounts 1,000,000
Sales returns and allowances 500,000
Accounts written off as uncollectible 100,000
Recovery of accounts written off 50,000

The entity recorded doubtful accounts expense at the rate of 5% of net credit sales.

What amount should be reported as allowance for doubtful accounts on December 31?
a. 450,000 c. 600,000
b. 625,000 d. 550,000

Notes:
 Percent of sales

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 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. Theoretically,
the rate to be used is computed by dividing the bad debts losses in prior years by the
charge sales of prior years.

When using this approach, proper matching of cost against revenue is achieved. This is so
because the bad debts loss is directly related to sales and reported in the year of sale.

Though, this method may not show accounts receivable at estimated realizable value.

14. Effective with the year ended December 31, 2013, Fateful 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 year
(2% on credit sales of P10,000,000) 200,000
Accounts written off 205,000
Estimated uncollectible accounts per aging, December 31 220,000

After year-end adjustment, what is the doubtful accounts expense for the current year?
a. 220,000 c. 200,000
b. 205,000 d. 175,000

Notes:
 Correction of allowance
The percent of sales method of estimating doubtful accounts has disadvantages of
estimating inadequate or excessive allowance. Aging the accounts is then necessary to
test the reasonableness of the allowance.

The correction of inadequate or excessive allowance is to be reported in the income

statement either as an addition or subtraction from doubtful accounts expense. The reason
is that the correction is the natural result of a change in estimate.

An inadequate allowance is adjusted as follows:

Doubtful accounts expense xxx

Allowance for doubtful accounts xxx
The effect is increasing both expense and the allowance

An excessive allowance is recorded as follows:

Allowance for doubtful accounts xxx

Doubtful accounts expense xxx
The effect is decreasing both expense and the allowance

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

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16. A method of estimating bad debts that focuses on the income statement rather than the
income statement rather than the statement of financial position is the allowances method
based on
a. Direct writeoff
b. Aging the trade accounts receivable
c. Credit sales
d. The balance in trade accounts receivable

17. A method of estimating doubtful accounts that emphasizes asset valuation rather than income
measurement in the allowance method based on
a. Aging the accounts receivable
b. Direct writeoff
c. Gross sales
d. Credit sales returns and allowances

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

19. An entity uses the allowance method to recognize doubtful accounts expense. What is the
impact of a collection of an account previously written off?
a. No effect on both allowance for doubtful accounts and doubtful accounts expense
b. No effect on allowance for doubtful accounts and decrease in doubtful accounts
expense
c. Increase in allowance for doubtful accounts and no effect on doubtful accounts expense
d. Increase in allowance for doubtful accounts and decrease in doubtful accounts expense

20. When a specific customer’s account receivable is written off as uncollectible, what will be
the effect on net income?
a. No effect under both allowance method and direct writeoff method
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

COMPREHENSIVE PROBLEM

21. Walkaway Company started business on January 1, 2013. After considering the collection
experience of other entities in the industry, the entity established an allowance for bad debts
estimated at 5% of credit sales. Outstanding accounts receivable recorded on December 31,
2013 totaled P115,000, while the allowance for bad debts accounts had a credit balance of
P12,500 after recording estimated doubtful accounts expense for December and after writing
off P2,500 of uncollectible accounts.

Further analysis of the entity’s accounts showed that merchandise purchased in the current
year amounted to P450,000 and ending merchandise inventory was P75,000. Goods were
sold at 40% above cost.

Sales on account amounted to 80% of total sales. Total collections from customers, on the
other hand, excluding cash sales, amounted to P300,000.

What is the effect of the transactions on accounts receivable and allowance for bad debts?

Accounts receivable Allowance for bad debts

a. 2,500 understated 6,000 understated
b. 5,000 understated 8,500 understated
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 c. 82,500 understated 10,000 understated
d. 85,000 understated 12,600 understated

22. Colossal Company provided the following transactions affecting accounts receivable during
the year ended December 31, 2013:

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 3,100,000
Accounts written off as worthless 50,000
Credit memo issued to credit customers for sales rets. and allow. 250,000
Cash refunds given to cash customers for sales
for sales rets. and allowance 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, 2013 statement of financial position:

Accounts receivable 950,000

Allowance for bad debts 90,000

The entity provided for its net uncollectible account losses by crediting allowance for bad
debts for 2% of net credit sales for the current period. What is the balance of the accounts
receivable and allowance bad debts after adjustment on December 31, 2013?

Accounts receivable allowance for bad debts

a. 1,300,000 148,880
b. 1,220,000 188,480
c. 1,300,000 188,480
d. 1,220,000 148,880

NOTES RECEIVABLE

23. On December 31, 2013, Precious Company sold used equipment and received a noninterest
bearing note requiring payment of P500,000 annually for ten years. The first payment is due
December 31, 2014, and the prevailing rate of interest for this type of note at date of issuance
is 12%. Present value factors are as follows:

Present value of 1 t 12% for 10 periods 0.322

Present value of ordinary annuity of 1 at 12% 5.650

In the December 31, 2013 statement of financial position, what is the carrying amount of the
note receivable?
a. 5,000,000 c. 1,610,000
b. 2,175,000 d. 2,825,000

Notes:
 Notes receivable are claims supported by formal promises to pay usually in the form of
notes.

 Initial measurement
Conceptually, notes receivable shall be measure initially at present value. The
present value is the sum of all future cash flows discounted using the prevailing market
rate of interest for similar notes.

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 However, short-term notes receivable are measured at face value. Cash flows relating to
short-term notes receivable are not discounted because the effect on discounting is
usually not material.
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.

24. Persevere Company is a dealer in equipment. On December 31, 2013, 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, 2014.

The market interest rate for similar notes was 8%. The relevant present value factors are:

PV of 1 at 8% for 5 periods 0.68

PV of an ordinary annuity of 1 at 8% for 5 periods 3.99

What is the carrying amount of the note receivable on December 31, 2014?
a. 1,654,600 c. 2,000,000
b. 2,154,600 d. 1,495,000

Notes:
 Subsequent measurement
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 of uncollectibility.

Simply stated, amortized cost is

Present value (amount initially recognized) xxx

Payment of the principal (principal repayment) (xxx)
Cumulative amortization of unearned interest* xxx/(xxx)
Impairment losses (xxx)
Amortized cost xxx

*unearned interest is the difference between the amount initially recognized

(present value of the note) and the principal maturity (face value of the note) or also
known as the discount.

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.

Present value if the note xxx

Plus cumulative amortization of the discount xxx
Amortized cost/carrying amount xxx

Or
Face value of the note xxx
Minus the unamortized discount (xxx)
Amortized cost/carrying amount xxx

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25. Passion Company sold machinery on January 1, 2013 for which the cash selling was
P758,200. The buyer entered into an installment sale contract at an implicit interest rate of
10%. The contract required payment of P200,000 a year over 5 years with the first payment
due on December 31, 2013. What amount of interest income should be reported in 2014?
a. 100,000 c. 63,402
b. 75,820 d. 0

Notes:
 The amounted of discount or unearned interest income shall be amortized using the
effective interest method. The present value of the future cash flows is usually the
amount recognized as sales or the amount set as selling price used in the computation of
gain or loss.

26. On December 31, 2013, Languit 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% is 0.71. What amount should be reported as gain on sale in 2013?
a. 1,800,000 c. 200,000
b. 640,000 d. 0

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

28. 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. The interest receivable account would show a balance on
a. July 1 but not December 31 of the current year
b. December 31 but not July 1 of current year
c. July 1 and December 31 of the current year
d. Neither July 1 nor December 31 of the current year

29. 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 the next year. The interest receivable account on
December 31 of the current year would consist of an amount representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess at October 1 of the present value of the note receivable over its face value

30. 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?

I. Interest receivable
II. Unearned discount on note receivable

a. I only c. Neither I nor II

b. Both I and II d. II only

-END-
Valix, Conrado T., Peralta, Jose F., Valix, Christian Aris M., Financial Accounting Vol. 1 First
Part 2013 Edition.

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