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REICEIVABLES

MULTIPLE CHOICE QUESTIONS-THEORY

1. 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 normal operating cycle, whichever is lower
D. within one year or within normal operating cycle, whichever is higher

2. Which of the following statement is true in relation to presentation of receivables in


statement of financial position?
A. Trade receivables and nontrade receivables are shown separately.
B. Nontrade receivables are presented as noncurrent assets.
C. Trade account receivables and trade notes receivable shall b presented separately.
D. Trade receivable and nontrade receivable which are currently collectible shall be
presented as one line item called “trade and other receivables”

3. Accounts receivable shall be recognized initially at


A. Face value
B. Discounted value
C. Maturity value
D. Current value

4. Long-term notes receivables which normally bears interest or an interest which is


unreasonably low shall be recognized initially at
A. Face value
B. Discounted value
C. Maturity value
D. Current value

5. Credit balances in accounts receivables shall be classified as


A. Current liabilities
B. Part of accounts payable
C. Long term liabilities
D. Deduction from accounts receivable

6. 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 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.

7. Which method of recording bad debt loss in consistent with accrual accounting?
A. Allowance method
B. Direct write-off method
C. Percent of sales method
D. Percent of accounts receivable method

8. A method of estimating bad debts that focuses on the income statement whether rather
than the statement of financial position is the allowance method based on
A. Direct write-off method
B. Aging the trade accounts receivable
C. Credit sales
D. The balance in the trade accounts receivable

9. When the allowance method of recognizing uncollectible accounts is used, the entry to
record the write off of a special account would
A. Decrease both accounts receivable and the allowance for uncollectible accounts.
B. Decrease accounts receivable and increase allowance for uncollectible accounts.
C. Increase the allowance for uncollectible accounts and decrease net income.
D. Decrease both accounts receivable and net income

10. When an accounts receivable aging schedule is prepared, a series of computations is


made to determine estimated uncollectible accounts. The resulting amount from this
aging schedule
A. When added to the total accounts written off during the year is the desired credit
balance of the allowance for doubtful accounts at year-end.
B. Is the amount of doubtful accounts expense for the year
C. Is the amount that should be added to the beginning allowance for doubtful accounts
to get the doubtful accounts expense for the year.
D. Is the amount of desired credit balance of the allowance for doubtful accounts to
be reported at year end.

11. 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. Account previously written off becomes collectible
D. Specific uncollectible account is written off

12. When comparing the allowance method of accounting for bad debts with the direct write
off method, which of the following is true?
A. The direct write off method is exact and also better illustrates the matching principle.
B. The allowance method is less exact but it better illustrates the matching principle
C. The direct write off method is theoretically superior
D. The direct write off method requires two separate entries to write off an uncollectible
account

13. A debit balance in the allowance for doubtful accounts


A. Should never occur
B. Is always the result of management not providing a large enough allowance in order
to manage earnings
C. May occur before the end of period adjustment for uncollectible accounts.
D. May exist even after the period of adjustment for uncollectible accounts.

14. On October 1 of the current year, an entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire amount
of the interest are due on September 30 of next year. The interest receivable on December
31 of the current year would consist of an amount representing
A. Three months of accrued interest income
B. Nine months of accrued interest income
C. Twelve months of accrued interest income
D. The excess on October 1 of the present value of the note receivable over its fact
amount

15. On July 1, 2012, an entity obtained a two-year 8% note receivable for service rendered.
At that time, the market rate of interest are due on June 30, 2014. Interest receivable on
December 31, 2012 is
A. 5% of the face amount of the note
B. 4% of the face amount of the note
C. 5% of July 1, 2012 present value of the amount due on June 30, 2014.
D. 4% of July 1, 2012 present value of the amount due on June 30, 2014.

16. An entity uses the installment sales method to recognized revenue. Customers pay
installments notes in 24 equal monthly amounts which include 12% interest. What is the
installment notes receivable six months after the sale?
A. 75% of the original sales price
B. Less than 75% of the original sales price
C. The present value of the remaining monthly payments discounted at 12%
D. Less than the present value of the remaining monthly payments discounted at 12%

17. The interest on a non interet bearing note is equal


A. The excess of the face value over the present value
B. The excess of the present value of over the face value
C. The excess of the market value over the present value
D. Zero

18. On July 1 of the current year, an entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire amount
of the interest are due in one year. The interest receivable account would show a balance
on
A. July 1 but not December 31
B. December 31 but not July 1
C. July 1 and December 31
D. Neither July 1 nor December 31

19. In an entity’s April 30, 2012 statement of financial position a note receivable was reported
as a noncurrent asset and accrued interest for eight months was reported as a current asset.
Which of the following terms would fit the entity’s note receivable?
A. Both principal and interest are payable on August 31, 2012 and August31, 2013
B. Principal and interest are due December 31, 2012
C. Both principal and interest are payable on December 31, 2012 and December 31, 2013
D. Principal is due August 31, 2013, and interest is due August 31, 2012 and August
31, 2013

20. The “amortized cost” of loan receivable is the amount of which


A. 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.
B. The loan receivable is measured initially minus principal repayment, plus or minus
amortization recognized and the principal maturity amount.
C. The loan receivable is measured initially.
D. The loan receivable is measure initially minus principal payment.

STRAIGHT PROBLEMS

PROBLEM 1
On June 3, Arnold Company sold to Chester Company merchandise having a sale price of
P3, 000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling P90, terms n/30, was
received by Chester On June 8 from John Booth Transport Service for the freight cost. On June
12, the company received a check for the balance due from Chester Company.

Required:
a) Prepare journal entries on the Arnold Company books to record all the events noted above
under each of the following bases.

1) Sales and receivables are entered at gross selling price.


2) Sales and receivables are entered at net of cash discounts.

b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit
payment until July 29.

PROBLEM 2
Presented below is information from Perez Computers lncorporated.

July 1 Sold P20,000 of computers to Robertson Company with terms 3/15, n/60. Perez
uses the gross method to record cash discounts.
10 Perez received payment from Robertson for the full amount owed from the July
transactions.
17 Sold P200, 000 in computers and peripherals to The Clark Store with terms of
2/10,n/30.
30 The Clark Store paid Perez for its purchase of July 17.

Required:

Prepare the necessary journal entries for Perez Computers.

PROBLEM 3

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of P1,500 per month,
has just purchased a new Acura. You decided to test the accuracy of the accounts receivable
balance of P82,000 as shown in the ledger.

The following information is available for your first year in business.

1. Collections from customers P198,000


2. Merchandise purchased 320,000
3. Ending merchandise inventory 90,000
4. Goods are marked to sell at 40% above cost

Required:
Compute an estimate of the ending balance of accounts receivable from customers that should be
appear in the ledger and any apparent shortages. Assume that all sales are made on account.

PROBLEM 4
Jim Carrie Company shows a balance of P181,140 in the Accounts Receivable account on
December 31, 2013. The balance consists of the following:
Installment accounts due in 2014 P23,000
Installment accounts due after 2014 34,000
Overpayments to vendors 2,640
Due from regular customers, of which P40,000
represents accounts pledged as security for a bank loan 79,000
Advances to employees 1,500
Advances to subsidiary company(due in 2015) 81,000

Required:

Compute the amount of trade and other receivables balance to be reported in the statement of
financial position of Jim Carrie Company as of December 31,2013. P140,140

PROBLEM 5

On December 31, 2014 the accounts receivable control account of Belle Company had a balance
of P6,150,000. An analysis of the accounts receivable account showed the following:

Accounts deemed to be worthless P 75,000


Advance payments to creditors on purchase orders 300.000
Advances to affiliated companies 750,000
Customers’ credit balance arising from sales return (450,000)
Interest receivable on bond investment 300,000
Other trade accounts receivable - unassigned 1,500,000
Subscriptions receivable - ordinary share due in 30 days 1,650,000
Trade accounts receivable -assigned 1,125,000
Trade installment receivable due 1- 18 months, (including unearned
finance charges, P37,500) 637,500
Trade receivables from officers, due currently 112,500
Trade accounts on which post-dated checks are held (no entries were
made on receipts of checks) 150,000
Total 6,150,000

The correct balance of trade receivables on December 31, 2014 is P3,487,500

PROBLEM 6

Duncan Company reports the following financial information before adjustments.


Debit Credit

Accounts Receivable P100,000


Allowance for Doubtful Accounts P 2,000
Sales Revenue(all in credit) 900,000
Sales Return and Allowances 50,000

Required:

Prepared the journal entry to record Bad Debt Expense assuming Duncan Company
estimates bad debts at

(a) 1% of net sales

(b) 5% of accounts receivable

PROBLEM 7

At the end of 2014, Aramis company has accounts receivable of P800,000 and an allowance for
doubtful accounts of P40,000. On January 16, 2015, Aramis Company determined that its
receivable form Ramirez Company of P6,000 will not be collected, and management authorized
its write-off.

Required:

A. Prepare the journal entry to Aramis company to write off the Ramirez receivable.
B. What is the net realizable value of Aramis Company’s account receivable before the
write-off of the Ramirez Company receivable?
C. What is the net realizable value of Aramis company’s accounts receivable after the write–
off of the Ramirez receivable?

PROBLEM 8

The following are a series of unrelated situations.

1. Halen Company’s unadjusted trial balance at December 31, 2014, included the following
accounts.
Debit Credit

Allowance for doubtful accounts P4,000

Net Sales P1,200,000


Halen Company estimates its bad debts expense to be 1 ½ of net sales. Determined its bad
debt expense for 2014.

2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2014,
disclosed the following:
Amount estimated to be uncollectible P 180,000
Accounts Receivable 1,750,000
Allowance for doubtful accounts(per book) 125,000

What is the net realizable value of Stuart’s receivables at December 31, 2014?

3. Shares Co. provides for doubtful accounts based on 3% of credit sales. The following
data are available for 2014.

Credit sales during 2014 P 2,400,000


allowance for doubtful accounts 1/1/14 17,000
Collection of accounts written off in prior years
(customer credit was reestablished) 8,000
Customer accounts written off as uncollectible during 2014 30,000

What is the balance in Allowance for Doubtful Accounts at December 31, 2014? P67, 000

4. At the end of its first year operations, December 31, 2014, Darden Inc. reported the
following information.

Accounts receivable, net of allowance for doubtful accounts P950,000

Customer account written off as uncollectible during 2014 24,000

Bad debt expense for 2014 84,000

What should be the balance in account receivable at December 31,2014, before subtracting
the allowance for doubtful accounts? P1, 010, 000

5. The following accounts were taken from Bullock Inc.’s trial balance at December 31,
2014.
Debit Credit

Net credit sales P750,000

Allowance for doubtful accounts P 14,000

Accounts receivable 310,000


If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be
reported for 2014? P23, 300

Required:

Answer the questions relating to each of the five independent situations as requested.

PROBLEM 9

Manilow Corporation operates in an industry that has a high rate of bad debts before any year-
end adjustments, the balance in Manilow’s Accounts Receivable account was P555,000 and
Allowance for Doubtful Accounts had a credit balance of P40,000. The year-end balance
reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging
schedules shown below.

Days Account Outstanding Amount Probability of Collection\

Less than 16 days P 300,000 .98


Between 16 and 30 days 100,000 .90
Between 31 and 45 days 80,000 .85
Between 46 and 60 days 40,000 .80
Between 61 and 75 days 20,000 .55
Over 75 days 15,000 .00

Required:

A. What is the appropriate balance of Allownce for Doubtful Accounts at year-end? P45,000
B. What is the net realizable value of account receivable? P495,000
C. How much is the bad debt expense? P 20,000

PROBLEM 10
From inception of operations to December 31,2014, Fortner Corporation provided for
uncollectible accounts receivable 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 o yearend
adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days.

The balance in Allowance for Doubtful Accounts was P130,000 at January 1, 2014. During
2014, 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,OOO. Fortner installed a computer system in November 2014, and
an aging of accounts receivable was prepared for the first time as of December 31, 2014. A
summary of the aging is as fol lows.

Classification by Balance in Estimated %


Month of Sale Each Category Uncollectible

November—December 2014 P1, 080,000 2%


July—October 650,000 10%
January—June 420,000 25%
Prior to 1/1/14 150,000 80%

Based on the review of collectability of the account balances in the “prior to 1/1/14” aging
category, additional receivables totaling P60, 000 were written off as of December 31, 2014. The
80% uncollectible estimate applies to the remaining P90, 000 in the category. Effective with the
year ended December 31, 2014, Fortner adopted a different method for estimating the allowance
for doubtful accounts at the amount indicated by the year-end aging analysis of accounts
receivable.

Required:
A. Compute the required ending balance Allowance for Doubtful Accounts as of December
31, 2014.
B. Prepare the journal entry for the year-end adjustment to Allowance for Doubtful
Accounts balance as of December 31, 2014.

PROBLEM 11
Presented below is information related to the Accounts Receivable accounts of Gulistan Inc.,
during the current year 2014.

1. An aging schedule of the accounts receivable as of December 31, 2014, is as follows.

% to Be Applied after
Age Net Debit Balance Correction Is Made
Under 60 days P172,342 1%
60—90 days 136, 490 3%
9 1—120 days 39,924* 6%
Over 120 days 23,644 P3,700 definitely uncollectible;
P372,400 Estimated remainder
uncollectible is 25%

*The P 3,240 write-off of receivables is related to the 91-to-120 day category.

2. The Accounts Receivable control account has a debit balance of P372,400 December 31,
2014.
3. Two entries were made in the Bad Debt Expense account during the vear: (1) a debit on
December 31 for the amount credited to Allowance for Doubtful Accounts, and(20 a credit
for P3,240 on November 3, 2014, and a debit to Allowance for doubtful Accounts because of a
Bankruptcy.

4. Allowance for Doubtful accounts is as follows for 2014.

Allowance for Doubtful Accounts


Nov.3 Uncollectible accounts Jan. 1 Beginning balance 8,750
Written off 3,240 Dec. 31 5% of P372,400 18,620

5. a credit balance exists in Accounts receivable (60-90 days) of P4,840, which represents an
advance on a sales contract

Required:
Assuming that the books hae not been closed for 2014, make the necessary correcting entries.

PROBLEM 12
Presented below are independent situations related to the notes receivable of Sandara Company.

1. Sandara Company has P3,000,000 note receivable from sale of plant bearing interest at
12% per annum. The note is dated June 1, 2012. The note is payable in 3 annual
installments of P1, 000,000 plus interest on the unpaid balance every June 1. The initial
principal and interest payment was made on June 1, 2013. P2,000,000

2. Sandara Company sold a tract of land to RI Co. on July 1, 2013, for P8, 000,000 under an
installment sale contract. Ri Co. signed a 4-year 11% note addition to the down payment
of P2, 400,000. The equal annual payments of principal and interest on the note will be
P1,805,000 payable on July 1, 2014, 2015, 2016, and 2017. The land had an established
cash price of P8,000,000, and its cost to the company was P6,000,000. The collection of
the installments on this note is reasonably assured.

3. On January 1013, Sandara Company sold a tract of land to three doctors as an


investment. The land, purchase 10 years ago, was carried on Sandvalue of P125, 000.
Sandara received a noninterest-bearing note for P220, 000 from the doctors. The note is
due on Decembr 31, 2014. There is no readily available market value for the land, but the
current market rate of interest for comparable notes is 10%.

4. .On December 31, 2012, Sandara Company finished consultation services and accepted in
exchange a promissory note with a face value of P300,000, a due date of December 31,
2015, and a stated rate of 5% with interest receivable at the end of each year. The fair
value of the services is not readily determinable and the note is not readily marketable.
Under the circumstances, the note is considered to have an appropriate imputed rate of
interest 10%.

5. On January 1, 2013, Sandara Company sold land that originally cost P400,000 to X
Company. As payment, X gave Sandara Company a P600,000 note.The note bears an
interest rate of 4% and is to be repaid in three annual installments of P200,000(plus
interest on the outstanding balance). The first payment is due on December 31, 2013. .
The market price of the land is not reliably determinable. The prevailing rate of interest
for notes of this type is 14%.

Required:
Determine the carrying amounts and the appropriate presentation of each note receivable on
Sandara’s December 31, 2013 statement of financial position. (Round-off present value
factors to four decimal places)

PROBLEM 13

On October 1, 2014, Arden Farm Equipment Company sold a pecan-harvesting machine to


Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden 2-year,
P120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest
to be paid annually on October 1. Arden’s financial statements are prepared on a calendar-year
basis.

Required:
Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal
entries for Arden Farm Equipment Company for the entire term of the note.

PROBLEM 14

On December 31, 2014, Oakbrook Inc. rendered services to Beghun Corporation at an agreed
price of P102,049, accepting P40,000 down and agreeing to accept the balance in four equal
installments of P20,000 receivable each December 31. An assumed interest rate of 11% is
imputed.

Required:
Prepare the entries that would be recorded by Oakbrook Inc. for the sale and for the receipts and
interest on the following dates. (Assume that the effective-interest method is used for
amortization purposes.)
a) December 3l, 2014
b) December 31, 2015
c) December 31. 2016
d) December 31, 2017.
e) December 31, 2018

PROBLEM 15

Braddock Inc. had the following long-term receivable account balances at December 31. 2013.

Note receivable from sale of division P1, 500,000


Note receivable from officer 400,000

Transactions during 2014 and other information relating to Braddock’s long-term receivables
were as follows.

1. The P1, 500,000 note receivable is dated May 1, 2013, bears interest at 9%, and
represents the balance of the consideration received from the sale of Braddock’s
electronics division to New York Cornpany. Principal payments of P500, 000 plus
appropriate interest are due on May 1, 2014, 2015, and 2016. The first principal interest
payment was made on May 1, 2014. Collection of the note installments is reasonably
assured. .

2. The P400, 000 note receivable is dated December 31, 2013, bears interest at
December 31, 2016. The note is due from Sean May, president of Braddock Inc. and is
collateralized by 10,000 shares of Braddock’s common stock. Interest is payable annually
on December 31, and all interest payments were paid on their due dates through
December 31, 2014. The quoted market price of Braddock’s common stock was P45 per
share on December 31, 2014.

3. On April 1, 2014, Braddock sold a patent to Pennsylvania Companyin exchange for a


P100, 000 zero-interest-bearing note due on April 1, 2016.There was no established
exchange price for the patent, and the note had no ready market. The prevailing rate of
interest for a note of this type at April 1, 2014, was 12%. The present value of P1 for two
periods at 12% is 0.797(use this factor).The patent had a carrying value of P40,000 at
January 1, 2014 and the amortization for the year ended December 31, 2014, would have
been P8,000. The collection of the note receivable from Pennsylvania is reasonably
assured.

4. On July 1, 2014, Braddock sold a parcel of land to Splinter Company for P200,000 under
an installment sale contract. Splinter made a P60,000 cash down payment on July 1,
2014, and signed a 4-year 11% note for the P140,000 balance. The equal annual
payments of principal arid interest on the note will be P45,125 payable on july 1, 2015,
through July 1, 2018. The land could have been at an established cash price of P200,000
The cost of the land to Braddock was P150,000. Circumstances are such that the
collection of the installments on the note is reasonably assured.

Required:

a) Prepare the long-term receivables section of Braddock’s balance sheet at December


31, 2014.
b) Prepare a schedule showing the current portion of the long-term receivables and
accrued interest receivable that would appear in Braddock’s balance sheet at December
31, 2014.
c) Prepare a schedule showing interest revenue from the long term receivables that would
appear on Braddock’s income statement for the year ended December 31, 2014.

PROBLEM 16

Money Bank granted a loan to aborrower 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


Direct origination cost 61, 520
Indirect origination cost 26, 400
Origination fee received from borrower 350,000

Required:
1. What is the carrying amount of the loan receivable on January 1, 2014?(round off present
value factors to four decimal places)
2. Prepare the journal entries for year 2014
3. What is carrying mount of the loan receivable on December 31, 2014?

PROBLEM 17

On December 31, 2014, Iva Majoli Company borrowed P62, 092 from Paris Bank, signing a 5-
year, P100,000 zero-interest-bearing note. The note was issued to yield 10% interest.
Unfortunately, during 2016, Majoli began to experience financial difficulty. As a result, at
December 31, 2016, Paris Bank determined that it was probable that it would receive back only
P75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Required:
a) Prepare the entry to record the issuance of the loan by Paris bank on December 31, 2014.
b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2016, by
Paris Bank.

PROBLEM 18

On December 31, 2014, Conchita Martinez Company signed a P 1,000,000 note to Sauk City
Bank. The market interest rate at that time was 12%. The stated interest rate on the note was
10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales,
Conchita Martinez’s financial situation worsened. On December 31, 2016, Sauk City Bank
determined that it was probable that the company would pay back only P 600,000 of the,
principal at maturity. However, it was considered likely that interest would continue to be paid,
based on the P1,000,000 loan.

Required:
a) Determine the amount of cash Conchita Martinez received from the loan on December 31,
2014.
b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2016.
c) Determine the loss on impairment that Sauk City Bank should recognize on December 31,
2016.

PROBLEM 19

On November 1, 2013, Manor Company’s trade receivable account balance was P8,500,000. It
assigned P6, 500,000 to Bee Financing Company as a security for a loan. The loan amount of P4,
000,000 carries an interest rate of 6%. Bee Financing Company charges 2% service fee based on
the amount borrowed.

Credit sales from November 1 to December 31, 2013 totaled P3, 000,000. Total collections from
the credit customers during the same period amounted to P4, 600,000, of which P2, 400,000 was
from the assigned accounts. Bee Financing Company remitted the collections of the assigned
accounts to Manor Company by the end of 2013. Bee financing company applied the collection
initially to the interest and the balance to the principal.
The allowance for uncollectible accounts is based on 2% of the receivables balance.

Required:
a.) Prepare the entries in relation to the accounts receivables for the period November 1 to
December 31, 2013.
b.) The trade receivables reported in the December 31, 2013 statement of financial position
is? P6,762, 000
c.) The “equity over the assigned accounts” at December 31,2013 is P2,460,000
PROBLEM 20

On December 1, 2013, specific customer accounts receivable totalingP2,150,000 were assigned


to Brick Lending by molly Company as a collateral for a P1,400,000 loan.

The finance company charged a 0.5% finance charge on the total accounts receivable
assigned.the note bears interest at 9% per year. During December, Molly Company collected
P680,000 of the assigned accounts. The amount was remitted to the finance company.

Required:

a.) The cash proceeds arising from the assignment of the receivable is P1,389,250

b.) The gain/loss arising from the assignment of the receivable is none

c.) The “equity over the assigned accounts” at December 31, 2013 is P739,500

PROBLEM 21

Ames Quartet Inc. factors receivable with carrying amount of P200,000 to Joffrey Company for
P160,000 on a with recourse basis,.

Required:

The recourse provision has a fair value of P1,000. This transaction should be recorded as a sale.
Prepare the appropriate journal entry to record this transaction on the books of Ames Quartet Inc.

Cash 160,000
Loss on Factoring 41,000
Accounts Receivable 200,000
Liability for recourse obligation 1,000

PROBLEM 22
JFK Corp. factors P300, 000 of accounts receivable with LBJ Finance Corporation on a without
recourse basis on July 1, 2014. The receivable records are transferred to LBJ Finance, which will
receive the collections. LBJ Finance assesses a finance charge of 1 ½ of the amount of accounts
receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts,
returns, and allowances. The transaction is to be recorded as a sale.

Required:

Instructions (a) prepare the journal entry on July 1, 2014, for JKF Corp. to record the sale
receivables without recourse. (b) Prepare the journal entry on July 1, 2014, for LBJ Finance
Corporation to record the purchase of receivables without recourse.
PROBLEM 23

Iris Company accepted an 8,000,000 90-day, 12% interest bearing note dated August 31, 2012.
On September 30, 2012, Iris Company discounted the note with recourse at Empire State Bank at
15%. The proceeds, however, were not received until October 1, 2012.

The discounting with recourse is accounted for as a conditional sale with the recognition of a
contingent liability.

Required:

a.) The amount of cash received form discounting the note receivable. P8,034,000
b.) The amount of loss reported on the note receivable discounting. P46,000

PROBLEM 24

On August 31, 2012, Glee Company discounted with recourse a customer’s note at its bank at a
discount rate of 15%. The note received from the customer on August 1, 2012, which is for 90
day has a face amount of P5, 000,000 and carries a rate of 12%. Customer paid the note to the
bank on October 30, 2011, the date of maturity.

Glee Company accounted the note discounting as a secured borrowing.

Required:

a.) The amount of cash received from discounting the note receivable. P5,021,250
b.) The interest expense recognized on August 31, 2012 is P28,750

MULTIPLE CHOICE QUESTIONS


1. On the December 31, 2014 statement of financial position of Mann Co., the current
receivables consisted of the following:
Trade accounts receivable P93,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit
(November 2014) 3,000
Selling price of unsold goods sent by Mann on
Consignment at 130% of cost (not included in
Mann’s ending inventory) 26,000
Security deposit on lease of warehouse used for
Storing some inventories 30,000
Total P150,000

At December 31,2014, the correct total of Mann’s current net receivables was
A. 94,000
B. 120,000
C. 124,000
D. 150,000

2. The following information relates to Jay Co.’s account receivable for 2014:
Accounts receivable, 1/1/14 P650,000
Credit sales for 2014 2,700,000
Sales returns for 2014 75,000
Accounts written off during 2014 40,000
Collections from customers during 2014 2,150,000
Estimated future sales returns at 12/31/14 50,000
Estimated uncollectible accounts at 12/31/14 140,000

What amount should Jay report for account receivable, before allowances for sales
returns and uncollectible accounts, at December 31, 2014?

A. 1,200,000
B. 1,125,000
C. 1,085,000
D. 925,000

3. Frame Co. has an 8% note receivable dated June 30, 2012, in the original amount of
P150,000. Payments of P50,000 in principal plus accrued interest are due annually on
July 1, 2013, 2104, and 2015. In its June 30, 2014 statement of financial position, what
amount should Frame report as a current asset for interest on the note receivable?
A. O
B. 4,000
C. 8,000
D. 12,000

4. On December 1, 2011, Tigg MortgageC0. gave Pod Corp. a P200,000, 12% loan. Pod
received
proceeds of P194,000 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,
2012. 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. Tigg does not elect the fair value
option for recording the note to Pod. What amount of accrued interest receivable should
Tigg include in its December 31, 2014 statement of financial position?

A. P4,450
B. P2,166
C. P2,000
D. P0
5. On Merf’s April 30, 2014 balance sheet a note receivable was reported as a noncurrent
asset and its accrued interest for eight months was reported as a current asset. Which of the
following terms would fit Merf’s note receivable?
A. Both principal and interest amounts are payable on August 31, 2014, and August 31,
2015.
B. Principal and interest are due December 31, 2014.
C. Both principal and interest amounts are payable on December 31, 2014, and December
31, 2015
D. Principal is due August 31, 2015, and interest is due August 31, 2014, and August
31, 2015.

6. On August 15, 2014, Benet Co. 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, 2014. Note principal,
together with all interest, is due November 15, 2014. Assume Benet did not elect the fair
value option for reporting the note. When the note was recorded on August 15, which of
the following accounts increased?
A. Unearned discount.
B. Interest receivable
C. Prepaid interest.
D. Interest revenue

7. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of
Delta’s customers take advantage of the discount. Delta uses the gross method of recording
sales and trade receivables. An analysis of Delta’s trade receivables balances at December
31, 2014, revealed the following:

Age Amount Collectible


0-15 days . P100,000 100%
16- 30 days 60,000 95%
31 - 60 days 5,000 90%
Over 60 days 2,500 P500
P167,500

In its December 31, 2014 statement of financial position, what amount should Delta report
for allowance for discounts?

A. 1,000
B. 1,620
C. 1,675
D. 2,000

8. Fenn Stores, Inc. sales of P1,000,000 during December, 2014. Experience has shown that
sales will be returned within thirty days and an additional 3% returned within ninety days.
Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales
will be exchanged for merchandise of equal or greater value. What amount should Fenn
report for net sales in its income statement for the month of December 2014?
A. 900,000
B. P850,000
C. P780,000
D. P750,000

9. At January 1, 2014, Jamin Co. had a credit balance of P260, 000 in its allowance for
uncollectible accounts. Based on past experience, 2% of Jamin’s credit sales have been
uncollectible. During 2014 Jamin wrote off P325,000 of uncollectible accounts. Credit sales
for 2014 were P9,000,000. In its December 31, 2014 statement of financial position, what
amount should Jamin report as allowance for uncollectible accounts?
A: P115,000
B. P180,000
C. P245,000
D. P440,000

10. The following accounts were abstracted from Roxy Co.’s unadjusted trial balance at
December 31, 2014:

Debit Credit
Accounts receivable P1, 000,000
Allowance for uncollectible accounts 8,000
Net credit sales P3, 000,000

Roxy estimates that 3% of the gross accounts receivable will become uncollectible. After
adjustment at December 31, 2014, the allowance for uncollectible should have a credit balance
of
A . P90,000
B. P82,000
C. P38,000
D. P30,000

11. Inge Co. determined that the net value of its accounts an aging of the receivables, was
P325,000. Additional information is as follows:

Allowance for uncollectible accounts— 1/1/14 P 30,000


Uncollectible accounts written off during 2014 18,000
Uncollectible accounts recovered during 2014 2,000
Accounts receivable at 12/31/14 350,000
For 2014, what would be Inge’s uncolIectible accounts expense?
A. P 5,000
B. P14,000
C. P15,000
D. P21,000

12. The following information pertains to Tara Co.’s accounts receivable at December 31, 2014:

Days outstanding Amount Estimated % uncollectible

0-60 P120,000 1%
61-120 90,000 2%
Over 120 100,000 6%
P310,000

During 2O14, Tara wrote off P7,000 in receivables and recover P4,000 that had been written off
in prior years. Tara’s December 31, 2013 allowance for uncollectible accounts was P22,000.
Under the aging method, what amount of allowance for uncollectible accounts should Tara report
at Decernber 31, 2014?

A. P9,000
B. P10,000
C. P13,000
D. P19,000

13. A method of estimating uncollectible accounts that emphasizes asset valuation rather than
income measurement is the allowance method based on
A. Aging the receivables.
B. Direct write-off.
C. Gross sales.
D. Credit sales less returns and allowances

14. When the allowance method of recognizing uncollectible accounts is used, the entry to record
the write-off of a specific account
A. Decreases both accounts receivable and the allowance for uncollectible accounts.
B. Decreases accounts receivable and increases the allowance for uncollectible accounts.
C. Increases the allowance for uncollectible accounts and decreases net income.
D. Decreases both accounts receivable and net income.
15. A company uses the allowance method to recognize uncollectible accounts expense. What is
the effect at the time of the collection of an account previously written off on each of the
following accounts?

Allowance for Uncollectible


uricollectible accounts accounts expense
A. No effect Decrease
B. Increase Decrease
C Increase No effect
D. No effect No effect

16. On January 1, 2014, Boy Company sold a machine to Bawang Company.B awang signed a
noninterest bearing note requiring payment of P30, 000 annually for seven years. The first
payment was made on January 1, 2014. The prevailing rate of interest for this type on note at
date of issuance was 10%. Information on present value factors is as follows:

Present value of
Present value of 1at ordinary annuity of 1 at
Period 10% 10%

6 .56 4.36
7 .51 4.87

Boy should record the sale in January 2014 at


A. P107,100
B. P146, 100
C. P130,800
D. P160,800

17. On July1, 2014, Shaw Co. sold a machine costing P500,000 with accumulated depreciation
of P380,000 on the date of sale. Shaw received as consideration for the sale, a P300,000
noninterest-bearing note, due July 1, 2017. There was no established equipment and the note had
no ready market. The prevailing rate of interest for a note of this type at July 1, 2014 was 12%
and 13% on December 31, 2014. In relation to this transaction, the tota1 income to be
recognized in Shaw’s 2014 profit or loss is (Round off present value factors to four decimal
places)
A. P180,000
B. P119,165
C. P101,445
D. P106,352

18. Boy Company sold a machine to Golden Corporation on January price was P379,100.
Golden entered into an installment sales contract with Boy, calling for annual payments of P
100,000 for five years, including interest on December 31, 2014. How much interest income
should be recorded by Boy in 2015?

A. 5,200,000
B. 5,000,000
C. 4,750,000
D. 4,950,000

19.Payla Company borrowed from Gold Bank under a 10-year loan in the amount of P5,000,000
with interest rate of 6%. Payments are due monthly and are computed to be P55,500. Gold bank
incurs P200,000 of direct loan origination cost and P50,000 of indirect loan origination cost. In
addition, Gold bank charges Payla a 5-point nonrefundable loan origination fee. Gold bank, the
lender, has carrying amount of
A. 5,200,000
B. 5,000,000
C. 4,750,000
D. 4,950,000

20. Entity K has a loan whose initial carrying amount is P100,000 and whose effective interest
rate is 8%. On January 1, 2014, Entity K determines that the borrower will probably enter into
bankruptcy, and expects to collect only P20, 000 of remaining principal and interest cash flows.
Entity K expects to recover this amount at the end of 2014. The prevailing interest rate for
similar type of note as of January 1, 2014 is 10% and 9% on December 31, 2014. How much
should recognized as loan impairment loss in 2014?

A. 80,000
B. 81,482
C. 81, 818
D. 81, 652

21. Grey Company holds an overdue note receivable of P800,000 plus recorded accrued interest
of P64,000. The effective interest rate is 8%. As a result of a court-imposed settlement on
December 31, 2014, Grey agreed to the following restructuring arrangement:

 Reduced the principal obligation to P600,000.


 Forgave the P64,000 of accrued interest.
 Extended the maturity date to December 31, 2016.
 Annual interest of P40,000 is to be paid to Grey on December 31, 2015 and 2016.

The present value of the interest and principal payments to be received by Grey Company
discounted for two years at 8% is P585, 734. On December 31, 2014, Grey would recognize
a valuation allowance for impaired loans of

A. P278,266
B. P184,000
C. P14,266
D.P 0

22. The Premier National Bank has a note receivable of P200,000 from the Marvelous Company
that it is carrying at face value and is due on December 31, 2018. Interest on the note payable at
9% each December 31. The Marvelous Company paid the interest due on December 31, 20l4, but
informed the bank that it would probably miss the next two years’ interest payments because of
its financial difficulties. After that, it expected to resume its annual interest payments, but it
would make the principal payment one year late, with interest paid for that additional year at the
time of the principal payments. How much should be recognized as loan impairment loss in
2014? (Round off present value factors to four decimal places.)

A. P12, 752
B. P31,669
C. P19,965
D.P32,812

Use the following information for the next two questions.


(Round off present value factors to four decimal places)

On December 31, 2014, Merciful Bank entered into a debt restructuring agreement with
Miserable Corp., which was experiencing financial difficulties. A note for P1,000,000 and one
year’s accrued interest was due on this date from Miserable. The note receivable from Miserable
was restructured as follows:

 Reduced the principal obligation to P700,000.


 Forgave the P 120,000 of accrued interest for 2014.
 Extended the maturity date to December 31, 2017.
 Reduced the interest rate to 8%.

Interest is payable annually on December 31, beginning 2015. In accordance with the agreement,
Miserable made payments to Merciful Bank on December 31, 2015, 2016 and 2017.

23. The loan impairment loss to be recognized in Merciful Bank’s 2009 profit or loss is
A. P477,422
B. P420,000
C. P487,239
D.P 0

24. How much interest income should Merciful Bank report for the year ended December 31,
2010?
A. P75,931
B. P64,258
C. P56,000
D.P 0

25. Which of the following is a method to generate cash from accounts receivable?

Assignment Factoring
A. Yes No
B. Yes Yes
C. No Yes
D. No No

26. Gar Co. factored its receivables. Control was surrendered in the transaction which was on a
without recourse basis with Ross Bank. Gar received cash as a result of this transaction, which is
best described as a

A. Loan from Ross collateralized by Gar’s accounts receivable.


B. Loan from Ross to be repaid by the proceeds from Gar’s accounts receivable.
C. Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts retained by
Gar.
D. Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts
transferred to Ross

Use the following information for the next three questions:


Taylored Corp. factored P400,000 of accounts receivable to Rich Corp. on July 1, 2014. Control
was surrendered by Taylored. Rich accepted the receivables subject to recourse for nonpayment.
Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In
addition, Rich charge 15% interest cornputed on a weighted-average time to maturity of the
receivables of forty-one days. The fair value of the recourse obligation is P12,000.

27. Taylored will receive and record cash of,


A. P385, 260
B. P357,260
C.P365,260
D. P377,260

28. Which of the following statements is correct?

A. Rich should record an asset of P8,000 for the recourse obligation.


B. Taylored should record a liability and corresponding loss of 12,000 related to the
recourse obligation.
C. Taylored should record a liability of P12,000, but no loss, related to the recourse
obligation.
D. No entry for the recourse obligation should be made by Taylored or Rich until the debtor
fails to pay.

29. Assuming all the receivables are collected, Taylored’s cost of factoring the receivables would
be

A. P8,000
B. P34,740
C. P42,740
D. P14,740

30. Scarbrough Corp., factored P600,000 of accounts receivable to Duff Corp. on October 1,
2014. Control was surrederd by Scarbrough. Duff accepted the receivables subject to recourse
for nonpayment. Duff assessed a fee of 3% and retains a holdback equal to 5% of the accounts
receivable. In addition, Duff charged 15% interest computed on a weighted-average time to
maturity of the receivables of fifty-four days. The fair value of the recourse obligation is P9,000.
Scarbrough will receive and record cash of

A. P529,685
B. P538,685
C. P547,685
D. P556,685

31. Synthia Corp. factored P750,000 of accounts receivable to Thomas Company on December
3, 2014. Control was surrendered by Synthia. Thomas accepted the receivables subject to
recourse for nonpayment. Thomas assessed a fee of 2% and retains a holdback equal to 4% of the
accounts receivable. In addition, Thomas charged 12% interst computed on weighted-average
time to maturity of the receivables of fifty-one days. the fair value of the recourse obligation is
P15,000. Assuming all receivables are collected. Synthia’s cost of fsctoeing the receivables
would be

A. P12,575
B. P15,000
C. P27,575
D. P42,575