Trade and Other Receivables Receivable Financing

True or False (1-10).
Instruction: Write true if the statement is correct and false if the statement
is incorrect.
1. Factoring is a financing arrangement whereby one party formally transfers its rights to
accounts receivable to another party in consideration for a loan.
Answer: False
Source: Theory of Accounts Volume I by Conrado Valix
Topic: Receivable Financing
2. Assignment is a financial arrangement that is usually done on a “without recourse,

notification basis”.
Answer: False
3. If a note receivable is discounted with recourse, note receivable discounted is credited.

Answer: True
4. If a note receivable is discounted without recourse, note receivable is debited.

Answer: False
5. Note receivable discounted without recourse shall be excluded from total receivables
without disclosure of contingent liability.
Answer: True
6. Trade receivables are classified as current assets if they are reasonably expected to be
collected within one year or within the operating cycle, whichever is shorter.
Answer: False
Topic: Trade and Other Receivables
7. A credit sale is a method of estimating bad debts that focuses on the income statement
rather than the statement of financial position.
Answer: True
Topic: Allowance for Bad Debts
8. Direct writeoff is a method of estimating uncollectible accounts that emphasizes asset

valuation rather than income measurement.
Answer: False
9. Imputed interest is based on the stated interest rate.

Answer: False
10. Subsequent to initial recognition, a loan receivable shall be measured at amortized cost
using the straight line method.
Answer: False
Multiple Choices (11-90). Instruction: Choose the letter of your best answer before the number.
11. If accounts receivable are pledged against borrowing, the amount of accounts receivable
pledged shall be
a. Excluded from total receivables with disclosure
b. Excluded from total receivables without disclosure
c. Included in total receivables with disclosure
d. Included in total receivables without disclosure
12. When account receivable are factored
a. Accounts receivable shall be credited
b. Payable to factor is credited
c. A contingent liability is ordinarily created
d. The factoring is accounted for as borrowing

13. It is a predetermined account withheld by a factor as a protection against customer

returns, allowances and other special adjustments.
a. Equity in assigned accounts
b. Service charge
c. Factor’s holdback
d. Loss on factoring

14. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements

15. Which of the following is a method to generate cash from accounts receivable?
I. Assignment
II. Factoring
a. I only
b. II only
c. Both I and II
d. Neither I nor II

16. 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. Hypothecation
b. Factoring
c. Defalcation
d. Pledging

17. 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

18. 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?
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face value less the discount at 12%
d. Face value less the discount 15%

19. A note receivable bearing a reasonable interest rate is sold for a bank with recourse. At
the date of the discounting transaction, the note receivable account should be
a. Decreased by the proceeds from the discounting transaction
b. Increased by the proceeds from the discounting transaction
c. Increased by the face amount of the note
d. Decreased by the face amount of the note

20. 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
b. Discounted and pledged
c. Discounted and assigned
d. Factored

21. Nontrade receivables are classified as current assets only if they are reasonably
expected to be realized in cash
a. Within one year or within the operating cycle, whichever is shorter
b. Within one year or within the operating cycle, whichever is longer
c. Within the normal operating cycle
d. Within one year, the length of the operating cycle notwithstanding

22. Accounts receivable shall be recognized initially at

a. Face value
b. Discounted value
c. Maturity value
d. Current value
23. Credit balances in accounts receivable

a. Current liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts receivable

24. 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

25. The advantage of relating an entity’s bad debt experience to accounts receivable is that
this approach
a. Makes estimates of uncollectible accounts unnecessary
b. Gives a reasonably accurate measurement of receivables in the statement of
financial position
c. Relates bad debt expense to the period of sale
d. Is the only generally accepted method for measuring accounts receivable

26. 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
b. Decrease under both allowance 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

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

28. Which of the following methods of determining bad debt expense most closely matches
expense to revenue?
a. Charging bad debts only as accounts are written off as uncollectible
b. Charging bad debts with a percentage of sales for that period
c. Estimating the allowance for doubtful accounts as a percentage of accounts
receivable
d. Estimating allowance for doubtful accounts by aging the accounts receivable

29. Why is the allowance method preferred over the direct writeoff method of accounting for
bad debts?
a. The allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under direct writeoff method is difficult to do
d. Improved matching of bad debt expense with revenue is achieved

30. Which of the following is not permitted in accounting for uncollectible accounts
receivable?
a. Percentage of account receivable, allowance method
b. Percentage of sales, allowance method
c. Direct writeoff method
d. All of the choices are acceptable under PFRS

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

32. 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
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note

33. 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 yea. When the note receivable was recorded on
July 1. Which is the following was debited?
I. Interest receivable
II. Unearned discount on note receivable
a. I only
b. Both I and II
c. Neither I nor II
d. II only

34. Which of the following statements is true in relation to 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 receivables which are currently collectible shall be
presented as one line item called “trade and other receivables”

35. Receivables from subsidiaries shall be classified as

a. Current assets
b. Noncurrent assets
c. Either as current or noncurrent depending on the expectation of realizing them within
one year or over one year
d. Partly current and partly noncurrent

36. The amortized cost of loan receivable is the amount at 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 payment, plus or minus the
cumulative amortization of any difference between the initial amount recognized and
the principal maturity amount.
c. The loan receivable is measured initially
d. The loan receivable is measured initially minus principal repayment

37. 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
b. I and II only
c. I and III only
d. I,II and III

38. Which of the following is not an objective evidence of impairment of a financial asset?
a. Significant financial difficulty of the issuer
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

39. If there is evidence that an impairment loss on loan receivable has been incurred, the
loss is equal to the
a. Excess of the carrying amount of the loan receivable over the present value of the
cash flows related to the loan
b. Excess of the present value of cash flows related to the loan over the carrying
amount of the loan receivable
c. Excess of the carrying amount of the loan over the principal amount of the loan
d. Excess of the principal amount of the loan over the carrying amount
40. All of the following are problems associated with the measurement of accounts
receivable, except
a. Uncollectible accounts
b. Returns
c. Cash discounts under the net method
d. Allowances granted

41. Jungkook Company assigned P 4,000,000 of accounts receivable as collateral for a P

2,000,000 6% of 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. 200,000 loss
b. 100,000 loss
c. 240,000 gain
d. 0
Source: Practical Accounting Volume I by Conrado Valix

Solution:
No gain or loss is recognized because assignment of accounts receivable is a secured
borrowing financing and not a sale.
42. Suga Company sold accounts receivable without recourse for P 5,300,000. The entity
received P 5,000,000 cash immediately from the factor. The remaining P 300,000 will be
received once the factor verifies that none of the accounts receivable is in dispute. The
accounts receivable had a face amount of P 6,000,000. The entity had previously
established an allowance for bad debts of P 250,000 in connection with such accounts.
What amount of loss on factoring should be recognized?
a. 700,000
b. 450,000
c. 750,000
d. 300,000

Solution:
Sale price 5,300,000
Carrying amount of accounts receivable (6,000,000-250,000) 5,750,000
Loss on factoring (450,000)
43. V Company sold P 5,800,000 in accounts receivable for cash of P 5,000,000. The factor
withheld 10% of the cash proceeds to allow for possible customer returns and other
adjustments. An allowance for bad debts of P 600,000 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
b. 700,000
c. 500,000
d. 800,000

Solution:
Sale price 5,000,000
Carrying amount of accounts receivable (5,800,000-600,000) 5,200,000
Loss on factoring (200,000)
44. Jhope Company factored P 4,000,000 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 loss
b. 200,000 gain
c. 600,000 loss
d. 600,000 gain
Solution:
Loss on factoring-equal to finance fee (5% x 4,000,000) 200,000
45. Rapmon Company factored without recourse P 2,000,000 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
a. 1,940,000
b. 1,900,000
c. 1,840,000
d. 2,000,000

Solution:
Accounts receivable 2,000,000
Finance charge (3% x 2,000,000) (60,000)
Factor’s holdback (5% x 2,000,000) (100,000)
Cash received from factoring 1,840,000
46. Jin Company assigned P 3,000,000 of accounts receivable as collateral for a P

2,000,000 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 P 1,920,000, debit finance charge P 80,000, and credit note payable P
2,000,000
b. Debit cash P 1,920,000, debit finance charge P 80,000, and credit accounts
receivable P 2,000,000
c. Debit cash P 1,920,000, debit finance charge P 80,000, debit due from bank P
1,000,000, and credit accounts receivable P 3,000,000
d. Debit cash P 1,880,000, debit finance charge P 120,000, and credit note payable P
2,000,000
Solution:
Face amount of loan 2,000,000
Finance fee (4% x 2,000,000) (80,000)
Cash received 1,920,000
(For Numbers 47-48) Hanbin Company factored P 750,000 of accounts receivable at year-
end. Control was surrendered. The factor accepted the accounts receivable subject to
recourse for nonpayment. The factor assessed a fee of 2% and retained a holdback equal to
4% of the accounts receivable. In addition, the factor charged 12% interest computed on a
weighted-average time to maturity of fifty-one days. The fair value of the recourse obligation
is P 15,000.
47. What is the amount of cash initially received from the factoring?
a. 692,425
b. 720,000
c. 722,425
d. 705,000

Solution:
Accounts receivable 750,000
Factor’s holdback (4% x 750,000) (30,000)
Factoring fee (2% x 750,000) (15,000)
Interest (750,000 x 12% x 51/365) (12,575)
Cash initially received from factoring 692,425
48. Assuming all accounts receivable are collected, what is the cost of factoring the
a. 12,575
b. 15,000
c. 27,575
d. 42,575
Solution:
Factoring fee 15,000
Interest 12,575
Total cost of factoring 27,575
(For numbers 49-50) On July 1, 2015, Yunhyeong Company sold goods in exchange for P
2,000,000, 8 month, noninterest-bearing note receivable. At the time of the sale, the market
rate of interest was 12%. The entity discounted the note at 10% on September 1, 2015.
49. What is the cash received from discounting?

a. 1,940,000
b. 1,938,000
c. 1,900,000
d. 1,880,000

Solution:
Principal-maturity value 2,000,000
Less: Discount ( 2,000,000 x 10% x 6/12) 100,000
Net proceeds 1,900,000
50. What is the loss on note receivable discounting?

a. 100,000
b. 75,000
c. 25,000
d. 0

Solution:
Carrying amount of note receivable (2,000,000)
Loss on note receivable discounting (100,000)
(For numbers 51-52) Bobby Company accepted from a customer P 1,000,000 face amount,
6-month, and 8% note dated April 15, 2015. On the same date, the entity discounted the
note without recourse at a 10% discount rate.
51. What amount of cash was received from the discounting?

a. 1,040,000
b. 990,000
c. 988,000
d. 972,000

Solution:
Principal 1,000,000
Add: Interest (1,000,000 x 8% x 6/12) 40,000
Maturity Value 1,040,000
Less: Discount (1,040,000 x 10% x 6/12) 52,000
Net proceeds 988,000

a. 50,000
b. 40,000
c. 52,000
d. 12,000

Solution:
Carrying amount of note receivable-equal to principal (1,000,000)
(For numbers 53-54) On June 30, 2015, Jun-hoe Company discounted at the bank a
customer P 6,000,000; 6 month, 10% note receivable dated April 30, 2015. The bank
discounted the note at 12% without recourse.
53. What is the amount received from the note receivable discounting?
a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000

Solution:
Principal 6,000,000
Add: Interest (6,000,000 x 10% x 6/12) 300,000
Less: Discount (6,300,000 x 12% x 4/12) 252,000

a. 252,000
b. 152,000
c. 52,000
d. 48,000

Solution:
Principal 6,000,000
Accrued Interest (6,000,000 x 10% x 2/12) 100,000
Less: Carrying amount of note receivable 6,100,000
55. On July 1, 2015, Chan-woo Company sold equipment to Donghyuk Company for P
1,000,000. Chan-woo accepted a 10% note receivable for the entire sales price. This
note is payable on two equal installments of P 500,000 plus accrued interest on
December 31, 2015 and December 31, 2016. On July 1, 2016, 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
b. 493,500
c. 503,500
d. 517,000

Solution:
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
(For numbers 56-57) Jooheon Company accepted from a customer a P 4,000,000, 90-day,
12% interest-bearing note dated August 13, 2015. On September 30, 2015, the entity
discounted the note with recourse at the Apex State Bank at 15%. However, the proceeds
were not received until October 1, 2015. The discounting with recourse is accounted for as a
conditional sale with recognition of a contingent liability.
56. What is the amount received from the discounting of note receivable?
a. 4,017,000
b. 4,120,000
c. 4,103,000
d. 3,965,500

Solution:
Principal 4,000,000
Interest (4,000,000 x 12% x 90/360) 120,000
Less: Discount (4,120,000 x 15% x 60/360) 103,000

a. 40,000
b. 23,000
c. 17,000
d. 20,000

Solution:
Principal 4,000,000
Accrued Interest Receivable (4,000,000 x 12% x 30/360) 40,000
Less: Carrying amount of note receivable 4,040,000
58. On August 31, 2015, Wonho Company discounted with recourse a note at the bank at
discount rate of 15%. The note was received from the customer on August 1, 2015, is for
90 days, has a face value of P 5,000,000, and carries an interest rate of 12%. The
discounting transaction is accounted for as secured borrowing. The customer paid the
note to the bank on October 30, 2014, the date of maturity. What is the interest expense
to be recognized on August 31, 2015?
a. 50,000
b. 21,250
c. 28,750
d. 25,000

Solution:
Principal 5,000,000
Interest (5,000,000 x 12% x 90/360) 150,000
Discount (5,150,000 x 15% x 60/360) 128,750
Principal 5,000,000
Accrued interest receivable (5,000,000 x 12% x 30/360) 50,000
Carrying amount of note receivable 5,050,000

Carrying amount of note receivable (5,050,000)
Interest expense (28,750)
59. On November 1, 2015, Hyungwon Company discounted with recourse at 10%, a one
year, noninterest bearing, and P 2,050,000 note receivable maturing on January 31,
2016. 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, 2015?
a. 2,050,000
b. 2,000,000
c. 2,033,333
d. 0

Solution:
The contingent liability is equal to the principal or face value of the note receivable
discounted.
60. Kihyun Company discounted P 5,000,000 one year note at a discount rate of 12%,
when rate should be used for the recording of interest expense?
a. 10.0%
b. 10.7%
c. 12.0%
d. 13.6%
Solution:
Note payable 5,000,000
Discount (5,000,000 x 12%) (600,000)
Effective interest = Discount/ Net proceeds

= 600,000/4,400,000
= 13.6%
(For numbers 61-63) Minhyuk Company provided for doubtful accounts expense monthly at
3% of credit sales. The balance in the allowance for doubtful accounts was P 1,000,000 on
January 1, 2015. During 2015, credit sales totaled P 20,000,000, interim provisions for
doubtful accounts were made at 3% of credit sales, P 200,000 accounts were written off,
and recoveries of accounts previously written off amounted to P 50,000.
An aging of accounts receivable was made on December 31, 2015.

1-60 days 6,000,000 10% uncollectible
More than one year 400,000 50% uncollectible
9,900,000
61. What amount should be reported as doubtful accounts expense for the current year?
a. 2,250,000
b. 1,650,000
c. 800,000
d. 850,000

Solution:
1-60 days (6,000,000 x 10%) 600,000
61-180 days (2,000,000 x 20%) 400,000
181-360 days (1,500,000 x 30%) 450,000
More than one year (400,000 x 50%) 200,000
Required allowance-December 31,2015 1,650,000
Allowance for Doubtful accounts-January 1, 2015 1,000,000

Recoveries 50,000
Doubtful accounts expense (SQUEEZE) 800,000
Total 1,850,000
Accounts written off (200,000)
Allowance for doubtful accounts-December 31, 2015 1,650,000
62. What is the year-end adjustment to the allowance for doubtful accounts on December
31, 2015?
a. 800,000 debit
b. 800,000 credit
c. 200,000 debit
d. 200,000 credit

Solution:
Correct doubtful accounts expense 800,000
Recorded doubtful accounts expense (3% x 20,000,000) 600,000
Increase in doubtful accounts expense 200,000
63. What is the net realizable value of accounts receivable on December 31,2015
a. 9,900,000
b. 8,250,000
c. 7,650,000
d. 8,450,000

Solution:
Accounts receivable-December 31, 2015 9,900,00
Allowance for doubtful accounts-December 31, 2015 (1,650,000)
Net realizable value 8,250,000
(For numbers 64-67) From inception of operations, Arbotante Company carried no

allowance for doubtful accounts. Uncollectible accounts were expensed as written off and
recoveries were credited to income as collected. During 2015, 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. The historical bad debts loss percentage is to be recomputed
each year based on all available past years up to a maximum of five years.
Year Credit sales Writeoffs Recoveries

2011 1,500,000 15,000 0
2012 2,250,000 38,000 2,700
2013 2,950,000 52,000 2,500
2014 3,300,000 65,000 4,800
2015 4,000,000 83,000 5,000
The entity reported accounts receivable of P 1,250,000 on December 31, 2014 and P
2,000,000 on December 31, 2015.
64. What is the bad debts rate in 2015?

a. 1.6%
b. 1.7%
c. 1.8%
d. 2.0%

Solution:
Year Credit sales Writeoffs Recoveries
2011 1,500,000 15,000 -
2012 2,250,000 38,000 2,700
2013 2,950,000 52,000 2,500
2014 3,300,000 65,000 4,800
Total 10,000,000 170,000 10,000
2015 4,000,000 83,000 5,000
Total 14,000,000 253,000 15,000
Rate in 2015 = (253,000-15,000) / 14,000,000 = .017

65. What is the allowance for doubtful accounts on December 31, 2014?
a. 20,000
b. 21,250
c. 22,500
d. 25,000

Solution:
Allowance-December 31, 2014 (1,250,000 x 0.16) 20,000
a. 32,000
b. 34,000
c. 36,000
d. 40,000

Solution:
Allowance-December 31 ,2015 (2,000,000 x .017) 34,000
67. What is doubtful accounts expense for 2015?
a. 97,000
b. 78,000
c. 83,000
d. 92,000

Solution:
Allowance-December 31, 2014 20,000
Recoveries in 2015 5,000
Doubtful accounts expense for 2015 SQUEEZE 92,000
Total 117,000
Writeoffs in 2015 (83,000)
Allowance-December 31, 2015 34,000
(For numbers 68-69) Roque Company began operations on January 1, 2014. On December
31, 2014, the entity provided for doubtful accounts based on 1% of annual credit sales. On
January 1, 2015, the entity changed the method of determining the allowance for doubtful
accounts by aging of accounts receivable.
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, 2015 and 2014:
2015 2014
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 – 91 80,000 90,000
91 – 180 60,000 45,000
Over 180 25,000 15,000
a. 28,000
b. 24,000
c. 26,000
d. 0

Solution:
Allowance for doubtful accounts- December 31, 2014 (1% x 2,800,000) 28,000
a. 30,000
b. 39,000
c. 29,150
d. 27,000

Solution:
0 – 30 (300,000 x 1%) 3,000
31 – 90 (80,000 x 5%) 4,000
91 – 180 (60,000 x 20%) 12,000
Over 180 (25,000 x 80%) 20,000
39,000
70. Mangiliman Company prepared an aging of accounts receivable on December 31, 2015
and determined that the net realizable value of the accounts receivable at that date is P
5,000,000.
Accounts receivable on December 31, 2014 4,800,000

Accounts receivable on December 31, 2015 5,400,000
Allowance for doubtful accounts on December 31, 2014 600,000
Accounts written off as uncollectible during 2015 500,000
What amount should be reported as doubtful accounts expense for the current year?
a. 500,000
b. 300,000
c. 400,000
d. 700,000

Solution:
Allowance for doubtful accounts-December 31, 2014 600,000
Doubtful accounts expense SQUEEZE 300,000
Total 900,000
71. Pangilinan Company used the allowance method of accounting for uncollectible
accounts. During the current year, the entity had charged P 800,000 to bad debt
expense, and wrote off accounts receivable of P 900,000 as uncollectible. What was the
decrease in working capital?
a. 900,000
b. 800,000
c. 100,000
d. 0

Solution:
Only the bad debt expense decreases working capital. The writeoff does not affect
anymore the working capital because the effect is offsetting on current assets.
72. Buchiki Company’s allowance for doubtful accounts was P 1,000,000 at the end of 2015
and P 900,000 at the end of 2014. For the year ended December 31, 2015, the entity
reported doubtful accounts expense of P 160,000 in the income statement. What amount
was debited to the appropriate account to write off uncollectible accounts in 2015?
a. 60,000
b. 100,000
c. 160,000
d. 260,000

Solution:
Doubtful account expense 160,000
Total 1,060,000
Accounts written off SQUEEZE (60,000)
Allowance for doubtful accounts-December 31, 2015 1,000,000
73. At the end of first year of operations, Hopps Company had a net realizable value of
accounts receivable of P 5,000,000. During the year, the entity recorded charges to bad
debt expense of P 800,000 and wrote off as uncollectible accounts receivable of P
200,000. What is the year end accounts receivable balance before the allowance for
doubtful accounts?
a. 5,600,000
b. 5,200,000
c. 5,000,000
d. 6,000,000

Solution:
Net realizable value of accounts receivable 5,000,000
Allowance for doubtful accounts (800,000 – 200,000) 600,000
Gross accounts receivable 5,600,000
74. Wilde Company adjusted the allowance for uncollectible accounts at year end. The
ledger balances for accounts receivable and the related allowance were P 5,000,000
and P 200,000, respectively. The entity used the percentage of accounts receivable
method. Accounts receivable were estimated to be 5% uncollectible. What amount
should be recorded as an adjustment to the allowance for uncollectible accounts at year
end?
a. 250,000 increase
b. 250,000 decrease
c. 50,000 decrease
d. 50,000 increase

Solution:
Required allowance (5% x 5,000,000) 250,000
Allowance before adjustment 200,000
Increase in allowance 50,000
75. On January 1, 2015, Seeu Company had a credit balance of 260,000 in the allowance
for uncollectible accounts. Based on past experience, 2% of credit sales would be
uncollectible. During the current year, the entity wrote off P 325,000 of uncollectible
accounts. Credit sales for the year were P 9,000,000. On December 31, 2015, what
amount should be reported as allowance for uncollectible accounts?
a. 115,000
b. 180,000
c. 245,000
d. 440,000

Allowance for uncollectible accounts-January 1 260,000
Uncollectible accounts expense (2% x 9,000,000) 180,000
Allowance for uncollectible accounts-December 31 115,000
76. Jovi 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. 435,000
b. 265,000
c. 235,000
d. 241,000

Solution:
Doubtful accounts expense (9,500,000 – 800,000 – 200,000 x 3%) 255,000
Allowance for doubtful accounts-December 31 235,000
77. At year end, Jeneva Company reported net sales of P 7,100,000 and allowance for
doubtful accounts with debit balance of P 16,000 before adjustment. The entity
estimated the uncollectible accounts receivable at 2% of net sales. What is the
allowance for doubtful accounts at year end?
a. 158,000
b. 144,500
c. 142,000
d. 126,000
Solution:
Allowance for doubtful accounts (debit balance) (16,000)
Doubtful accounts expense (7,100,000 x 2%) 142,000
Allowance for doubtful accounts, December 31 126,000
78. Chris Redfield Company provided the following data relating to accounts receivable for
the current year:
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?
a. 1,200,000
b. 1,125,000
c. 1,085,000
d. 925,000

Solution:
Accounts receivable-January 1 650,000
Total 3,350,000
Less: Collections from customers 2,150,000
Less: Accounts written off 40,000
Less: Sales returns 75,000
Accounts receivable-December 31 1,085,000

Less: Allowance for doubtful accounts 110,000
Less: Allowance for sales returns 50,000
Net realizable value 925,000
79. When examining the accounts of Jill Valentine Company, it is ascertained that balances
relating to both receivables and payables are included in a single controlling account
called “receivable control” with a debit balance of P 4,850,000. An analysis of the make-
up of this account revealed the following:
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 100,000
goods not yet shipped
Expected bad debts 150,000
After further analysis of the aged accounts receivable, it is determined that the allowance
for doubtful accounts should be P 200,000. What amount should be reported as “trade
and other receivables” under current assets?
a. 8,950,000
b. 8,800,000
c. 8,600,000
d. 8,850,000

Solution:
Accounts receivable-customers (7,800,000 + 400,000 postdated checks) 8,200,000
Allowance for doubtful accounts (200,000)
Accounts receivable-officers 500,000
Debit balances-creditors 300,000
Total trade and other receivables 8,800,000
80. On December 31, 2015, Sherry Birkins Company reported that the current receivables
consisted the following:
Trade accounts receivable 930,000

Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit in November 30,000
Selling price of unsold goods sent by Miami on consignment at 130% 260,000
of cost and not included in Miami’s ending inventory
Security deposit on lease of warehouse used for storing some 300,000
inventories
Total 1,500,000
On December 31, 2015, what total amount should be reported as trade and other
receivables under current assets?
a. 940,000
b. 1,200,000
c. 1,240,000
d. 1,500,000

Solution:
Trade accounts receivable 930,000
Allowance for uncollectible accounts (20,000)
Claim receivable 30,000
Total trade and other receivables 940,000
81. Ada Wong 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. 8,200,000
b. 6,200,000
c. 2,000,000
d. 4,200,000

Solution:
Inventory-January 1 4,800,000
Purchases 8,000,000
Goods available for sale 12,800,000
Inventory-December 31 (4,400,000)
Cost of goods sold 8,400,000
Gross margin on sales 4,200,000
Gross sales 12,600,000
Cash sales (2,000,000)
Accounts receivable-January 1 4,000,000
Total 14,600,000
Accounts receivable collected (8,400,000)
82. Barry Burton Company provided the following information for the current year:
January 1 December 31
Allowance for doubtful accounts 60,000
Sales 8,000,000
Cash collected from customers 7,000,000
The cash collections included a recovery of P 10,000 from a customer whose account
had been written off as worthless in prior year. During the year, it was necessary to
recognized doubtful accounts expense of P 100,000 and write off worthless customers’
accounts of P 30,000. At year end, a customer settled an account by issuing a 12% six
month note for P 400,000. What is the net realizable value of accounts receivable on
December 31?
a. 1,640,000
b. 1,670,000
c. 1,780,000
d. 1,630,000

Solution:
Sales 8,000,000
Total 9,200,000
Cash collections (7,000,000 – 10,000 recovery) (6,990,000)
Write off (30,000)
Note received in settlement of account (400,000)

Recovery of accounts written off 10,000
Doubtful accounts expense 100,000
Total 170,000
Writeoff (30,000)
Net realizable value (1,780,000 – 140,000) 1,640,000
83. On June 1, 2015, Mirai Company loaned Akihiko P 500,000 on a 12% note, payable in
five annual installments of P 100,000 beginning January 1, 2016. In connection with this
loan, Akihiko was required to deposit P 5,000 in a noninterest-bearing escrow account.
The amount held in escrow is to be returned to Akihiko 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, 2015. Akihiko made timely payments through November 1,
2015. On January 1, 2016, Mirai received payment of the first principal installment plus
all interest due. On December 31, 2015, what is the accrued interest receivable on the
loan?
a. 0
b. 5,000
c. 10,000
d. 15,000

Solution:
November 2015 (500,000 x 1%) 5,000
December 2015 (500,000 x 1%) 5,000
Accrued interest receivable on December 31, 2015 10,000
(For numbers 84-85) Duterte Company has an 8% note receivable dated June 30, 2015, in
the original amount of P 1,500,000. Payments of P 500,000 in principal plus accrued interest
are due annually on July 1, 2016, 2017 and 2018.
84. What is the balance of note receivable on July 1, 2016?

a. 1,500,000
b. 1,000,000
c. 500,000
d. 0

Solution:
Note receivable, June 30, 2015 1,500,000
Payment on July 1, 2016 (500,000)
Note receivable, July 1, 2016 1,000,000
85. In the June 30, 2017 statement of financial position, what amount should be reported as
a current asset for interest on the note receivable?
a. 120,000
b. 40,000
c. 80,000
d. 0

Solution:
Accrued interest receivable-June 30, 2017 (1,000,000 x 8%) 80,000
86. On December 31, 2015, Celeste Company sold a machine in the ordinary course of
business to Baron Company in exchange for a noninterest bearing note requiring ten
annual payments of P 100,000. Baron made the first payment on December 31, 2015.
The market interest rate for similar notes at date of issuance was 8%.
Period Present value of 1 at 8% Present value of ordinary annuity of 1 at 8%

9 0.50 6.25
10 0.46 6.71
On December 31, 2015, what is the carrying amount of the note receivable?
a. 450,000
b. 460,000
c. 625,000
d. 671,000

Solution:
Present value (100,000 x 6.25) 625,000
(For numbers 87-88) Fyra Bank a loan to a borrower on January 1, 2015. The interest rate
on the loan is 10% payable annually starting December31, 2015. The loan matures in five
years on December 31, 2019.
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%.
87. What is the carrying amount of the loan receivable on January 1, 2015?
a. 4,000,000
b. 4,650,000
c. 4,411,500
d. 3,711,500

Solution:
Origination fee received 350,000
Direct origination cost (61,500)
Unearned interest income 288,500
Note receivable 4,000,000

Unearned interest income (288,500)
Carrying amount-January 1, 2015 3,711,500
88. What is the carrying amount of the loan receivable on December 31, 2015?
a. 4,000,000
b. 3,756,880
c. 4,243,120
d. 3,600,000

Solution:
Loan receivable 4,000,000
Unearned interest income-December 31, 2015 (288,500 – 45,380) (243,120)
Carrying amount-December 31, 2015 3,756,800
(For numbers 89-90) National Bank granted a loan to a borrower on January 1, 2015. The
interest on the loan is 10% payable annually starting December 31, 2015. The loan matures
in three years on December 31, 2017.
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%.
89. What is the carrying amount of the loan receivable on January 1, 2015?
a. 4,000,000
b. 3,807,900
c. 4,150,000
d. 3,657,900

Solution:
Origination fee received 342,100
Direct origination cost incurred (150,000)
Unearned interest income 192,100

Unearned interest income (192,100)
Carrying amount-January 1, 2015 3,807,900
90. What is the carrying amount of the loan receivable on December 31, 2015?
a. 4,000,000
b. 3,807,900
c. 3,864,848
d. 3,750,932

Solution:
Unearned interest income-December 31, 2015 (192,100 – 56,948) (135,152)
Problem Solving(91-100). Instruction: Solve the following problems with complete solutions.
I. Jimin Company factored P 6,000,000 of accounts receivable to a finance entity at the

end of current year. Control was surrendered by Jimin 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.
1. What is the amount of cash initially received from the factoring?
Answer: 5,386,850
Solution:
Factor’s holdback (6,000,000 x 5%) (3,000,000)
Factoring fee (6,000,000 x 3%) (180,000)
Interest (6,000,000 x 15% x 54/365) (133,150)
Cash initially received from factoring 5,386,850
2. If all accounts are collected, what is the cost of factoring the accounts receivable?
Answer: 313,150
Solution:
Factoring fee 180,000
Interest 133,150
Total cost of factoring 313,150
II. Jinhwan Company received from a customer a one-year, P 500,000 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?
Answer: 513,000
Solution:
Principal 500,000
Add: Interest (500,000 x 8%) 40,000
Maturity Value 540,000
Less: Discount (540,000 x 8% x 6/12) 27,000
Net proceeds 513.000
III. Shownu Hotel manages an extensive network of boutique hotels in the country. The
entity has significant accounts receivable from three customers, namely:
Bacolod Inn 5,000,000

Chicken House 9,000,000
Landmark Hotel 8,000,000
Other accounts receivable not individually significant 4,500,000
The entity has determined that the Chicken House receivable is impaired by P 1,500,000
and the Landmark Hotel receivable is impaired by P 2,000,000. 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 receivables. What is the total
impairment loss of accounts receivable?
Answer: 3,975,000
Solution:
Bacolod Inn 5,000,000
Other accounts receivable not individually significant 4,500,000
All other accounts receivable 9,500,000
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
IV. Cruz Company prepared an aging of accounts receivable on December 31, 2015 and
determined that the net realizable value of the accounts receivable was P 2,500,000.
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
What amount should be recognized as doubtful accounts expense for the current year?
Answer: 100,000
Solution:
Recovery of accounts written off 50,000
Doubtful accounts expense SQUEEZE 100,000
Total 430,000
V. Garcia Company reported the following balances after adjustments at year end:
2015 2014
Accounts receivable 5,250,000 4,800,000
Net realizable value 5,100,000 4,725,000
During 2015, the entity wrote off accounts totaling P 160,000 and collected P 40,000 on
accounts written off in previous year. What amount should be recognized as doubtful
accounts expense for the year ended December 31, 2015?
Answer: 195,000
Solution:
Allowance- 12/31/2014 (4,800,000 – 4,725,000) 75,000
Recovery of accounts written off in previous year 40,000
Doubtful accounts expense for 2015 SQUEEZE 195,000
Total 310,000
Accounts written off in 2015 (160,000)
Allowance- 12/31/2015 (5,250,000 – 5,100,000) 150,000
VI. Claire Redfield Company provided the following information relating to accounts
receivable for the current year:
Accounts receivable on January 1 1,300,000

Collections from customers, excluding recovery 4,750,000
Accounts written off 125,000
Collection of accounts written off in prior year 25,000
(customer credit was not reestablished)
Estimated uncollectible receivables per aging of receivables at 165,000
December 31
What is the balance of accounts receivable, before allowance for doubtful accounts on
December 31?
Answer: 1,825,000
Solution:
Add: Credit sales 5,400,000
Total 6,700,000
Less: Collection from customers 4,750,000
Less: Accounts written off 125,000
VII. Leon Kennedy Company provided the following data for the current year:
Sales on account 3,600,000

Notes receivable to settle accounts 400,000
Provision for doubtful accounts 90,000
Accounts receivable written off 25,000
Purchases on account 3,900,000
Payments to creditors 3,200,000
Discounts allowed by customers 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
Discounts taken by customers 40,000
Collections received in settlement of notes 180,000
What is the net realizable value of accounts receivable at year end?

Answer: 605,000
Solution:
Provision for doubtful accounts 90,000
Allowance for doubtful accounts 65,000
Sales on account 3,600,000

Notes received to settle accounts (400,000)
Accounts receivable written off (25,000)
Merchandise returned by customer (15,000)
Collections received to settle accounts (2,450,000)
Discounts taken by customers (40,000)
Accounts receivable 670,000
Allowance for doubtful accounts (65,000)
Net realizable value 605,000
VIII. Lightning Company sold a factory on January 1, 2015 for P 7,000,000. The entity
received a cash down payment of P 1,000,000 and a 4 year, 12% note for the balance.
The note is payable in equal annual payments of principal and interest of P 1,975,400
payable on December 31 of each year until 2018. What is the carrying amount of the
note receivable on December 31, 2015?
Answer: 4,744,600
Solution:
Note receivable-January 1, 2015 (7,000,000 – 1,000,000) 6,000,000
Principal payment on December 31, 2015:
Annual payment 1,975,400
Interest (12% x 6,000,000) (720,000)
IX. National Bank granted a 10 year loan to Skaarf Company in the amount of P 1,500,000
with a stated interest rate of 6%. Payments are due monthly and are computed to be P
16,650. National Bank incurred P 40,000 of direct loan origination cost and P 20,000 of
indirect loan origination cost. In addition, National Bank charged Skaarf Company a 4
point nonrefundable loan origination fee. What is the initial carrying amount of the loan
receivable on the part of National Bank?
Answer: 1,480,000
Solution:
Direct origination cost 40,000
Total 1,540,000
Origination fee received from borrower (1,500,000 x 4%) (60,000)
Carrying amount 1,480,000

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True or False (1-10).

2. Assignment is a financial arrangement that is usually done on a “without recourse,

3. If a note receivable is discounted with recourse, note receivable discounted is credited.

4. If a note receivable is discounted without recourse, note receivable is debited.

8. Direct writeoff is a method of estimating uncollectible accounts that emphasizes asset

9. Imputed interest is based on the stated interest rate.

Source: Theory of Accounts Volume I by Conrado Valix

13. It is a predetermined account withheld by a factor as a protection against customer

Source: Theory of Accounts Volume I by Conrado Valix

14. Why would an entity sell accounts receivable to another entity?

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

22. Accounts receivable shall be recognized initially at

23. Credit balances in accounts receivable

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

35. Receivables from subsidiaries shall be classified as

Source: Theory of Accounts Volume I by Conrado Valix

36. The amortized cost of loan receivable is the amount at which

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

Source: Theory of Accounts Volume I by Conrado Valix

41. Jungkook Company assigned P 4,000,000 of accounts receivable as collateral for a P

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

46. Jin Company assigned P 3,000,000 of accounts receivable as collateral for a P

Source: Practical Accounting Volume I by Conrado Valix

49. What is the cash received from discounting?

Source: Practical Accounting Volume I by Conrado Valix

50. What is the loss on note receivable discounting?

Source: Practical Accounting Volume I by Conrado Valix

51. What amount of cash was received from the discounting?

Source: Practical Accounting Volume I by Conrado Valix

52. What is the loss on note receivable discounting?

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

54. What is the loss on note receivable discounting?

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix

57. What is the loss on note receivable discounting?

Source: Practical Accounting Volume I by Conrado Valix

Source: Practical Accounting Volume I by Conrado Valix