Chapter 4: Accounts Receivable

Question 1

Assets that represents contractual rights to receive cash or other asset from another entity.

Answer 1

Receivables

Question 2

Supported by oral or informal promises to pay.

Answer 2

Accounts Receivable

Question 3

Arising from loans extended by financial institutions.

Answer 3

Loans Receivable

Question 4

Arising from advances to officers, employees, suppliers, affiliates.

Answer 4

Advances

Question 5

Classified as current assets when they are expencted to be realized in cash within the normal operating cycle of the business or one year.

Answer 5

Trade Receivables

Question 6

Within what time frame must cash be realized for an asset to be considered a trade receivable?

Answer 6

• Within the normal operating cycle
• One year
• Whichever is the longer between the two

Question 7

Supported by written or formal promises to pay in the form of promissory notes.

Answer 7

Notes Receivable

Question 8

Income earned but not yet received.

Answer 8

Accrued Income

Question 9

From reimbursable deposits paid to cover potential damages or losses.

Answer 9

Deposits

Question 10

From insurance companies for casualties sustained, defendants under suit, government agencies for refundable taxes, and other remittances.

Answer 10

Claims Receivable

Question 11

The time between the acquisition of assets for processing and their realization in cash or cash equivalents.

Answer 11

Normal Operating Cycle

Question 12

How many months in the normal operating cycle of a business?

Answer 12

12 months

Question 13

Current assets only when they are expected to be realized in cash within one year. Non-current if more than one year.

Answer 13

Non-trade Receivable

Question 14

What is the journal entry needed to eliminate a credit balance in accounts receivable due to overpayment?

Answer 14

Debit - Accounts Receivable
Credit - Advances from customers

Question 15

It is included in current liabilities as part of non-trade payables.

Answer 15

Advances from customers

Question 16

Account included in current assets as part of non-trade receivables.

Answer 16

Advances to suppliers

Question 17

What is the inital measurement of receivables?

Answer 17

Fair value plus transaction costs

Question 18

Ownership transferred to buyer upon shipment.

Answer 18

FOB Shipping Point

Question 19

Ownership is transferred only when the buyer receives the goods.

Answer 19

FOB Destination

Question 20

Seller paid the freight in advance before shipment.

Answer 20

Freight Prepaid

Question 21

Carrier will collect the shipping cost from the buyer upon delivery.

Answer 21

Freight Collect

Question 22

Who will pay the shipping cost if:

FOB Shipping Point + Freight Collect

Answer 22

Buyer

Question 23

Who will pay the shipping cost if:

FOB Destination + Freight Prepaid

Answer 23

Seller

Question 24

Who will pay the shipping cost if:

FOB Destination + Freight Collect

Answer 24

The seller is responsible for the payment, but since the buyer covered the expense, the buyer can simply deduct the shipping cost from the total price of the goods.

Question 25

Who will pay the shipping cost if: FOB Shipping Point + Freight Prepaid

Answer 25

The seller covered the shipping cost at the time of shipment, but the buyer will include that shipping cost in the total price of the goods to reimburse the seller.

Question 26

Given to encourage orders in large quantities or to avoid frequent changes in catalogs, to alter prices for different quantities purchased, or to hide the true invoice price from competitors.

Answer 26

Trade Discounts

Question 27

Deducted from the list price when determining the invoice price. It is not recorded by either the seller or buyer.

Answer 27

Trade Discounts

Question 28

The standard price set by a seller for a product or service before any discounts, promotions, or negotiations are applied.

Answer 28

List Price

Question 29

The total amount the buyer is obligated to pay to the seller.

Answer 29

Invoice Price

Question 30

Under this method, accounts receivable and sales are initially recorded at amounts gross of cash discounts. Cash discounts are recorded only when they are taken by the buyer.

Answer 30

Gross Method

Question 31

Under this method, accounts receivable and sales are initially recorded at amounts net of cash discounts.

Answer 31

Net Method

Question 32

Accounts receivale are measured at what value?

Answer 32

Net Realizable Value (NRV)

Question 33

Given to encourage prompt payment. It is deducted from the invoice price when determining the net amount collectible within the discount period.

Answer 33

Cash Discount

Question 34

Two methods to account for cash discount.

Answer 34

- Gross Method - Net Method

Question 35

The contra-asset account of accounts receivable.

Answer 35

Allowance for Doubtful Accounts

Question 36

A balance sheet account representing estimated uncollectible receivables.

Answer 36

Allowance for Doubtful Accounts

Question 37

An income statement account representing the cost of uncollectible accounts for a specific period.

Answer 37

Bad Debts Expense

Question 38

Two methods of accounting for bad debts.

Answer 38

- Allowance Method - Direct Write-off Method

Question 39

Under this method, an allowance is recognized for bad debts expense when the collectibility of accounts becomes doubtful or questionable.

Answer 39

Allowance Method

Question 40

Under this method, bad debts expense is directly written-off from the balance of accounts receivable only when the accounts are deemed worthless.

Answer 40

Direct Written-off Method

Question 41

What is the journal entry for allowance method?

Answer 41

Debit - Allowance for Doubtful Accounts Credit - Accounts Receivable

Question 42

What is the journal entry for direct written-off method?

Answer 42

Debit - Bad Debt Expense Credit - Accounts Receivable

Question 43

The process of removing uncollectible amounts from the accounts receivable ledger.

Answer 43

Write-offs

Question 44

The amounts collected from previously written-off accounts receivable.

Answer 44

Recoveries