Chapter 6

Question 1

Current receivables are measured at?

Answer 1

net realizable value

Question 2

Non current receivables are measured at?

Answer 2

net present value of the future cash flows

Question 3

Define Trade receivables

Answer 3

he majority of receivables, are current assets arising from credit sales to customers in the normal course of business and due in customary trade terms

Question 4

What is the criteria for booking a sales return allowance?

Answer 4

the amount of future returns can be reasonably estimated and the amount has to be material.

Question 5

What is the JE for Sales Return Allowance

Answer 5

DR Sales returns (contra revenue)

CR Allowance for sales returns (contra asset)

Question 6

What types of receivables require disclosure in the notes to the financial statements

Answer 6

1. Related party receivables
2. Loss contingencies
3. Pledged or assigned receivables
4. Concentrations of credit risk

Question 7

What is the acceptable methods for uncollectible accounts expense according to GAAP?

Answer 7

The allowance method

Question 8

When is the direct write off method for receivables used?

Answer 8

This method is used for tax purposes.

Question 9

What is the JE for recording Allowance for uncollectable accounts

Answer 9

Dr. Bad debt expense

Cr. Allowance for uncollectible accounts

Question 10

What are the two methods for calculating the balance for uncollectable accounts?

Answer 10

1. Income Statement (percentage of sales)

2. Balance sheet (percentage of receivables)

Question 11

Define Factoring

Answer 11

Factoring is a transfer of receivables to a third party (a factor) who assumes the responsibility of collection.

Question 12

If a sale of receivables is with recourse

Answer 12

the transferor (seller) may be required to make payments to the transferee or to buy back receivables in specified circumstances. For example, the seller may become liable for defaults up to a given percentage of the transferred receivables.

Question 13

Is a receivable booked for sales made by credit card?

Answer 13

Only if the credit card company reimburses at a time after the sale.

Question 14

Define Pledging of a receivable

Answer 14

is the use of receivables as collateral (security) for a loan

Question 15

How must a note receivable be disclosed if it is discounted with recourse

Answer 15

it must be disclosed as a contingent liability

Question 16

how to calculate the amount of discount on a note receivable

Answer 16

(face amount × stated rate × note term) - (maturity amount × bank’s discount rate × note term remaining)

Question 17

Calculate revenue booked from a note receivable

Answer 17

Carrying amount X effective rate

Question 18

Calculate Interest receivable from a note receivale

Answer 18

Face amount X nominal rate