Receivables

Question 1

What is the measurement attribute of accounts receivable?

Answer 1

Net realizable value.

Question 2

Does International Financial Reporting Standards (IFRS) permit recognition of accounts receivable when there is a firm sales commitment?

Answer 2

In some instances when the recognition criteria have been met.

Question 3

Are notes receivable typically related to customer transactions?

Answer 3

No, they are not typically related.

Question 4

What factors affect receivable valuation?

Answer 4

Trade discounts;
Sales discounts;
Sales returns and allowances;
Uncollectible accounts.

Question 5

List the two methods of accounting for accounts receivables.

Answer 5

Gross

Net.

Question 6

List the characteristics of notes receivables.

Answer 6

Typically non-customer transactions;
Longer time frame;
Have an interest element.

Question 7

List the characteristics of accounts receivables.

Answer 7

Typically related to customer contracts;
Short time frame;
Typically no interest element.

Question 8

What other name is used for customer accounts receivable?

Answer 8

Trade Receivable.

Question 9

How are receivables accounted for using the gross method?

Answer 9

Records receivables at gross invoice price (before cash discount).

Question 10

Define “contra to sales”.

Answer 10

Sales discounts.

Question 11

If material amounts of cash discounts are expected to be taken by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the gross method.

Answer 11

TRUE

Question 12

If material amounts of cash discounts are expected to be forfeited by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the net method.

Answer 12

FALSE

Question 13

The gross and net methods of recording sales discounts yield the same net sales if customers take all available discounts.

Answer 13

TRUE

Question 14

Allowance for sales discounts is contra to accounts receivable.

Answer 14

TRUE

Question 15

The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. The amount remitted is $39.51

Answer 15

TRUE

Question 16

The gross method of accounting for cash discounts separately records cash discounts not taken by customers.

Answer 16

FALSE

Question 17

The gross method of accounting for cash discounts records receivables at gross invoice price, which is the price before applying the trade discount.

Answer 17

FALSE

Question 18

Sales discounts forfeited is contra to accounts receivable.

Answer 18

FALSE

Question 19

Describe the Allowance Method of Accounting for Bad Debts.

Answer 19

Determine the amount uncollectible and provide an Allowance to measure Accounts Receivable at net realizable value.

Question 20

Describe the Direct Write-Off Method for Bad Debts.

Answer 20

Direct write off records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Direct write-off method is rarely used.

Question 21

Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?

Answer 21

The Allowance method.

Question 22

What is the preferred method of accounting for uncollectible accounts receivable?

Answer 22

Allowance method.

Question 23

All uncollectible accounts arising from 1998 sales were written off in 1998, although the firm did not know this at the end of 1998. Therefore, the direct write-off and allowance methods of accounting for uncollectible accounts will likely yield the same net income in 1998.

Answer 23

FALSE

Question 24

In most cases, the direct write-off method of accounting for uncollectible accounts is not permissible under US GAAP.

Answer 24

TRUE

Question 25

When specific accounts are written off, bad debt expense is increased under the direct write-off method of accounting for uncollectible accounts.

Answer 25

TRUE

Question 26

The entry to write off an account under the direct write-off method will have no effect on net income.

Answer 26

FALSE

Question 27

The allowance method must be used if bad debts are probable and estimable.

Answer 27

TRUE

Question 28

Describe the income statement approach for bad debts.

Answer 28

Estimates bad debt expense as a percentage of credit sales.

Question 29

Describe the balance sheet approach for calculating an allowance balance.

Answer 29

Applies a percentage to ending accounts receivable.

Question 30

What purpose does analyzing ending accounts receivable serve?

Answer 30

The determination of the needed or desired balance in the allowance account.

Question 31

Recovery of a previously written-off account under the allowance method increases net accounts receivable.

Answer 31

FALSE

Question 32

The entry to write off an account under the allowance method has no effect on net accounts receivable.

Answer 32

TRUE

Question 33

Total sales for a period equals $1,000,000. Of that amount, $400,000 is cash sales. The firm estimates bad debt expense at 8% of credit sales. The preadjusted allowance for doubtful accounts balance is $4,000. Bad debt expense for the period is $48,000.

Answer 33

TRUE

Question 34

When aging of accounts receivable is performed, the sum of the accounts across all age categories equals total gross accounts receivable.

Answer 34

TRUE

Question 35

The ending allowance for doubtful accounts balance before recording the adjustment for bad debt expense affects the amount of bad debt expense to be recorded under both the income statement and balance sheet approaches.

Answer 35

FALSE

Question 36

What do we call the (1) maker and (2) holder of a note?

Answer 36

(1) Maker is the buyer or borrower. (2) The holder is the seller or lender.

Question 37

How is the present value in a noncash transaction determined?

Answer 37

The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.

Question 38

How is the present value in a cash transaction determined?

Answer 38

The amount of cash that exchanged hands.

Question 39

At what value should a note receivable be recorded?

Answer 39

The present value of all future cash flows.

Question 40

Describe the difference between an interest-bearing and a noninterest-bearing note receivable.

Answer 40

Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest; Noninterest-bearing: the face amount of the note includes principal and interest that will be collected at maturity date.

Question 41

Define "market rate".

Answer 41

Interest rate used to determine the present value of a note receivable.

Question 42

Interest-bearing notes should be recorded at face value if the stated and market interest rates are the same.

Answer 42

TRUE

Question 43

A note pays simple interest each February 28 and August 31. Accrued interest receivable at December 31, the balance sheet date, is based on the stated rate for 4 months.

Answer 43

TRUE

Question 44

A mortgage note pays equal monthly payments at the end of each month. Interest revenue for a particular month is based on the principal balance at the end of the month.

Answer 44

FALSE

Question 45

A 1-year noninterest-bearing note should be recorded at 91% of face value if the market interest rate is 10%.

Answer 45

TRUE

Question 46

A noninterest-bearing note pays no interest.

Answer 46

FALSE

Question 47

When the market rate of interest exceeds the stated rate on a note, the note is recorded at a discount.

Answer 47

TRUE

Question 48

Define "maker".

Answer 48

A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.

Question 49

With respect to the transfer of receivable, what are the three conditions of a sale?

Answer 49

(1) The transferred assets have been isolated from the transferor, even in bankruptcy; (2) the transferee is free to pledge or exchange the assets; (3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.

Question 50

In the transfer of receivables, if the three conditions for a sale are not met, what happens?

Answer 50

The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.

Question 51

Describe a transaction with recourse.

Answer 51

The transferor is responsible for nonpayment on the part of the original maker of the receivable.

Question 52

Describe a transaction without recourse.

Answer 52

Transferor is not responsible for nonpayment on the part of the maker of the receivable.

Question 53

What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?

Answer 53

Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.

Question 54

When a note is discounted with a financial institution, the note's interest rate must be used to compute the fee to the financial institution.

Answer 54

FALSE

Question 55

When a receivables transfer is accounted for as a loan, the transferor records a loss on the transfer.

Answer 55

FALSE

Question 56

ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on the sale of an asset to another party. The discount percentage is 7%. The proceeds to ABC, Inc. equal $1,001.19.

Answer 56

TRUE

Question 57

When a transfer of receivables is recorded as a sale, the receivables are removed from the original creditor's books.

Answer 57

TRUE

Question 58

When a transfer of receivables is recorded as a loan, the receivables are removed from the original creditor's books.

Answer 58

FALSE

Question 59

When control over the receivables transferred has passed to the transferee, the transfer is recorded as a sale.

Answer 59

TRUE

Question 60

If two of the three criteria for the sale of receivables are met, the transfer of receivables is recorded as a sale.

Answer 60

FALSE

Question 61

If the transferor continues to have a financial interest in the receivables transferred, the transfer must be accounted for as a borrowing.

Answer 61

TRUE

Question 62

The key issue in accounting for the transfer of receivables is whether control over the receivables has passed from the transferor to the transferee.

Answer 62

TRUE

Question 63

When a 6-month note is discounted with a financial institution after being held for 2 months, the maturity value of the note includes 4 months of interest.

Answer 63

FALSE

Question 64

When a 6-month note is discounted with a financial institution after being held for 2 months, the financial institution computes its fee using 4 months of interest on the maturity value.

Answer 64

TRUE

Question 65

The maker of a note is the original creditor.

Answer 65

FALSE

Question 66

Notification means that the maker will remit payment to the third party providing funds in the transfer of receivables.

Answer 66

TRUE

Question 67

Define "factoring".

Answer 67

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.

Question 68

Who bears the cost of bad debts when factoring without recourse?

Answer 68

The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.

Question 69

Who bears the costs of bad debts when factoring with recourse?

Answer 69

The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.

Question 70

What is the accounting treatment when factoring with recourse, as accounted for as a loan?

Answer 70

The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.

Question 71

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

Answer 71

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.

Question 72

A factoring with recourse can be accounted for as either a sale or a loan.

Answer 72

TRUE

Question 73

In a factoring without recourse, the factor bears the cost of uncollectible accounts.

Answer 73

TRUE

Question 74

The term "with recourse" means that the maker must pay if the note is defaulted.

Answer 74

FALSE

Question 75

The transferor of receivables is the original creditor.

Answer 75

TRUE

Question 76

A firm factors $5,000 of receivables with recourse at a fee of 4%. Uncollectible accounts are estimated to be $500. The transfer is accounted for as a sale. The loss to be recorded by the transferor is $700.

Answer 76

TRUE

Question 77

In a factoring accounted for as a loan, interest expense is recognized in proportion to cash received on the transferred receivables.

Answer 77

TRUE

Question 78

When does loan impairment occur?

Answer 78

When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.

Question 79

What is the accounting treatment for loan impairments?

Answer 79

The receivable should be written down to: Present value of future cash flows using original effective interest rate, or Market value, if this value can be determined.

Question 80

How is the loss on impairment accomplished?

Answer 80

With a debit to bad debt expense and a credit to a contra-receivable account.

Question 81

List the methods through which interest revenue is recognized after a write-down has occurred.

Answer 81

Interest and cost recovery methods.

Question 82

When a receivable is impaired, what should it be written down to?

Answer 82

The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.

Question 83

The new carrying value of an impaired loan is the present value of the remaining payments expected to be received using the original interest rate in the loan

Answer 83

TRUE

Question 84

The loss on impairment of a loan is the difference between the note's carrying value before recognizing the loss, and the present value of the remaining payments expected to be received using the original interest rate in the loan

Answer 84

TRUE

Question 85

After an impaired note is written down, no further interest revenue is recognized.

Answer 85

FALSE

Question 86

After an impaired note is written down, the interest method must be used to recognize interest revenue.

Answer 86

FALSE

Question 87

A note which has two equal remaining payments is considered impaired at the balance sheet date. The first remaining payment is due one year from the balance sheet date, and the second remaining payment is due two years from the balance sheet date. The creditor expects that only 80% of each payment will be collected. The bad debt expense to be recorded at the balance sheet date is 20% of the note's carrying value at that date.

Answer 87

TRUE

Question 88

According to IFRS, value in use is the discounted present value of future cash flows arising from use of the asset and from its disposal.

Answer 88

TRUE

Question 89

Under IFRS, the impairment loss on the write down of a loan receivable is not recoverable.

Answer 89

FALSE