Unit 6 questions Flashcards
On the BS should material receivables be segregated?
Yes.
On a balance sheet, what is the preferable presentation of notes receivable or accounts receivable from officers, employees, or affiliated companies?
As assets but separately from other receivables. The basic principle is that, if the different categories of receivables are material in amount, they should be presented separately in the balance sheet. Receivables from officers, employees, or affiliated companies are assets and should be presented in the balance sheet as such. If these receivables are material, they should be segregated from other classifications of receivables.
A receivable classified as current on the statement of financial position is expected to be collected within:
within the current operating cycle or 1 year, whichever is longer.
In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 4, Pulham has a receivable from Angles. How should the receivable be reported in Pulham’s Year 4 financial statements?
The total receivable should be disclosed separately.
Related parties include an entity and its equity-based investees. A receivable from a related party should be separately and fully disclosed. Indeed, nontrade receivables generally are subject to separate treatment.
When the allowance method of recognizing bad debt expense is used, the allowance would decrease when a(n)
Specific uncollectible account is written off.
When an account receivable is written off, both accounts receivable and the allowance for uncollectible accounts are decreased. The entry is to debit the allowance and credit the receivable.
Which method of recording uncollectible accounts expense is consistent with accrual accounting?
Allowance method.
The allowance method attempts both to match the expense with the related revenue and to determine the NRV of the accounts receivable. This method is acceptable under GAAP. The direct write-off method debits expense and credits accounts receivable at the time uncollectibility is established. This method does not match revenue and expense or state receivables at NRV. It is not acceptable under GAAP.
Under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account
Has no effect on net income.
The entry to record bad debt expense under the allowance method is to debit bad debt expense and credit the allowance account. When a specific account is then written off, the allowance is debited and accounts receivable credited. Net income is affected when bad debt expense is recognized, not at the time of the write-off. Because accounts receivable and the allowance account are decreased by the same amount, a write-off of an account also has no effect on the net amount of accounts receivable.
A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on
Aging the receivables.
Under the allowance method, uncollectible accounts are estimated in two ways. The method that emphasizes asset valuation is based on an aging of the receivables to determine the balance in the allowance for uncollectible accounts. Bad debt expense is the amount necessary to adjust the allowance account to this estimated balance. The method emphasizing the income statement calculates bad debt expense as a percentage of sales.
When a noninterest-bearing note is exchanged for property, the note, the sales price, and the cost of the property exchanged for the note should be recorded at the:
fair value of the property or at the market value of the note, whichever is more clearly determinable.
