Exercise 9 (Adapted)

What are two methods of recording accounts receivable transactions when a cash discount

situation is involved? Which is more theoretically correct? Which is used in practice more of

the time? Why?

Exercise 10 (Adapted)

What is the theoretical justification of the allowance method as contrasted with the direct writeoff method of accounting for bad debts? (

1. Subsequent to initial recognition, accounts receivable should be carried at

a. Face Value c. Maturity Value

b. Net Realizable Value d. Present Value

2. Loans and receivables are nonderivative financial assets

a. With fixed or determinable payments that are not quoted in an active market.

b. With fixed or determinable payments that are quoted in an active market.

c. Without fixed or determinable payments that are not quoted in an active market.

d. Without fixed or determinable payments that quoted in an active market.

3. Subsequent to initial recognition, loans and receivables are measured at

a. Cost

b. Amortized cost using straight line method

c. Amortized cost using effective interest method

d. Fair value

4. Trade receivables are classified as current assets when they are reasonably expected to be

collected

a. Within one year.

b. Within the normal operating cycle.

c. Within one year or within the normal operating cycle whichever is shorter

d. Within one year or within the normal operating cycle whichever is longer

5. Receivable from subsidiaries and affiliates, if significant should be classified as

a. Current assets

b. Noncurrent assets

c. Either as noncurrent or current depending on the expectation of realizing them within

one year or over one year.

d. Intangible assets.

6. A method of estimating uncollectible accounts that emphasizes asset valuation rather than

income measurement is the allowance method based on

a. Aging the receivables. c. Gross sales.

b. Direct write-off. d. Credit sales less returns and allowances.

7. When the allowance method of recognizing uncollectible accounts is used, the entry to

record the write-off of a specific account

a. Decreases both accounts receivable and the allowance for uncollectible accounts.

b. Decreases accounts receivable and increases the allowance for uncollectible accounts.

c. Increases the allowance for uncollectible accounts and decreases net income.

d. Decreases both accounts receivable and net income.

8. A company uses the allowance method to recognize uncollectible accounts expense. What

is the effect at the time of the collection of an account previously written off on each of the

following accounts?

Allowance for uncollectible accounts Uncollectible accounts expense

a. No effect Decrease

b. Increase Decrease

c. Increase No effect

d. No effect No effect