THEORY

1.Trade receivables are classified as current assets if they are reasonably expected to be collected

A.within one year

B.within the normal operating cycle

C.within one year or within normal operating cycle, whichever is lower

D.within one year or within normal operating cycle, whichever is higher

2.Which of the following statement is true in relation to presentation of receivables in statement of financial position?

A.Trade receivables and nontrade receivables are shown separately.

B.Nontrade receivables are presented as noncurrent assets.

C.Trade account receivables and trade notes receivable shall b presented separately.

D.Trade receivable and nontrade receivable which are currently collectible shall be presented as one line item called trade and other receivables

3.Accounts receivable shall be recognized initially at

A.Face value

B.Discounted value

C.Maturity value

D.Current value

4.Long-term notes receivables which normally bears interest or an interest which is unreasonably low shall be recognized initially at

A.Face value

B.Discounted value

C.Maturity value

D.Current value

5.Credit balances in accounts receivables shall be classified as

A.Current liabilities

B.Part of accounts payable

C.Long term liabilities

D.Deduction from accounts receivable

6.In the case of long-term installments receivable(real estate installment sales) where a major portion of the receivables will be collected beyond the normal operating cycle

A.The entire receivables are shown as current without disclosure of the amount not currently due.

B.The entire receivables are shown as noncurrent.

C.Only the portion currently due is shown as current and the balance as noncurrent.

D.The entire receivables are shown as current with disclosure of the amount not currently due.

7.Which method of recording bad debt loss in consistent with accrual accounting?

A.Allowance method

B.Direct write-off method

C.Percent of sales method

D.Percent of accounts receivable method

8.A method of estimating bad debts that focuses on the income statement whether rather than the statement of financial position is the allowance method based on

A.Direct write-off method

B.Aging the trade accounts receivable

C.Credit sales

D.The balance in the trade accounts receivable

9.When the allowance method of recognizing uncollectible accounts is used, the entry to record the write off of a special account would

A.Decrease both accounts receivable and the allowance for uncollectible accounts.

B.Decrease accounts receivable and increase allowance for uncollectible accounts.

C.Increase the allowance for uncollectible accounts and decrease net income.

D.Decrease both accounts receivable and net income

10.When an accounts receivable aging schedule is prepared, a series of computations is made to determine estimated uncollectible accounts. The resulting amount from this aging schedule

A.When added to the total accounts written off during the year is the desired credit balance of the allowance for doubtful accounts at year-end.

B.Is the amount of doubtful accounts expense for the year

C.Is the amount that should be added to the beginning allowance for doubtful accounts to get the doubtful accounts expense for the year.

D.Is the amount of desired credit balance of the allowance for doubtful accounts to be reported at year end.

11.When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts would decrease when

A.Specific account receivable is collected

B.Account previously written off is collected

C.Account previously written off becomes collectible

D.Specific uncollectible account is written off

12.When comparing the allowance method of accounting for bad debts with the direct write off method, which of the following is true?

A.The direct write off method is exact and also better illustrates the matching principle.

B.The allowance method is less exact but it better illustrates the matching principle

C.The direct write off method is theoretically superior

D.The direct write off method requires two separate entries to write off an uncollectible account

13.A debit balance in the allowance for doubtful accounts

A.Should never occur

B.Is always the result of management not providing a large enough allowance in order to manage earnings

C.May occur before the end of period adjustment for uncollectible accounts.

D.May exist even after the period of adjustment for uncollectible accounts.

14.On October 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due on September 30 of next year. The interest receivable on December 31 of the current year would consist of an amount representing

A.Three months of accrued interest income

B.Nine months of accrued interest income

C.Twelve months of accrued interest income

D.The excess on October 1 of the present value of the note receivable over its fact amount

15.On July 1, 2012, an entity obtained a two-year 8% note receivable for service rendered. At that time, the market rate of interest are due on June 30, 2014. Interest receivable on December 31, 2012 is

A.5% of the face amount of thenote

B.4% of the face amount of thenote

C.5% of July 1, 2012 present value of the amount due on June 30, 2014.

D.4% of July 1, 2012 present value of the amount due on June 30, 2014.

16.An entity uses the installment sales method to recognized revenue. Customers pay installments notes in 24 equal monthly amounts which include 12% interest. What is the installment notes receivable six months after the sale?

A.75% of the original sales price

B.Less than 75% of the original sales price

C.The present value of the remaining monthly payments discounted at 12%

D.Less than the present value of the remaining monthly payments discounted at 12%

17.The interest on a non interet bearing note is equal

A.The excess of the face value over the present value

B.The excess of the present value of over the face value

C.The excess of the market value over the present value

D.Zero

18. On July 1 of the current year, an entity received a one-year note receivable bearinginterest at the market rate. The face amount of the note receivable and the entire amount of the interest are due in one year. The interest receivable account would show a balance on

A. July 1 but not December 31

B. December 31 but not July 1

C. July 1 and December 31

D. Neither July 1 nor December 31

19. In an entitys April 30, 2012 statement of financial position a note receivable was reported as a noncurrent asset and accrued interest for eight months was reported as a current asset. Which of the following terms would fit the entitys note receivable?

A. Both principal and interest are payable on August 31, 2012 and August31, 2013

B. Principal and interest are due December 31, 2012

C. Both principal and interest are payable on December 31, 2012 and December 31, 2013

D. Principal is due August 31, 2013, and interest is due August 31, 2012 and August 31, 2013

20. The amortized cost of loan receivable is the amount of which

A. The loan receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial amount recognized and the principal maturity amount, minus reduction for impairment.

B. The loan receivable is measured initially minus principal repayment, plus or minus amortization recognized and the principal maturity amount.

C. The loan receivable is measured initially.

D. The loan receivable is measure initially minus principal payment.

PROBLEMS:

Problem 1:

On January 1, 2016, Bink Company sells an equipment costing P800,000 and with accumulated depreciation of P450,000. The company receives as consideration P100,000 cash and a 15% note for P400,000 due on December 31, 2018. The interest is payable annually every December 31. The prevailing rate of interest for a note of this type is 15%.

1.What is the gain or loss to be recognized on January 1, 2016?

2.How much interest income should be reported for the year 2016?

3.Classify the note as current or non-current on December 31, 2016.

4.Classify the note as current or non-current on December 31, 2017.

Problem 2:

On January 1, 2016, Bink Company sells an equipment costing P800,000 and with accumulated depreciation of P450,000. The company receives as consideration P100,000 cash and a non-interest bearing note for P400,000 due on December 31, 2018. The prevailing rate of interest for a note of this type is 15%. (Round off present value factors to four decimal places)

1.What is the gain or loss to be recognized on January 1, 2016?

2.What is the discount on notes receivable on January 1, 2016?

3.How much interest income should be reported for the year 2016?

4.Determine the carrying value of the note as of December 31, 2016. Classify the note as current or non-current on December 31, 2016.

5.How much interest income should be reported for the year 2017?

6.Determine the carrying value of the note as of December 31, 2017. Classify the note as current or non-current on December 31, 2017.

7.How much interest income should be reported for the year 2018?

Problem 3: Ames Quartet Inc. factors receivable with carrying amount of P200,000 to Joffrey Company for P160,000 on a with recourse basis,.

Required: The recourse provision has a fair value of P1,000. This transaction should be recorded as a sale. Prepare the appropriate journal entry to record this transaction on the books of Ames Quartet Inc.

Problem 4: Iris Company accepted an 8,000,000 90-day, 12% interest bearing note dated August 31, 2012. On September 30, 2012, Iris Company discounted the note with recourse at Empire State Bank at 15%. The proceeds, however, were not received until October 1, 2012. The discounting with recourse is accounted for as a conditional sale with the recognition of a contingent liability.

Required:

a.)The amount of cash received form discounting the note receivable.

b.)The amount of loss reported on the note receivable discounting.

Problem 5: On August 31, 2012, Glee Company discounted with recourse a customers note at its bank at a discount rate of 15%. The note received from the customer on August 1, 2012, which is for 90 day has a face amount of P5, 000,000 and carries a rate of 12%. Customer paid the note to the bank on October 30, 2011, the date of maturity.

Glee Company accounted the note discounting as a secured borrowing.

Required:

a.)The amount of cash received from discounting the note receivable.

b.)The interest expense recognized on August 31, 2012 is

Problem 6: The Premier National Bank has a note receivable of P200,000 from the Marvelous Company that it is carrying at face value and is due on December 31, 2018. Interest on the note payable at 9% each December 31. The Marvelous Company paid the interest due on December 31, 20l4, but informed the bank that it would probably miss the next two years interest payments because of its financial difficulties. After that, it expected to resume its annual interest payments, but it would make the principal payment one year late, with interest paid for that additional year at the time of the principal payments. How much should be recognized as loan impairment loss in 2014? (Round off present value factors to four decimal places.

Problem 7:

Use the following information for the next two questions.

(Round off present value factors to four decimal places)

On December 31, 2014, Merciful Bank entered into a debt restructuring agreement with Miserable Corp., which was experiencing financial difficulties. A note for P1,000,000 and one years accrued interest was due on this date from Miserable. The note receivable from Miserable was restructured as follows:

Reduced the principal obligation to P700,000.

Forgave the P 120,000 of accrued interest for 2014.

Extended the maturity date to December 31, 2017.

Reduced the interest rate to 8%.

Interest is payable annually on December 31, beginning 2015. In accordance with the agreement, Miserable made payments to Merciful Bank on December 31, 2015, 2016 and 2017.

1. The loan impairment loss to be recognized in Merciful Banks 2014 profit or loss is

2. How much interest income should Merciful Bank report for the year ended December 31, 2015?