Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso -Test Bank

CHAPTER 7

CASH AND RECEIVABLES

CHAPTER STUDY OBJECTIVES

1. Understand cash and accounts receivable from a business perspective. Companies often have a significant amount of accounts receivable, which requires time and effort to manage and control. Companies strive to ensure that their collection policy is restrictive enough to minimize large losses in the form of uncollectible accounts receivable, while not being so restrictive that it interferes with the ability to attract new customers. Typical accounts receivable related categories include trade receivables, loans receivable, and nontrade receivables (including items like interest receivable and amounts due from officers and advances to employees).

2. 2. Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported. Financial assets are a major type of asset defined as cash, a contractual right to receive cash or another financial asset, an equity holding in another company, or a contractual right to exchange financial instruments under potentially favourable conditions. To be reported as cash, an asset must be readily available to pay current obligations and not have any contractual restrictions that would limit how it can be used in satisfying debts. Cash consists of coins, currency, and available funds on deposit at a bank. Negotiable instruments such as money orders, certified cheques, cashier’s cheques, personal cheques, and bank drafts are also viewed as cash. Savings accounts are usually classified as cash. Cash equivalents include highly liquid short-term investments (that is, those maturing three months or less from the date of purchase) that can be exchanged for known amounts of cash and have an insignificant chance of changing in value. Examples include treasury bills, commercial paper, and money-market funds. In certain circumstances, temporary bank overdrafts may be deducted in determining the balance of cash and cash equivalents.

Cash is reported as a current asset in the statement of financial position, with foreign currency balances reported at their Canadian dollar equivalent at the date of the statement of financial position. The reporting of other related items is as follows: (1) Restricted cash: Legally restricted deposits that are held as compensating balances against short-term borrowing are stated separately in Current Assets. Restricted deposits held against long-term borrowing arrangements are separately classified in non-current assets either in Investments or Other Assets. (2) Bank overdrafts: These are reported in the Current Liabilities section and may be added to the amount reported as accounts payable. (3) Cash equivalents: This item is often reported together with cash as “cash and cash equivalents”.

3. Define receivables and identify the different types of receivables from an accounting perspective. Receivables are claims held against customers and others for money, goods, or services. Most receivables are financial assets. The receivables are described in the following ways: (1) current or non-current; (2) trade or nontrade; and (3) accounts receivable or notes or loans receivable.

4. Account for and explain the accounting issues related to the recognition and measurement of accounts receivable. The entity becomes a party to the contractual provisions of the accounts receivable financial instrument only when it has a legal claim to receive cash or other financial assets. Therefore the timing of recognition of accounts receivable is intertwined with the timing of recognition of revenue as was discussed in Chapter 6. For most companies when the sale is recognized, either cash is received (realized) or an account receivable is recognized.

Two issues that may complicate the measurement of accounts receivable are (1) the availability of discounts (trade and cash discounts) and (2) the length of time between the sale and the payment due dates (the interest element). Ideally, receivables should be measured initially at their fair value, which is their present value (discounted value of the cash to be received in the future). Receivables that are created by normal business transactions and are due in the short term are excluded from present value requirements.

5. Account for and explain the accounting issues related to the impairment in value of accounts receivable. Short-term receivables are reported at their net realizable value—the net amount that is expected to be received in cash, which is not necessarily the amount that is legally receivable. Determining net realizable value requires estimating uncollectible receivables and any future returns or allowances and discounts that are expected to be taken. The adjustments to the asset account also affect the income statement amounts of bad debt expense, sales returns and allowances, and sales discounts. The assessment of impairment is usually based on an aged accounts receivable report, with higher percentages of uncollectible accounts indicated for older amounts outstanding. Even if a company estimates bad debt expense each period as a percentage of sales, the accounts receivable at the date of the statement of financial position are analyzed to ensure the balance in the allowance account is appropriate.

6. Account for and explain the accounting issues related to the recognition and measurement of short-term notes and loans receivable. The accounting issues related to short-term notes receivable are identical to those of accounts receivable. However, because notes always contain an interest element, interest income must be properly recognized. Notes receivable either bear interest on the face amount (interest-bearing) or have an interest element that is the difference between the amount lent and the maturity value (non–interest-bearing).

7. Account for and explain the accounting issues related to the recognition and measurement of long-term notes and loans receivable. Long-term notes and loans receivable are recognized initially at their fair value (the present value of the future cash flows) and subsequently at their amortized cost. Transaction costs are capitalized. This requires amortizing any discount if the item was issued at less than its face value, or any premium if it was issued for an amount greater than its face value, using the effective interest method. The straight-line method may be used under ASPE. Amortization of the discount (or premium) results in a reduction of (or increase in) interest income below (or above) the cash amount received.

8. Account for and explain the basic accounting issues related to the derecognition of receivables. To accelerate the receipt of cash from receivables, the owner may transfer the receivables to another entity for cash. The transfer of receivables to a third party for cash may be done in one of two ways: (1) Secured borrowing: the creditor requires the debtor to designate or pledge receivables as security for the loan. (2) Sale (factoring or securitization) of receivables: Factors are finance companies or banks that buy receivables from businesses and then collect the remittances directly from the customers. Securitization is the transfer of receivables to a special purpose entity that is mainly financed by highly rated debt instruments. In many cases, transferors have some continuing involvement with the receivables they sell. For the transfer to be recorded as a sale, IFRS focuses on whether the risks and rewards of ownership have been transferred to the transferee. ASPE focuses on whether the transferor has surrendered control and has continued involvement with the receivables.

9. Explain how receivables and loans are reported and analyzed. Disclosure of receivables requires that (1) valuation accounts be appropriately offset against receivables, (2) the receivables be appropriately classified as current or non-current, and (3) pledged or designated receivables be identified. As financial instruments, specific disclosures are required for receivables so that users can determine their significance to the company’s financial position and performance and can assess the nature and extent of associated risks and how these risks are managed and measured. Private entities require less disclosure than those reporting under IFRS. Receivables are analyzed in terms of their turnover and age (number of days outstanding), and in terms of relative changes in the related sales, receivables, and allowance accounts.

10. Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future. The two sets of standards are very similar, with minor differences relating to what is included in cash equivalents. ASPE does not require use of the effective interest method, whereas IFRS does require it for financial asset investments that are not held for trading purposes. Impairment provisions represent an issue that was recently resolved under IFRS. However, changes to the IFRS impairment model under IFRS 9 have led to additional differences between IFRS and ASPE.

11 Explain common techniques for controlling cash (Appendix 7A). The common techniques that are used to control cash are as follows: (1) Using bank accounts: A company can vary the number and location of banks and the types of accounts to meet its control objectives. (2) The imprest petty cash system: It may be impractical to require small amounts of various expenses to be paid by cheque, yet some control over them is important. (3) Physical protection of cash balances: Adequate control of receipts and disbursements is part of protecting cash balances. Every effort should be made to minimize the cash on hand in the office. (4) Reconciliation of bank balances: Cash on deposit is not available for counting and is proved by preparing a bank reconciliation.

Multiple Choice—Conceptual

Answer No. Description

b 1. Management of accounts receivable

b 2. Management of accounts receivable

d 3. Management of accounts receivable

d 4. Definition of financial asset

a 5. Identification of cash item

d 6. Classification of bank overdraft

c 7. Compensating balance

d 8. Reporting of nontrade receivables

a 9. Nontrade receivables

d 10. Classification of dividends and interest receivable

b 11. Standards for recognition and measurement of accounts receivable

c 12. Trade discounts

d 13. Net method of recording receivables

a 14. Gross method of recording receivables

b 15. Classification of Sales Returns and Allowances

a 16. Non-recognition of interest element

c 17. Valuation of short-term receivables

a 18. Valuation of receivables

c 19. Recording of receivables

c 20. Definition of credit risk

b 21. Classification of allowance for doubtful accounts

c 22. Write off of receivables

a 23. Bad debts and the matching concept

b 24. Direct write off method

c 25. Effect of write off entry

d 26. Collection of a previously written off account receivable

a 27. Relation of bad debts expense to accounts receivable

b 28. Identification of impaired accounts receivable

c 29. Recording bad debt expense

c 30. Notes receivable

d 31. Recording of notes receivable

a 32. Recording of revenue

c 33. Straight-line method of amortization

c 34. Valuation of notes receivable

b 35. Note issued at less than face value

a 36. Note issued above face value

d 37. Present value of note

a 38. Recording notes receivable at year end

b 39. Receivables used as collateral

d 40. Factoring of receivables

b 41. Factoring and securitization differences

a 42. Recording a loss on sale of receivables

c 43. Amount owed when receivables are factored

d 44. Accounts receivable turnover ratio

b 45. Liquidity of accounts receivable

d 46. Requirements for presentation and disclosure under IFRS

d 47. Receivables turnover ratio

Multiple Choice—Conceptual (cont’d)

Answer No. Description

c 48. Treatment of cash and cash equivalents

a 49. Receivables recognition and measurement

c *50. Purpose of Cash Over & Short account

c *51. Bank reconciliation journal entries

b *52. Treatment of bank error on bank reconciliation

c *53. Reconciling item on bank reconciliation

b *54. Cash balance on bank reconciliation

*This topic is dealt with in an Appendix to the chapter.

Multiple Choice—Computational

Answer No. Description

c 55. Reporting cash and cash equivalents at year end

b 56. Reporting cash on the balance sheet

b 57. Calculation of current net receivables

b 58. Recording of receivables using the net method

c 59. Recording of receivables using the gross method

b 60. Use of the net method when discount is taken

d 61. Calculation of net realizable value of accounts receivable

b 62. Calculation of bad debt expense using aging of receivables

d 63. Calculation of bad debt expense

c 64. Calculation of bad debt expense

a 65. Calculation of actual bad debts written off

b 66. Calculation of Allowance for Doubtful Accounts balance

b 67. Calculation of implicit interest rate for zero-interest-bearing note

c 68. Recognition of interest income in the first year

b 69. Recognition of interest income in subsequent year

c 70. Calculation of cash proceeds from transfer of receivables

c 71. Entry to record collection of assigned receivables

b 72. Factoring receivables without recourse

c 73. Factoring receivables with recourse

d *74. Entry to replenish petty cash

a *75. Calculation of correct cash balance

b *76. Calculation of correct cash balance

c *77. Calculation of correct cash balance

c *78. Calculation of correct cash balance

a *79. Calculation of correct cash balance

*This topic is dealt with in an Appendix to the chapter.

Exercises

Item Description

E7-80 Cash management from a business perspective

E7-81 Accounts receivable planning and control

E7-82 Terminology

E7-83 Definitions

E7-84 Reporting of cash

E7-85 Reporting of cash and cash equivalents

E7-86 Restricted cash balances

E7-87 Classification of accounts receivable

E7-88 Nontrade receivables

E7-89 Recording of trade discounts

E7-90 Sales Returns and Allowances

E7-91 Entries for bad debt expense

E7-92 Allowance for doubtful accounts

E7-93 Entries for bad debt expense

E7-94 Amortization of discount on note

E7-95 Schedule of note discount amortization

E7-96 Note with fair value not equal to cash consideration

E7-97 Recognition and measurement of long-term notes receivable

E7-98 Notes received for Property, Goods, or Services

E7-99 Accounts receivable assigned

E7-100 Sales of receivables without recourse

E7-101 Issues with derecognition of accounts receivable

E7-102 Accounts receivable analysis and securitization

E7-103 Presentation and disclosure of receivables

E7-104 ASPE/IFRS differences

E7-105 ASPE/IFRS differences

*E7-106 Reconciliation of cash account

*E7-107 Bank reconciliations

* E7-108 Control of petty cash

*This topic is dealt with in an Appendix to the chapter.

PROBLEMS

Item Description

P7-109 Entries for bad debt expense

P7-110 Amortization of discount under the straight-line and effective interest methods

P7-111 Note with fair value not equal to cash consideration

P7-112 Accounts receivable assigned

P7-113 Factoring accounts receivable

P7-114 Reasons for selling receivables

P7-115 Secured borrowings vs factoring of receivables

*P7-116 Bank reconciliation

*This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE—Conceptual

1. Which of the following statements is correct regarding receivables?
2. a) Receivables are written promises of the purchaser to pay for goods or services.
3. b) Receivables are claims held against customers and others for money, goods, or services.
4. c) Receivables are non-financial assets.
5. d) Receivables that are expected to be collected within a year are classified as non-current.

Answer: b

Difficulty: Easy

Learning Objective: Understand cash and accounts receivable from a business perspective.

Section Reference: Understanding Cash and Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Comprehension

2. Which of the following actions would NOT be considered good management of accounts receivable?
3. a) assessing creditworthiness of new or potential customers
4. b) very loose or flexible credit terms to encourage sales
5. c) offering discounts to encourage faster payment
6. d) regular aged receivables analysis

Answer: b

Difficulty: Easy

Learning Objective: Understand cash and accounts receivable from a business perspective.

Section Reference: Understanding Cash and Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

3. Which of the following are reasons why a companies should monitor accounts receivable levels carefully?
4. a) to maximize costs of collection
5. b) to encourage prompt payment from their customers
6. c) to minimize the stress on working capital and related bank debt
7. d) b) and c) only
8. e) All of the above are reasons why companies should monitor accounts receivable.

Answer: d

Difficulty: Easy

Learning Objective: Understand cash and accounts receivable from a business perspective.

Section Reference: Understanding Cash and Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

4. Which of the following is NOT a financial asset?
5. a) a contractual right to receive cash or other financial asset from another party
6. b) an equity instrument of another entity
7. c) a contractual right to exchange financial instruments with another party under potentially favourable conditions
8. d) a contractual right to pay cash or another financial asset to another party

Answer: d

Difficulty: Medium

Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.

Section Reference: Cash Recognition and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

5. Which of the following is considered as “cash” for reporting purposes?
6. a) money-market chequing accounts
7. b) certificates of deposit (CDs)
8. c) travel advances to employees
9. d) postdated cheques

Answer: a

Difficulty: Easy

Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.

Section Reference: Cash Recognition and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

6. Bank overdrafts are generally reported as
7. a) a current asset.
8. b) a contra account.
9. c) a non-current asset.
10. d) a current liability.

Answer: d

Difficulty: Easy

Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.

Section Reference: Cash Recognition and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

7. The portion of any demand deposit that a customer keeps as support for its existing or maturing obligations is called a(n)
8. a) account receivable.
9. b) bank overdraft.
10. c) compensating balance.
11. d) restricted cash.

Answer: c

Difficulty: Easy

Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.

Section Reference: Cash Recognition and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

8. Because of their special nature, nontrade receivables are generally
9. a) reported as cash and cash equivalents.
10. b) classified and reported as separate items on the statement of financial position.
11. c) classified in a note that is cross referenced to the statement of financial position.
12. d) both b) & c) are correct.

Answer: d

Difficulty: Hard

Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.

Section Reference: Definition and Types

CPA: Financial Reporting

Bloomcode: Knowledge

9. Which of the following is not an example of a nontrade receivable?
10. a) amounts arising from sale of goods or services
11. b) dividends and interest receivable
12. c) claims against insurance companies for losses suffered
13. d) amounts owing from a purchaser on sale of capital

Answer: a

Difficulty: Medium

Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.

Section Reference: Definition and Types

CPA: Financial Reporting

Bloomcode: Knowledge

10. Dividends and interest receivable would be classified as
11. a) loans receivable.
12. b) trade receivables.
13. c) notes receivable.
14. d) nontrade receivables.

Answer: d

Difficulty: Easy

Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.

Section Reference: Definition and Types

CPA: Financial Reporting

Bloomcode: Knowledge

11. The general accounting standards for recognition and measurement of accounts receivable include
12. a) measuring the receivable initially at amortized cost.
13. b) measuring the receivable initially at fair value.
14. c) after initial recognition, measuring the receivable at fair value.
15. d) not recognizing the receivable until it is paid.

Answer: b

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

12. Trade discounts are generally NOT used to
13. a) avoid frequent changes in catalogues.
14. b) quote different prices for different quantities purchased.
15. c) encourage faster payment.
16. d) hide the true invoice price from competitors.

Answer: c

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

13. The net method of recording accounts receivable is rarely used because it
14. a) is less theoretically correct than the gross method.
15. b) requires an “Allowance for Sales Discounts” to be reported on the statement of financial position.
16. c) has a different effect on the statement of financial position and income statement.
17. d) requires more bookkeeping for the additional adjusting entries after the discount period has passed.

Answer: d

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

14. If a company uses the gross method of recording accounts receivable, then cash discounts taken should be reported as
15. a) a deduction from sales in the income statement.
16. b) an item of “other expense” in the income statement.
17. c) a deduction from accounts receivable in determining the net realizable value of accounts re
18. d) sales discounts forfeited in the cost of goods sold section of the income statement.

Answer: a

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

15. “Sales Returns and Allowances” are reported as
16. a) an expense.
17. b) a deduction from Sales Revenue.
18. c) a deduction from Accounts Receivable.
19. d) an addition to Accounts Receivable.

Answer: b

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

16. The interest element for trade receivables
17. a) is usually not recognized because of materiality considerations.
18. b) must always be recognized and be accounted for using the net method.
19. c) is included in the net realizable value of the receivables.
20. d) becomes more significant as the time between the sale and payment shortens.

Answer: a

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

17. Assuming that the ideal measure of short-term receivables in the statement of financial position is the discounted value of the cash to be received in the future, failure to follow this practice usually does NOT make the financial statements misleading because
18. a) most short-term receivables are not interest-bearing.
19. b) the allowance for uncollectible accounts includes a discount element.
20. c) the amount of the discount is not material.
21. d) most receivables can be sold to a bank or factor.

Answer: c

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

18. Receivables are initially valued based on their ______.
19. a) fair value
20. b) estimated amount collectible
21. c) lower-of-cost-or-market value
22. d) historical cost

Answer: a

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

19. Jenny Manufactures sold toys listed at $240 per unit to Jack Inc. for $204, a trade discount of 15 percent. Jack Inc. in turn sells the toys in the market at $225. Jenny should record the receivable and related sales revenue (per unit) at
20. a) $240.
21. b) $225.
22. c) $204.
23. d) $191.

Answer: c

Difficulty: Hard

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.

Section Reference: Recognition and Measurement of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Comprehension

Feedback: None. $204 is provided in the question.

20. The likelihood of loss because of the failure of the other party to fully pay the amount owed is called
21. a) accounting risk.
22. b) bad debts.
23. c) credit risk.
24. d) currency risk.

Answer: c

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

21. “Allowance for Doubtful Accounts” is a(n)
22. a) expense account.
23. b) contra account.
24. c) liability account.
25. d) current asset.

Answer: b

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

22. Using the allowance method, when an account receivable is written off, the account to be debited is
23. a) accounts receivable.
24. b) bad debts expense.
25. c) allowance for doubtful accounts.
26. d) cash.

Answer: c

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

23. Which of the following approaches to determine bad debts expense best achieves the matching concept?
24. a) percentage of sales
25. b) percentage of ending accounts receivable
26. c) percentage of average accounts receivable
27. d) direct write off

Answer: a

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

24. The direct write off method of accounting for the impairment of receivables
25. a) is never acceptable.
26. b) is an acceptable method when the effect of not applying the allowance method would be highly
27. c) is specifically disallowed under IFRS.
28. d) usually results in the same net income as the allowance method.

Answer: b

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

25. Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account
26. a) increases the allowance for doubtful accounts.
27. b) has no effect on the allowance for doubtful accounts.
28. c) has no effect on net income.
29. d) decreases net income.

Answer: c

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

26. Under the allowance method of recognizing uncollectible accounts, the entry to recognize the collection of a previously written off uncollectible account
27. a) increases net income.
28. b) has no effect on the allowance for doubtful accounts.
29. c) decreases the allowance for doubtful accounts.
30. d) increases the allowance for doubtful accounts.

Answer: d

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

27. The advantage of relating a company’s bad debt expense to its outstanding accounts receivable is that this approach
28. a) gives a reasonably correct valuation of the receivables in the statement of financial position.
29. b) best relates bad debts expense to the period of sale.
30. c) is the only generally accepted method for valuing accounts receivable.
31. d) makes estimates of uncollectible accounts unnecessary.

Answer: a

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

28. What is the single most important indicator used to identify impaired accounts receivable?
29. a) the customer’s payment history
30. b) the age of the accounts
31. c) credit reports and references
32. d) industry in which the company operates

Answer: b

Difficulty: Easy

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA Financial Reporting

Bloomcode: Knowledge

29. What is the normal journal entry for recording bad debt expense under the allowance method?
30. a) debit Allowance for Doubtful Accounts, credit Accounts Receivable
31. b) debit Allowance for Doubtful Accounts, credit Bad Debt Expense
32. c) debit Bad Debt Expense, credit Allowance for Doubtful Accounts
33. d) debit Accounts Receivable, credit Allowance for Doubtful Accounts

Answer: c

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.

Section Reference: Impairment of Accounts Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

30. Which of the following statements is correct?
31. a) There is no interest included in a zero-interest-bearing note.
32. b) A long-term note’s fair value and present value are always the same.
33. c) All notes contain an interest element because of the time value of money.
34. d) A note is signed by the payee in favour of the maker.

Answer: c

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of short-term notes and loans receivable.

Section Reference: Recognition and Measurement of Short-Term Notes and Loans Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

31. At the beginning of 2017, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2017 year-end statement of financial position and $1,000 as sales revenue for 2017. What effect did this accounting for the note have on Gannon’s net earnings for 2017, 2018, 2019, and its retained earnings at the end of 2019, respectively?
32. a) overstate, overstate, understate, zero
33. b) overstate, understate, understate, understate
34. c) overstate, overstate, overstate, overstate
35. d) None of these answer choices are correct.

Answer: d

Difficulty: Hard

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of short-term notes and loans receivable.

Section Reference: Recognition and Measurement of Short-Term Notes and Loans Receivable

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Analysis

Feedback: Answer is none of the options; it should be: overstate, understate, understate, zero.

32. Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $600,000 to Arch Inc. Arch Inc. will pay $650,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?
33. a) $540,000
34. b) $585,000
35. c) $600,000
36. d) $650,000

Answer: a

Difficulty: Medium

Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of short-term notes and loans receivable.

Section Reference: Recognition and Measurement of Short-Term Notes and Loans Receivable

CPA: Financial Reporting

Bloomcode: Knowledge

Bloomcode: Application

Feedback: ($600,000 × .90) = $540,000