CHAPTER 4

1.​ Define receivables.

-​ Receivables are another type of financial asset that represents a contractual right that
entitles one entity to receive and obtain cash or another form of financial asset from a
different business entity. In addition, retailers and manufacturers categorize receivables
using trade receivables and non-trade receivables.

2.​ Explain the classification and presentation of receivables in the statement of financial position.
Since trade receivables are expected to be collected and realized within a normal
operating cycle, whichever is longer, they are classified as current assets in the financial
statement. Meanwhile, regardless of the duration of the operating cycle, non-trade
receivables are regarded as and identified as current assets if they are expected to be
realized in cash within a year. It will be categorized as a non-current asset if it is not
collectible within a year. Additionally, when trade and non-trade receivables are currently
collectible, they must be presented in the financial statement's face as a single line item
referred to as "trade and other receivables," but disclosures must be made in the notes to
the financial statements regarding the specifics of the total of trade and other receivables.

3.​ Explain the treatment of customers’ credit balances.

-​ Customers' overpayments, returns, allowances, and advance payments result in credit
balances in accounts receivable, which is referred to as customer credit balances.
Moreover, these credit balances are regarded as current liabilities and cannot be offset
against the debit balances in other customer accounts unless they are insignificant, in
which case simply the net accounts receivable may be shown.

4.​ Explain the initial and subsequent measurement of trade accounts receivable.
-​ Financial assets are said to be measured initially at fair value plus the transaction cost
that is attributable directly to the acquisition. Typically, the transaction price represents
the fair value. The fair value and face amount are equal for short-term receivables. Thus,
accounts receivables are measured initially at the original invoice amount or face value.
Moreover, the subsequent measurement of accounts receivables is at amortized cost.

5.​ Explain the two methods of recording accounts receivable and credit sales.
-​ The gross method, which is more widely and often used since it is easier to apply, is one
of two ways to record accounts receivable and sales. Under this method, accounts
receivable and sales are recorded at the gross amount of the invoice. While the net
method records accounts receivable and sales using the net amount of the invoice, it
subtracts the cash discount from the invoice price.

6.​ Explain the allowance method of accounting for bad debts.

If the accounts have a poor chance of being collected, the allowance method requires the
acknowledgment of bad debt losses. The “allowance for doubtful accounts” is a deduction from
accounts receivable.

7.​ Explain the direct write off method of accounting for bad debts.
 -​ Only when it is determined that the accounts are worthless or uncollectible does the
direct writeoff method involve the recognition of a bad debt loss. By debiting bad debts
and crediting accounts receivable, uncollectible accounts are recorded.

8.​ Give the proforma entry under the allowance method for each of the following:
- Doubtful accounts
- Accounts receivable proved to be worthless
- Recovery of accounts previously written off
9.​ Give the proforma entry under the direct writeoff method for each of the following:
- Doubtful accounts
- Accounts receivable proved to be worthless
- Recovery of accounts previously written off
10.​ Explain the presentation of doubtful accounts in the income statement.
-​ If the sales manager is in charge of granting credit and collecting accounts, doubtful
accounts will likely be shown as a distribution cost on the income statement. Contrarily, if
the granting of credit and collection of accounts are under the supervision of the officer in
charge other than the sales managers, doubtful accounts are considered and shown as
administrative expenses in the income statement. Doubtful accounts are categorized as
administrative expenses in the absence of any contrary statement.

CHAPTER 5
1.​ What are the three methods of estimating doubtful accounts?
-​ The three methods of estimating doubtful accounts are: first, the aging of accounts
receivable, or the "statement of financial position approach;", second, the percent of
accounts receivable, or also the statement of financial position approach; and lastly, the
percent of sales, or the "income statement approach".

2.​ Explain the aging method of estimating doubtful accounts.

-​ This approach is used to determine whether an account is past due or not. An allowance
is then calculated through multiplying each classification's sum by the entity's rate or
percent of loss for each category. This approach has the benefit of correctly representing
receivables in the financial position at net realizable value.

3.​ Explain the percentage of accounts receivable method of estimating doubtful accounts.
-​ The needed allowance balance is calculated by multiplying a certain rate by the open
accounts at the end of the period; the rate is often chosen based on the entity's prior
performance. This method is easy to use and has the benefit of reporting receivables at
their estimated realizable value.

4.​ Explain why the aging method and percentage of accounts receivable are known as “statements
of financial approach”.
 5.​ Explain the percentage of sales method of estimating doubtful accounts.
-​ The doubtful account expenses are calculated by multiplying the total annual sales by a
specific rate. The rate could be applied on both total sales and credit sales. The rate to
be applied is theoretically determined by dividing the charge sales from preceding years
by the bad debt losses from those years. The current year's charge sales are multiplied
by the rate thus derived to determine the disputed accounts expense.

6.​ Explain why the percentage of sales method is known as “income statement approach”.
7.​ When is an account past due?
-​ If an account is past due, it will be based on the credit terms. An account is already past
due when the agreed-upon maximum credit term has already passed.

8.​ Explain the treatment of an inadequate or excessive allowance for doubtful accounts.
9.​ Is a debit balance in the allowance for doubtful accounts possible?
10.​ What does a debit balance in the allowance for doubtful accounts indicate?

CHAPTER 6
1.​ Define notes receivable.
-​ The term "note receivables" refers to claims that are supported by a formal, written
promise to pay; these promises often take the form of notes. Only claims resulting from
the sale of goods or services in the regular course of business are represented by notes
receivable.

2.​ What is a negotiable promissory note?

-​ It is a formal written agreement that a person, also known as the maker, creates and
signs to signify a promise to pay money to another person, usually known as the payee,
immediately upon demand or at a certain, predetermined future date.

3.​ Explain the treatment of dishonored notes receivable.

-​ Notes that have previously matured but have not yet been paid are referred to as
dishonored notes. Typically, dishonored notes receivables are withdrawn from the notes
receivables account and then transferred to the accounts receivables account. The face
amount, interest, and any fees should all be included in the amount charged to accounts
receivable.

4.​ Explain the initial measurement of short-term notes receivable.

-​ Short-term notes receivable are initially valued and measured at face value. Short-term
note receivable cash flows are not discounted since the effect of discounting is often not
material

5.​ Explain the initial measurement of long-term notes receivable.

-​ If the long-term notes are interest-bearing or not, the initial measurement of such
receivables will vary. The face value of interest-bearing long-term notes, which is their
current value at the time of issue, will serve as the initial measurement. Contrarily,
non-interest bearing notes are originally valued at their present value, which is the
discounted value of future cash flows calculated using the effective interest rates.
6.​ What is the meaning of non interest bearing note receivable?
-​ Since all notes inherently incorporate interest, the phrase "non-interest bearing note" is a
misnomer. The interest is simply not indicated as a distinct rate, but is instead a part of
the face amount.

7.​ Explain the subsequent measurement of long-term notes receivable.

-​ The subsequent measurement of long term notes receivable is at amortized cost using
the effective interest method.

8.​ Explain compounding of interest in relation to interest bearing notes receivable.

9.​ What is the meaning of the present value of notes receivable?
10.​ Explain the computation of present value of long-term notes receivable.