ACCCOB2_3_Receivables

Non-trade receivables are classified as current assets only if reasonably expected to be realized within one year, the length of the operating cycle, notwithstanding.

• T

• F

When an accounts receivable is sold outright, the accounts receivable has been pledged.

• T

• F

The factor assumes the risk of collectibility and absorbs any credit losses in collecting the accounts receivable.

• T

• F

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

• Within one year or within the normal operating cycle, whichever is shorter

• Within one year or within the normal operating cycle, whichever is longer

• Within the normal operating cycle

• Within one year

Accounts receivable should normally be reported at

• Current value plus accrued interest

• Expected amount to be received

• Present value of future cash receipts

• Current value less expected collections

Why is the allowance method preferred over the direct write-off method of accounting for bad debts?

• Estimates are used

• Improved matching of bad debts expense with revenue

• Determining worthless accounts under direct write-off method is difficult to do

• Allowance method is used for tax purposes

Why would an entity sell accounts receivable to another entity?

• accelerate access to amount collected

• limit its legal liability

• comply with customer agreements

• improve the quality of credit granting process

A method of estimating bad debts that focuses on the balance sheet

• Direct write-off

• Net credit sales

• Aging the trade accounts receivable

• Credit sales

A debit balance in the allowance for doubtful accounts

• Should never occur

• May exist even after the year-end adjustments for uncollectible accounts

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

• May occur before the year-end adjustment for uncollectible accounts

What is effective interest?

• Interest based on the average interest rate.

• Interest based on the market interest rate.

• Interest based on the bank prime interest rate.

• Interest based on the stated interest rate.