Intermediate Accounting Chapter 2

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Receivables

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______________, in the broadest sense, represent any legitimate claim from others for money, goods or services.

In the narrower sense and ascontemplated in accounting, ___________ represent claims that are expected to be settled by receipt of cash.

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True

Back 2

t/f

For accounting purposes, receivables include the following:

1. Amounts collectible from customers and others, most frequently arising from sales of merchandise, claims for money lent, or the performance of services. They may be on open accounts evidenced by time drafts or promissory notes.

2. Accrued revenues, such as accrued interest, commissions, rental and others.

3. Other items such as loans and advances to officers, employees, affiliated companies, customers or other outside parties; legitimate claims against suppliers and insurance companies; and otherclaims arising from nonrecurring transactions such as calls for subscriptions receivables and disposal of property.

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• Trade Receivables

• Non-trade Receivables

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Classification of receivables according to source:

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Trade Receivables

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Receivables arising from sale of goods or services in the normal course of business.

These receivables should include only charges for actual sales completed (when there has already been actual or constructive delivery of goods, or performance of services) on or before the end of the reporting period.

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Non-trade Receivables

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Receivables that arise from sources other than from sale of goods or services in the normal course of business.

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• Loans to officers and employees• Advances to affiliates

• Accrued interest and dividends

• Deposits to guarantee performance or payment or to cover possible damages or losses

• Subscriptions for the entity's equity securities

• Deposit with creditors

• Claims for losses and damages

• Claims for tax refunds or rebates

• Claims against common carriers for damaged or lost goods

Back 6

Specific examples of non-trade receivables include:

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current assets

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In a properly classified statement of financial position, trade receivables are generally classified as ____________ because they are collectible within the entity's normal operating cycle.

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Normal Operating Cycle

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is the period required for:

• cash to be converted into inventories through purchase and production.

• inventories into receivables through sale.

• receivables back into cash or cash equivalents through collection.

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current assets

disclosed

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if the normal operating cycle of the business extends beyondtwelve months because of long credit terms, as in the caseinstallment receivables (e.g., installment sales for household appliances), in which such accounts are an integral part of working capital, it is appropriate to classify the receivables as __________; however, the amount or estimate thereof not collectible within twelve months should be _________.

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TRUE

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t/f

Non-trade receivables that are expected to be collected within 12 months from the end of the reporting period are also classified as current assets, regardless of the length of the entity's normal operating cycle.

Non-trade receivables that are not reasonably expected to be collected within twelve months from the end of the reporting period are reported as non-current assets.

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TRUE

Back 11

t/f

an entity shall recognize a financial asset in its statement of financial position when and only when, entity becomes a party to the contractual provision of the instrument.

Thus, trade receivables are recognized simultaneous to the recognition of related revenues, either from sale of goods or rendering of services.

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transaction price

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Trade receivables are initially recognized at the __________.

is the amount to which an entity expects to be entitled in change for the transfer of goods and services.

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Accounts Receivable

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Trade receivables on open accounts and are not evidenced by promissory notes or time drafts are called __________.

These are evidenced by sales invoices, delivery receipts and other similar documents.

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Trade discounts

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also known as volume or quantity discounts, are means of converting a catalog list price to the prices actually charged to the buyer.

These may be used to make price differentials among different classes of customers, varying quantities, or changes in prices.

it is also used to avoid frequent changes in catalogs and to hidethe true invoice price from competitors.

They are commonly quoted inpercentage, and at times, series of percentages.

are not recognized for financial accounting purposes. They are deducted from the list price prior to recording the accounts receivable arising from a credit sales transaction.

To state simply, both accounts receivable and the related revenue are always recorded net of ___________.

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Cash discounts

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or sales discounts from the seller's point of view, are reductions from the sales price as an inducement for prompt payment of an account.

They are expressed in terms which may read as: 2/10, n/30 (2% discount is granted if account is paid within 10 days from the invoice date, gross amount due in 30 days); 3/15, n/60 (3% discount granted if account is paid within 15 days from the invoice date, grossamount due in 60 days).

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• Gross price method

• Net price method

• Allowance method.

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The timing of the recognition of the cash discounts is based on the method of accounting adopted by the company for purchases and the related accounts payable. These methods are as follows:

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TRUE

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t/f

Cash discounts are recognized (a) when taken using the gross price method, (b) when not taken using the net price method and (c) when offered using the allowance method.

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Gross Price Method

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Under this method, both the account receivable and sales are initially recorded at the gross sales price with no accounting recognition of the available cash discount until it is actuallytaken. When the discount is taken, it is debited to the sales discounts account.

lacks conceptual validity, but it is the simplest and most widely used method because the cash discount is usually immaterial and the record keeping is less complicated.

is the most popular because of its convenience. However, it may not faithfully represent the amount of sales reported in the statement of comprehensive income, specifically, whensignificant amounts of receivable are collected beyond the discount period.

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True

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t/f

Under the gross price method, in as much as the sales discount is recorded only when taken, it is possible that sales may have been recorded in one reporting period, but the cash discount may have been taken by thecustomer upon payment in the subsequent period. Thus, if no adjustment would be taken up at year-end, both the sales revenue and accounts receivable are overstated on the financial statements. To avoid such misstatement, an entry to set up anticipated sales discounts must beprepared at year-end, as follows:

(dr.) Sales Discount

(cr.) Allowance for Sales Discount

For convenience, the aboveadjusting entry is reversed at the beginning of the subsequent accounting period, so that the eventual collection is recorded by merely debiting cash and crediting accounts receivable at the amount of cash collected.

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TRUE

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t/f

The sales account is a mixture of two items of revenues:

• revenue from sales to customers; and

• the finance income earned by the entity because of the lapse of the discount period granted.

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Net Price Method

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Under the this method,

• both the accounts receivable and the sales are recorded at the sales price less the available cash discount.

• the company does not recognize the cash discount if it collects the account within the discount period.

is theoretically superior over the gross method, because it initially recognizes the accounts receivable at its amortized cost.This method requires that variable considerations resulting from discounts, rebates, refunds, credits, priceconcessions, incentives, penalties or other similar items shall be estimated by the entity to minimize reversal of revenue in the future when an uncertainty has been resolved.

This method requires an adjusting entry at year-end for sales discounts forfeited on accounts receivable that have passed the period. The year-end adjusting entry is:

(dr.) A/R

(cr.) Sales Discounts Forfeited

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Sales Discounts Forfeited (or Sales Discounts Not Taken)

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If collection is made beyond the discount period and therefore, the cash discount is not taken by the customer, the difference between the amount collected (the gross price) and the amount originally recorded (thenet price) is credited to the ___________ account.

The balance of this account is reported as other operating income (or finance income in profit or loss section on thestatement of comprehensive income.

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Allowance Method

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Under the this method,

• the accounts receivable is recorded at the gross sales price, the sales revenue is recorded at net amount and the available cash discount is recorded as a credit in the valuation account, Allowance for Sales Discounts.

• The sales discount is recognized when it is offered to customer using the account allowance for sales discount.

• an adjusting entry is made at year-end when the account remains uncollected and the discount period has already lapsed. The adjustment cancels the related allowance for salesdiscount, thus increasing the amortized cost of accounts receivable. Such year-end adjusting entry is:

(dr.) Allowance for Sales Discounts

(cr.) Sales Discounts Forfeited

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Allowance for Sales Discount account

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is a valuation account that reduces accounts receivable to its amortized cost.

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Time draft

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a written order to pay at a later date.