FAR 3.2 - Trade Receivables

Question 1

Accounts receivables from purchasers of the company’s goods and services

Answer 1

Trade receivables

Question 2

Accounts receivables from persons other than customers, such as advances to employees, tax refunds, etc.

Answer 2

Non-trade receivables

Question 3

What does “2/10 n/30” discount mean?

Answer 3

A 2% discount on sales price If the payment is made within 10 days

Question 4

This method records a sale without regard to the available discount:

Answer 4

Gross method

Question 5

If payment is received within the discount period under the gross method, what journal entry is posted?

Answer 5

The sales discount account (contra-revenue) is debited to reflect the discount

Question 6

This method records sales and accounts receivable net of the available discount when a sale is made:

Answer 6

Net method

Question 7

If payment is received after the discount period using the net method, what journal entry is made?

Answer 7

Aa sales discount not taken account (revenue) must be credited

Question 8

What are the two methods of recognizing uncollectible accounts receivables? And which is acceptable under GAAP?

Answer 8

1. Direct write off method
2. Allowance method = acceptably under GAAP

Question 9

What are the two methods of estimating uncollectible or doubtful accounts under the allowance method?

Answer 9

1. Percentage of accounts receivable at year-end method
2. Aging of receivables method

Question 10

This is the process whereby the company uses existing accounts receivable as collateral for a loan:

Answer 10

Pledging

Question 11

The process by which a company can convert its receivables into cash by assigning them to a factor either with or without recourse:

Answer 11

Factoring

Question 12

Factoring ________ recourse means the sale is final and that the assignee (the factor) assumes the risk of any losses on the collections:

Answer 12

Without

Question 13

Accounts receivable are transferred to a different entity, such as a trust or subsidiary in this situation. The entity would then sell securities that are collateralized by the accounts receivable. Investors receive cash as the accounts receivable are paid.

Answer 13

Securitization

Question 14

In a note receivable, what is the face value, maturity value, and present value?

Answer 14

Face value = principal
Maturity value = principal + interest
Present value = face value - unearned interest