CPA Financial Accounting and Reporting Far Quiz: Account For Accounts Receivable And Allowance

What this quiz covers

This quiz focuses on Account For Accounts Receivable And Allowance, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Debit Allowance for credit losses $22,000; Credit Accounts receivable$22,000.
2. Debit Credit loss expense $22,000; Credit Allowance for credit losses$22,000. (correct answer)
3. Debit Accounts receivable $22,000; Credit Credit loss expense$22,000.
4. Debit Credit loss expense $22,000; Credit Accounts payable$22,000.

Explanation: This question tests the basic journal entry for increasing the allowance for credit losses under ASC 326 when control weaknesses necessitate a higher allowance. Regardless of the reason for the adjustment (control weaknesses, economic changes, etc.), increases to the allowance are recorded by debiting Credit loss expense and crediting Allowance for credit losses for $22,000 (Answer B). Answer A incorrectly shows a write-off entry rather than an allowance adjustment. Answer C reverses the proper accounts and would inappropriately increase receivables while reducing expense. Answer D incorrectly credits Accounts payable, which is unrelated to credit losses on receivables. The fundamental principle is that all increases to the allowance for credit losses flow through Credit loss expense on the income statement, maintaining the matching of estimated losses with the period in which the credit risk increases.

Question 2

1. $15,000. (correct answer)
2. $75,000.
3. $60,000.
4. $135,000.

Explanation: This question requires calculating the adjustment needed to achieve a target allowance percentage under ASC 326. With gross receivables of $2,500,000, a 3$75,000. Since the existing allowance is $60,000 (credit), the required adjustment is$15,000 ($75,000 target minus$60,000 existing), recorded as a debit to Credit loss expense and credit to Allowance for credit losses (Answer A). Answer B incorrectly uses the total target balance rather than the incremental adjustment. Answer C appears to use the existing balance rather than calculating the adjustment. Answer D incorrectly adds amounts rather than calculating the difference. The fundamental concept is that period-end adjustments to the allowance equal the difference between the estimated required balance and the existing balance, not the total estimated losses.

Question 3

1. Increase credit loss expense and increase the allowance for credit losses, reducing net accounts receivable. (correct answer)
2. Decrease sales revenue and decrease accounts receivable for the incremental expected uncollectible amounts.
3. Reclassify the allowance for credit losses to a noncurrent liability because collection is expected to take longer.
4. No effect until specific customer balances are written off, because changes in credit policy are not recognized in estimates.

Explanation: This question examines the financial statement impact of changes in credit terms and their effect on expected credit losses under ASC 326. When a company extends payment terms and observes deteriorating payment behavior, ASC 326 requires updating the allowance for credit losses to reflect increased expected losses, resulting in higher credit loss expense and a larger allowance, thereby reducing net accounts receivable (Answer A). Answer B incorrectly suggests reducing sales revenue, but revenue recognition occurs at the point of control transfer regardless of credit terms or collectability under ASC 606. Answer C incorrectly proposes reclassifying the allowance as a liability, when it remains a contra-asset to accounts receivable regardless of collection timing. Answer D incorrectly states no effect until write-off, contradicting ASC 326's requirement to recognize expected losses immediately. The principle is that changes in credit risk factors must be reflected in the allowance estimate in the period they become known, not deferred until actual losses occur.

Question 4

1. Debit Credit loss expense $45,000; Credit Allowance for credit losses$45,000.
2. Debit Accounts receivable $45,000; Credit Allowance for credit losses$45,000.
3. Debit Retained earnings $45,000; Credit Allowance for credit losses$45,000. (correct answer)
4. Debit Allowance for credit losses $45,000; Credit Retained earnings$45,000.

Explanation: This question addresses the transition accounting for adopting ASC 326 (CECL). Upon initial adoption, the cumulative effect of the change in accounting principle is recorded as an adjustment to beginning retained earnings, not through current period earnings, as specified in ASC 326-10-65-1. The correct entry is: Debit Retained earnings $45,000; Credit Allowance for credit losses$45,000 (Answer C). Answer A incorrectly runs the adoption adjustment through current period Credit loss expense, which would distort current period results. Answer B incorrectly debits Accounts receivable, which would increase the gross receivable balance. Answer D reverses the proper accounts. The principle for accounting changes is that cumulative catch-up adjustments for new standards are typically recorded directly to retained earnings at adoption, preserving the comparability of current period operating results.

Question 5

1. Debit Cash $7,500; Credit Credit loss expense$7,500.
2. Debit Accounts receivable $7,500; Credit Allowance for credit losses$7,500; then Debit Cash $7,500; Credit Accounts receivable$7,500. (correct answer)
3. Debit Cash $7,500; Credit Sales revenue$7,500.
4. Debit Allowance for credit losses $7,500; Credit Cash$7,500.

Explanation: This question addresses the recovery of a previously written-off account under the allowance method. When collecting a previously written-off receivable, the proper treatment requires two entries: first, reinstate the receivable by reversing the original write-off (Debit Accounts receivable; Credit Allowance for credit losses), then record the cash collection (Debit Cash; Credit Accounts receivable) - Answer B. Answer A incorrectly credits Credit loss expense directly, bypassing the receivable reinstatement and potentially understating gross receivables. Answer C incorrectly credits Sales revenue, which would overstate revenue by recognizing the same sale twice. Answer D incorrectly debits the allowance account when receiving cash, which doesn't properly reflect the transaction flow. The two-step process ensures proper tracking of gross receivables and maintains the integrity of the allowance account while providing transparency about recovery patterns.

Question 6

1. Debit Credit loss expense $16,000; Credit Allowance for credit losses$16,000.
2. Debit Allowance for credit losses $24,000; Credit Credit loss expense$24,000.
3. Debit Credit loss expense $24,000; Credit Allowance for credit losses$24,000. (correct answer)
4. Debit Credit loss expense $20,000; Credit Allowance for credit losses$20,000.

Explanation: This question tests the adjustment calculation when the allowance for credit losses has an unusual debit balance. The allowance typically has a credit balance, but excessive write-offs can create a temporary debit balance of $4,000. To achieve the desired$20,000 credit balance, the company must record a $24,000 credit to the allowance ($4,000 to eliminate the debit + $20,000 to create the credit), with the offsetting debit to Credit loss expense (Answer C). Answer A only considers the$20,000 target without accounting for the existing $4,000 debit balance. Answer B incorrectly reverses the entry. Answer D uses an incorrect calculation of the adjustment amount. The key principle is that when calculating allowance adjustments, you must consider the existing balance regardless of whether it's a normal credit or unusual debit balance, adjusting from the current position to the desired ending balance.

Question 7

1. Debit Allowance for credit losses $25,000; Credit Accounts receivable$25,000. (correct answer)
2. Debit Credit loss expense $25,000; Credit Accounts receivable$25,000.
3. Debit Accounts receivable $25,000; Credit Allowance for credit losses$25,000.
4. Debit Allowance for credit losses $25,000; Credit Sales revenue$25,000.

Explanation: This question addresses the proper accounting for writing off a specific uncollectible account under the allowance method per ASC 326. When a specific account is determined to be uncollectible, the write-off reduces both the gross accounts receivable and the allowance for credit losses, with no impact on current period expense since losses were previously estimated. The correct entry is: Debit Allowance for credit losses $25,000; Credit Accounts receivable$25,000 (Answer A). Answer B incorrectly charges the write-off to current period expense, which would double-count the loss since it was already included in the allowance estimate. Answer C reverses the proper accounts, which would incorrectly increase receivables and the allowance. Answer D incorrectly credits Sales revenue, which violates the matching principle and revenue recognition standards. The fundamental concept is that write-offs under the allowance method utilize the previously established allowance rather than creating new expense.

Question 8

1. Record a write-off of $160,000 at year-end by debiting credit loss expense and crediting accounts receivable.
2. Adjust the year-end allowance for credit losses (with a corresponding credit loss expense) to reflect the expected shortfall, while keeping the receivable recorded until written off. (correct answer)
3. Disclose the bankruptcy only; do not adjust the allowance because the bankruptcy occurred after year-end.
4. Reverse previously recognized revenue for $160,000 at year-end because collectability is no longer expected.

Explanation: This question addresses subsequent events and their impact on year-end credit loss estimates under ASC 326 and ASC 855. When a customer bankruptcy occurs after year-end but relates to conditions existing at year-end, it provides evidence about the collectability that should be reflected in the year-end allowance for credit losses through an adjustment to credit loss expense (Answer B). Answer A incorrectly suggests writing off the receivable at year-end, but write-offs require formal approval and typically occur when uncollectibility is confirmed. Answer C incorrectly treats this as a non-adjusting subsequent event, when bankruptcy due to year-end conditions requires adjustment. Answer D incorrectly suggests reversing revenue, which violates revenue recognition principles since control of goods/services already transferred. The principle is that subsequent events providing evidence about conditions existing at the balance sheet date require adjustment of estimates, while the actual write-off occurs in the subsequent period.

Question 9

1. Debit Allowance for credit losses $12,000; Credit Credit loss expense$12,000.
2. Debit Credit loss expense $30,000; Credit Allowance for credit losses$30,000.
3. Debit Credit loss expense $12,000; Credit Allowance for credit losses$12,000. (correct answer)
4. Debit Accounts receivable $12,000; Credit Allowance for credit losses$12,000.

Explanation: This question tests the application of ASC 326 (CECL) for adjusting the allowance for credit losses to its required ending balance. The key fact is that the existing allowance has a credit balance of $18,000, but management's year-end assessment indicates it should be$30,000, requiring an increase of $12,000. Under ASC 326, entities must record credit loss expense to adjust the allowance to reflect expected lifetime losses, making the correct entry: Debit Credit loss expense$12,000; Credit Allowance for credit losses $12,000 (Answer C). Answer A incorrectly reverses the accounts, reducing rather than increasing the allowance. Answer B incorrectly uses the total desired balance ($30,000) rather than the adjustment amount ($12,000). Answer D incorrectly debits Accounts receivable, which would increase the gross receivable balance rather than adjust the allowance. The key principle is that the allowance adjustment equals the difference between the desired ending balance and the current balance, recorded through credit loss expense.

Question 10

1. Recognize credit losses only when it is probable that a loss has been incurred, based primarily on past-due status.
2. Estimate expected lifetime credit losses using relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. (correct answer)
3. Estimate only the next 12 months of expected credit losses for trade receivables and ignore longer-term expectations.
4. Measure impairment as the difference between the receivable’s carrying amount and its fair value through profit or loss.

Explanation: This question tests understanding of the Current Expected Credit Loss (CECL) model under ASC 326 for measuring credit losses on financial assets. ASC 326 requires entities to estimate expected lifetime credit losses using all available relevant information, including historical experience, current conditions, and reasonable and supportable forecasts (Answer B). Answer A describes the previous incurred loss model that was replaced by CECL, which delayed recognition until losses were probable. Answer C incorrectly limits the measurement period to 12 months, whereas CECL requires lifetime expected losses for trade receivables. Answer D describes a fair value measurement approach that is not applicable to trade receivables under ASC 326. The CECL model represents a fundamental shift from incurred to expected losses, requiring earlier recognition of credit losses based on forward-looking information rather than waiting for triggering events.

Question 11

1. $63,000 reflecting the total costs of the factoring arrangement including estimated recourse liability (correct answer)
2. $48,000 representing only the commission charged by the finance company without recourse considerations
3. $80,000 combining commission, security deposit retention, and estimated recourse liability amounts
4. $32,000 calculated as the security deposit plus estimated recourse liability components only

Explanation: In a factoring arrangement with recourse, the loss on sale includes: (1) commission expense of $400,000 × 12$48,000, and (2) estimated recourse liability of $15,000. The security deposit of$400,000 × 8% = $32,000 is recorded as a receivable from the factor, not as a loss. Total loss =$48,000 + $15,000 =$63,000. Option B ignores the recourse liability. Option C incorrectly treats the security deposit as a loss. Option D omits the commission, which is the primary cost of factoring.

Question 12

1. $39,600 representing the credit balance maintained from the percentage of sales calculation
2. $71,100 calculated by adding the bad debt provision to the existing credit balance in the account (correct answer)
3. $43,100 reflecting the cumulative effect of all transactions including write-offs and recoveries during the year
4. $35,000 representing only the impact of the current year bad debt expense calculation on the account balance

Explanation: Under the percentage of sales method, bad debt expense = $2,200,000 × 1.8$39,600. This amount is added to the existing allowance balance. The $31,500 credit balance already reflects the write-offs ($28,000 debit) and recoveries ($4,500 credit) during the year. Ending balance =$31,500 + $39,600 =$71,100. Option A shows only the bad debt expense, not the ending balance. Option C appears to incorrectly recalculate the pre-adjustment balance. Option D uses an unexplained calculation method.

Question 13

1. $255,000 calculated as the original assignment less the advance received from the finance company
2. $300,000 since all originally assigned receivables remain on Horizon's books until the advance is fully repaid
3. $120,000 representing the remaining assigned receivables that have not yet been collected by Horizon (correct answer)
4. $75,000 representing the receivables remaining after collections, reduced by the portion related to the outstanding advance

Explanation: When you encounter accounts receivable assignment questions, remember that assignment is a financing arrangement where the company retains ownership of the receivables and simply uses them as collateral for a loan. In this problem, Horizon assigned $300,000 of receivables but still owns them all. The key insight is that the carrying amount of assigned receivables on Horizon's balance sheet reflects only the uncollected portion of the originally assigned receivables. Here's what happened: Horizon assigned $300,000 in receivables and received an$255,000 advance (85% × $300,000). When Horizon collected$180,000 from customers, they remitted this entire amount to Metro Finance. This reduces the assigned receivables balance to $120,000 ($300,000 - $180,000 collected). Answer A incorrectly suggests you subtract the advance received from the original assignment. The advance is a liability, not a reduction of the receivables asset. Answer B wrongly assumes all originally assigned receivables stay at full value regardless of collections - this ignores basic accounting for collections. Answer D makes the error of trying to net the receivables against the outstanding loan balance, but these are separate items on the balance sheet. The correct answer is C: $120,000 represents the remaining assigned receivables that haven't been collected yet. Study tip: In assignment problems, always track two separate items: the receivables balance (reduced only by collections) and the loan payable (reduced by remittances to the finance company). Don't net them against each other on the balance sheet.

Question 14

1. $445,200 calculated by failing to properly account for write-offs reducing the gross receivables balance
2. $441,700 representing gross receivables reduced by only the current year bad debt expense provision
3. $434,700 reflecting an incorrect treatment of the recovery transaction's impact on the allowance
4. $438,400 calculated as ending gross receivables less the adjusted allowance balance after all transactions (correct answer)

Explanation: When you encounter accounts receivable problems on the CPA exam, you need to track changes to both gross receivables and the allowance account separately, then calculate net realizable value as the difference between them. Let's work through this systematically. Start with gross receivables: $420,000 beginning balance +$1,850,000 credit sales - $1,790,000 collections -$21,500 write-offs = $458,400. Note that the$3,500 recovery increases gross receivables since you're reinstating a previously written-off account, giving us $461,900. For the allowance account: $16,800 beginning balance -$21,500 write-offs + $24,300 bad debt expense +$3,500 recovery = $23,100. The recovery affects the allowance because you're reversing the previous reduction from the write-off. Net realizable value = $461,900 -$23,100 = $438,400. Answer D correctly represents this complete calculation. Answer A ($445,200) fails to reduce gross receivables for the write-offs, treating them as if they don't affect the gross balance. Answer B ($441,700) only reduces gross receivables by the current year's bad debt expense provision rather than using the proper allowance calculation. Answer C ($434,700) incorrectly handles the recovery transaction, likely by not properly reinstating both the receivable and adjusting the allowance. Study tip: Always set up T-accounts for both gross receivables and the allowance when working through complex receivables problems. This helps you track each transaction's dual effects and avoid the common trap of confusing cash collections with write-offs or recoveries.

Question 15

1. $14,300 representing the total estimated uncollectible amount based on the aging analysis
2. $11,100 calculated as the required adjustment to achieve the target allowance balance (correct answer)
3. $17,500 including an additional provision for unexpected collection difficulties in the following year
4. $7,900 representing only the adjustment for accounts that have significantly aged during the period

Explanation: First, verify ending A/R: $180,000 +$920,000 - $885,000 -$22,000 = $193,000 (which matches the aging total). Calculate required allowance: Current$120,000 × 2% = $2,400; 30-60 days$45,000 × 8% = $3,600; 61-90 days$18,000 × 25% = $4,500; Over 90 days$10,000 × 60% = $6,000. Total required allowance =$16,500. Since there's a $3,200 credit balance before adjustment, bad debt expense =$16,500 - $3,200 =$11,100. Option A shows the total required allowance, not the expense. Option C adds an inappropriate additional provision. Option D appears to use an incorrect calculation method.

Question 16

1. $43,080 increase to the allowance account (correct answer)
2. $52,080 representing the total required allowance balance rather than the adjustment amount
3. $48,080 calculated by omitting the effect of recoveries on the current allowance balance
4. $38,080 reflecting an incorrect application of the percentage to net rather than gross receivables

Explanation: First, calculate ending gross accounts receivable: $850,000 beginning +$2,400,000 sales - $2,350,000 collections -$38,000 write-offs + $5,000 recovery =$867,000. Next, calculate the current allowance balance: $42,000 beginning -$38,000 write-offs + $5,000 recovery =$9,000. The recovery increases both A/R and the allowance when the account is reinstated. Required allowance = $867,000 × 6$52,080. Adjustment needed = $52,080 -$9,000 = $43,080 increase.

Question 17

1. Debit Cash $45,000, Credit Accounts Receivable$45,000, then Debit Notes Payable $42,200, Interest Expense$2,800, Credit Cash $45,000
2. Debit Cash $45,000, Credit Pledged Accounts Receivable$45,000, then Debit Notes Payable $45,000, Credit Cash$45,000
3. Debit Cash $45,000, Credit Accounts Receivable$45,000, then Debit Notes Payable $45,000, Credit Cash$45,000 (correct answer)
4. Debit Cash $42,200, Interest Expense$2,800, Credit Accounts Receivable $45,000, recording the net amount received after bank deductions

Explanation: In a pledge arrangement, the company retains ownership of receivables and records normal collection entries. Collection: Dr. Cash $45,000, Cr. A/R$45,000. Remittance: Dr. Notes Payable $45,000, Cr. Cash$45,000 (the full collection reduces the loan balance). Interest expense would be recorded separately when incurred or paid, not when remitting collections. Option A incorrectly reduces the loan by only the net amount after interest. Option B uses 'Pledged A/R' which isn't necessary since ownership is retained. Option D incorrectly nets the collection against interest expense.

Question 18

1. Gain of $5,200 calculated by including the full recourse asset value without considering transaction costs properly
2. Gain of $1,400 representing the excess of total consideration over the net carrying amount of receivables sold
3. Loss of $16,800 reflecting all transaction costs and the difference between receivables sold and cash received
4. Loss of $13,600 calculated as the difference between carrying amount and total consideration received (correct answer)

Explanation: When you encounter questions about sales of receivables under FASB ASC 860, focus on calculating the gain or loss by comparing the carrying amount of assets given up versus the total consideration received (including any retained interests). In this transaction, you need to identify what Sunset gave up versus what they received. Sunset transferred receivables with a carrying amount of $150,000. In return, they received$135,000 cash plus a recourse asset valued at $3,200, totaling$138,200 in consideration. However, they also incurred $1,800 in transaction costs, which reduces the net consideration to$136,400. The calculation is: Net consideration received ($136,400) minus carrying amount of receivables ($150,000) equals a loss of $13,600. Answer A incorrectly adds the full recourse asset value without properly deducting transaction costs, leading to an improper gain calculation. Answer B treats this as a gain by miscalculating the relationship between consideration and carrying amount—it fails to properly account for transaction costs reducing the net proceeds. Answer C overstates the loss by incorrectly treating the entire difference between receivables and cash received ($15,000) plus transaction costs as the loss, ignoring the value of the recourse asset entirely. Answer D correctly recognizes this as a loss of $13,600, properly accounting for all components: cash received, fair value of retained interests, transaction costs, and the original carrying amount. Remember: In receivables sales, always calculate total consideration received (cash plus retained interests) minus transaction costs, then compare to the carrying amount of assets transferred.