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Chapter 9 – Exercises & Cases

Multiple Choice Questions​

  1. The revenue recognition principle states that revenue should be recognized:
    a) When cash is received
    b) When it is earned
    c) When invoice is sent
    d) When customer orders
    Answer: b) Revenue is recognized when earned (goods delivered or services performed).

  2. The allowance method for uncollectible accounts:
    a) Writes off accounts when they become uncollectible
    b) Estimates uncollectible accounts and creates allowance
    c) Only used for large accounts
    d) Not allowed in Luxembourg
    Answer: b) Allowance method estimates uncollectible accounts and creates an allowance account.

  3. Accounts Receivable Turnover is calculated as:
    a) Average Receivables ÷ Net Credit Sales
    b) Net Credit Sales ÷ Average Receivables
    c) Total Sales ÷ Receivables
    d) Receivables ÷ Sales
    Answer: b) Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable.

  4. Which PCN account is used for Accounts Receivable - Customers?
    a) 400000
    b) 410000
    c) 420000
    d) 430000

    Answer: b) 410000 is Accounts Receivable - Customers (Class 4).

  5. When an account receivable becomes uncollectible and is written off:
    a) Bad Debt Expense is increased
    b) Allowance for Doubtful Accounts is decreased
    c) Accounts Receivable is decreased
    d) Both b and c
    Answer: d) Both Allowance for Doubtful Accounts and Accounts Receivable are decreased.

  6. Notes receivable differ from accounts receivable in that notes receivable:
    a) Are informal
    b) Usually don't include interest
    c) Are formal written promises with interest
    d) Are always short-term
    Answer: c) Notes receivable are formal written promises to pay, usually with interest.

  7. The aging of receivables method is a:
    a) Balance sheet approach
    b) Income statement approach
    c) Direct write-off method
    d) Cash basis method
    Answer: a) Aging of receivables is a balance sheet approach to estimating bad debts.

  8. VAT on a credit sale is recognized:
    a) When cash is received
    b) When sale is made
    c) When account is collected
    d) When account is written off
    Answer: b) VAT is recognized when the sale is made (revenue recognized).

  9. Average Collection Period is calculated as:
    a) 365 ÷ Accounts Receivable Turnover
    b) Accounts Receivable Turnover ÷ 365
    c) Receivables ÷ Sales × 365
    d) Sales ÷ Receivables × 365
    Answer: a) Average Collection Period = 365 Days ÷ Accounts Receivable Turnover.

  10. In Luxembourg, VAT on an uncollectible account:
    a) Is always lost
    b) May be recoverable with proper documentation
    c) Is never recoverable
    d) Is only recoverable for large amounts
    Answer: b) VAT may be recoverable on uncollectible accounts with proper documentation and following Luxembourg VAT rules.

Questions​

  1. Explain the revenue recognition principle. How does it apply to credit sales and accounts receivable?

  2. Compare the direct write-off method and the allowance method for uncollectible accounts. Why is the allowance method preferred?

  3. Explain the balance sheet approach (aging method) for estimating bad debts. How is it calculated?

  4. What is accounts receivable turnover? How is it calculated, and what does it indicate about receivables management?

  5. How do notes receivable differ from accounts receivable? When might a business use notes receivable?

  6. Explain how VAT is handled when an account receivable becomes uncollectible in Luxembourg. What documentation is required?

  7. What are the PCN account classifications for receivables in Luxembourg? How are customer accounts managed?

  8. How can receivables management be improved? What strategies help reduce the average collection period?

  9. Explain the percentage of completion method for long-term projects. When is it used?

  10. What are other types of receivables besides accounts receivable? Give examples and explain how they're accounted for.

Problems Set A​

Problem A-1: Recording Credit Sales

Record the following credit sales with proper PCN accounts: a) Credit sale €2,000 (excluding VAT), VAT 17%, to Customer A b) Credit sale €1,500 (excluding VAT), VAT 3%, to Customer B c) Collection of €2,340 from Customer A

Problem A-2: Allowance Method - Income Statement Approach

A business has credit sales of €100,000 and estimates bad debts at 2% of credit sales. The allowance account has a €500 credit balance. Prepare the adjusting entry.

Problem A-3: Allowance Method - Balance Sheet Approach

Prepare an aging schedule and calculate the allowance needed:

Receivables:

  • Current: €10,000
  • 1-30 days: €5,000
  • 31-60 days: €3,000
  • Over 60 days: €2,000

Estimated Uncollectible:

  • Current: 1%
  • 1-30 days: 3%
  • 31-60 days: 10%
  • Over 60 days: 25%

Current allowance balance: €300 credit

Problem A-4: Accounts Receivable Turnover

Calculate accounts receivable turnover and average collection period:

  • Net Credit Sales: €120,000
  • Beginning Receivables: €15,000
  • Ending Receivables: €25,000

Problem A-5: Writing Off Accounts

A business writes off Customer C's account of €800. Later, Customer C pays €500. Record both transactions.

Problems Set B​

Problem B-1: Complete Receivables Cycle

A Luxembourg business has the following transactions:

  1. Credit sales: €50,000 (excluding VAT), VAT 17%
  2. Collections: €40,000
  3. Write-offs: €1,000
  4. Recoveries: €200

Required: a) Record all transactions b) Calculate ending receivables c) Estimate bad debts using income statement approach (2% of sales) d) Prepare adjusting entry e) Show presentation on balance sheet

Problem B-2: Aging Analysis and Allowance

Prepare complete aging analysis and allowance calculation:

Aging Schedule:

  • Customer A: €5,000 (current)
  • Customer B: €3,000 (30 days)
  • Customer C: €2,000 (45 days)
  • Customer D: €1,000 (90 days)

Estimated Uncollectible:

  • Current: 2%
  • 1-30: 5%
  • 31-60: 15%
  • 60+: 30%

Current allowance: €400 credit

Required: a) Calculate estimated uncollectible b) Prepare adjusting entry c) Show net receivables on balance sheet

Problem B-3: Notes Receivable

A customer signs a 90-day note for €10,000 at 6% interest on November 1.

Required: a) Record the note
b) Accrue interest at December 31
c) Record collection at maturity (January 30)
d) Calculate total interest

Problem B-4: VAT on Bad Debts

A Luxembourg business writes off an account of €1,170 (€1,000 + €170 VAT). VAT is recoverable.

Required: a) Record the write-off b) Record VAT recovery c) Explain the impact on VAT return

Comprehensive Problem​

Comprehensive Problem 9: Complete Receivables Management

Mode Luxembourg SARL needs to properly account for receivables and bad debts. The business has the following information for the year ended December 31, 2024:

Beginning Balances (January 1, 2024):

  • Accounts Receivable: €20,000
  • Allowance for Doubtful Accounts: €600 (credit)

Transactions During Year:

  • Credit Sales: €200,000 (excluding VAT), VAT 17%
  • Collections: €180,000
  • Write-offs: €2,500
  • Recoveries: €500

Aging Analysis (December 31, 2024):

  • Current: €25,000
  • 1-30 days: €8,000
  • 31-60 days: €4,000
  • Over 60 days: €3,000

Estimated Uncollectible Percentages:

  • Current: 2%
  • 1-30 days: 5%
  • 31-60 days: 15%
  • Over 60 days: 30%

Required:

  1. Record All Transactions:
    a) Credit sales with VAT
    b) Collections
    c) Write-offs
    d) Recoveries

  2. Calculate Ending Receivables:
    a) Gross receivables
    b) Using aging method, calculate required allowance
    c) Current allowance balance (after write-offs and recoveries)
    d) Required adjustment

  3. Prepare Adjusting Entry:
    a) Adjust allowance to required amount
    b) Show calculation

  4. Financial Statement Presentation:
    a) Show accounts receivable on balance sheet
    b) Show bad debt expense on income statement

  5. Receivables Management Analysis:
    a) Calculate accounts receivable turnover
    b) Calculate average collection period
    c) Interpret results
    d) Recommend improvements

  6. Luxembourg Compliance:
    a) Explain PCN account classifications used
    b) Explain VAT handling on bad debts
    c) Explain documentation requirements
    d) Explain tax implications

Cases​

Case 9-1: Managing Credit Risk

Marie's restaurant has started offering credit to corporate customers. Some customers pay on time, but others are slow to pay. Marie is concerned about bad debts.

Current Situation:

  • 20 corporate customers
  • Average monthly credit sales: €15,000
  • Some customers taking 60-90 days to pay
  • One customer hasn't paid in 120 days (€2,000)

Questions for Analysis:

  1. What credit policies should Marie implement?

  2. How should Marie estimate bad debts? Which method is most appropriate?

  3. What should Marie do about the 120-day overdue account?

  4. How can Marie improve collection procedures?

  5. What internal controls are needed for receivables?

  6. How should Marie handle VAT on potentially uncollectible accounts?

Case 9-2: Earnings Management Concerns

A business owner is under pressure to meet profit targets. The owner is considering manipulating bad debt estimates to increase reported earnings.

Situation:

  • Current bad debt estimate: 3% of sales
  • Owner wants to reduce to 1% to increase earnings
  • No change in actual collection experience
  • Business has been stable

Questions for Analysis:

  1. Is it ethical to reduce the bad debt estimate in this situation?

  2. What are the consequences of underestimating bad debts?

  3. How would this affect financial statements?

  4. What would auditors look for?

  5. What are the legal and regulatory implications in Luxembourg?

  6. What should the owner do instead?

Solutions are published in supplementary/instructor/solutions/chapter_09_solutions.md.