FAR · Select balance sheet accounts · 6 practice questions
Trade Accounts Receivable vs. Nontrade and Customer Credits
Trade accounts receivable arise from ordinary open-account sales, while customer credit balances generally are liabilities. Below, sort balances into trade accounts receivable, other assets, customer liabilities, or receivable reductions.
Try one first
Hint
Ask whether each balance represents an amount owed to the company or an amount the company owes to a customer.
Answer D. The $480,000 of debit balances are trade receivables (amounts customers owe). The $22,000 of credit balances represent amounts Pine owes to customers (overpayments or return credits) and therefore meet the definition of liabilities. Because Pine cannot offset balances across different customers, the receivables and liabilities must be presented separately on the balance sheet.
Why not A: This nets debit and credit balances into a single receivable, which is tempting, but incorrect because the credit balances are obligations to customers (liabilities) when there is no enforceable right to offset across customers.
Why not B: While this recognizes the two amounts are different, it incorrectly treats the $22,000 as only a note disclosure; those credit balances represent liabilities and must be presented on the face of the balance sheet rather than only in the notes.
Why not C: This adds the credit balances to receivables, which is incorrect, credit balances reduce what customers owe (or indicate amounts Pine must pay or credit back), so they do not increase receivables.
Sort it
The balance is an open-account claim from an ordinary customer sale, including an unsold pledged account.
The balance is a nontrade receivable, a separately presented note, or a supplier prepayment.
Lark owes a refund or credit, and no qualifying same-customer offset applies.
The amount reduces customer debit balances through an allowance, expected discount, or permitted same-customer offset.
| Item | Goes to |
|---|---|
| Lark's unpaid open-account invoice for inventory delivered in an ordinary sale. | Trade accounts receivableThe customer owes money for an ordinary sale on open account. |
| Lark's customer overpayment, belonging to a different customer than those with debit balances. | Customer liabilitiesLark owes the customer money. It cannot offset that obligation against unrelated customers' receivables. |
| Lark's rebate receivable from a supplier based on raw material purchases. | Other assetsThe rebate comes from purchasing activity, not an ordinary sale to a customer. |
| Lark's ordinary customer accounts pledged as bank-loan collateral, but not sold. | Trade accounts receivablePledging the accounts does not remove them from AR. Lark retains the receivables and discloses the pledge. |
| Lark's expected cash discounts on outstanding invoices recorded using the gross method. | Reductions of trade accounts receivableExpected discounts reduce the amount collectible on the outstanding invoices. |
| Lark's loan receivable from an officer. | Other assetsThe balance comes from lending to an officer, not selling goods or services to a customer. |
| Lark's open-account amount due for services already performed in its ordinary business. | Trade accounts receivableOrdinary service sales qualify just like ordinary merchandise sales. |
| Lark's sales invoice converted to a customer note before year-end. | Other assetsPresent it as notes receivable, not trade accounts receivable. Its sales origin still makes it a trade note. |
| Lark's refund liability for expected returns under customers' contractual return rights. | Customer liabilitiesExpected returns create a refund obligation. They are not a credit-loss allowance or an additional deduction from AR. |
| Lark's required ending allowance for expected credit losses on customer accounts. | Reductions of trade accounts receivableThe allowance reflects collection risk and reduces gross trade accounts receivable to its reported net amount. |
| Lark's interest receivable on an employee note. | Other assetsThe interest comes from an employee lending arrangement, not ordinary customer sales. |
| Lark's insurance claim receivable for damaged inventory. | Other assetsThe insurer's obligation comes from insurance coverage, not a customer sale. |
| Lark's customer refund credit against that customer's debit balance, with legally enforceable offset rights and intent to offset. | Reductions of trade accounts receivableThe same-customer balance meets the offset test, so net presentation is permitted. |
| Lark's advance paid to a supplier for future inventory. | Other assetsThe advance is a prepayment for future goods, not an amount owed by a customer. |
Key points
- Remember: Classify what the balance represents, not where it appears in the customer ledger.
- An AR control account may already net customer credits. Add those credits back to recover gross customer debit balances.
- Use the required ending credit-loss allowance, not its unadjusted balance or the adjusting entry.
- Being due within one year makes an asset current, not necessarily trade.
How the exam traps you
- Net every customer's credit balance against total AR. Present customer credits separately unless legally enforceable rights and intent permit offsetting with the same customer.
- Include every current receivable in trade accounts receivable. Check its source and form. Separate nontrade receivables and notes from open-account customer sales.
- Remove accounts pledged to a bank from AR. A collateral pledge is not a sale. Keep the receivables and disclose the pledge.
Question 2
| Receivable / Payable | Amount |
|---|---|
| Accounts receivable from customers for normal credit sales | $480,000 |
| Allowance for credit losses on those accounts | $18,000 |
| Interest receivable on an employee note | $6,000 |
| Advance paid to a supplier for future inventory | $12,000 |
| Customer accounts with credit balances from overpayments | $9,000 |
Hint
Identify which balance comes from normal credit sales to customers, then think about whether trade receivables are shown at gross amount or net amount.
Answer D. Trade receivables arise from normal customer sales and are reported net of the allowance for credit losses. Marin's trade receivables equal $480,000 less the $18,000 allowance = $462,000. Interest receivable, supplier advances, and customer overpayments are not netted into trade receivables (customer overpayments are a current liability).
Why not A: This uses the gross accounts receivable balance and ignores the allowance for credit losses. When an allowance exists, trade receivables are reported net of that allowance.
Why not B: This subtracts the $9,000 customer credit balances from accounts receivable but ignores the allowance for credit losses. Both the allowance and the correct classification of customer overpayments must be handled properly.
Why not C: This subtracts both the $18,000 allowance and the $9,000 customer credit balances. Customer overpayments are classified as a current liability and should not be netted against trade receivables.
Question 3
Hint
Separate uncertainty about the amount the customer truly owes from uncertainty about collecting an amount the customer already owes.
Answer B. The expected rebate changes the consideration Lark is contractually entitled to and therefore is a transaction-price (variable consideration) matter that reduces revenue. By contrast, Delta's loss of financing affects collectibility of an otherwise valid receivable and is reflected through the allowance for expected credit losses. The key distinction is entitlement/price versus collectibility.
Why not A: This is tempting because candidates often treat invoicing as fixing the amount owed. It is wrong because invoiced amounts can still include variable consideration (rebates or credits) that affect revenue rather than being treated as bad debt.
Why not C: This distractor plays on timing issues in revenue recognition, but the timing of identification doesn't change the nature of the shortfall. If the shortfall is due to the customer's inability to pay, it is a credit-loss issue; if it changes the seller's entitled consideration, it affects revenue.
Why not D: This appeals to candidates who expect only realized events to trigger accounting changes. It is incorrect because both expected rebates (variable consideration) and expected credit losses should be estimated and reflected at the reporting date when information is available.
Question 4
Hint
Focus on why the receivable exists: did it come from selling to a customer, or from some other business relationship?
Answer A. Trade receivables arise from amounts due from customers for goods or services sold in the ordinary course of business. A supplier rebate relates to purchasing activity (amounts receivable from a supplier), not to sales to customers, so it is a nontrade receivable. Nontrade receivables should be presented separately from trade receivables.
Why not B: Although the receivable is in note form, it still arises from a sale to a customer; receivables that originate from selling activity remain trade receivables regardless of form.
Why not C: This is a classic trade accounts receivable because it arises from a sale to a customer in the ordinary course of business, so it belongs with trade receivables.
Why not D: Amounts due from customers for services rendered in the ordinary course of business are trade receivables, so this should not be excluded from trade receivables.
Question 5
Hint
Focus on why the amount will not be collected: customer nonpayment risk, contractual discount terms, revised transaction price, or a return right. Only one of those typically creates a refund liability.
Answer A. Expected product returns create an obligation to refund or credit the customer and therefore are recorded as a refund liability (with a related asset for expected returns), rather than as an allowance for credit losses or a direct write-down of receivables. Allowances for credit losses cover customer collectibility risk, which is a different economic phenomenon than a customer exercising a contractual return right. Thus expected returns are presented separately from the receivable allowance.
Why not B: Expected cash discounts reduce the net amount the entity expects to collect under the invoice terms and are handled under the gross/discount accounting method (often as a contra or reduction of receivables), not as a refund liability. The customer is paying less under the agreed terms rather than returning goods.
Why not C: This is tempting because it reduces expected cash collections, but credit losses reflect collectibility risk and are captured in the allowance for credit losses (ASC 326), not as a refund liability. The underlying issue is the customer's inability or unwillingness to pay, not a contractual right to return goods.
Why not D: A price concession is a change in the transaction price or an anticipated adjustment to consideration and typically affects revenue/receivable measurement rather than creating a refund liability tied to return rights. Although it results in less consideration, it stems from renegotiation or dispute resolution, not a customer return right.
Question 6
Hint
Separate valuation reductions of receivables from items that are classified elsewhere on the balance sheet.
Answer C. Start with customer debit balances only: $6,240,000. Subtract estimated cash discounts of $96,000 and the required ending allowance for credit losses of $260,000 to arrive at $5,884,000. Customer credit balances and the refund liability are presented separately as liabilities and are not additional reductions of trade accounts receivable, net.
Why not A: This is based on incorrectly netting customer credit balances ($140,000) against the customer debit balances. Customer credit balances are generally reclassified as liabilities rather than deducted from trade receivables.
Why not B: This reflects subtracting the unadjusted allowance balance ($210,000) instead of the required ending allowance ($260,000). For presentation of receivables, use the properly adjusted ending allowance.
Why not D: This mistakenly treats the refund liability for expected sales returns ($180,000) as a contra-receivable. Under current presentation, refund liabilities are shown separately and do not reduce trade accounts receivable, net.
Common questions
What is the difference between trade and nontrade receivables?
Trade receivables come from ordinary sales to customers. Officer loans, employee note interest, supplier rebates, and insurance claims are nontrade.
Are customer credit balances assets or liabilities?
Customer credit balances generally are current liabilities. Netting requires a legally enforceable right and intent to offset with the same customer; unrelated customer balances stay separate.
Is a customer note receivable a trade receivable?
A note from an ordinary customer sale is a trade note, but it is not open-account trade accounts receivable. Present it as notes receivable.
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