Multiple Choice
At what amount are accounts receivable initially recorded on the balance sheet?
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7. Receivables and Investments
Types of Receivables
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In which of the following situations is a company most likely to issue a note receivable?
A
When a customer pays cash immediately for goods or services.
B
When a customer needs an extension on payment and agrees to sign a formal written promise to pay with interest.
C
When a company receives inventory on account from a supplier.
D
When a company writes off an uncollectible account as a bad debt.
Verified step by step guidance1
Understand the concept of a note receivable: A note receivable is a formal written promise from a customer to pay a specific amount of money, often with interest, at a future date. It is typically issued when a customer cannot pay immediately and requires an extension on payment.
Analyze the given options: Review each scenario to determine whether it aligns with the definition and purpose of a note receivable.
Option 1: 'When a customer pays cash immediately for goods or services.' This does not involve a note receivable because payment is made immediately, and no formal promise to pay is required.
Option 3: 'When a company receives inventory on account from a supplier.' This situation involves accounts payable, not a note receivable, as the company owes money to the supplier rather than receiving a promise to pay from a customer.
Option 4: 'When a company writes off an uncollectible account as a bad debt.' This situation involves recognizing a loss due to non-payment, not issuing a note receivable. Therefore, the correct scenario is Option 2: 'When a customer needs an extension on payment and agrees to sign a formal written promise to pay with interest.'
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