Ch 9 (1-40)
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 20X1: Customer Note Maturity Interest Due Interest Rate J.Perez $ 100,000 Quarterly 10% P.Berg $ 100,000 — Negotiated To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. At the end of the first quarter, which of the following entries will be made to record the interest earned by Palmer on the Perez note? A) DR Cash $2,500 CR Interest income $2,500 B) DR Accrued interest receivable $2,500 CR Interest income $2,500 C) DR Notes receivable—Perez $2,265 CR Interest income $2,265 D) DR Cash $2,265 CR Accrued interest receivable $2,265
A) DR Cash $2,500 CR Interest income $2,500
Which of the following statements is true regarding a troubled debt restructuring? A) In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender. B) A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms including cancelation of the original loan and execution of a new loan agreement. C) In a troubled debt restructuring, GAAP restructuring gains and losses for accounting are equal to real economic gains and losses for the companies involved. D) All accounting aspects of a troubled debt restructuring are explicitly covered by IFRS.
A) In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender.
Which of the following statements is false regarding factoring receivables? A) When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer's account proves to be uncollectible. B) When a company accepts credit cards, it is engaging in a form of factoring. C) Factoring can be done either with or without recourse. D) When a company sells its accounts receivable to a factor with recourse, a recourse obligation that is recorded would be a credit entry on its books.
A) When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer's account proves to be uncollectible.
Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company's financial statements would be expected to show: A) a reduction in the percentage of the allowance for credit losses to receivables. B) an increase in the percentage of the allowance for credit losses to receivables. C) no difference in the percentage of the allowance for credit losses to receivables. D) None of these answer choices are correct.
A) a reduction in the percentage of the allowance for credit losses to receivables.
Information about credit quality, amortization cost by credit quality indicator for the prior five years and in the aggregate, and the methodology for estimating credit losses must be disclosed for: A) all receivables reported at amortized cost B) only receivables expected to be collected within one year C) only receivables expected to be collected over a period exceeding one year D) only interest-bearing notes
A) all receivables reported at amortized cost
Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has: A) the power to direct the activities of the SE and the right to participate in the SE's gains and losses. B) the power to direct the activities of the SE but not the right to participate in the SE's gains and losses. C) limited control over the sale of the securities. D) None of these answer choices are correct.
A) the power to direct the activities of the SE and the right to participate in the SE's gains and losses.
Edsel Inc. has the following unadjusted year end trial balance information available for 20X1: Credit sales $ 600,000 Ending accounts receivable balance $ 180,000 Ending allowance for credit losses balance $ 1,500 Estimated uncollectibles 2 % If Edsel uses the sales revenue approach for estimating the allowance for credit losses, the income statement should show an expense of: A) $10,000 B) $12,000 C) $14,000 D) $20,000
B) $12,000
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 20X1. Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 20X3. What effective interest rate will Island use for the restructured note? A) 8.7% B) 8.9% C) 10.0% D) 13.1%
B) 8.9%
When a firm does not adopt the fair value option, it: A) need not disclose the fair value of its long-term notes receivable or accounts receivable B) still must disclose the fair value of its long-term notes receivable but need not disclose the accounts receivable fair value if the fair values approximates the reported value C) must disclose the fair value of its long-term notes receivable only if the reported value exceeds fair value D) must disclose both the fair value of both notes and accounts receivable under all circumstances
B) still must disclose the fair value of its long-term notes receivable but need not disclose the accounts receivable fair value if the fair values approximates the reported value
The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 20X1: Customer Note Maturity Interest Due Interest Rate J.Perez $ 100,000 Quarterly 10% P.Berg $ 100,000 — Negotiated To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. What amount will Palmer use to record the sale to Perez? A) $90,000 B) $90,595 C) $100,000 D) $110,381
C) $100,000
On January 2, 20X1, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note. What will be the balance in the Notes Receivable—Lewisburg Fabricators account at the end of 20X2? A) $54,447 B) $58,802 C) $63,507 D) $80,000
C) $63,507
Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter's receivables for a 6% fee. These receivables have a related allowance for credit losses of $3,500. Assuming the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make? A) DR Cash $100,000 CR Accounts receivable $100,000 B) DR Cash $94,000 DR Loss on sale of receivables 6,000 CR Accounts receivable $100,000 C) DR Cash $94,000 DR Allowance for credit losses 3,500 DR Loss on sale of receivables 2,500 CR Accounts receivable $100,000 D) DR Cash $94,000 DR Loss on sale of receivables 6,000 CR Due to Hisker Enterprises $100,000
C) DR Cash $94,000 DR Allowance for credit losses 3,500 DR Loss on sale of receivables 2,500 CR Accounts receivable $100,000
Regarding accounts receivable and an allowance for credit losses account, which of the following statements is false? A) Net realizable value equals the sales price of an item less reasonable further costs to both make the item ready to sell and to sell it. B) An aging of accounts receivable is a determination of how long each receivable has been on the books. C) The net realizable value of accounts receivable is decreased when a credit loss is written off. D) Receivables that result from transactions other than trade receivables, if material, are to be separately disclosed on the balance sheet.
C) The net realizable value of accounts receivable is decreased when a credit loss is written off.
Net realizable value of receivables is gross receivables minus: A) provision for credit losses and sales returns. B) provision for credit losses and estimated returns and allowances. C) estimated provision for credit losses and estimated returns and allowances. D) proven credit losses and estimated returns and allowances.
C) estimated provision for credit losses and estimated returns and allowances.
Consistent with IFRS No. 7, the fair value must be disclosed for receivables and loans with the following characteristics: A) short-term maturity B) long-term maturity C) recognized at amortized cost D) All of these choices are correct
D) All of these choices are correct
An analyst notes that ABC Inc.'s allowance for credit losses as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change? A) ABC's management expects a default rate on outstanding receivables different than prior years. B) ABC's management is using the allowance for credit losses to "manage" earnings. C) The company ages its receivables and the distribution of accounts receivable over the various age categories is different than prior years. D) The company has stopped making sales on credit.
D) The company has stopped making sales on credit.
Which of the following statements is false regarding accounts receivable reporting? A) Growth in accounts receivable could exceed sales growth because a firm allows its customers more time to pay. B) Many irregularities in receivables recognition can be discovered by tracking the relationship between changes in sales and changes in receivables. C) When a company adopts an aggressive revenue recognition policy, it can lead to significant journal entries of sales returns in later periods. D) When a firm's sales growth exceeds its growth in receivables, it could be an indication of aggressive revenue recognition policies.
D) When a firm's sales growth exceeds its growth in receivables, it could be an indication of aggressive revenue recognition policies.
With a loan collateralized by receivables, A) the bank makes the loan without recourse. B) the bank has recourse against the accounts receivable customers. C) a company receives cash and is not responsible for repaying the loan. D) a company receives cash and is responsible for repaying the loan.
D) a company receives cash and is responsible for repaying the loan.
Management must periodically assess the reasonableness of the allowance for credit losses if it uses the: A) direct write-off method. B) percent of sales method only. C) percent of gross receivables method only. D) percent of sales or the percent of gross receivables method.
D) percent of sales or the percent of gross receivables method.
Edsel Inc. has the following unadjusted year end trial balance information available for 20X1: Credit sales $ 600,000 Ending accounts receivable balance $ 180,000 Ending allowance for credit losses balance $ 1,500 Estimated uncollectibles 2 % If Edsel uses the gross accounts receivable approach for estimating the allowance for credit losses, the income statement will show an expense of: A) $2,100 B) $3,600 C) $5,100 D) $8,500
A) $2,100
On January 2, 20X1, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note. What amount will Jensen recognize as interest income during 20X1? A) $4,356 B) $4,704 C) $5,111 D) $0
A) $4,356
Echo Company's 20X1 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 20X1, the company's credit sales amounted to $857,250. Per Echo's 20X1 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo's beginning balance in the allowance for credit losses was $17,600, the ending balance in this account must be: A) $15,000 B) $21,350 C) $36,350 D) The required "allowance for credit losses" balance cannot be determined from the data given.
B) $21,350
Edsel Inc. has the following unadjusted year end trial balance information available for 20X1: Credit sales $ 600,000 Ending accounts receivable balance $ 180,000 Ending allowance for credit losses balance $ 1,500 Estimated uncollectibles 2 % If Edsel uses the gross accounts receivable approach for estimating the allowance for credit losses, the allowance for credit losses account, after the proper adjustments to the accounts are recorded, should show a balance of: A) $2,600 B) $3,600 C) $5,600 D) $6,200
B) $3,600
On January 2, 20X1, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note. What amount will Jensen recognize as interest income during 20X2? A) $4,356 B) $4,704 C) $5,111 D) $0
B) $4,704
Corona Industries purchased a stamping machine on January 2, 20X1, for $100,000. It made an initial payment of $20,000 and financed the balance over 5 years at State Bank. The loan terms were for annual payments of $16,000 plus 10% interest, payable on December 31 each year. The year 20X4 proves to be a difficult year and on December 1, 20X4 Corona negotiates a debt restructuring with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current fair value of $22,000. What is the amount of the restructuring gain or loss to Corona? A) $6,000 loss B) $6,000 gain C) $8,933 loss D) $13,000 gain
B) $6,000 gain
Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter's receivables for a 6% fee. These receivables have a related allowance for credit losses of $3,500. Assume that the transaction was a factoring arrangement with recourse and included a holdback of $6,000. If the fair value of the recourse obligation is equal to the allowance of $3,500, which one of the following entries will Ritter make to record this transaction? A) DR Cash $100,000 DR Allowance for credit losses 3,500 CR Accounts receivable $100,000 CR Recourse obligation 3,500 B) DR Cash $88,000 DR Loss on sale of receivables 6,000 DR Allowance for credit losses 3,500 DR Due from Hisker Enterprises 6,000 CR Accounts receivable $100,000 CR Recourse obligation 3,500 C) DR Cash $88,000 DR Loss on sale of receivables 12,000 CR Accounts receivable $100,000 D) DR Cash $88,000 DR Loss on sale of receivables 12,000 CR Due to Hisker Enterprises $100,000
B) DR Cash $88,000 DR Loss on sale of receivables 6,000 DR Allowance for credit losses 3,500 DR Due from Hisker Enterprises 6,000 CR Accounts receivable $100,000 CR Recourse obligation 3,500
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag? A) The firm adopts new credit terms that lengthen the payment terms to the industry average. B) The firm adopts an aggressive revenue recognition policy. C) The firm develops an attractive credit policy for first time buyers. D) The firm changes its timing of revenue recognition to a more conservative approach.
B) The firm adopts an aggressive revenue recognition policy.
Accounts receivables initially are recognized at: A) the present value of the related future cash flows. B) amortized cost. C) net realizable value. D) the future value.
B) amortized cost.
Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue: A) is whether the terms regarding the transfer were initiated by the transferor or transferee. B) is whether the transferor surrenders control over the receivables. C) comes down to how clearly the rights, etc. being retained are specified in the transfer agreement. D) is whether any gain or loss related to the transfer is recognized in earnings.
B) is whether the transferor surrenders control over the receivables.
Which of the following is false regarding uncollectible accounts? A) Most companies establish credit policies by weighing the expected cost of credit sales against the expected benefit of increased sales. B) Accrual accounting requires that some estimate of uncollectible receivables be offset against current period sales. C) Companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum. D) To manage credit losses, companies often choose a profit-maximizing balance which makes uncollectible accounts unavoidable.
C) Companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum.
Harry Jones accepted a six-month, 8%, $40,000 note receivable from a customer on July 1, 20X1. Jones has an arrangement with the National Bank to discount selected customer notes at 10% without recourse. If the note were discounted on August 1 under the terms of agreement with National Bank, which one of the following journal entries would Jones record? A) DR Cash $39,867 CR Note payable—National Bank $39,867 B) DR Cash $40,000 CR Note receivable $40,000 C) DR Cash $39,867 DR Interest expense 133 CR Note receivable $40,000 D) DR Cash $39,867 DR Loss on sale of note receivable 133 CR Note payable—National Bank $40,000
C) DR Cash $39,867 DR Interest expense 133 CR Note receivable $40,000
Guthrie Corporation reports accounts receivable at a net realizable value of $2,940,000 (gross receivable of $3,000,000 minus allowance for credit losses accounts of $60,000). Assume that there is an active market for these types of receivables and that the price is 94% of face value. To adjust the receivable's carrying value to fair value, Guthrie would make which of the following entries? A) DR Realized loss on receivables $180,000 CR Accounts receivable $180,000 B) DR Unrealized loss on receivables $120,000 CR Fair value adjustment--accounts receivable $120,000 C) DR Unrealized loss on receivables $180,000 CR Fair value adjustment--accounts receivable $180,000 D) DR Realized loss on receivables $120,000 CR Accounts receivable $120,000
C) DR Unrealized loss on receivables $180,000 CR Fair value adjustment--accounts receivable $180,000
In a troubled debt restructuring, the restructured loan can differ from the original loan in any of the ways listed below except: A) Scheduled interest and principal payments may be reduced or eliminated. B) The repayment schedule may be extended over a longer time period. C) The repayment schedule is shortened and the interest rate is significantly increased. D) The customer and lender can settle the loan.
C) The repayment schedule is shortened and the interest rate is significantly increased.
Donau Inc. performs services with a normal contract price of $265,000 for a new customer. The customer signs a non-interest-bearing note of $300,000. The differences between the normal contract price and the face amount of the note is considered: A) a sales discount. B) a credit allowance. C) imputed interest. D) additional service revenue.
C) imputed interest.
If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price: A) is equal to the carrying value of the mortgages on the bank's books. B) is lower than the carrying value of the mortgages on the bank's books. C) is higher than the carrying value of the mortgages on the bank's books. D) cannot be determined by examining the carrying value of the mortgages on the bank's books because the selling price is determined purely by the market.
C) is higher than the carrying value of the mortgages on the bank's books.
When the sum of the future cash flows of a restructured note is above the current note's carrying value, the debtor recognizes: A) a gain on the debt restructure. B) a loss on the debt restructure. C) neither a gain nor a loss on the debt restructure. D) both a restructure gain and an early extinguishment loss.
C) neither a gain nor a loss on the debt restructure.
Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the: A) transfer was with or without recourse. B) transferor collects payments directly from the customer. C) transferor surrenders control over the receivable. D) customer ultimately defaults.
C) transferor surrenders control over the receivable.
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 20X1. Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 20X3. Mutual Bank will record this transaction to recognize: A) a receivable restructuring gain of $2,214. B) a debt restructuring loss of $8,000. C) neither a gain nor a lost from debt restructuring. D) a debt restructuring loss of $2,214.
D) a debt restructuring loss of $2,214.
Consistent with ASC topic 326, expected credit losses are recognized as: A) a reduction of the related revenue. B) an addition to cost of goods sold. C) an aggregated expense. D) a separately reported loss.
D) a separately reported loss.
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 20X1. Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 20X3. Island will record this transaction to recognize: A) a debt restructuring gain of $20,000. B) a debt restructuring loss of $20,000. C) a debt restructuring gain of $8,000. D) neither a gain nor a loss from debt restructuring.
D) neither a gain nor a loss from debt restructuring.
