Chapter 6 intermediate practice questions

On December 31, 2021 Sheridan Company sold for $151100 an old machine having an original cost of $170400 and a book value of $121200. The terms of the sale were as follows: $29900 down payment $59800 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 8% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2021 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 8% for 2 years is 1.78326.)

$106639. In instances where no interest rate is stated, the company measures the present value of the note. The present value of the annuity is ($59800 × 1.78326) or $106639.

preparing its August 31, 2021 bank reconciliation, Cullumber Corp. has available the following information: Balance per bank statement, 8/31/21 $23400 Deposit in transit, 8/31/21 $5200 Return of customer's check for insufficient funds, 8/30/21 $690 Outstanding checks, 8/31/21 $3160 Bank service charges for August $100 At August 31, 2021, Cullumber's correct cash balance is

$25440 Balance per bank statement, $23400 + Deposits in transit, $5200 - Outstanding checks, $3160 = $25440.

Oriole Company's average collection period is 52 days and its net sales are $2434600. What are Oriole Company's average accounts receivables for the period? (Use 365 days for calculation. Round intermediate calculations to 1 decimal place, e.g, 5.3.)

$347800 Dividing net sales by average accounts receivables (net) produces the accounts receivable turnover ratio. The average collection period is computed as 365 days / the accounts receivable turnover ratio. In this case, 365/x = 52 days. So, the accounts receivable turnover ratio is 7.0. $2434600/Average A/R = 52. So, average Accounts Receivables are $347800.

The required balance in Cullumber's Allowance for Doubtful Accounts is $39600, based on an aging of its accounts receivable. The Allowance for Doubtful Accounts currently has a debit balance of $6300. Cullumber's bad debt expense for the period is

$45900. The existing balance in Allowance for Doubtful Accounts is considered under the percentage-of-receivables method. Therefore, bad debt expense is $45900 (Required Allowance for Doubtful Accounts Balance, $39600 + Allowance for Doubtful Accounts current debit balance, $6300).

During the year, Sheridan Enterprises made an entry to write off an $8640 uncollectible account. Before this entry was made, the balance in accounts receivable was $100700 and the balance in the allowance account was $9940 (credit balance). The net realizable value of accounts receivable before and after the write-off entry was

$90760. Before: Accounts Receivable, $100700 - Allowance Account, $9940 = $90760. After: (Accounts Receivable, $100700 - $8640) - (Allowance Account, $9940 - $8640) = $90760.

cash discount of 1/10, n/30 means the customer gets a:

1% discount if they pay within 10 days.

If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)?

18% 1% ÷ [(30 days - 10 days)/360 days)] = 18% effective annual rate of interest.

Cullumber Company received a seven-year zero-interest-bearing note on February 22, 2020, in exchange for property it sold to Bramble Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7.3% on February 22, 2020, 7.8% on December 31, 2020, 8.0% on February 22, 2021, and 8.3% on December 31, 2021. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2020 and 2021, respectively?

7.3% and 7.3%

Which of the following is a method used to generate cash from accounts receivable?

Assignment: Yes, Factoring: Yes

The minimum cash amounts that banks often require their loan customers to maintain in checking accounts is called:

Compensating balances

A creditor bases an impairment loan loss on the difference between the present value of the future cash flows (using the historical effective-interest rate) and the fair value of the note.

False A creditor bases an impairment loan loss on the difference between the present value of the future cash flows (using the historical effective-interest rate) and the carrying amount of the receivable.

The accounts receivable turnover ratio is computed by dividing gross sales by ending net receivables.

False The accounts receivable turnover ratio is computed by dividing net sales by average net accounts receivables.

A company considers a loan receivable impaired when it is probable, based on current information and events, that it will be successful at collecting all amounts due (both principal and interest).

False A company considers a loan receivable impaired when it is probable, based on current information and events, that it will not collect all amounts due (both principal and interest).

Aging accounts receivable is a variation of the percentage-of-sales approach to recognizing bad debt expense.

False Aging is an estimation method used with the percentage-of-accounts receivable approach.

If a company receives a zero-interest-bearing note, its present value is the equal to the face amount of the note.

False If a company receives a zero-interest-bearing note, its present value is the cash paid to the borrower.

Young Enterprises has an overdraft at one of its banks, Bank of Cleveland. Young has no other accounts at Bank of Cleveland. Under U.S. GAAP, Young should report the bank overdraft as an offset against cash held at other banks.

False Under U.S. GAAP, bank overdrafts are generally not offset against the cash account. A major exception is when available cash is present in another account in the same bank on which the overdraft occurred.

Which of the following help to reduce the size of a company's float?

Lockbox accounts

of the following are properly classified as temporary investments except:

Money orders money market funds (no checking privileges). money market certificates. (money orders.) certificates of deposit (CDs).

On March 1, 2021, Wildhorse Pasta Company assigns $1404700 of its accounts receivable to Bank of China as collateral for a $1002200 note. Bank of China assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 15 percent. Which of the following is correct regarding this transaction?

On March 1, 2021, Bank of China will credit Interest Revenue for $14047. On March 1, 2021, Bank of China will debit Notes Receivable for $1002200, credit Interest Revenue for $14047 (1% finance charge × $1404700 assigned accounts receivable), and credit cash for $988153. The bank has provided a loan, and the receivables are collateral for the loan.

The IRS approach to transferring of receivables focuses on which of the following?

Rewards. Risks. Loss of control.

Which of the following statements is incorrect?

Securitization requires the purchaser to service the receivables.

Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale?

The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible.

Cash can be classified as a current or long-term asset.

True

Under the direct write-off method, bad debts are only recognized when an account is determined to be uncollectible.

True

When compared to the aging of accounts approach, the percentage-of-sales approach of estimating bad debts does a better job of matching revenues (sales) and expenses (bad debt expense) on the income. statement

True The percentage-of-sales approach of estimating bad debts does a better job of matching revenues (sales) and expenses (bad debt expense) on the income statement. The percentage-of-receivables approach does the best job of presenting accounts receivable at their net realizable value.

In a transfer of receivables accounted for as a secured borrowing:

a finance charge is recorded

If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market,

an imputed interest rate is used to value the note.

If a company employs the net method of recording accounts receivable from customers, then sales discounts forfeited (not taken) should be reported as

an item of "other revenues and gains" in the income statement.

Short-term paper with maturities of less than 3 months should be classified as

cash equivalents

Notes receivable can be classified as

current, trade, nontrade

Which of the following methods of determining annual bad debt expense violates the expense recognition concept?

direct write-off The direct write-off method usually fails to record expenses in the same period as the associated revenue and therefore violates the expense recognition concept.

Finance companies that buy receivables from businesses are called:

factors

The interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note is the:

implicit rate

Under IFRS, bank overdrafts are

netted against cash balances.

The accounts receivable turnover ratio measures the

number of times the average balance of accounts receivable is collected during the period.

Non-trade receivables include all of the following except

oral promises of the purchaser to pay for goods and services sold Options: claims against defendants under suit. dividends receivable. deposits paid to cover potential losses. oral promises of the purchaser to pay for goods and services sold.