ACC311 Chapter 7-MC

On December 31, 2014, Swan Company sold for $150,000 an old machine having an original cost of $170,000 and a book value of $120,000. The terms of the sale were as follows: $30,000 down payment $60,000 payable on Dec. 31 each of the next two years The agreement of sale made no mention of interest; however, 9% 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, 2014 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)

$105,546 The present value of the annuity is ($60,000 × 1.75911)

In preparing its August 31, 2014 bank reconciliation, Adel Corp. has available the following information: Balance per bank statement, 8/31/14: $21,650 Deposit in transit, 8/31/14: $3,900 Return of customer's check for insufficient funds, 8/30/14 $600 Outstanding checks, 8/31/14: $2,750 Bank service charges for August: $100

$22,800. $21,650 + $3,900 - $2,750 = $22,800.

Alma Company's average collection period is 45 days and its net sales are $2,430,000. What are Alma Company's average receivables for the period?

$300,000. Dividing net sales by average 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 = 45 days. So, the accounts receivable turnover ratio is 8.1. $2,430,000/Average A/R = 8.1. So, average A/R are $300,000.

The required balance in Wheeler's Allowance for Doubtful Accounts is $36,750, based on an aging of its accounts receivable. The Allowance for Doubtful Accounts currently has a debit balance of $4,200. Wheeler's bad debt expense for the period is A. $4,200. B. $36,750. C. $40,950. D. $32,550.

$40,950. The existing balance in Allowance for Doubtful Accounts is considered under the percentage-of-receivables method. Therefore, bad debt expense is $40,950 ($36,750 + $4,200).

The accounts receivable turnover ratio measures the A. number of times the average balance of accounts receivable is collected during the period. B. percentage of accounts receivable turned over to a collection agency during the period. C. percentage of accounts receivable arising during certain seasons. D. number of times the average balance of inventory is sold during the period.

A. number of times the average balance of accounts receivable is collected during the period. The accounts receivable turnover ratio measures the number of times the average balance of accounts receivable is collected during the period.

In a transfer of receivables accounted for as a secured borrowing: A. a gain or loss is recorded. B. receivables are reduced. C. a finance charge is recorded. D. a recourse liability is recognized.

C. a finance charge is recorded. In a transfer of receivables accounted for as a borrowing, the receivables remain on the books of the borrower and a finance charge is recorded.

Which of the following help to reduce the size of a company's float? A. Lockbox accounts. B. Imprest accounts. C. Petty cash accounts. D. Bank reconciliation procedures.

A. Lockbox accounts. Multiple collection centers generally reduce the size of a company's float. The greatest advantage of a lockbox is that it accelerates the availability of collected cash.

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? A. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. B. The transferred asset has been isolated from the transferor. C. The transferee cannot require the transferor to repurchase the receivables. D. The transferees have obtained the right to pledge or exchange the receivables.

A. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. The transferor is not obligated to make a genuine effort to identify those receivables that are uncollectible.

Short-term paper with maturities of less than 3 months should be classified as: A. cash equivalents. B. investments. C. temporary investments. D. receivables.

A. cash equivalents. Short-term paper with maturities of less than 3 months should be classified as cash equivalents.

The interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note is the: A. implicit rate. B. effective rate. C. imputed rate. D. stated rate.

A. implicit rate. The implicit rate can be computed based on the present value and the future values involved.

Which of the following is a method used to generate cash from accounts receivable? Assignment Factoring A1.Yes No B2.Yes Yes C3.No Yes D4.No No

B. 2 Assignment and Factoring are both methods used to generate cash from accounts receivable.

All of the following are properly classified as temporary investments except: A. Money market funds (no checking privileges). B. Money market certificates. C. Money orders. D. Certificates of deposit (CDs).

C. Money orders. Items appropriately classified as temporary investments include money market funds, money market savings certificates, and certificates of deposit (CDs).

Mayer Company received a seven-year zero-interest-bearing note on February 22, 2013, in exchange for property it sold to Reardon 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% on February 22, 2013, 7.5% on December 31, 2013, 7.7% on February 22, 2014, and 8% on December 31, 2014. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2013 and 2014, respectively? A. 0% and 0% B. 7% and 7% C. 7% and 7.7% D. 7.5% and 8%

B. 7% and 7% Since the interest rate was 7% on February 22, 2013, that is the rate that should be used.

On March 1, 2014, Beijing Pasta Company assigns $1,400,000 of its accounts receivable to Bank of China as collateral for a $1,000,000 note. Bank of China assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Which of the following is correct regarding this transaction? A. Bank of China has purchased Beijing Pasta's receivables. B. On March 1, 2014, Bank of China will credit Interest Revenue for $14,000. C. On March 1, 2014, Bank of China will credit Gain on Purchase of Receivables for $34,000. D. On March 1, 2014, Bank of China will credit Due from Factor for $20,000.

B. On March 1, 2014, Bank of China will credit Interest Revenue for $14,000. On March 1, 2014, Bank of China will debit Notes Receivable for $1,000,000, credit Interest Revenue for $14,000, and credit cash for $986,000. The bank has provided a loan, and the receivables are collateral for the loan.

Sparrow Corporation has recently acquired notes receivable that have a fair value of $405,000 and a carrying amount of $310,000. Sparrow decides on December 31, 2014, to use the fair value option for the first valuation of these receivables. Which of the following is incorrect? A. Sparrow must value these receivables at fair value in all subsequent periods in which it holds these receivables. B. Sparrow must value all similar receivables at fair value in all subsequent periods in which it holds this type of receivable. C. An unrealized holding gain of $95,000 will be reported as part of net income for the year ended December 31, 2014. D. Interest revenue will be reported as part of net income for the year ended December 31, 2014.

B. Sparrow must value all similar receivables at fair value in all subsequent periods in which it holds this type of receivable. This is a correct statement. Interest revenue will be reported as part of net income; the unrealized holding gain is exclusive of interest revenue.

If a company employs the net method of recording accounts receivable from customers, then sales discounts not taken should be reported as A. an addition to sales in the income statement. B. an item of "other revenue" in the income statement. C. a deduction from accounts receivable in determining the net realizable value of accounts receivable. D. sales discounts forfeited in the cost of goods sold section of the income statement.

B. an item of "other revenue" in the income statement. If using the net method, a company considers Sales Discounts Forfeited as an "Other revenue" item.

Which of the following classifications is likely to be eliminated by the FASB? A. temporary investments B. cash equivalents C. short-term investments D. restricted cash

B. cash equivalents The cash equivalents classification is likely to be eliminated by FASB.

Under IFRS, bank overdrafts are A. reported as current liabilities. B. netted against cash balances. C. netted against cash balances only if there is a second account at the same bank with a balance sufficient to cover the overdraft. D. reported as an expense.

B. netted against cash balances. Under IFRS, bank overdrafts are netted against cash balances.

A cash discount of 1/10, n/30 means the customer gets a: A. 1% discount if they pay within 20 days. B. 10% discount if they pay within 30 days. C. 1% discount if they pay within 10 days. D. 10% discount if they pay within 20 days.

C. 1% discount if they pay within 10 days. The discount is 1% and the discount period is 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)? A. 1% B. 12% C. 18% D. 30%

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

If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market, A. the note is not recorded in the financial statements, it is only disclosed in the notes to the financial statements. B. the stated rate of interest on the note is used to value the note. C. an imputed interest rate is used to value the note. D. the prevailing rate of interest at each balance sheet date is used to value the note.

C. an imputed interest rate is used to value the note. If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market, the company must approximate an applicable interest rate that may differ from the stated interest rate. The resulting interest rate is called an imputed interest rate.

The minimum cash amounts that banks often require customers to whom they lend money to maintain in checking accounts is called: A. bank overdrafts. B. cash equivalents. C. compensating balances. D. money market funds.

C. compensating balances. Compensating balances are the minimum cash amounts required by banks to be maintained by their customers.

Finance companies that buy receivables from businesses are called: A. receivers. B. principles. C. factors. D. recoursers.

C. factors. Factors buy other companies' receivables for a fee.

Under IFRS, bank overdrafts are A. reported as a deduction from the current asset section. B. reported as a deduction from shareholders' equity. C. netted against cash and a net cash amount reported. D. reported as a current liability.

C. netted against cash and a net cash amount reported. Under IFRS, bank overdrafts are netted against cash and a net cash amount reported.

During the year, Trout Enterprises made an entry to write off a $8,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $100,000 and the balance in the allowance account was $9,000. The net realizable value of accounts receivable before and after the write-off entry was A. $100,000. B. $99,000. C. $83,000. D. $91,000.

D. $91,000. Before: $100,000 - $9,000 = $91,000. After: ($100,000 - $8,000) - ($9,000 - $8,000) = $91,000.

Notes receivable can be classified as A. current. B. trade. C. nontrade. D. All of these answer choices are correct.

D. All of these answer choices are correct. Notes receivable can be classified as current or noncurrent, and as either a trade or nontrade receivable.

The IFRS approach to derecognizing a receivable focuses on which of the following? A. Rewards. B. Risks. C. Loss of control. D. All of these choices are correct.

D. All of these choices are correct. When derecognizing a receivable, IFRS considers an approach focused on risks, rewards, and loss of control.

Which of the following methods of determining annual bad debt expense violates the expense recognition concept? A. Percentage of sales B. Percentage of ending accounts receivable C. Percentage of average accounts receivable D. Direct write-off

D. 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. Percentage of sales and percentage of receivables both estimate bad debt expense and report in the same period as the related sales.

Non-trade receivables include all of the following except A. Claims against defendants under suit. B. Dividends receivable. C. Deposits paid to cover potential losses. D. Oral promises of the purchaser to pay for goods and services sold.

D. Oral promises of the purchaser to pay for goods and services sold. Accounts Receivable (oral promises of the purchaser to pay for goods and services sold) is a trade receivable.

Which of the following statements is incorrect? A. Securitization takes a pool of assets, such as credit card receivables, and sells shares in these pools of interest and principal payments. B. Securitization can be done with virtually every asset with a payment stream and a long-term payment history. C. Securitization involves relatively lower fees and higher quality receivables. D. Securitization requires the purchaser to service the receivables.

D. Securitization requires the purchaser to service the receivables. Usually with a securitization the seller continues to service the receivables.

Cash consists of all of the following except: A. Personal checks. B. Certified checks C. Money orders. D. Short-term paper with a maturity of 6 months.

D. Short-term paper with a maturity of 6 months. All of the options are considered cash except short-term paper with a maturity of 6 months which is classified as a temporary investment.

If, as anticipated, the FASB eliminates the cash equivalent classification, a treasury bill will be classified as: A. cash. B. an investment. C. a receivable. D. a short-term investment.

D. a short-term investment. Treasury bills will be classified as short-term investments.

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). (T or F)

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).

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. (T or F)

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.

Aging accounts receivable is a variation of the percentage-of-sales approach to recognizing bad debt expense. (T or F)

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

Young Enterprises has an overdraft at one of its banks, Bank of Cleveland. Young has no other accounts at Bank of Cleveland. Young should report the bank overdraft as an offset against cash held at other banks. (T or F)

False. Bank overdrafts are 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.

The accounts receivable turnover ratio is computed by dividing gross sales by ending net receivables. (T or F)

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

If a company elects the fair value option, unrealized holding gains and losses on receivables are reported as part of other comprehensive income. (T or F)

False. Unrealized holding gains and losses on receivables are included in net income.

The percentage-of-sales approach of estimating bad debts does the best job of matching revenues and expenses on the income statement. (T or F)

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

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

True. Bad debt expense is recognized when an account is written off under the direct write-off method.

Cash can be classified as a current or long-term asset. (T or F)

True. Companies classify restricted cash either in the current assets or in the long-term assets section, depending on the date of availability or disbursement. Cash classified in the long-term section is frequently set aside for plant expansion or retirement of long-term debt.