Chapter 7 AC 310

effective interest rate

...

On December 1, 2013, Spice Company wants to borrow $262,000 from Bank Center and use its receivables as collateral for the loan. Bank Center will lend Spice Company 80% of the face amount of the receivables, charge a finance fee equal to 3% of the assigned receivables, and charge 12% interest payable monthly. What is the net amount of cash Spice Company receives on December 1, 2013?

203,312 The cash received is equal to 80% of the receivables less a 3% discount. In this case $262,000 × 80% = $209,600. $209,600 × 97% = $203,312.

The average collection period is calculated as

365/receivables turnover ratio

Monogram Company offers credit customers terms stated as 2/10, n/30. On October 5, 2013, Monogram sold merchandise at a price of $42,000. The customer paid ½ of the balance due on October 14 and the remaining balance on November 4. How much total cash was collected on this sale by Monogram Company?

41,580

Warren House manufactures and sells LCD TVs. On January 1, 2013, Warren House sold 710 LCD TVs to Beam, Inc. Warren House accepted a 12-month, noninterest bearing note for $118,600 in payment for the TVs. The TVs would have sold for $105,500 cash. The journal entry to record this transaction will include

A credit to Discount on note receivable for $13,100.

Premiere Muffins, Inc. has $6,500,000 of accounts receivable at December 31, 2013 and an allowance for doubtful accounts of $305,000. The December 31, 2013 balance sheet of Premiere Muffins will report

Accounts receivable, net, $6,195,000

The Committee of Sponsoring Organizations (COSO) defines internal control as a process designed to provide reasonable assurance regarding all of the following except

Appropriateness of tradeoff between risk and return.

further requires the auditor to express its own opinion on whether the company has maintained effective internal control over financial reporting.

Auditing Standard No. 5

Spice Company wants to borrow $250,000 from Bank Center and use its receivables as collateral for the loan. Which of the following statements is false regarding this transaction?

Bank Center will recognize the receivables and record them at their fair value.

_____ requires more disaggregation of accounts and notes receivable in the balance sheet or notes; for example separate disclosure of receivables from related parties.

GAAP

_____ treats bank overdrafts as liabilities

GAAP

______ focuses on whether control of assets has shifted from the transferor to the transferee

GAAP

Under _____, any liabilities are netted with cash

IFRS

____ allows bank overdrafts to be offset against other cash accounts.

IFRS

focuses on whether the company has transferred "substantially all of the risks and rewards of ownership," as well as whether the company has transferred control

IFRS

New Tire Co. is performing its monthly bank reconciliation. Which of the following statements is correct regarding this process?

If any errors on the part of the bank are discovered during the reconciliation process, the balance per bank would be adjusted.

Which of the following statements is correct concerning reversals of impairments?

Impairment reversals cannot result in the net book value of the receivable exceeding the original amount of the receivable (as adjusted for normal amortization of discount/premium).

True regarding the recording of cash discounts

Most companies use the gross method because it's easier and doesn't require adjusting entries for discounts not taken, The gross method views cash discounts not taken as part of sales revenue ,The net method considers cash discounts not taken as interest revenue.

Warren House manufactures and sells LCD TVs. On January 1, 2013, Warren House sold 710 LCD TVs to Beam, Inc. Warren House accepted a 12-month, noninterest bearing note for $118,600 in payment for the TVs. The TVs would have sold for $105,500 cash. The journal entry would be

Note receivable 118,600 Discount on note receivable 13,100 Sales revenue 105,500

Cash that is restricted in some way and not available for current use is

Reported as a noncurrent asset; such as "investments and funds" or "other assets".

Which of the following would be considered effective with regard to internal control in a company's cash receipts process?

Steve opens the mail each day and prepares a listing of all checks.

When a petty cash fund is replenished for cash expenditures made during the period,

The appropriate expense accounts are debited.

Accounts receivable are recorded at

The exchange price agreed upon by the buyer and seller.

designed to monitor receivables

The receivables turnover and average collection period ratios

A company has to separately disclose trade receivables and receivables from related parties under

U.S. GAAP

focuses on whether control of assets has shifted from the transferor to the transferee.

U.S. GAAP

cash in a checking account, U.S. Treasury bills that mature in six months, undeposited customer checks, cash in a savings account, and currency and coins. Which of these items would not be included in the company's balance sheet as cash and cash equivalents?

U.S. treasury bills

contra account to accounts receivable

allowance for sales returns

returns are material and a company can make reasonable estimates of future returns, an _______ ____ ______ ________ is established.

allowance for sales returns

Troubled debt restructurings result in

an impairment loss if the lender believes it is probable that it will not receive all of the cash flows (principal and any interest payments) that have been promised by the borrower.

_____ _____ ______ is the result of adjusting the allowance account to the desired ending balance

bad debt expense

The ______ _____ approach estimates the net realizable value of accounts receivable to be reported

balance sheet

The _______ _______ approach to estimating future bad debts indirectly determines bad debt expense by estimating the net realizable value for accounts receivable that exist at the end of the period.

balance sheet

the allowance for uncollectible accounts at the end of the period is estimated and then bad debt expense is determined by adjusting the allowance account to reflect net realizable value

balance sheet approach

both refer to the same discount intended to provide incentive for quick payments

cash and sales discounts

Maintaining a petty cash account for very minor cash purposes is consistent with a

cash disbursement control system.

Preparing a listing of all checks has to do with

cash receipts

The compensating balance can be included in the _____ and _____ _________ category of current assets

cash;cash equivalents

amount of cash a depositor (debtor) must leave on deposit in an account at a bank (creditor) as security for a loan or a commitment to lend

compensating balance

Estimated returns are recorded by ________ the sales returns account (a contra account to sales revenue) and _______ an "allowance for sales returns" account (a contra account to accounts receivable).

debiting; crediting

The ______ ____ ___ _____ does not anticipate or estimate uncollectible accounts; the bad debts are written off as they occur.

direct write off method

When interest is discounted from the face amount of a note, the ________ interest rate is higher than the stated discount rate.

effective

Both IFRS and U.S. GAAP allow a "______ _____ _____" for accounting for receivables.

fair value option

considers discounts not taken as part of sales revenue

gross method

________ sales returns can be recorded as they occur.

immaterial

The ________ ________ approach to estimating bad debts determines bad debt expense directly by relating uncollectible amounts to credit sales

income statement

Using the ________, bad debt expense is estimated as a percentage of each period's net credit sales.

income statement approach

Impairment reversals ______ income, for example by crediting bad debt expense in the period of reversal.

increase

The net method considers cash discounts not taken as

interest revenue.

If a sales return results in a customer returning goods that are defective, the company should record the returned goods at their ______ ______

market value

A compensating balance

must be disclosed even if the arrangement is informal; results in a higher effective interest rate since the amount of cash available for use is less than the loan amount.

considers discounts not taken as interest revenue, because they are viewed as compensation to the seller for allowing the buyer to defer payment

net method

The balance sheet approach to estimating future bad debts indirectly determines bad debt expense by estimating the _____ _________ _____ for accounts receivable that exist at the end of the period.

net realizable value

____ ______ is the gross amount of sales less actual returns and the allowance for estimated future returns.

net sales

The receivables turnover is calculated as

net sales/average accounts receivable (net)

The assignment of all accounts receivable in general as collateral for debt requires no special accounting treatment other than

note disclosure

What is appropriate for all compensating balances?

note disclosure

The discount on note receivable is a contra account to the _____ ________

note receivable

The classification and disclosure of a compensating balance depends

on the nature of the restriction and the classification of the related debt

Recognizing sales returns when they occur could result in an __________ of income in the period of the related sale.

overstatement

established by transferring a specified amount of cash from the company's general checking account to an employee designated as the petty cash custodian

petty cash

______ ________ is a process of using receivables to collateralize a loan

pledging receivables

Under IFRS the allowance for doubtful accounts is called the '__________ ___ _____ ______."

provision for bad debts

Even when specific customer accounts haven't been proven uncollectible by the end of the reporting period, bad debt expense properly should be matched with _______ ______ on the income statement for that period

sales revenue

The gross method views cash discounts not taken as part of

sales revenue.

More liberal credit policies, such as allowing customers a longer time to pay, are typically initiated to increase ____ ______

sales volumes

Treasury bills are counted as

short term investment

The use of ___________ is an attempt to satisfy the matching principle in accounting for bad debts and to record the accounts receivable at net realizable value.

the allowance method

Average accounts receivable is calculated as

the two years added together and divided by 2

cash equivalents have a maturity rate of no more than

three months

reductions below a list price and are used to establish a final price for a transaction

trade discounts

way to change prices without publishing a new catalog or to disguise real prices from competitors.

trade discounts

The income statement approach to estimating bad debts determines bad debt expense directly by relating __________ _______ to ________ ______

uncollectible accounts;credit sales

Accounts receivable factored ______ recourse are accounted for as the sale of an asset

without