Accounting 303 Chapter 7 Orion
Why do companies often use the gross method of recording cash discounts if the net method is theoretically more correct?
The gross method requires less bookkeeping
Miles Corporation sold land to South Ridge Inc. for $200,000 cash and a zero interest-bearing note with a face amount of $600,000. The fair value of the land at the date of sale was $690,000. What value should be assigned to the note receivable by South Ridge?
The land has a fair value of $690,000 so the cash plus note must equal that amount. $690,000 - $200,000 = $490,000
Scarlett Corporation factored, with recourse, $625,000 of accounts receivable with Twelve Oaks Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Scarlett Corporation estimates the recourse obligation at $10,500 and reported ___ as a loss on sale of receivables.
The loss is the finance charge plus the fair value of the recourse obligation. Finance charge: 0.03 x $625,000 = $18,750 $18,750 + $10,500 = $29,250
What would be the result of writing off an uncollectible account under the allowance method of recognizing uncollectible accounts?
The net income would remain the same.
Which of the following is most like the SEC definition for a compensating balance?
The portion of any demand deposit, time deposit, or certificate of deposit maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with the lending institution.
Unitex sold its accounts receivable outright to Hyperion Enterprises which is a financing company that normally buys accounts receivable of other companies without recourse. What has happened to the accounts receivable?
They have been factored.
To properly record bad debt expense, one should not determine bad debt expense by
charging bad debts as accounts are written off as uncollectible.
Which words correctly complete the following statement? A promissory note is signed by the ________ who agrees to pay a certain sum of money to the
maker; payee
Gandalf & Sons receives a 5-year, $20,000 zero interest-bearing note, the present value of which is $11,348.60. What is the implicit interest rate that equates the total cash to be received to the present value of the future cash flows?
$20,000/$11348.6 = 1.7623 Raise 1.7623 to the power of 1/the number of periods and then subtract 1. 1.7623(1/5) - 1 = 11.999
Jane Dear Tractors has cash in bank of $85,000, cash set aside for a plant expansion in a separate account of $105,000, short-term paper that matures in 10 months for $35,000, and a compensating balance at another bank for a long-term loan of $90,000. How much should be reported under the heading Cash?
$85,000 Restricted cash and compensating balance are separately reported as assets. The short-term paper is not a cash equivalent due to the 10-month maturity date, and the heading only includes cash, not cash equivalents. The cash in this case is limited to the cash in the bank.
Which of the following statements are true regarding the classification of accounts and notes receivable? (Select all that apply.) 1. Segregation of the different types of receivables is required if they are material. 2. Disclose any loss contingencies that exist on the receivables. 3. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively. 4. Valuation accounts should be appropriately offset against the proper receivable accounts.
1, 2, and 4 but not 3
Which of the following statements are true regarding uncollectible accounts receivable? (Select all that apply.) 1. The direct write-off method records the bad debt in the year that it is determined that a specific receivable cannot be collected. 2. The allowance method is based on the assumption that the percentage of receivables that will not be collected can be predicted from past experiences, present market conditions, and an analysis of outstanding balances. 3. The direct write-off method will provide for a proper matching of costs with revenues of the period when the average monthly accounts receivable balance is consistent throughout the year. 4. An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders' equity.
1, 2, and 4 but not 3
Which of the following conditions are required if the transfer of receivables with recourse is to be accounted for as a sale? 1. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. 2. The transferor surrenders control of the future economic benefits of the receivables. 3. The transferee cannot require the transferor to repurchase the receivables. 4. The transferor's obligation under the recourse provisions can be reasonably estimated.
2, 3, and 4 but not 1
When a customer purchases merchandise inventory from a business organization, the customer may be given a discount which is designed to induce prompt payment. What is the term for this type of discount?
A cash discount
On August 2, Home Run Apparel sold $30,000 of inventory items on credit with the terms 1/10, net 30. Payment on $18,000 sales was received on August 8 and the remaining payment on $12,000 sales was received on August 27. What would be included in the entry for August 27 under the net method?
A debit to Accounts Receivable and credit to Sales Discount Forfeited for $120
Which phrases fill in the following blanks? The normal journal entry to record the collection of accounts receivable previously written off when using the allowance method would debit ____ and credit
Accounts Receivable; Allowance for Doubtful Accounts.
Which phrases fill in the following blanks? The normal journal entry when writing-off an account as uncollectible under the allowance method would debit ___ and credit
Allowance for Doubtful Accounts; Accounts Receivable.
How should Trinitron Inc. report an IOU from Julius Corporation?
As a receivable
Hat Trick Manufacturing sold equipment to Puck & Co., taking in exchange a zero interest bearing note. The equipment had a fair market value of $36,000 and the face amount of the note was $40,000. How should Hat Trick Manufacturing present the note in a balance sheet prepared immediately after receipt of the note?
At face amount less implicit interest.
Which of the following is an example of a company that must choose the fair value option for their note from Basil Corp for 2020?
Atlanta Inc. is still holding a note from Basil Corp for which it chose the fair value option in 2019
Which of the following shows the correct journal entry to record the sale under the net method if Dalton Inc. made a $15,000 sale with credit terms of 2/10, n/30?
Debit Accounts Receivable for $14,700 and credit Sales Revenue for $14,700
Al's Toys Cash balance on December 31, 2020, was $10,000. In addition, Al had the following items on its premises on December 31: Check payable to Al's Toys, dated January 5, 2021, included in December 31 book balance$ 250 Postage stamps on hand not included in December 31 book balance $120 Cashier's check payable to Al's Toys, dated December 26, 2020, not included in December 31 Cash balance $1,500 The proper amount to be shown as Cash on Al's balance sheet at December 31, 2020, is
Cash should be reduced by the $250 that was improperly included for the postdated check and then increased by $1,500 for the improperly excluded check. $10,000 -$250 + $1,500 = $11,250
A company that wishes to emphasize better matching of expenses with revenues rather than a better estimate of net realizable value should use the percentage-of-receivables approach for estimating uncollectible accounts.
False
The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.
False
The balance sheet will have a more accurate valuation of receivables if the percentage-of-sales method, rather than the percentage-of-receivables method, is used.
False The percentage-of-sales basis results in a better matching of expenses with revenues—an income statement viewpoint.
For the month of May 2020, Ceres Corporation, which uses the direct write-off method in accounting for uncollectible accounts receivable, has the following information: Cash sales $40,000 Cash received on accounts receivable $32,000 Accounts receivable, May 1, 2020 $105,000 Accounts receivable, May 31, 2020 $92,000 Accounts receivable written off as uncollectible $2,000 What are the gross sales for May 2020?
Find the difference between the beginning and ending accounts receivable. $105,000 - $92,000 = $13,000 Subtract this from the cash received on accounts receivable to find the amount of credit sales. $32,000 -$13,000 = $19,000 Add this to the cash sales. $19,000 + $40,000 = $59,000 Adjust for the direct write offs. $59,000 + $2,000 = $61,000
In addition to being a short-term, highly liquid investment that is readily convertible into known amounts of cash, which of the following is also true of cash equivalents?
It is likely they will be recorded as temporary investments in the future.
What is the expected result of an accounts receivable that the company expects to collect in 10 months?
It would be classified as a current receivable because the current year or operating cycle includes the next 10 months.
What is the expected result if Northern Pine Company pays $16,750 for a zero-interest-bearing, three-year note with a face value of $20,000?
Northern Pine can determine the yearly interest by amortizing the difference between the future value and the present value over the life of the note.
Line Drive Apparel had accounts receivable of $200,000 at 1/1/2020. During 2020 the only transactions affecting accounts receivable were sales of $800,000 and cash collections of $700,000. What would be the accounts receivable turnover?
Sales/average accounts receivable = turnover Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable )/2 =($200,000 + ($200,000 + $800,000 -$700,000))/2 =$250,000 $800,000/$250,000 = 3.2
Why is the allowance method preferable to the direct write-off method?
The allowance method recognizes the expense of a bad debt in the same period as the sale.
A company receives a note for which there is no stated interest rate in exchange for services, and determining the fair value of the services is difficult. What will happen in regards to the interest rate on the note when the prevailing interest rates change?
The company will approximate an interest rate when it receives the note and then ignore changes in prevailing interest rates
If a specific account receivable is determined to be uncollectible then the net amount reported for short-term receivables will NOT change.
True
A generally accepted method of determining the amount of the adjustment to bad debt expense is by determining
a percentage of sales not adjusted for the balance in the allowance.
Which phrases fill in the following blanks? Orion Industries calculated the ________ to assess how successful they were at collecting outstanding receivables and the ________ to assess the effectiveness of their credit and collection policies.
accounts receivable turnover; days outstanding
A bank overdraft that is not material should be reported in the current liabilities where it is________ to Accounts Payable.
added
Accounts receivable from officers, employees, or affiliated companies should be presented on the balance sheet
as assets but separately from other receivables.
Which of the following is not a problem associated with the valuation of accounts receivable?
cash discounts under the net method
Recording annual bad debt expense by ___ violates the expense recognition concept.
direct write-off
A _____ would be properly classified as cash.
savings account
What is the interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note?
the implicit rate
Trade discounts are offered
to avoid frequent changes in catalogs and to easily alter prices for different customers.