Cash and Receivables CPA questions
Roster Company adjusts its Allowance for Credit Losses at year end. The general ledger balances for the Accounts Receivable and the related allowance account before adjustment were $1,500,000 and $45,000, respectively. Roster estimates its necessary balance in its Allowance for Credit Losses as 4% of the Accounts Receivable balance. What amount should Roster record as an adjustment to its Allowance for Credit Losses at year end?
$15,000 decrease Explanation The desired ending balance in the allowance account is calculated by multiplying the percentage times ending Accounts Receivable, 4% × $1,500,000, or $60,000. Since the unadjusted balance in the allowance account is $45,000, it must be increased by $15,000 to equal the desired balance of $60,000.
Case Company's balances in Allowance for Credit Losses were $25,000 at the beginning of the current year and $18,000 at year end. During the year, receivables of $10,000 were written off as uncollectible. What amount should Case report as credit loss expense at year end?
$3,000 Explanation With a beginning balance of $25,000, the allowance for credit losses would be reduced to $15,000 by write-offs of $10,000. Since the ending balance in the allowance is $18,000, there must have been an increase of $3,000, which would have resulted from the recognition of credit loss expense.
On March 31, Year 3, Vale Company had an unadjusted credit balance of $1,000 in its allowance for credit losses. An analysis of Vale's trade accounts receivable at that date revealed the following: Age/Amount/Estimated uncollectible 0 - 30 days/$60,000/5% 31-60 days/$4,000/10% Over 60 days/$2,000/$1,400 What amount should Vale report as allowance for credit losses in its March 31, Year 3, balance sheet?
$4800 Explanation Under the current expected credit loss or CECL method, credit losses are accumulated in the allowance for credit losses (a contra-asset account) rather than reduce the recorded balance of accounts receivable directly. On each reporting date, the allowance is adjusted so that the net amount equals what management expects to be collected. Increases in the allowance are reported in a credit losses expense account. Decreases in the allowance are reported in a reversal of credit loss expense account. The aging of accounts receivable approach to estimate the expected credit losses identifies the percentage of uncollectible accounts in each category. For Vale: 5% of the $60,000 of accounts 0-30 days past due will be uncollectible, or $3,000 10% of the $4,000 of accounts 31-60 days past due will be uncollectible, or $400 $1,400 of the $2,000 of accounts over 60 days past due will also be uncollectible The total uncollectible amount will be $4,800. The allowance is adjusted accordingly so the ending allowance balance equals $4,800. Note that the entry to record the credit losses would only require a credit to the allowance of $3,800 due the existing $1,000 current balance.
Arnold Company has a checking account at Neighbor Bank and an interest-bearing savings account at Stranger Bank. On December 31, year 1, the bank reconciliations for Arnold Company are as follows: Stranger Bank Bank Balance: $45,000 Deposit in transit: $5,000 Book balance: $50,000 Neighbor Bank Bank Balance: $15,000 Outstanding checks: ($15,500) Book balance: ($500) What amount should be classified as cash on Arnold's balance sheet at December 31, year 1?
$50,000 Explanation Normally, both checking accounts and interest-bearing savings accounts are included in cash and reported in amounts equal to their reconciled balances, the book balances in this case. When an account is overdrawn, however, it may not be offset against accounts with positive balances unless they are in the same institution with the right of offset. When that is not the case, as here, the overdraft is reported as a liability and only the positive balance of $50,000 will be reported as cash.
At December 31, Year 1, Gasp Company's allowance for credit losses had a credit balance of $30,000. During Year 2, Gasp wrote off uncollectible accounts of $45,000. At December 31, Year 2, an aging of the accounts receivable indicated that $50,000 of the December 31, Year 2, receivables may be uncollectible. What amount of allowance for credit losses should Gasp report in its December 31, Year 2, balance sheet?
$50,000 Explanation The aging of receivables is one method used to estimate credit losses. Credit losses are reported by recognizing the expense on the income statement and offsetting accounts receivables on the balance sheet by an allowance for credit losses, a contra-asset account (ie, a valuation account). The balance in the allowance for credit losses represents the portion of accounts receivable that is not expected to be collected as a result of the customers' inability to pay. If $50,000 is expected to be uncollectible, that is the amount that should be reported for the allowance for credit losses at December 31, Year 2. The balance in the allowance for credit losses represents the portion of accounts receivable that is not expected to be collected. If $50,000 is expected to be uncollectible, that is the amount that should be reported for the allowance at December 31, Year 2. Since the previous year's balance was $30,000 and $45,000 in accounts were written off, the allowance would have been exhausted during the year and have a balance of zero. The $15,000 in write-offs not absorbed by the allowance would have been recorded as a debit to credit loss expense and a credit to accounts receivable. A credit loss expense of $50,000 would be recognized in order to end up with a balance of $50,000 in the allowance for credit losses.
Misk, Incorporated received from a customer a one-year, $750,000 note bearing annual interest of 9%. After holding the note for six months, Misk discounted the note at National Bank at an effective interest rate of 12%. What amount of cash did Misk receive from the bank?
$768,450 Explanation Misk will first calculate the maturity value of the note, which will be the face value of $750,000 plus one year's interest at 9% or $67,500. Since the note is being discounted after 6 months, the bank will receive $817,500 after six months. The discount will be $817,500 × 12% × 6/12 or $49,050. As a result, Misk will receive $817,500 − $49,050 or $768,450 from the bank.
On April 1, Keder, Incorporated factored $90,000 of its accounts receivable without recourse. The factor retained 8% of the accounts receivable as an allowance for sales returns and charged a 4% commission on the gross amount of the factored receivables. What amount of cash did Keder receive from the factored receivables?
$79,200 Explanation Factoring accounts receivable without recourse is the equivalent to a sale of accounts receivable. The sales price will be equal to the face amount of the receivables, $90,000, minus a commission, 4% × $90,000, or $3,600, resulting in a sales price of $86,400. In addition, the buyer will hold back, or retain, some of the sales price as protection against the return of goods to the seller. In this case, the retained amount is 8% of receivables, or $7,200, resulting in proceeds of $86,400 − $7,200 or $79,200.
Cook Company determined that the net value of its accounts receivable at December 31, Year 4, based on an aging of the receivables, was $235,000. Additional information is as follows: Allowance for credit losses - January 1,Year 4: $40,000 Uncollectible accounts written off during Year 4: $22,000 Uncollectible accounts recovered during Year 4: $8,000 Accounts receivable at December 31, Year 4: $270,000 How much was recognized as the credit loss expense?
$9,000 Explanation Credit losses (bad debts) are the portion of trade receivables the seller does not expect to collect as a result of the customers' inability to pay. Under the Current Expected Credit Loss (CECL) model, the allowance for credit losses (a contra-account to receivables) is recorded to reflect the total estimate of expected credit losses. On each reporting date, the allowance is adjusted so that the net amount (receivables less allowance) equals what management expects to be collected. Increases in the allowance are reported in as a credit loss expense. Decreases in the allowance are reported as a reversal of the credit loss expense. One method used to determine credit loss expense is the perform an aging of the receivables. During the year, the allowance for credit losses is increased by recoveries (reinstated accounts) and decreased by accounts written off. The ending balance for the allowance before recognizing any credit loss expense is $26,000 ($40,000 beginning allowance − $22,000 write-offs + $8,000 recoveries). A year-end accounts receivable of $270,000 with a net value of $235,000, requires an allowance for credit losses of $35,000 ($270,000 − $235,000). The company will make the following journal entry to increase the $26,000 current allowance balance to the required balance of $35,000.
When the current expected credit losses method is used, which of the following statements is true regarding the impact a collection of an account previously written off would have on Accounts Receivable and Allowance for Credit Losses balances? A) Accounts Receivable would not change and Allowance for Credit Losses would decrease. B) Accounts Receivable would not change and Allowance for Credit Losses would increase. C) Accounts Receivable would increase and Allowance for Credit Losses would decrease. D) Accounts Receivable would increase and Allowance for Credit Losses would not change.
B) Accounts Receivable would not change and Allowance for Credit Losses would increase. Explanation The recovery of a receivable that was previously written off is recognized by first reversing the entry to write it off with an increase to the allowance account and an increase in Accounts Receivable. The collection is recorded with an increase in Cash and a decrease to Accounts Receivable. The net effect is an increase in the allowance account and an increase in Cash with no change to Accounts Receivable.
Gray Company is concerned that it may not have enough employees to ensure proper separation of duties regarding cash disbursements. Which of the following may be performed by the same individual? A) Authorizing vendor payments and recording the payments in the general ledger. B) Comparing vendor invoices with associated purchase orders and verifying physical receipt of orders with receiving department. C) Access to blank checks and ability to sign them with an automatic check-signing device. D) Setting up wire transfers via the company's online bank account and releasing wire transfers.
B) Comparing vendor invoices with associated purchase orders and verifying physical receipt of orders with receiving department. Explanation The same employee may take appropriate steps to verify that the payment amount requested on a vendor's invoice agrees with what the company intended to order, as shown in the purchase order, and with what was actually received from the vendor. Such steps are often preliminary to authorization of payment, which may also be performed by the same employee. Giving one employee the ability to both authorize vendor payments and record the payments in the general ledger opens up the possibility for fraud or theft; the employee can authorize payment of one amount while recording a different amount in the general ledger. Having access to blank checks and an automatic check-signing device would allow an employee to write and sign a check to herself. Similarly, the ability to both prepare and release wire transfers would allow an employee to wire money to himself.
Carter Company records credit losses adhering to the current expected credit loss model. During the year, Carter wrote off a customer's account receivable. What impact does the write-off have on Carter's net income and total assets? A) Net income did not change and net assets decreased. B) Net income decreased and net assets decreased. C) Net income did not change and net assets did not change. D) Net income decreased and net assets did not change.
C) Net income did not change and net assets did not change. Explanation A customer's account is written off with a debit, or decrease, to the Allowance for Credit Losses, and a credit, or decrease, to Accounts Receivable. Since net Accounts Receivable is equal to Accounts Receivable minus the allowance account, and since both are reduced by the same amount, net Accounts Receivable is not changed and financial position is not affected. In addition, since no income statement accounts are involved, net income remains the same as well.
Choose the correct statement(s) below regarding the direct write-off method for calculating credit loss expense. I. It is not normally consistent with GAAP and accrual accounting. II. Its use tends to result in an overstatement of accounts receivable on the balance sheet. III. Under this method, credit loss expense is recognized when a specific account is determined to be uncollectible.
I, II, and III Explanation Under the direct write-off method, accounts receivable is reported at its gross amount and credit loss expense is recognized when a specific account has been identified as uncollectible and is written off. As a result, accounts receivable is overstated on the balance sheet since it ignores the fact that some of the reported receivables will not be collectible. It is also not consistent with accrual accounting and GAAP, which require that credit loss expense be recognized, on an estimated basis, in the same period as the sale is reported.
During the year, Hauser Company wrote off a customer's account receivable. Hauser recognizes credit losses according to the current expected credit loss model. What impact would the write-off have on net income and total assets? Comprehensive income/Total assets a.Decrease/Decrease b.Decrease/No effect c.No effect/Decrease d.No effect/No effect
Option D Explanation GAAP requires the current expected credit loss (CECL) model to be used when accounting for credit losses (ie, bad debts). Rather than reducing the accounts receivable (A/R) directly, expected credit losses accumulate in the allowance for credit losses, a contra (ie, valuation) account. The allowance is adjusted on each reporting date, so the net carrying value of the A/R equals what management expects to collect due to credit risk. The CECL model requires accounts receivable to be written off (partially or fully) during the period in which the accounts are determined to be uncollectible (matching principle). The entry to write off a specific uncollectible account: is recorded with a debit (decrease) to the allowance for credit losses and a credit (decrease) to accounts receivable, has no effect on net income (or comprehensive income) because only balance sheet accounts are used, and has no effect on total assets because the debit and credit to the asset and contra-asset accounts are offsetting.
In its December 31 balance sheet, Butler Company reported trade accounts receivable of $250,000 and related allowance for credit losses of $20,000. What is the total risk of credit loss related to Butler's trade accounts receivable, and what amount of that risk is off-balance sheet risk? Risk of credit loss / Off-balance sheet risk A)$ 0/ $ 0 B)$ 230,000 / $ 0 C)$ 230,000 / $ 20,000 D)$ 250,000 / $ 20,000
choice B Explanation Choice B (Correct): An entity may have a risk of credit loss that is not associated with a financial asset or any other item(s) that are reported on the balance sheet. This result in an off-balance-sheet risk of credit exposure. A common example is an entity's guarantee of another entity's obligations. If receivables were subject to a total credit loss (become worthless), the asset would be written off by removing the $250,000 receivable and the $20,000 allowance. Therefore, the total risk of credit loss equals the $230,000 ($250,000 − $20,000) net amount of the receivable. Since the asset appears on the balance sheet in that amount, no portion of the loss would be considered off-balance-sheet. Choice A (Incorrect): If receivables were to become worthless, the total risk of credit loss is the amount at which net receivables are reported, which is not $0. Choice C (Incorrect): Although the risk of credit loss is $230,000, it appears on the balance sheet as the carrying value of accounts receivable and, as a result, no portion of it is off-balance-sheet risk. Choice D (Incorrect): The risk of credit loss is the amount of loss that would be recognized if an asset were to become worthless, which is the net amount at which it is reported, not the gross amount of $250,000.