Chapter 7 AC 310
effective interest rate
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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