Intermediate Accounting Ch. 7

Which condition will require that a compensating balance must be reported as restricted cash in noncurrent assets section of the balance sheet?

A company may not withdraw a portion of funds until its loan is due in 5 years

The discount on notes receivable account is classified as

A contra account to notes receivable

Cash that is restricted and is not available for current use may be reported in the balance sheet as

A noncurrent asset Investments and funds Other assets

Which of the following is a cost of offering a cash discount?

A reduction in the amount of cash collected from customers who take advantage of the discount.

Which method of financing with receivables has the transferee recognize the receivables as assets in its balance sheet?

A sale of receivables

Which of the following are potential benefits of offering cash discounts to customers?

Accelerated customer payment Increased sales volume Reduction in bad debt

Which of the following is a trade receivable?

Accounts receivable

When the amount of bad debts is material, GAAP requires the ____ method be used to reduce the carrying value of accounts receivable to the amount of cash expected to be received.

Allowance

When a specific account receivable is determined to be uncollectible, which of the following occur?

Allowance account is reduced Account receivable is reduced

When an accounts receivable is written off, which account is effected?

Allowance for uncollectible accounts

Which of the following items are classified as receivables?

Amounts loaned and expected to be repaid Amounts owed by customers Tax refund claims

A secured borrowing occurs when accounts receivable are ____ or ____ as collateral for a loan

Assigned Pledged

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the ____ account on the balance sheet.

Cash

Short-term, highly liquid investments such as money market funds or treasury bills are classified as

Cash equivalents

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that

Checks are signed by authorized individuals All expenditures are authorized All disbursements (other than petty cash) are made by check

Which of the following are adjustments to the book balance in a bank reconciliation?

Company errors Collections made by the bank on the company's behalf Bank service charges

A restriction of cash wherein the borrower is required to maintain a specific amount in a low-interest or noninterest-bearing account at the bank is called a(n) ____ balance.

Compensating

A cash restriction imposed by a bank wherein the debtor must leave a certain amount of funds such as 5% of the original loan in the low-interest or noninterest-bearing account is a

Compensating balance

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of ____.

Control

Which of the following give rise to a note receivable?

Loaning money to stockholders Loaning money to an affiliated company A formal, written extension of the credit period to trade customers

A petty cash fund is an efficient way to handle what type of payments?

Low cost office supply purchases

Both IFRS and U.S. GAAP permit the fair value option for accounting for receivables. Which of the following is correct regarding the application of this option?

IFRS restricts the circumstances for applying the fair value option

Checks received from customers that have not been deposited yet are included where on a company's balance sheet?

In the current asset "cash" account.

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) ____ approach to measuring bad debts.

Income statement

Separation of duties requires that

Individuals who have physical responsibility for assets should not have access to accounting records

Which of the following are nontrade receivables?

Interest receivable Loan to employee Tax refund claims

Since cash is the most liquid of assets, a well-designed system of ____ must surround all cash transactions.

Internal controls

Internal control over cash is important because cash

Is easily stolen Is a highly liquid asset

On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On January 1, when Song receives the note from the customer, Song will record

Credit to discount on note receivable $20,281 Debit to notes receivable $100,000 Credit to sales revenue $79,719

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end and principal and interest are due at maturity. The entry required on Light's books on April 1 when the note is due requires a

Credit to interest receivable, $2,000 Debit to cash, $104,000 Credit to note receivable, $100,000 Credit to interest revenue, $2,000

On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On December 31, when Song records interest for the year, Song will record

Credit to interest revenue $9,566 Debit to discount on note receivable $9,566

On March 1, Song Corp. receives a $100,000, 90-day, noninterest-bearing note receivable from a customer. The discount rate is 12%. On June 1, when Song receives full payment from the customer, Song will record a

Credit to interest revenue for $3,000

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. Orange has a December 31 year-end. On February 1, year 2, when the note matures, the journal entry for Orange will include a

Credit to interest revenue, $400

The income statement approach for estimating bad debts focuses on

Current year's credit sales

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require which of the following entries?

Debit Interest Receivable $2,000; credit interest revenue $2,000

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. The entry required on Orange's books on December 31, at the end of the year includes a

Debit Interest Receivable, $800

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable

Warner Corp. sells goods on account for $10,000. The customer pays the invoice in full on April 15, but on April 20, the customer returns $3,000 of the merchandise and receives a refund. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Cash

A company believes its sales returns will be material. What is the journal entry required?

Debit sales returns; credit allowance for sales returns

When actual inventory returns occur in a perpetual inventory system, which of the following happens?

Debit the asset inventory account

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise and receives a refund. As of May 15, the customer has paid for all of the goods with cash. What will Adrian record on May 15?

Debit to Sales Returns Credit to Cash

Tilly Corp. factored accounts receivable that had a book value of $100,000 to Second Bank. The transfer was made without recourse. Second Bank charged a 5% factoring fee and retained $3,000 to provide a reserve against potential sales returns and allowances. The journal entry Tilly will make to record the factoring arrangement will include a

Debit to cash for $92,000

Rascal Corp. borrows $500,000 by signing on a 1-year, 12% promissory note from General Finance Company and assigns $600,000 of its accounts receivable as collateral for the loan. General Finance charges a financing fee of 1% of the receivables assigned. The journal entry for Rascal to record the borrowing will include a

Debit to finance charge expense for $6,000

Carly Corp. factored accounts receivable that had a book value of $100,000 to First Bank. The transfer was made without recourse. First Bank charged a 4% factoring fee and retained $5,000 to provide a reserve against potential sales returns and allowances. Management estimates the fair value of the last 9% of receivables to be equivalent to the book value. The journal entry Carly will make to record the factoring arrangement will include a

Debit to loss on sale of receivables for $4,000.

Reconciling cash receipts to bank records helps verify that the amounts received also were

Deposited

Which of the following is an internal control procedure for cash disbursements?

Disbursements should be made by check

The transfer of a note receivable to a financial institution for an amount less than the face amount of the note is referred to as

Discounting a note receivable

An application where the interest rate stays the same over time, but interest revenue increases as the rate is multiplied by a receivable balance that increases is referred to as what?

Effective interest method

Internal control consists of plans to

Encourage adherence to company policies and procedures Promote operational efficiency Minimize errors and theft

Internal control consists of plans to

Enhance the accuracy of accounting data Promote operational efficiency Enhance the reliability of accounting data

A financial institution that buys receivables for cash and charges a fee for this service is referred to as a(n)

Factor

In a ____ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections.

Factor

Restrictions on cash may be

Formal by contract Informal arising from management intent

Cash equivalents include which of the following?

Money market funds Commercial paper with a maturity date of 90 days from date of purchase Treasury bills with a maturity date of 2 months from date of purchase

The income statement approach for estimating bad debts uses a percentage of

Net credit sales

The transfer of a(n) ____ to a financial institution is called discounting.

Note receivable

When adjusting the bank balance in a bank reconciliation, which item must be subtracted from the bank balance?

Outstanding checks

Which of the following situations require cash to be restricted?

Requirements to set aside funds to repay debt Requirement to use cash for future plant expansion

When a bank requires a borrower to set aside funds for the future payment of debt, this is known as what?

Restricted cash

Which of the following is a discount that is a reduction in the amount to be paid if the customer pays within a specified time period?

Sales discount

Under which approach to financing with receivables does the borrower act like it borrowed money from the lender, with the receivables remaining on the borrowers balance sheet and serving as collateral?

Secured borrowing

A critical aspect of a good internal control system is

Separation of duties

When adjusting the book balance in a bank reconciliation, which items must be subtracted from the cash account book balance?

Service charges Charges for NSF checks

The reconciliation process for cash receipts requires that the amount received from customers should agree with

The accounting records The bank-generated deposit slip

The classification and disclosure of a compensating balance depends on the nature of the restriction. Which condition will require that a compensating balance must be reported as restricted cash in either the current or noncurrent assets section of the balance sheet?

The restriction is legally binding

A company is allowed to account for the transfer of receivables as a sale if what occurs?

The transferor has surrendered control over the assets transferred

Which of the following indicate surrender of control over the assets transferred?

The transferor will have no continuing involvement Receivables are sold without recourse

In a sale of receivables, the ____ includes the receivables as assets in its balance sheet.

Transferee

Who has the receivables on their balance sheet in a sale of receivables?

Transferee

Who houses the financed receivables on their balance sheet in a secured borrowing?

Trasferor

For a note receivable, if the original terms of the debt are changed due to financial difficulties of the borrower, this is referred to as a ____ ____ restructuring.

Troubled debt

When a creditor changes the terms of a debt agreement in response to the debtor's financial difficulties, this is referred to as what?

Troubled debt restructuring

True or false: With the effective interest method, interest revenue differs between periods.

True

Under the allowance method, when is bad debt expense recognized?

When the allowance is created

A troubled debt restructuring occurs when

the creditor changes the terms of the agreement to make it easier for the debtor to pay