Intermediate Accounting Ch.7 LearnSmart Part 2
The _____ approach to transfer receivables is preferred by the transferor.
sale
Examine the following journal entry. This journal entry represents which of the following transactions?
sale with recourse
If a company anticipates that some of its note receivables will not be collectible, it should
use an allowance account to value the note at net realizable value.
In a factoring arrangement made ____ recourse, the seller bears the risk of uncollectibility.
with
In a factoring arrangement made _____ recourse, the seller bears the risk of uncollectibility.
with
The buyer assumes the risk of uncollectibility when accounts receivable are sold
without recourse
Similar to accounts receivable, a company must estimate credit losses on its notes receivable and use a(n) _______ account to reduce the receivable to the appropriate carrying value.
allowance
Similar to accounts receivable, a company must estimate credit losses on its notes receivable and use a(n) account to reduce the receivable to the appropriate carrying value.
allowance
In a sale of an accounts receivable without recourse, if the customer does not pay, the loss is assumed by the _____ of the accounts receivable.
buyer, transferee, purchaser, owner, or factor
bearing note, interest is deducted from the face amount of the loan to determine the cash proceeds available to the borrower at the time of loan.
noninterest, non interest, or non-interest
A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.
note receivable
The transfer of a(n) ____ to a financial institution is called discounting.
note receivable
Companies finance with receivables to
obtain immediate cash.
Companies finance with their receivables to
receive cash before customers would pay amounts due. increase cash flow. shorten the operating cycle.
To calculate the effective rate of interest on a noninterest-bearing note, the amount of interest is divided by the ______.
sales price
On January 1, year 1. Jordan receives a $100,000 note receivable from a customer. The note receivable is a 10% note, due at the end of the year on December 31. Jordan immediately discounts the note receivable at Third Bank at a discount rate of 12%. What are the cash proceeds of the discounted note?
$96,800 Reason: ($100,000 x 1.10) = $110,000 maturity value. $110,000 x 0.12 = $13,200 discount. Maturity value of $110,000 less $13,200 discount = $96,800.
Which of the following give rise to a note receivable?
A formal, written extension of the credit period to trade customers. Loaning money to an affiliated company. Loaning money to stockholders.
Which method of financing with receivables has the transferee recognize the receivables as assets in its balance sheet?
A sale of receivables
In a sale of receivables, the includes the receivables as assets in its balance sheet.
transferee
On January 1, Klay Corp. receives a $100,000, 120-day, noninterest-bearing note receivable from a customer. The discount rate is 6%. On May 1, when Klay receives full payment from the customer, Klay will record a
credit to notes receivable for $100,000.
An alternative method for valuing notes receivable is the
fair value method.
true or false: When a discount on notes receivable is amortized, interest revenue is recorded.
true
The required accounting treatment for pledging receivables requires
disclosure in the notes to financial statements.
On January 1, 2022, Austin Company received a 12-month, $100,000 note with a stated rate of 7%. On April 30, 2022, Austin discounted the note at the Houston Bank. The bank's discount rate is 8%. What are the cash proceeds from discounting the note receivable?
$101,293 Reason: $100,000 face amount + $7,000 interest to maturity ($100,000 x 7%) = maturity value less the discount for the time remaining to maturity of $5,707 ($107,000 x 8% x 8/12) = $101,293
Lee accepts a $100,000, 90-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is
$97,000.
Garcia sells goods to a customer for $100,000 on a noninterest-bearing, 180-day note receivable. The discount rate is 12%. The effective interest rate for this note is
12.77% Reason: The interest is $100,000 x 12% x 180/360 days = $6,000. $6,000/$94,000 proceeds = 6.383% x 2 = 12.77% annual interest (rounded).
Which method of financing with receivables has the transferor derecognize the receivables from its balance sheet?
A sale of receivables
If Company A sells accounts receivable without recourse to ABC Finance and the customer cannot pay, who assumes the risk of bad debts?
ABC Finance
A partial transfer in accounts receivable is treated as a secured borrowing, unless the amount transferred qualifies as a , which is defined as sharing proportionally in the cash flows of the receivable and having equal rights with respect to the receivables.
Blank 1: participating Blank 2: interest
Which of the following are services performed by a factor?
Buy accounts receivable. Handle billing and collection of accounts receivable.
If Company A sells accounts receivable with recourse to ABC Finance and the customer cannot pay, who assumes the risk of bad debts?
Company A
Which of the following is an accurate comparison of long-term notes receivable to short-term notes receivable?
The time value of money has a larger effect on long-term notes receivable.
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 March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?
Debit Notes Receivable $100,000; credit Service Revenue $100,000.
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
It is likely that bad debt accruals under IFRS will be _____ and will occur _____ than under U.S. GAAP.
lower; later
The formula for calculating interest multiplies which of the following?
Fraction of the annual period Annual interest rate Face amount of the note
Which of the following must be disclosed regarding asset transfers?
How fair values were estimated when recording the transaction. Any cash flows occurring between the transferor and transferee. The amount of receivables that are past due and any related credit losses during the period.
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
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
The IFRS Expected Credit Loss model bases expected credit losses on most receivables that could occur when?
Only within the next twelve months.
Jessica accepts a $50,000, 60-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is
Reason: $50,000 - ($50,000 x 12% x 60/360) = $49,000
Riley has a $100,000 note receivable from a customer. The note receivable is an 8% note, due in 9 months. Three months after accepting the note, Riley discounts the note receivable at Third Bank at a discount rate of 10%. What are the cash proceeds of the discounted note?
Reason: ($100,000 x 0.08 x 9/12) = $6,000 interest. Maturity value of $106,000 x 0.10 x 6/12 = $5,300 discount. Maturity value of $106,000 less $5,300 discount = $100,700.
A sale of accounts receivable requires which of the following?
Recognize the fair value of assets acquired or liabilities assumed. Remove the accounts receivable from the balance sheet.
The required accounting treatment for transfer of receivables as a sale includes which of the following
Remove receivables Record proceeds Recognize gain or loss
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
Which of the following are reasons why a transferor prefers the sale approach over the secured borrowing approach of transferring receivables?
The transferor seems more liquid The transferor seems less leveraged The transferor seems more profitable
Which of the following conditions must exist for a transfer of receivables to be treated as a sale?
The transferor surrenders control of the asset. The assets are isolated and beyond the reach of the transferor. The transferee has the right to pledge or exchange the assets.
Who has the receivables on their balance sheet in a sale of receivables?
Transferee
The recognizes a note receivable in a secured borrowing agreement.
Transferor
True or false: Long-term notes receivable are accounted for the same way as short-term notes receivable, but the time value of money has a larger effect.
True Reason: The accounting for long-term notes receivable is the same as short-term notes receivable, but the time value of money has a larger effect on long-term notes.
True or false: A sale of an accounts receivable results in removing the accounts receivable from the balance sheet.
True Reason: When an accounts receivable is sold, the transferor removes the accounts receivable from the balance sheet.
The discount on notes receivable account is classified as
a contra account to notes receivable.
Financing with receivables is accomplished through
a secured borrowing or a sale of receivables.
The discount on notes receivable account is a(n) _________ account to the note receivable account.
contra
The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of
control
A note received solely for cash is valued at
its present value, which is the cash amount.
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 January 1, Klay Corp. receives a $100,000, 120-day, noninterest-bearing note receivable from a customer in exchange for the sale of goods. The note has a 6% discount rate. On January 1, when Klay receives the note from the customer, Klay will record
credit to discount on notes receivable for $2,000. credit to sales revenue for $98,000. debit to notes receivable for $100,000.
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 journal entry required for a note receivable transferred as a sale would include a
credit to notes receivable.
Tilly Corp. factored accounts receivable that had a book value of $100,000 to Second Bank. The transfer was made with recourse. Second Bank charged a 5% factoring fee and retained $3,000 to provide a reserve against potential sales returns and allowances. Tilly estimates the amount of accounts receivable that will be uncollectible is $2,000. The journal entry Tilly will make to record the factoring arrangement will include a
credit to recourse liability for $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.
On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a
debit to Notes Receivable, $40,000.
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.
Kraven Corporation borrows $100,000 by signing on a 1-year, 8% promissory note from General Finance Company and assigns $120,000 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 Kraven to record the borrowing will include a
debit to cash for $98,800.
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
debit to cash, $104,000 credit to interest revenue, $2,000 credit to note receivable, $100,000 credit to interest receivable, $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
debit to discount on note receivable $9,566 credit to interest revenue $9,566
Kraven Corp. borrows $100,000 by signing on a 1-year, 8% promissory note from General Finance Company and assigns $120,000 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 Kraven to record the borrowing will include a
debit to finance charge expense for $1,200.
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. credit to liability—financing arrangements for $500,000.
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.
The transfer of a note to a financial institution is referred to as
discounting
A financial institution that buys receivables for cash and charges a fee for this service is referred to as a(n)
factor
arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections
factor or factoring
If a company elects the fair value option for receivables, changes in fair value are recognized as
gains and losses on the income statement.
(Face amount x annual rate x fraction of the annual period) is the formula for
interest
Financing receivables can be done by a
secured borrowing. sale of receivables
The type of arrangement wherein a special purpose entity is created for the purpose of purchasing pools of receivables is called
securitization
The type of financing arrangement wherein accounts receivable are sold to a trust or subsidiary as a pool of receivables is called
securitization.
If a note with an unrealistic interest rate is received solely in exchange for cash, the present value of the note is considered to be
the cash paid.
When recording noninterest-bearing notes receivable, the discount on a noninterest-bearing note receivable represents
the interest to be earned on the note receivable.
True or false: Both interest bearing and noninterest bearing notes bear interest.
true
True or false: When a discount on notes receivable is amortized, interest revenue is recorded.
true
True or false: With the effective interest method, interest revenue differs between periods.
true