RES SU6 - HW1 (6.1 & 6.2)

Fact Pattern: On January 2, Year 3, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, Year 6. There was no established exchange price for the equipment, and the market value of the note cannot be reasonably approximated. The prevailing rate of interest for a note of this type at January 2, Year 3, was 10%. The present value of 1 at 10% for three periods is 0.75. In Emme's Year 3 income statement, what amount should be reported as gain (loss) on sale of equipment? A) $(30,000) B) $120,000 C) $30,000 D) $150,000

A) $(30,000) Emme Co. sold equipment with a carrying amount of $480,000 and received a note with a present value of $450,000 ($600,000 × .75). Thus, Emme should report a $30,000 loss ($480,000 - $450,000).

Orr Co. prepared an aging of its accounts receivable at December 31 and determined that the net carrying amount of the receivables was $250,000. Additional information is available as follows: Allowance for credit losses at 1/1: $28,000 Accounts written off as uncollectible during the year: $23,000 Gross accounts receivable at 12/31: $270,000 Collections of accounts that were previously written off and not expected to be recovered: $5,000 For the year ended December 31, Orr's credit loss expense is A) $10,000 B) $20,000 C) $23,000 D) $15,000

A) $10,000 As indicated in the T-account analysis below, the beginning balance of the allowance is $28,000, the ending balance is $20,000 ($270,000 gross accounts receivable at 12/31 - $250,000 carrying amount), total debits for write-offs equaled $23,000, and credits for recoveries of accounts written off totaled $5,000. The balancing credit for credit loss expense is therefore $10,000.

Foster Co. adjusted its allowance for credit losses at year end. The general ledger balances for the accounts receivable and the related allowance account were $1,000,000 and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate its allowance for credit losses. Accounts receivable were estimated to be 5% uncollectible. What amount should Foster record as an adjustment to its allowance for credit losses at year end? A) $10,000 increase. B) $50,000 increase. C) $50,000 decrease. D) $10,000 decrease.

A) $10,000 increase. Because the percentage of accounts receivable method is used to estimate the allowance, the accounts receivable balance must be multiplied by 5%. Thus, the allowance for credit losses should be $50,000 ($1,000,000 × 5%). Given that the pre-adjustment allowance for credit losses is $40,000, the year-end adjustment must increase the allowance by $10,000 (debit credit loss expense, credit the allowance).

Inge Co. determined that the net value of its accounts receivable at December 31, based on an aging of the receivables, was $325,000. Additional information is as follows: Allowance for credit losses at 1/1: $30,000 Uncollectible accounts written off during the year: $18,000 Collection of accounts previously written off that were not expected to be recovered: $2,000 Gross amount of accounts receivable at 12/31: $350,000 For the year, what would be Inge's credit loss expense? A) $11,000 B) $15,000 C) $21,000 D) $5,000

A) $11,000 The allowance for credit losses before year-end adjustment is $14,000 ($30,000 beginning balance - $18,000 write-offs + $2,000 collection of written off accounts). The balance should be $25,000 ($350,000 year-end gross A/R - $325,000 net value based on aging). Thus, the allowance account should be credited and credit loss expense debited for $11,000 ($25,000 desired balance - $14,000).

On December 1, Year 4, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan. Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, Year 5. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000. What amount of accrued interest receivable should Tigg include in its December 31, Year 4, balance sheet? A) $2,000 B) $2,166 C) $4,450 D) $0

A) $2,000 Accrued interest receivable is always equal to the face amount times the nominal rate for the period of the accrual. Thus, the accrued interest receivable is $2,000 [$200,000 × 12% × (1 ÷ 12)].

On January 1, Year 3, Orr Company bought a building with an assessed value of $220,000 on the date of purchase. Orr gave as consideration a $400,000 noninterest-bearing note due on January 1, Year 6. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type at January 1, Year 3, was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest expense should be included in Orr's Year 3 income statement? A) $30,000 B) $33,333 C) $40,000 D) $22,000

A) $30,000 The purchase of a building without an established exchange price should be recorded at the fair value of the consideration given. A noninterest-bearing note receivable or payable should be recorded at the present value of the future cash flows discounted at the prevailing rate of interest. This note payable and building should therefore be recorded at $300,000 ($400,000 × 0.75). The difference between the face amount (a liability) and the present value is recorded as a discount and amortized to interest expense over the life of the note payable using the effective interest method. The amount of interest expense for the first year is $30,000 ($300,000 discounted note × 10% effective rate).

Mill Co.'s allowance for credit losses was $100,000 at the end of Year 2 and $90,000 at the end of Year 1. For the year ended December 31, Year 2, Mill reported credit loss expense of $16,000 in its income statement. What amount did Mill debit to the appropriate account in Year 2 to write off actual bad debts? A) $6,000 B) $10,000 C) $26,000 D) $16,000

A) $6,000 When uncollectible accounts are written off, a debit is made to the allowance and a credit to accounts receivable. The beginning balance in the allowance account is $90,000, the ending balance is $100,000, and the credit loss expense is $16,000. Because write-offs equal the beginning balance, plus the credit loss expense, minus the ending balance, $6,000 of accounts must have been written off. 12/31/Yr 1: $90,000 - Write-offs: $6,000 + Credit loss expense: $16,000 = 12/31/Yr 2 Allowance: $100,000

An internal auditor is deriving cash flow data based on an incomplete set of facts. Credit loss expense was $2,000. Additional data for this period follows: Credit sales: $100,000 Gross accounts receivable -- beginning balance: $5,000 Allowance for credit losses -- beginning balance: $(500) Accounts receivable written off: $1,000 Increase in net accounts receivable (after subtraction of allowance for credit losses): $30,000 How much cash was collected this period on credit sales? A) $68,000 B) $64,000 C) $68,500 D) $70,000

A) $68,000 The beginning balance of gross accounts receivable (A/R) was $5,000 (debit). Thus, net beginning A/R was $4,500 ($5,000 - $500 credit in the allowance for credit losses). The allowance was credited for the $2,000 credit loss expense. Accordingly, the ending allowance (credit) was $1,500 ($500 - $1,000 write-off + $2,000). Given a $30,000 increase in net A/R, ending net A/R must have been $34,500 ($4,500 beginning net A/R + $30,000), with ending gross A/R of $36,000 ($34,500 + $1,500). Collections were therefore $68,000 ($5,000 beginning gross A/R - $1,000 write-off + $100,000 credit sales - $36,000 ending gross A/R).

Rue Co.'s allowance for credit losses had a credit balance of $12,000 at December 31, Year 1. During Year 2, Rue wrote off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for credit losses was required at December 31, Year 2. What amount of credit loss expense should Rue report for Year 2? A) $86,000 B) $48,000 C) $60,000 D) $50,000

A) $86,000 The beginning balance of the allowance for credit losses was a credit of $12,000. The account was debited for $48,000 when the uncollectible accounts were written off. Thus, the credit for credit loss expense must be $86,000 if the ending balance is $50,000. 1/1/Year 2: $12,000 - Write-offs: $48,000 + Credit Loss Expense: $86,000 = 12/3/Year 2: $50,000

When the allowance method of recognizing credit losses on accounts receivable is used, how would the collection of an account previously written off affect gross accounts receivable and the allowance for credit losses? 1) Gross Accounts Receivable 2) Allowance for Credit Losses A) 1) No effect, 2) Increase B) 1) No effect, 2) Decrease C) 1) Increase, 2) Decrease D) 1) Increase, 2) No effect

A) 1) No effect, 2) Increase When an account that was previously written off that was not expected to be recovered is subsequently collected, the journal entry is to debit (increase) cash and credit (increase) allowance for credit losses. Thus, gross accounts receivable is not affected.

Johnson Company uses the allowance method to account for credit losses on accounts receivable. After recording the estimate of credit loss expense for the current year, Johnson decided to write off in the current year the $10,000 account of a customer who had filed for bankruptcy. What effect does this write-off have on the company's current net income and total current assets, respectively? 1) Net Income 2) Total Current Assets A) 1) No effect, 2) No effect B) 1) Decrease, 2) No effect C) 1) Decrease, 2) Decrease D) 1) No effect, 2) Decrease

A) 1) No effect, 2) No effect Johnson uses the allowance method. Thus, when a specific amount is written off, the journal entry is Dr. Allowance for credit losses: $10,000 Cr. Accounts receivable: $10,000 The write-off of a bad debt has no effect on expenses, net income, and total current assets.

Which method of recording credit loss expense accounts receivable is consistent with accrual accounting? 1) Allowance 2) Direct Write-Off A) 1) Yes, 2) No B) 1) Yes, 2) Yes C) 1) No, 2) No D) 1) No, 2) Yes

A) 1) Yes, 2) No The allowance method attempts both to match the expense with the related revenue and to determine the net amount expected to be collected from the accounts receivable. This method is acceptable under GAAP. The direct write-off method debits expense and credits accounts receivable at the time uncollectibility is established. This method does not match revenue and expense. It is not acceptable under GAAP.

Under the allowance method of recognizing credit losses on accounts receivable, the entry to write-off an uncollectible account A) Has no effect on net income. B) Has no effect on the allowance for credit losses. C) Increases the allowance for credit losses. D) Decreases net income.

A) Has no effect on net income. The entry to record credit loss expense under the allowance method is to debit credit loss expense and credit the allowance account. When a specific account is then written off, the allowance is debited and accounts receivable credited. Net income is affected when credit loss expense is recognized, not at the time of the write-off. Because accounts receivable and the allowance account are decreased by the same amount, a write-off of an account also has no effect on the net amount of accounts receivable.

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off that was not expected to be collected A) Increase the allowance for credit losses. B) Decrease the allowance for credit losses. C) Have no effect on the allowance for credit losses. D) Increase net income.

A) Increase the allowance for credit losses. When an account receivable is written off, both accounts receivable and the allowance for credit losses are decreased. When an account previously written off that was not expected to be collected is collected, the account must be reinstated by increasing both cash and the allowance.

On Merf's April 30, Year 4, balance sheet, a note receivable was reported as a noncurrent asset, and its accrued interest for 8 months was reported as a current asset. Which of the following terms would fit Merf's note receivable? A) Principal is due August 31, Year 5. Interest is due August 31, Year 4, and August 31, Year 5. B) Principal and interest are due December 31, Year 4. C) Both principal and interest amounts are payable on August 31, Year 4, and August 31, Year 5. D) Both principal and interest amounts are payable on December 31, Year 4, and December 31, Year 5.

A) Principal is due August 31, Year 5. Interest is due August 31, Year 4, and August 31, Year 5. A noncurrent note receivable is one that is not expected to be converted into cash within 1 year or one operating cycle, whichever is longer. Because the principal is due more than 1 year from the balance sheet date, it must be regarded as noncurrent. However, the accrued interest is a current asset because it is due in 4 months.

Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction, which is best described as a A) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross. B) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar. C) Loan from Ross to be repaid by the proceeds from Gar's accounts receivable. D) Loan from Ross collateralized by Gar's accounts receivable.

A) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross. When receivables are factored without recourse, the transaction is treated as a sale and the buyer accepts the risk of collectibility. The seller bears no responsibility for credit losses. A sale without recourse is not a loan. In a sale without recourse, the buyer assumes the risk of uncollectible accounts.

On June 1, Year 1, Yola Corp. lent Dale $500,000 on a 12% note, payable in five annual installments of $100,000 beginning January 2, Year 2. In connection with this loan, Dale was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Dale after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, Year 1. Dale made timely payments through November 1, Year 1. On January 2, Year 2, Yola received payment of the first principal installment plus all interest due. At December 31, Year 1, Yola's interest receivable on the loan to Dale is A) $15,000 B) $10,000 C) $0 D) $5,000

B) $10,000 Assuming the debtor made no payment on December 1, 2 months of interest should be accrued at year end. Consequently, the interest receivable on the loan is $10,000 [$500,000 × 12% × (2 ÷ 12)].

On January 1, Year 3, Mill Co. exchanged equipment for a $200,000, noninterest-bearing note due on January 1, Year 6. The prevailing rate of interest for a note of this type at January 1, Year 3, was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Mill's Year 4 income statement? A) $15,000 B) $16,500 C) $0 D) $20,000

B) $16,500 When a noninterest-bearing note is exchanged for property, and neither the note nor the property has a clearly determinable exchange price, the present value of the note should be determined by discounting all future payments using an appropriately imputed interest rate. Mill Company will receive $200,000 cash in 3 years. Assuming that 10% is the appropriate imputed rate of interest, the present value (initial carrying amount) of the note at January 1, Year 3, was $150,000 ($200,000 × 0.75). Interest revenue for Year 3 was $15,000 ($150,000 × 10%), and the entry was to debit the discount and credit interest revenue for that amount. Thus, the carrying amount of the note at January 1, Year 4, was $165,000 ($200,000 face amount - $35,000 unamortized discount). Interest revenue for Year 4 is therefore $16,500 ($165,000 carrying amount × 10% interest rate).

Hall Co.'s allowance for credit losses had a credit balance of $24,000 at December 31, Year 1. During Year 2, Hall wrote off uncollectible accounts of $96,000. The aging of accounts receivable indicated that a $100,000 allowance for credit losses was required at December 31, Year 2. What amount of credit loss expense should Hall report for Year 2? A) $120,000 B) $172,000 C) $100,000 D) $96,000

B) $172,000 The aging schedule determines the ending balance that should be in the allowance for credit losses. The aging of Hall Co.'s accounts receivable indicates that the balance on December 31, Year 2, should be $100,000 in the allowance for credit losses. Given that the allowance account had a credit balance of $24,000 at December 31, Year 1, and write-offs of $96,000 during the year, a credit loss expense of $172,000 should be recognized as the year-end adjustment to the allowance account. $24,000 - $96,000 + X = $100,000 X = $100,000 - $24,000 + $96,000 X = $172,000

On December 1, Year 4, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, Year 5. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its Year 4 income statement? A) $7,833 B) $2,005 C) $1,833 D) $0

B) $2,005 Under the effective-interest method, the effective rate of interest is applied to the net carrying amount of the receivable to determine periodic interest revenue. Thus, interest revenue from the loan for the month of December equals $2,005 [$194,000 × 12.4% × (1 ÷ 12)].

On June 1, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40, and the sale was made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. On June 12, Pitt received from Burr a remittance in full payment amounting to A) $2,912 B) $2,944 C) $3,112 D) $2,744

B) $2,944 A trade discount is a means of establishing a price for a certain quantity or for a particular class of customers. Neither the buyer nor the seller reflects trade discounts in the accounts. Assuming that the 30% discount is applied first, the initial discount is $1,500 ($5,000 × 30%), and the second discount is $700 [($5,000 - $1,500) × 20%]. Thus, the base price is $2,800. (If both discounts apply, it makes no difference which is taken first.) Because the buyer paid within the discount period, the cash equivalent price is $2,744 ($2,800 × 98%). Given that the goods were shipped FOB shipping point, title passed when they were put in the possession of the carrier, and the buyer is responsible for payment of delivery costs. Accordingly, the full amount owed by the buyer was $2,944 ($2,744 + $200 delivery costs).

The following information has been compiled by Able Manufacturing Company: ~ Sale of company products for the period to customers with net 30-day terms amounting to $150,000. ~ Sale of company products for the period to a customer, supported by a note for $25,000, with special terms of net 180 days. ~ Balance of trade receivables at the end of the last period was $300,000. ~ Collections of open trade receivables during the period was $200,000. ~ Rental income for the period, both earned and accrued but not yet collected, from the Able Employees' Credit Union for use of company facilities was $2,000. The open trade receivables balance to be shown on the statement of financial position for the period is A) $252,000 B) $250,000 C) $275,000 D) $277,000

B) $250,000 The open trade receivables balance is calculated as follows: Previous ending balance: $300,000 Add: Sales to customers (terms net 30): $150,000 Minus: Collections during period: $(200,000) = Open trade receivables reported: $250,000

The following accounts were abstracted from Roxy Co.'s unadjusted trial balance at December 31: Debit: Accounts receivable: $1,000,000 Allowance for credit losses: $8,000 Credit: Net credit sales: $3,000,000 Roxy estimates that 3% of the gross accounts receivable will become uncollectible. After adjustment at December 31, the allowance for credit losses should have a credit balance of A) $90,000 B) $30,000 C) $82,000 D) $38,000

B) $30,000 The allowance for credit losses at year end should have a credit balance of $30,000. This amount is equal to the $1 million of accounts receivable multiplied by the 3% that are estimated to become uncollectible.

The following information pertains to Tara Co.'s accounts receivable at December 31, Year 2: 0 - 60 Days ~ Amount: $120,000 ~ Estimated % Uncollectible: 1% 61 - 120 Days ~ Amount: $90,000 ~ Estimated % Uncollectible: 2% Over 120 Days ~ Amount: $100,000 ~ Estimated % Uncollectible: 6% Total Amount: $310,000 During Year 2, Tara wrote off $7,000 in receivables and recovered $4,000 that was written off in prior years and was not expected to be recovered. Tara's December 31, Year 1, allowance for credit losses was $22,000. Under the aging method, what amount of allowance for credit losses should Tara report at December 31, Year 2? A) $10,000 B) $9,000 C) $13,000 D) $19,000

B) $9,000 The aging schedule determines the allowance for credit losses based on year-end accounts receivable, their age, and their estimated collectibility. This year-end amount is $9,000 [($120,000 × 1%) + ($90,000 × 2%) + ($100,000 × 6%)].

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for credit losses of $20,000. What is the total amount of risk of accounting loss related to Butler's trade accounts receivable, and what amount of that risk is off-balance-sheet risk? 1) Risk of Accounting Loss 2) Off-Balance-Sheet Risk A) 1) $0, 2) $0 B) 1) $230,000, 2) $0 C) 1) $230,000, 2) $20,000 D) 1) $250,000, 2) $20,000

B) 1) $230,000, 2) $0 Butler's risk of accounting loss is measured by the net receivables balance ($250,000 accounts receivable - $20,000 allowance for credit losses = $230,000). Accounting loss is the loss that may have to be recognized due to credit and market risk as a direct result of the rights and obligations of a financial instrument. However, assuming that the carrying amount of these trade receivables approximates their fair value, the accounting loss cannot exceed the amount recognized as an asset. No off-balance-sheet risk of accounting loss results from reported accounts or notes receivable. Off-balance-sheet risk arises because of the existence of conditional rights and obligations that may expose the entity to a risk of accounting loss exceeding the amount recognized in the balance sheet, for example, recourse obligations on receivables sold.

Bee Co. uses the direct write-off method to account for uncollectible accounts receivable. During an accounting period, Bee's cash collections from customers equal sales adjusted for the addition or deduction of the following amounts: 1) Accounts Written Off 2) Increase in Accounts Receivable Balance A) 1) Addition, 2) Deduction B) 1) Deduction, 2) Deduction C) 1) Deduction, 2) Addition D) 1) Addition, 2) Addition

B) 1) Deduction, 2) Deduction The direct write-off method debits bad debt expense and credits accounts receivable when an account is written off. Sales are recorded by a debit to accounts receivable or cash and a credit to sales. Accordingly, in the reconciliation of sales to cash collections, an increase in accounts receivable reflects sales without collections. Write-offs of accounts receivable likewise represent sales without collections. Consequently, the increase in accounts receivable and the accounts written off are deductions in reconciling sales to cash collections.

During the year, Hauser Co. wrote off a customer's account receivable. Hauser used the allowance method for credit losses on accounts receivable. What impact would the write-off have on net income and total assets? 1) Net Income 2) Total Assets A) 1) Decrease, 2) No effect B) 1) No effect, 2) No effect C) 1) Decrease, 2) Decrease D) 1) No effect, 2) Decrease

B) 1) No effect, 2) No effect When using the allowance method, accounts that are written off are charged to the allowance account. The write-off of a particular bad debt has no effect on expenses and net income. Furthermore, write-offs do not affect the carrying amount of net accounts receivable because the reductions of gross accounts receivable and the allowance are the same.

Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next 3 years. The market rate for a note of this type is 10%. On issuing the note, Jole should record 1) Discount on note receivable 2) Prepaid purchases A) 1) Yes, 2) No B) 1) Yes, 2) Yes C) 1) No, 2) Yes D) 1) No, 2) No

B) 1) Yes, 2) Yes Without established exchange prices or evidence of the note's market value, the present value of a note with no stated rate or an unreasonable rate should be determined by discounting future payments using an imputed rate. The prevailing rate for similar instruments of issuers with similar credit ratings normally helps determine the appropriate rate. The purpose is to approximate the rate in a similar transaction between independent parties. The stated interest rate may be less than the imputed rate because the lender has received other stated (or unstated) rights and privileges as part of the bargain. The difference between the respective present values of the note calculated at the stated rate and at the imputed rate should be accounted for as the cost of the rights or privileges obtained. Jole Co. will record a discount on the note. In addition, because it has received an other stated (or unstated) right or privilege (the right to purchase merchandise at a discount from prevailing market prices), prepaid purchases also should be recorded at an amount equal to the discount.

When the accounts receivable of a company are sold outright to a company which normally buys accounts receivable of other companies without recourse, the accounts receivable have been A) Collateralized. B) Factored. C) Pledged. D) Assigned.

B) Factored. One means of immediately realizing cash on accounts receivable is factoring, which is the outright sale of receivables for cash at a discount. Receivables may be sold with or without recourse. If the sale of receivables is with recourse, the buyer may obtain payment from the seller if the debtor defaults. Factoring is the discounting of receivables on a nonrecourse, notification basis.

On August 15, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The 4-month note was dated July 15. Note principal, together with all interest, is due November 15. When the note was recorded on August 15, which of the following accounts increased? A) Prepaid interest. B) Interest receivable. C) Unearned discount. D) Interest revenue.

B) Interest receivable. Because the note bears interest at a reasonable rate (in this case, the market rate), its present value at the date of issuance is the face amount. Accordingly, the note should be recorded at this amount. Interest receivable also may be debited, and unearned interest revenue may be credited. The simple alternative is to debit cash and credit interest revenue when payment is received. If the reporting period ends prior to November 15, the period-end entry is to debit interest receivable and credit accrued interest revenue.

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct? A) Good Neighbor Financing will take title to the receivables and will return title to Milton after the loan is paid. B) Milton will retain control of the receivables. C) Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored. D) Good Neighbor Financing will assume the responsibility of collecting the receivables.

B) Milton will retain control of the receivables. A pledge (a general assignment) is the use of receivables as collateral (security) for a loan. The borrower agrees to use collections of receivables to repay the loan. Upon default, the lender can sell the receivables to recover the loan proceeds. Because a pledge is a relatively informal arrangement, it is not reflected in the accounts. A transfer of financial assets is a sale only when the transferor relinquishes control. If the transfer (e.g., a pledge) of accounts receivable is not a sale, the transaction is a secured borrowing. The transferor becomes a debtor, and the transferee, a creditor in possession of collateral. However, absent default, the collateral remains an asset of the transferor.

Which of the following is a false statement about balance sheet disclosure of accounts receivable? A) Allowances may be deducted from the gross amount of accounts receivable for credit losses and adjustments to be made in the future on accounts shown in the current balance sheet. B) That portion of installment accounts receivable from customers which falls due more than 12 months from the balance sheet date usually would be excluded from current assets. C) Accounts receivable should be identified on the balance sheet as pledged if they are used as security for a loan even though the loan is shown on the same balance sheet as a liability. D) Trade receivables are best shown separately from nontrade receivables where amounts of each are material.

B) That portion of installment accounts receivable from customers which falls due more than 12 months from the balance sheet date usually would be excluded from current assets. Related parties include an entity and its equity-based investees. A receivable from a related party should be separately and fully disclosed. Indeed, nontrade receivables generally are subject to separate treatment.

The following information relates to Jay Co.'s accounts receivable for the year just ended: Accounts receivable, 1/1: $650,000 Credit sales for the year: $2,700,000 Sales returns for the year: $75,000 Accounts written off during the year: $40,000 Collections from customers during the year: $2,150,000 Estimated uncollectible accounts at 12/31: $110,000 What amount should Jay report for accounts receivable, before allowance for credit losses, at December 31? A) $1,200,000 B) $1,125,000 C) $1,085,000 D) $1,165,000

C) $1,085,000

On July 1, Lee Co. sold goods in exchange for a $200,000 8-month noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12%. What amount did Lee receive when the note was discounted at a bank at 10% on September 1? A) $188,000 B) $180,000 C) $190,000 D) $186,667

C) $190,000 The maturity amount of a noninterest-bearing note receivable is its face amount. The discount fee is $10,000 [$200,000 maturity amount × 10% × (6 months ÷ 12)]. Thus, the proceeds equal $190,000 ($200,000 - $10,000).

Tinsel Co.'s balances in allowance for credit losses were $70,000 at the beginning of the current year and $55,000 at year end. During the year, receivables of $35,000 were written off as uncollectible. What amount should Tinsel report as credit loss expense at year end? A) $35,000 B) $50,000 C) $20,000 D) $15,000

C) $20,000 The journal entry to record the write-offs is to credit receivables for $35,000 and debit the allowance for the same amount. This results in a $35,000 credit balance ($70,000 beginning credit balance - $35,000 debit). Given an ending balance of $55,000, the allowance must be credited for $20,000 ($55,000 - $35,000). Thus, the journal entry for credit loss expense is a $20,000 credit to the allowance and a $20,000 debit to credit loss expense.

At the end of Year 1, Boller Co. had an ending balance in allowance for credit losses of $30,000. During Year 2, Boller wrote off $40,000 of accounts receivable. At the end of Year 2, Boller had $300,000 in accounts receivable and determined that 8% of these would be uncollectible. What amount should be reported as credit loss expense on Boller's Year 2 income statement? A) $64,000 B) $14,000 C) $34,000 D) $24,000

C) $34,000 The Year 2 ending balance for allowance for credit losses is $24,000 ($300,000 × 8%). The write-off of a particular bad debt has no effect on credit loss expense. It is recognized as a decrease in the balance of allowance for credit losses. Therefore, the credit loss expense in Year 2 of $34,000 can be calculated as follows: 1/1/Year 2 allowance for credit losses: $30,000 Accounts written off: $(40,000) Credit loss expense: $34,000 = 12/31/Year 2 allowance for credit losses: $24,000

Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year end: Credit sales: $10,000,000 Accounts receivable: $3,000,000 Allowance for credit losses: $50,000 Marr uses 3% of accounts receivable to determine its allowance for credit losses at year end. By what amount should Marr adjust its allowance for credit losses at year end? A) $140,000 B) $0 C) $40,000 D) $90,000

C) $40,000 The entity uses the percentage of accounts receivable method to estimate the allowance. The year-end balance should be $90,000 ($3,000,000 A/R × 3%). Hence, the year-end adjustment is $40,000 ($90,000 - $50,000) unadjusted balance.

For the year ended December 31, Beal Co. estimated its allowance for credit losses using the year-end aging of accounts receivable. The following data are available: Allowance for credit losses, 1/1: $42,000 Uncollectible accounts written off, 11/30: $46,000 Estimated uncollectible accounts per aging, 12/31: $52,000 After year-end adjustment, the credit loss expense should be A) $48,000 B) $46,000 C) $56,000 D) $52,000

C) $56,000 As indicated in the T-account analysis presented below, the credit loss expense is calculated as follows: Allowance for credit losses, 1/1: $42,000 - Uncollectible accounts written off, 11/30: $46,000 + Credit loss expense: $56,000 = Estimated uncollectible accounts per aging, 12/31: $52,000

In its December 31, Year 3, balance sheet, Fleet Co. reported accounts receivable of $100,000 before allowance for credit losses of $10,000. Credit sales during Year 4 were $611,000, and collections from customers, excluding recoveries, totaled $591,000. During Year 4, accounts receivable of $45,000 were written off and $17,000 were recovered. Fleet estimated that $15,000 of the accounts receivable at December 31, Year 4, were uncollectible. In its December 31, Year 4, balance sheet, what amount should Fleet report as accounts receivable before allowance for credit losses? A) $82,000 B) $58,000 C) $75,000 D) $67,000

C) $75,000 The ending balance in accounts receivable consists of the beginning balance, plus credit sales, minus collections, and minus write-offs. The recovery of accounts that were previously written off does not affect the accounts receivable balance. 1/1/Y4: $100,000 Sales: $611,000 Collections: $(591,000) Write offs: $(45,000) = 12/31/Y4: $75,000

On the December 31 balance sheet of Mann Co., the current receivables consisted of the following: Trade accounts receivable: $93,000 Allowance for credit losses: $(2,000) Claim against shipper for goods lost in transit (November): $3,000 Selling price of unsold goods sent by Mann on consignment at 130% of cost (not included in Mann's ending inventory): $26,000 Security deposit on lease of warehouse used for storing some inventories: $30,000 = Total: $150,000 At December 31, the correct total of Mann's current net receivables was A) $124,000 B) $150,000 C) $94,000 D) $120,000

C) $94,000 If a receivable is expected to be collected within the longer of 1 year or the operating cycle, it is current. If the receivable is noncurrent, it should be classified as an investment. Thus, the claim against the shipper is most likely a current receivable but the deposit is not. The unsold consigned goods are in the possession of the consignee but are the property of the consignor and are included in the consignor's inventory. Sales revenue from consigned goods should be recognized by the consignor when the merchandise is sold. Thus, the unsold consigned goods should be included in inventory at cost, not in receivables at their sales price. Consequently, current net receivables should equal $94,000 [($93,000 - $2,000) net trade receivables + $3,000 claim].

When the allowance method of recognizing credit losses on accounts receivable is used, the entry to record the write-off of a specific account A) Decreases accounts receivable and increases the allowance for credit losses. B) Increases the allowance for credit losses and decreases net income. C) Decreases both accounts receivable and the allowance for credit losses. D) Decreases both accounts receivable and net income.

C) Decreases both accounts receivable and the allowance for credit losses. When an account receivable is written off, both accounts receivable and the allowance for credit losses are decreased. The journal entry is to debit the allowance and credit accounts receivable.

A company entered into a loan with a lender for $100,000 and pledged $120,000 of the company's accounts receivable as collateral. The lender does not have the right to sell or repledge the accounts receivable. When the company receives the cash for the loan proceeds, what entry, if any, should be made to accounts receivable? A) Credit accounts receivable $100,000. B) Credit accounts receivable $20,000. C) No entry is made to accounts receivable. D) Credit accounts receivable $120,000.

C) No entry is made to accounts receivable. A pledge is the use of receivables as collateral (security) for a loan. The borrower agrees to use collections of receivables to repay the loan. Only upon default can the lender sell the receivables to recover the loan proceeds. Because a pledge is a relatively informal arrangement, it is not reflected in the accounts.

West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. West should record the cost of this merchandise as A) $20,000 B) $14,000 C) $15,600 D) $14,400

D) $14,400 When inventory is subject to cash discounts, the purchases may be reflected either net of these discounts or at the gross prices. However, purchases should always be recorded net of trade discounts. A chain discount is the application of more than one trade discount to a list price. Chain discounts should be applied in steps as indicated below. List price: $20,000 20% discount: $(4,000) = After 1st discount: $16,000 10% discount: $(1,600) = Cost of merchandise: $14,400

The following information applies to Nichola Manufacturing Company, which has a 6-month operating cycle: Cash sales: $100,000 Credit sales during the sixth month with net 30 days terms: $150,000 Credit sale during the fifth month with special terms of net 9 months: $10,000 Interest earned and accrued on an investment that matures during month 3 of the next cycle: $2,000 The total of Nichola's trade accounts receivable at the end of the current cycle is A) $262,000 B) $152,000 C) $260,000 D) $160,000

D) $160,000 A receivable classified as current on the statement of financial position is expected to be collected within the current operating cycle or 1 year, whichever is longer. The total of the trade accounts receivable at the end of the current cycle is therefore $160,000 ($150,000 + $10,000).

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that it is probable that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? A) $195,000 B) $200,000 C) $185,000 D) $190,000

D) $190,000 The company has $200,000 of sales and estimates that 5% of sales will be returned. Sales are recognized only in the amount of consideration to which the entity expects to be entitled. Thus, no sales are recognized for the products expected to be returned. The entity therefore recognizes net sales equal to 95% of gross sales. Net sales recognized are $190,000 ($200,000 × 95%).

On March 31, Vale Co. 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: 0-30 days ~ Amount: $60,000 ~ Estimated Uncollectible: 5% 31-60 days ~ Amount: $4,000 ~ Estimated Uncollectible: 10% Over 60 days ~ Amount: $2,000 ~ Estimated Uncollectible: 70% What amount should Vale report as allowance for credit losses in its March 31 balance sheet? A) $3,000 B) $3,800 C) $4,000 D) $4,800

D) $4,800 The aging schedule determines the balance in the allowance for credit losses. Of the accounts that are no more than 30 days old, the amount uncollectible is $3,000 ($60,000 × 5%). Accounts that are 31-60 days old and over 60 days old have estimated uncollectible balances of $400 ($4,000 × 10%) and $1,400 ($2,000 × 70%), respectively. Hence, the amount recorded in the allowance for credit losses is $4,800 ($3,000 + $400 + $1,400). The $1,000 balance already in the account is disregarded because the aging schedule determines the balance that should be in the account.

Joseph Upholstery's aging of accounts receivable is as follows: ~ 0-90 days: $150,000 ~ 91 days and over: $64,000 Joseph needs $80,000 to purchase upholstery fabric at an exhibition next month. Ace Factoring has offered to purchase Joseph's accounts receivable without recourse for ~ A 5% factor's fee ~ 15% reserve on the 0-90 days receivables ~ 20% reserve on the 91 days and over receivables Assume Joseph sells all of the receivables over 91 days to Ace Factoring. Approximately how much of the remaining receivables would Joseph have to sell to receive $80,000? A) $33,883 B) $33,684 C) $32,000 D) $40,000

D) $40,000 Joseph will receive $48,000 for the receivables over 90 days [$64,000 - $12,800 (20% reserve) - $3,200 (5% factor's fee)]. Joseph needs a net of $32,000 additional funds. Selling $40,000 of the receivables less than 90 days will net Joseph $32,000 [$40,000 - $6,000 (15% reserve) - $2,000 (5% factor's fee)]. Therefore, the correct answer is $40,000.

At December 31, Year 1, Gasp Co.'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? A) $35,000 B) $25,000 C) $20,000 D) $50,000

D) $50,000 The ending balance of the allowance for credit losses is a percentage of the ending balance of accounts receivable. The uncollectible accounts identified by the aging schedule at year end reflect the total required ending balance of the allowance. Since the company determined that $50,000 of the December 31, Year 2, receivables may be uncollectible, this is the ending balance of the allowance for credit losses.

Frame Co. has an 8% note receivable dated June 30, Year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1 for Year 2, Year 3, and Year 4. In its June 30, Year 3, balance sheet, what amount should Frame report as a current asset for interest on the note receivable? A) $0 B) $4,000 C) $12,000 D) $8,000

D) $8,000 Current assets are those reasonably expected to be realized in cash, sold, or consumed during the longer of the operating cycle of a business or 1 year. Given that the date of the balance sheet is 6/30/Yr 3, the interest to be paid on the next day, 7/1/Yr 3, should be classified as a current asset. On 7/1/Yr 3, $8,000 ($100,000 remaining principal × 8%) of interest and $50,000 of principal are to be received. The $8,000 of interest receivable is a current asset.

An analysis and aging of Jay Co.'s accounts receivable at December 31 disclosed the following: Accounts receivable: $900,000 Allowance for credit losses, per books: $50,000 Amounts deemed uncollectible: $64,000 The net carrying amount of the accounts receivable at December 31 should be A) $786,000 B) $850,000 C) $886,000 D) $836,000

D) $836,000 The net carrying amount of accounts receivable is equal to the $900,000 gross accounts receivable minus the $64,000 estimate of the accounts estimated to be uncollectible (the adjusted balance of the allowance for credit losses). The $50,000 balance in the allowance account is not used because it is an unadjusted balance.

Gibbs Co. uses the allowance method for recognizing credit losses on accounts receivable. Ignoring deferred taxes, the entry to record the write-off of a specific uncollectible account A) Decreases both net income and net carrying amount of accounts receivable. B) Affects neither net income nor gross accounts receivable. C) Decreases both net income and working capital. D) Affects neither net income nor working capital.

D) Affects neither net income nor working capital. The entry to record credit loss expense under the allowance method is to debit credit loss expense and credit the allowance for credit losses account. When a specific account is then written off, the allowance for credit losses is debited and gross accounts receivable credited. Net income is affected when credit loss expense is recognized, not at the time of the write-off. Because accounts receivable and the allowance account are decreased by the same amount, a write-off of an account also has no effect on the net amount of accounts receivable. Hence, it has no effect on working capital (current assets, including net accounts receivable, minus current liabilities).

A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position? A) At the face amount. B) At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate. C) At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate. D) At the face amount minus a discount calculated at the imputed interest rate.

D) At the face amount minus a discount calculated at the imputed interest rate. When a note is exchanged for property, goods, or services, the interest rate determined by the parties in an arm's-length transaction is presumed to be fair. But when the note is issued with no stated rate, the transaction should be recorded at the more clearly determinable of (1) the fair value of goods or services received or (2) the market value of the note. Assuming that the market value of the note cannot be reliably determined, the transaction is recorded at the fair value of services received, if known. Because the fair value of services received is lower than the note's face amount, a discount on the note is recognized. The imputed interest rate on this note is the one that equates the present value of future payments on the note with the fair value of services received.

In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 4, Pulham has a receivable from Angles. How should the receivable be reported in Pulham's Year 4 financial statements? A) The total receivable should be included as part of the investment in Angles, without separate disclosure. B) 70% of the receivable should be separately reported, with the balance offset against 30% of Angles's payment to Pulham. C) None of the receivable should be reported, but the entire receivable should be offset against Angles's payment to Pulham. D) The total receivable should be disclosed separately.

D) The total receivable should be disclosed separately. One means of immediately realizing cash on accounts receivable is factoring, which is the outright sale of receivables for cash at a discount. Receivables may be sold with or without recourse. If the sale of receivables is with recourse, the buyer may obtain payment from the seller if the debtor defaults. Factoring is the discounting of receivables on a nonrecourse, notification basis.

The amount of cash received from the transfer of receivables with recourse is most likely to be reported as a liability under which of the following conditions? A) Control of the future economic benefits embodied in the receivables has been surrendered by the transferor. B) The transferor is not required to repurchase the receivables except in accordance with limited recourse provisions. C) A reasonable estimate can be made of the fair value of the obligation of the transferor under the recourse provisions. D) The transferor is entitled and obligated to repurchase the receivables at a later date.

D) The transferor is entitled and obligated to repurchase the receivables at a later date. A transfer of financial assets with recourse is accounted for as a sale if the transferor surrenders control. An example of effective control is an agreement that entitles and obligates the transferor to repurchase or redeem the transferred assets prior to maturity. If the control criteria are not met, the transferor and transferee account for a transfer with recourse as a secured borrowing with a pledge of collateral.