IA Ch.7 SB PT. 3

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

true -Reason: The net note receivable increases over time so the interest revenue differs between periods.

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 --- 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

To calculate the effective rate of interest on a noninterest-bearing note, the amount of interest is divided by the ______.

sales price

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

$49,000. Reason: $50,000 - ($50,000 x 12% x 60/360) = $49,000

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.

The discount on notes receivable account is classified as

a contra account to notes receivable.

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. Reason: The 12% is an annual rate and since only 2/12 of a year has been earned, interest revenue is $800 (=$40,000*0.12*(2/12))

(Face amount x annual rate x fraction of the annual period) is the formula for

interest on a note

A note received solely for cash is valued at

its present value, which is the cash amount.

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. -Reason: $100,000 x 12% x 3/12 = discount amount

Which of the following give rise to a note receivable? (Select all that apply.)

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

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 (Select all that apply.)

-debit to cash, $104,000 -credit to interest revenue, $2,000 -credit to interest receivable, $2,000. -credit to note receivable, $100,000

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 (Select all that apply.)

-debit to discount on note receivable $9,566 -redit to interest revenue $9,566 Reason: n = 2, i = 12%, the present value factor is.79719 x $100,000 = $79,719 x 12% = $9,566

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 (Select all that apply.)

-debit to notes receivable $100,000 -credit to sales revenue $79,719 Reason: n = 2, i = 12%, the present value factor is.79719 x $100,000 -credit to discount on note receivable $20,281 Reason: n = 2, i = 12%, the present value factor is.79719 x $100,000

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 (Select all that apply.)

-debit to notes receivable for $100,000. -credit to sales revenue for $98,000. -credit to discount on notes receivable for $2,000.

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 (use 360 days for the year)

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).

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.

It is likely that bad debt accruals under IFRS will be _____ and will occur _____ than under U.S. GAAP.

lower; later

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

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.

On January 1, 2021, Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

as a noncurrent asset

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. Reason: The 12% is an annual rate and since only 1/12 of a year has been earned (year 2), interest revenue is $400 (= $40,000 x 0.12 x (1/12))

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.

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.

If a company elects the fair value option for receivables, changes in fair value are recognized as

gains and losses on the income statement.

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: 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

True or false: When a discount on notes receivable is amortized, interest revenue is recorded.

true