CHAPTER CASH AND RECEIVABLES IFRS questions are available at the end of this chapter TRUE-FALSE—Conceptual Answer T F F F F T F F T T T F F T F F T F T F No Description 10 11 12 13 14 15 16 17 18 19 20 Items considered cash Items considered cash Items considered cash Cash equivalents definition Bank overdrafts Cash equivalents Classification of receivables Items considered trade receivables Trade discount uses Sales discounts Valuation of receivables Percentage-of-receivables approach Percentage-of-sales method Reporting notes receivable Stated interest rate vs effective rate Classification of notes receivable Recourse liability Buying receivables with recourse Selling receivables with recourse Computing receivables turnover MULTIPLE CHOICE—Conceptual Answer d b d d b a b d b d d d d d c d No Description 21 22 23 P 24 25 26 27 28 29 S 30 31 32 33 34 S 35 S 36 Identification of cash items Identification of cash items Classification of travel advance Items included as cash Identification of cash items Classification of post-dated checks Classification of postage stamps Compensating balance definition Classification of cash restricted for plant expansion Cash equivalent definition Classification of bank overdraft Classification of compensating balances Definition of trade receivables Identification of trade receivables Presentation of nontrade receivables Cash discount definition Test Bank for Intermediate Accounting, Fourteenth Edition 7-2 MULTIPLE CHOICE—Conceptual (cont.) Answer d a d c a c d a b c a d c d a b a d b c d a c c a a d c a d b c c b c P No P 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 S 60 S 61 P 62 63 64 65 66 *67 *68 *69 *70 *71 Description Trade discount uses Classification of sales discounts Reasons for trade discounts Accounting for cash discounts and trade discounts Theoretically correct approach for cash discounts Accounts receivable valuation problems Reason allowance method is preferable Allowance method concept Accounting for bad debts and earnings management Recording bad debt expense Journal entry for writing off an account Journal entry for collection of an account previously written off Valuation of short-term receivables Bad debt provision and the matching concept Bad debts as a percentage of sales Bad debts as a percentage of sales Bad debts as a percentage of receivables Financial statement effect of a note recorded incorrectly Imputed interest description Reason a company sells receivables Transfer of receivables as a sale Definition of selling receivables with recourse Factoring accounts receivable without recourse Classification of accounts and notes receivable Transfer of receivables with recourse Accounts receivable turnover ratio Accounts receivable turnover ratio Items included in accounts receivable on balance sheet Days to collect accounts receivable calculation Reason for accounts receivable turnover increase Balance per bank reconciling item Entry to replenish Petty Cash Purpose of Cash Over & Short account Classification of bank service charges Treatment of bank credits on bank reconciliation These questions also appear in the Problem-Solving Survival Guide These questions also appear in the Study Guide * This topic is dealt with in an Appendix to the chapter S Cash and Receivables 7-3 MULTIPLE CHOICE—Computational Answer b d b c b c c b c a c d c b b d c b a b b d b b d b a a b c c d a b d c a c c b b c c c c No 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 Description Calculate cash balance Calculate effective interest on loan with required compensatory balance Reporting cash Cash and cash equivalents Reporting cash Cash and cash equivalents Determine effective annual interest rate of sales discount Calculate sales revenue using net method Entry for credit sale using gross method Entry for credit sale using net method Calculate ending allowance for doubtful accounts balance Calculate bad debt expense Calculate ending allowance for doubtful accounts balance Calculate balance of accounts receivable Calculate net realizable value of accounts receivable Calculate net realizable value of accounts receivable Calculate bad debt expense using aging of receivables Calculate bad debt expense using percent of sales Calculate bad debt expense using percent of receivables Valuation of accounts receivable Calculation of bad debt expense Calculate Allowance for Doubtful Accounts balance Valuation of accounts receivable Calculation of bad debt expense Calculate Allowance for Doubtful Accounts balance Determine appropriate interest rate for a zero-interest-bearing note Calculate present value of a zero-interest-bearing note Calculation of sales revenue Entry for exchange of goods for note receivable Calculate amount of interest Calculate interest revenue on a zero-interest-bearing note Calculate note payable amount Calculate gain (loss) on transfer of receivables Calculate gain (loss) on transfer of receivables Calculation of gain (loss) on transfer of receivables Calculate proceeds from transfer of receivables with recourse Record assignment of accounts receivables Calculate cash proceeds from transfer of receivables Entry to record collection of assigned receivables Factoring receivables without recourse Factoring receivables with recourse Calculate loss on sale of receivables Calculate loss on sale of receivables Calculate accounts receivable turnover Calculate accounts receivable turnover Test Bank for Intermediate Accounting, Fourteenth Edition 7-4 MULTIPLE CHOICE—Computational (cont.) Answer d b b c b c No *117 *118 *119 *120 *121 *122 Description Entry to replenish petty cash Calculate correct balance in bank account Calculate correct cash balance Calculate correct cash balance Calculate correct cash balance Calculate correct cash balance MULTIPLE CHOICE—CPA Adapted Answer a d d b c d c c b a a No 123 124 125 126 127 128 129 130 131 *132 *133 Description Determine current net receivables Calculate adjustment for bad debts Calculate bad debt expense Calculate adjustment to write off bad debts Effect of a write-off under the allowance method Determine balance in the Allowance for Doubtful Accounts Determine interest revenue of a zero-interest-bearing note Determine interest receivable at year end Assignment and factoring of accounts receivable Calculate correct cash balance Calculate the cash balance per books EXERCISES Item E7-134 E7-135 E7-136 E7-137 E7-138 Description Asset classification Allowance for doubtful accounts Entries for bad debt expense Fair value option Accounts receivable assigned PROBLEMS Item P7-139 P7-140 P7-141 *P7-142 *P7-143 Description Entries for bad debt expense Amortization of discount on note Accounts receivable assigned Factoring accounts receivable Bank reconciliation Cash and Receivables CHAPTER LEARNING OBJECTIVES' *10 Identify items considered as cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to valuation of accounts receivable Explain accounting issues related to recognition and valuation of notes receivable Explain the fair value option Explain accounting issues related to disposition of accounts and notes receivable Explain how to report and analyze receivables Explain common techniques employed to control cash 7-5 7-6 Test Bank for Intermediate Accounting, Fourteenth Edition SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item TF TF 21 TF MC TF TF 28 TF MC TF TF 33 10 TF TF 36 37 MC MC 38 39 11 12 13 42 43 44 TF TF TF MC MC MC 45 46 47 48 49 50 MC MC MC MC MC MC 51 52 53 82 83 84 14 15 16 TF TF TF 54 55 97 MC MC MC 98 99 100 137 E S S P 22 23 29 30 S 17 18 19 56 TF TF TF MC 57 58 59 S 60 MC MC MC MC 61 104 105 106 20 62 TF MC 63 64 MC MC 65 66 67 68 MC MC 69 70 MC MC 71 117 P Note: TF = True-False MC = Multiple Choice Type Item Type Item Learning Objective P MC 24 MC 26 MC 25 MC 27 Learning Objective MC 31 MC 73 MC 32 MC 74 Learning Objective S MC 34 MC 35 Learning Objective MC 40 MC 78 MC 41 MC 79 Learning Objective MC 85 MC 91 MC 86 MC 92 MC 87 MC 93 MC 88 MC 94 MC 89 MC 95 MC 90 MC 96 Learning Objective MC 101 MC 129 MC 102 MC 130 MC 103 MC 140 Learning Objective Learning Objective MC 107 MC 111 MC 108 MC 112 MC 109 MC 113 MC 110 MC 114 Learning Objective MC 115 MC MC 116 MC Learning Objective *10 MC 118 MC 120 MC 119 MC 121 E = Exercise P = Problem Type Item Type Item Type MC MC 72 MC MC MC 75 76 MC MC 77 134 MC E MC MC 80 81 MC MC 123 MC MC MC MC MC MC MC 124 125 126 127 128 135 MC MC MC MC MC E 136 139 E P MC MC MC MC 131 138 141 142 MC E P P MC MC 122 132 MC MC 133 143 MC P MC MC MC P Cash and Receivables 7-7 TRUE-FALSE—Conceptual Savings accounts are usually classified as cash on the balance sheet Certificates of deposit are usually classified as cash on the balance sheet Companies include postdated checks and petty cash funds as cash Cash equivalents are investments with original maturities of six months or less Bank overdrafts are always offset against the cash account in the balance sheet Short-term, highly liquid investments may be included with cash on the balance sheet All claims held against customers and others for money, goods, or services are reported as current assets Trade receivables include notes receivable and advances to officers and employees Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased 10 In the gross method, sales discounts are reported as a deduction from sales 11 The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible 12 The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable 13 The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet 14 Companies record and report long-term notes receivable at the present value of the cash they expect to collect 15 When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value 16 Notes receivable are generally reported as noncurrent assets 17 Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been 18 When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss 19 For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay Test Bank for Intermediate Accounting, Fourteenth Edition 7-8 20 The receivables turnover ratio is computed by dividing net sales by the ending net receivables True False Answers—Conceptual Item Ans T F F F F Item 10 Ans T F F T T Item 11 12 13 14 15 Ans T F F T F Item 16 17 18 19 20 Ans F T F T F MULTIPLE CHOICE—Conceptual P 21 Which of the following is not considered cash for financial reporting purposes? a Petty cash funds and change funds b Money orders, certified checks, and personal checks c Coin, currency, and available funds d Postdated checks and I.O.U.'s 22 Which of the following is considered cash? a Certificates of deposit (CDs) b Money market checking accounts c Money market savings certificates d Postdated checks 23 Travel advances should be reported as a supplies b cash because they represent the equivalent of money c investments d none of these 24 Which of the following items should not be included in the Cash caption on the balance sheet? a Coins and currency in the cash register b Checks from other parties presently in the cash register c Amounts on deposit in checking account at the bank d Postage stamps on hand 25 All of the following may be included under the heading of "cash" except a currency b money market funds c checking account balance d savings account balance Cash and Receivables S 7-9 26 In which account are post-dated checks received classified? a Receivables b Prepaid expenses c Cash d Payables 27 In which account are postage stamps classified? a Cash b Office supplies c Receivables d Inventory 28 What is a compensating balance? a Savings account balances b Margin accounts held with brokers c Temporary investments serving as collateral for outstanding loans d Minimum deposits required to be maintained in connection with a borrowing arrangement 29 Under which section of the balance sheet is "cash restricted for plant expansion" reported? a Current assets b Non-current assets c Current liabilities d Stockholders' equity 30 A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and a is acceptable as a means to pay current liabilities b has a current market value that is greater than its original cost c bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation d is so near its maturity that it presents insignificant risk of changes in interest rates 31 Bank overdrafts, if material, should be a reported as a deduction from the current asset section b reported as a deduction from cash c netted against cash and a net cash amount reported d reported as a current liability 32 Deposits held as compensating balances a usually not earn interest b if legally restricted and held against short-term credit may be included as cash c if legally restricted and held against long-term credit may be included among current assets d none of these 33 The category "trade receivables" includes a advances to officers and employees b income tax refunds receivable c claims against insurance companies for casualties sustained d none of these - 10 Test Bank for Intermediate Accounting, Fourteenth Edition 34 Which of the following should be recorded in Accounts Receivable? a Receivables from officers b Receivables from subsidiaries c Dividends receivable d None of these S 35 What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? a As offsets to capital b By means of footnotes only c As assets but separately from other receivables d As trade notes and accounts receivable if they otherwise qualify as current assets S 36 When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment Such a discount is called a(n) a trade discount b nominal discount c enhancement discount d cash discount P 37 Trade discounts are a not recorded in the accounts; rather they are a means of computing a price b used to avoid frequent changes in catalogues c used to quote different prices for different quantities purchased d all of the above 38 If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as a a deduction from sales in the income statement b an item of "other expense" in the income statement c a deduction from accounts receivable in determining the net realizable value of accounts receivable d sales discounts forfeited in the cost of goods sold section of the income statement 39 Why companies provide trade discounts? a To avoid frequent changes in catalogs b To induce prompt payment c To easily alter prices for different customers d Both a and c 40 The accounting for cash discounts and trade discounts are a the same b always recorded net c not the same d tied to the timing of cash collections on the account - 30 Test Bank for Intermediate Accounting, Fourteenth Edition DERIVATIONS — Computational No Answer 72 b Derivation $18,500 + $500 = $19,000 73 d $2,000,000 × 11 = $200,000 × (.11 – 05) = Interest $220,000 12,000 $232,000 $232,000 ÷ $2,000,000 = 116 = 11.6% 74 b 75 c 76 b 77 c $35,000 + $500 + $8,200 = $43,700 78 c 01 ì 360 ữ 20 = 18% 79 b $15,000 × (1 – 01) = $14,850 80 c $15,000 × 100% = $15,000 81 a $15,000 × (1 – 02) = $14,700 82 c ($6,400,000 × 01) – $3,000 = $61,000 83 d ($6,500,000 × 08) – $12,000 = $508,000 84 c $5,000,000 × 08 = $400,000 85 b $1,080,000 + ($180,000 – $80,000) = $1,180,000 86 b $1,200,000 – $125,000 = $1,075,000 87 d ($200,000 – $16,000) – ($18,000 – $16,000) = $182,000 88 c $16,000 – $18,000 + X = $11,000; X = $13,000 89 b ($850,000 – $28,000) × 02 = $16,440 90 a ($86,000 × 10) – $1,520 = $7,080 91 b $80,000 – $4,800 = $75,200 92 b ($480,000 × 05) – [$20,000 – ($14,400 – $4,200)] = $14,200 93 d $432,000 × 05 = $21,600 $30,000 + $300 + $5,500 = $35,800 Cash and Receivables 94 b $120,000 – $7,200 = $112,800 DERIVATIONS — Computational (cont.) No Answer Derivation 95 b $720,000 × 05 – [$30,000 – ($21,600 – $6,300)] = $21,300 96 d $600,000 × 05 = $30,000 97 b 7% and 7% 98 a $40,000 × 1.75911 = $70,364 99 a ($600,000 × 90) = $540,000 100 b 101 c $80,000 × 10 × 6/12 = $4,000 102 c $50,000 – $46,000 = $4,000 103 d $80,000 × 82645 = $66,116 104 a $3,000,000 × 05 = $150,000 105 b ($3,000,000 × 03) + $150,000 = $240,000 106 d 107 c $2,000,000 – [$2,000,000 × (.04 + 08)] = $1,760,000 108 a $2,000,000 × 03 = $60,000; $2,000,000 – $60,000 = $1,940,000 109 c $670,000 – $13,400 = $656,600 110 c 111 b $500,000 × 03 = $15,000 112 b ($500,000 × 03) + $2,500 = $17,500 113 c ($100,000 × 03) + $2,400 = $5,400 114 c ($400,000 × 03) + $9,600 = $21,600 115 c $750,000 ÷ [($100,000 + $150,000) ÷ 2] = 6.0 116 c $1,200,000 ÷ [($100,000 + $150,000) ÷ 2] = 9.6 *117 d $250 – $150 = $100 *118 b $72,000 – $24,000 + $8,000 + $1,000 = $57,000 - 31 - 32 Test Bank for Intermediate Accounting, Fourteenth Edition DERIVATIONS — Computational (cont.) No Answer *119 b Derivation $34,140 + $5,000 – $5,200 = $33,940 *120 c $42,400 + $900 – $1,800 + $2,900 = $44,400 *121 b $90,000 + $1,880 – $640 – $180 + $36 = $91,016 *122 c $35,000 + $5,400 – $4,900 = $35,500 DERIVATIONS — CPA Adapted No Answer 123 a Derivation $60,000 – $2,000 + $3,000 = $61,000 124 d Allowance for Doubtful Acct balance $68,000 + $10,000 – $46,000 = $32,000 (before bad debt expense) $650,000 – $600,000 – $32,000 = $18,000 (bad debt expense) 125 d $104,000 – $84,000 + $69,000 = $89,000 126 b $180,000 + $26,000 – $190,000 = $16,000 127 c Conceptual 128 d $750,000 × 04 = $30,000 129 c $600,000 × 75 = $450,000 present value $450,000 × 10 = $45,000 (2012 interest) ($450,000 + $45,000) × 10 = $49,500 (2013 interest) 130 c $400,000 ì 12% ì ữ 12 = $8,000 131 b Conceptual *132 a $18,650 + $3,900 – $2,750 = $19,800 *133 a $37,200 + $43,700 – $49,700 = $31,200 (4/30 balance per bank) $31,200 – $6,000 = $25,200 Cash and Receivables - 33 EXERCISES Ex 7-134—Asset classification Below is a list of items Classify each into one of the following balance sheet categories: a Cash b Receivables c Short-term Investments d Other Compensating balances held in long-term borrowing arrangements Savings account Trust fund Checking account Postage stamps Treasury bills maturing in six months Post-dated checks from customers Certificate of deposit maturing in five years Common stock of another company (to be sold by December 31, this year) 10 Change fund Solution 7-134 d a d a d c b d 10 c a Ex 7-135—Allowance for doubtful accounts When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible As a result of this, a company must recognize bad debt expense There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method Instructions (a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense (b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles - 34 Test Bank for Intermediate Accounting, Fourteenth Edition Solution 7-135 (a) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2) allowance The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any bad debt expense is recognized At the time a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of bad debt expense is recognized The allowance method requires an estimate of bad debt expense for a period of time by reference to the composition of the accounts receivable balance at a specific point in time (aging) or to the overall experience with credit sales over a period of time Thus, total bad debt expense expected to arise as a result of operations for a specific period is estimated, the valuation account (allowance for doubtful accounts) is appropriately adjusted, and a corresponding amount of bad debt expense is recognized As specific accounts are identified as uncollectible, the account is written off It is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for doubtful accounts) Net accounts receivable not change, and there is no charge to bad debt expense when specific accounts are identified as uncollectible and written off using the allowance method (b) The allowance method is preferable because it matches the cost of making a credit sale with the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period Since the direct write-off method does not recognize the bad debt expense until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the matching principle and does not achieve a proper carrying value for accounts receivable at the end of a period Ex 7-136—Entries for bad debt expense A trial balance before adjustment included the following: Accounts receivable Allowance for doubtful accounts Sales Sales returns and allowances Debit $120,000 Credit 730 $510,000 8,000 Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales Solution 7-136 (1) Bad Debt Expense Allowance for Doubtful Accounts Gross receivables $120,000 Rate 5% Total allowance needed 6,000 Present allowance (730) Adjustment needed $ 5,270 5,270 5,270 Cash and Receivables - 35 Solution 7-136 (cont.) (2) Bad Debt Expense Allowance for Doubtful Accounts Sales $510,000 Sales returns and allowances 8,000 Net sales 502,000 Rate 1% Bad debt expense $ 5,020 5,020 5,020 Ex 7-137—Fair Value Option Ellison Company sells large store-rack systems and frequently accepts notes receivable from customers as payment Ellison conducts a through credit check on its customers, and it charges a fairly low interest rate (1/2 of 1% payable monthly) on these notes Ellison has elected to use the fair value option for one of these notes and has the following data related to the carrying and fair value for its note Carrying Value December 31, 2012 December 31, 2013 Fair Value €88,000 72,000 €85,000 76,000 Instructions Prepare the journal entry at December 31 (Ellison’s year-end) for 2012 and 2013, to record the fair value option for these notes Solution 7-137 12/31/12 12/31/13 Unrealized Holding Gain/LossIncome Notes Receivable (€88,000 - €85,000) Notes Receivable [(€76,000 - €72,000) + €3,000] Unrealized Holding Gain/Loss - Income 3,000 3,000 7,000 7,000 Ex 7-138—Accounts receivable assigned Accounts receivable in the amount of $500,000 were assigned to the Fast Finance Company by Marsh, Inc., as security for a loan of $400,000 The finance company charged a 4% commission on the face amount of the loan, and the note bears interest at 9% per year During the first month, Marsh collected $260,000 on assigned accounts This amount was remitted to the finance company along with one month's interest on the note Test Bank for Intermediate Accounting, Fourteenth Edition - 36 Instructions Make all the entries for Marsh Inc associated with the transfer of the accounts receivable, the loan, and the remittance to the finance company Solution 7-138 Cash Finance Charge Notes Payable 384,000 16,000 Cash Accounts Receivable 260,000 Notes Payable Interest Expense Cash 260,000 3,000 400,000 260,000 263,000 PROBLEMS Pr 7-139—Entries for bad debt expense The trial balance before adjustment of Risen Company reports the following balances: Accounts receivable Allowance for doubtful accounts Sales (all on credit) Sales returns and allowances Dr $150,000 Cr $ 2,500 850,000 40,000 Instructions (a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales (b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance How will this difference affect the journal entries in part (a)? Solution 7-139 (a) (1) Bad Debt Expense Allowance for Doubtful Accounts Gross receivables $150,000 Rate 6% Total allowance needed 9,000 Present allowance (2,500) Bad debt expense $ 6,500 6,500 6,500 Cash and Receivables (2) (b) Bad Debt Expense Allowance for Doubtful Accounts Sales $850,000 Sales returns and allowances (40,000) Net sales 810,000 Rate 1% Bad debt expense $ 8,100 - 37 8,100 8,100 The percentage of receivables approach would be affected as follows: Gross receivables $150,000 Rate 6% Total allowance needed 9,000 Present allowance 2,500 Additional amount required $ 11,500 The journal entry is therefore as follows: Bad Debt Expense Allowance for Doubtful Accounts 11,500 11,500 The entry would not change under the percentage of sales method Pr 7-140—Amortization of discount on note On December 31, 2012, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2015, and a stated rate of 5%, with interest receivable at the end of each year The fair value of the services is not readily determinable and the note is not readily marketable Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10% The following interest factors are provided: Table Factors For Three Periods Future Value of Present Value of Future Value of Ordinary Annuity of Present Value of Ordinary Annuity of Interest Rate 5% 10% 1.15763 1.33100 86384 75132 3.15250 3.31000 2.72325 2.48685 Instructions (a) Determine the present value of the note (b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method (Round to whole dollars.) Solution 7-140 (a) Present value of interest Present value of maturity value = = $30,000 × 2.48685 $600,000 × 75132 = = $ 74,606 450,792 $525,398 - 38 Test Bank for Intermediate Accounting, Fourteenth Edition (b) Green Company Schedule of Note Discount Amortization Effective Interest Method 5% Note Discounted at 10% (Imputed) Date 12/31/12 12/31/13 12/31/14 12/31/15 Cash Interest (5%) Effective Interest (10%) $30,000 30,000 30,000 $90,000 $ 52,540 54,794 57,268* $164,602 Discount Amortized $22,540 24,794 27,268 $74,602 Unamortized Discount Balance $74,602 52,062 27,268 Present Value of Note $525,398 547,938 572,732 600,000 *$5 adjustment to compensate for rounding Pr 7-141—Accounts receivable assigned Prepare journal entries for Mars Co for: (a) Accounts receivable in the amount of $1,000,000 were assigned to Utley Finance Co by Mars as security for a loan of $850,000 Utley charged a 3% commission on the accounts; the interest rate on the note is 12% (b) During the first month, Mars collected $400,000 on assigned accounts after deducting $900 of discounts Mars wrote off a $1,060 assigned account (c) Mars paid to Utley the amount collected plus one month's interest on the note Solution 7-141 (a) Cash Finance Charge Notes Payable 820,000 30,000 (b) Cash Sales Discounts Allowance for Doubtful Accounts Accounts Receivable 400,000 900 1,060 (c) Notes Payable Interest Expense Cash 400,000 8,500 850,000 401,960 408,500 Pr 7-142—Factoring Accounts Receivable On May 1, Dexter, Inc factored $1,200,000 of accounts receivable with Quick Finance on a without recourse basis Under the arrangement, Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle the sales discounts, and absorb Cash and Receivables - 39 the credit losses Quick Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts Instructions (a) Prepare the journal entry required on Dexter's books on May (b) Prepare the journal entry required on Quick Finance’s books on May (c) Assume Dexter factors the $1,200,000 of accounts receivable with Quick Finance on a with recourse basis instead The recourse provision has a fair value of $21,000 Prepare the journal entry required on Dexter’s books on May Solution 7-142 (a) Cash 1,104,000 Due from Factor (2% × $1,200,000) 24,000 Loss on Sale of Receivables (6% × $1,200,000) 72,000 Accounts Receivable 1,200,000 (b) Accounts Receivable 1,200,000 Due to Dexter Financing Revenue Cash 24,000 72,000 1,104,000 (c) Cash 1,104,000 Due from Factor 24,000 Loss on Sale of Receivables 93,000 Accounts Receivable Recourse Liability 1,200,000 21,000 - 40 Test Bank for Intermediate Accounting, Fourteenth Edition *Pr 7-143—Bank reconciliation Benson Plastics Company deposits all receipts and makes all payments by check The following information is available from the cash records: MARCH 31 BANK RECONCILIATION Balance per bank Add: Deposits in transit Deduct: Outstanding checks Balance per books $26,746 2,100 (3,800) $25,046 Month of April Results Balance April 30 April deposits April checks April note collected (not included in April deposits) April bank service charge April NSF check of a customer returned by the bank (recorded by bank as a charge) Per Bank $27,995 11,784 11,100 3,000 35 900 Instructions (a) Calculate the amount of the April 30: Deposits in transit Outstanding checks (b) What is the April 30 adjusted cash balance? Show all work *Solution 7-143 (a) Deposits in transit, $4,205 [$13,889 – ($11,784 – $2,100)] Outstanding checks, $2,780 [$10,080 – ($11,100 – $3,800)] (b) Adjusted cash balance at April 30, $29,420 ($27,995 + $4,205 – $2,780) OR ($27,355 + $3,000 – $35 – $900) Per Books $27,355 13,889 10,080 -0-0-0- Cash and Receivables - 41 IFRS QUESTIONS True/False: iGAAP and U.S GAAP are very similar in accounting for cash and receivables iGAAP does not permit the reversal of impairment losses, as does U.S GAAP Under iGAAP, there is a specific standard that mandates segregation of receivables with different characteristics Under iGAAP, there is no specific standard related to pledging receivables Both the FASB and IASB have indicated that they believe all financial instruments should be recorded and reported at fair value Answers to True/False: True False False True True Multiple Choice Use the following information to answer Question and Harrison Company has a loan receivable with a carrying value of $15,000 at December 31, 2011 On January 3, 2012, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates that it will collect only 60% of the loan balance Which of the following entries would Harrison make to record the impairment under iGAAP? a Loan Receivable Impairment Loss 9,000 b Loan Recovery Expense Loan Receivable 6,000 c Impairment Loss Loan Receivable 9,000 d Impairment Loss Loan Receivable 6,000 9,000 6,000 9,000 6,000 - 42 Test Bank for Intermediate Accounting, Fourteenth Edition Assume that on January 5, 2013, Harrison learns that Thomas Clark Imports has emerged from bankruptcy As a result, Harrison now estimates that all but $1,500 will be repaid on the loan Under iGAAP, which of the following entries would be made on January 5, 2013? a Loan Receivable 4,500 Recovery of Impairment Loss 4,500 b Loan Receivable 1,500 Recovery of Impairment Loss 1,500 c Bad Debt Expense 1,500 Impairment Loss 1,500 d No journal entry is allowed under iGAAP The iGAAP approach for derecognizing a receivable focuses on which of the following? a Risks b Rewards c Loss of control d All of these When comparing U.S GAAP with iGAAP, which of the following is true regarding the reporting of securitizations? a Both U.S GAAP and iGAAP show these as off-balance-sheet treatments b Only iGAAP requires full or partial balance sheet recognition of securitizations c Only U.S GAAP requires full or partial balance sheet recognition of securitizations d Both U.S GAAP and iGAAP requires full or partial balance sheet recognition of securitizations Which of the following authoritative iGAAP guidance specifically addresses issues related to cash? a AIS No.1 (Presentation of Financial Statements) b IRFS No (Financial Instruments: Disclosures) c IAS No 39 (Financial Instruments: Recognition and Measurement) d None of these standards specifically addresses cash issues Key similarities between U.S GAAP and iGAAP include all of the following except a the definition used for cash equivalents b accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts c working toward implementing fair value measurement for all financial instruments d the same criteria is used to derecognize a receivable Genesis Company has seven loans receivable The loans vary in size and have been extended to companies with different credit ratings Given a downturn in the economy, it is expected that at least two of these loans will be impaired Which of the following statements best describes the accounting for these loans under iGAAP? a iGAAP implies that the loans should be reported as an aggregated portfolio b iGAAP uses an incurred loss model rather than an expected loss model, so no impairment on each of the two loans is recognized until an identifiable event occurs and is measurable c Under iGAAP, when impairment is permitted, the balance on each of the impaired loans becomes the new basis for the loan d iGAAP uses an expected loss model, so the entire diverse portfolio should be written down based on the anticipated impairment Cash and Receivables - 43 iGAAP requires an impairment loss for a loan receivable be recognized when a its carrying amount is less than its recoverable amount b its recoverable amount is less than its carrying amount c its present value of expected future cash flows is greater than its carrying amount d its principal amount is less than its interest amount Use the following information to answer Questions and 10 Johnstone Company has a loan receivable with a carrying value of $125,000 at December 31, 2011 On January 1, 2012, the borrower, Ralph Young Industries, declares bankruptcy, and Johnstone estimates that it will collect only 45% of the loan balance Which of the following entries would Johnstone make to record the impairment under iGAAP? a Loan Receivable Impairment Loss 56,250 b Loan Recovery Expense Loan Receivable 68,750 c Impairment Loss Loan Receivable 56,250 d Impairment Loss Loan Receivable 68,750 56,250 68,750 56,250 68,750 10 Assume that on January 4, 2013, Johnstone learns that Ralph Young Industries has emerged from bankruptcy As a result, Johnstone now estimates that all but $11,500 will be paid on the loan Under iGAAP, which of the following entries would be made on January 4, 2013? a Loan Receivable 57,250 Recovery of impairment Loss 57,250 b Loan Receivable 11,500 Recovery of impairment Loss 11,500 c Bad Debt Expense 11,500 Impairment Loss 11,500 d No journal entry is allowed under iGAAP 11 Under iGAAP, the characteristics that would imply segregation of receivables would include a past-due status b industry c collateral type d All of these could be used to determine whether segregation of receivables is implied Answers to Multiple Choice d a d b a d b b d 10 a 11 d - 44 Test Bank for Intermediate Accounting, Fourteenth Edition Short Answer: Briefly describe some of the similarities and differences between U.S GAAP and iGAAP with respect to the accounting for cash and receivables Key similarities relate to (1) the definition used for cash equivalents, (2) accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts, how to record trade and sales discounts, use of percentage of sales and receivables methods, pledging, and factoring and (3) both Boards are working to implement fair value measurement for all financial instruments but both Boards have faced bitter opposition from various factions Key differences relate to (1) iGAAP has no guidance for segregation of receivables with different characteristics, (2) iGAAP and U.S GAAP standards on the fair value option are similar but not identical The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S standard In addition, there is some difference in the financial instruments covered, (3) iGAAP and U.S GAAP differ in the criteria used to derecognize a receivable iGAAP is a combination of a risks and rewards and a loss of control approach U.S GAAP uses loss of control as the primary criterion In addition, iGAAP permits partial derecognition—U.S GAAP does not Walton Company, which uses iGAAP, has a note receivable with a carrying value of $30,000 at December 31, 2010 On January 2, 2011, the borrower declares bankruptcy, and Walton estimates that only $25,000 of the note will be collected Briefly describe the accounting for the loan subsequent to the bankruptcy, assuming Walton estimates that more than $25,000 can be repaid Under iGAAP, Walton may record recovery of losses on prior impairments Under U.S GAAP, reversal of impairment is not permitted Rather the balance on the loan after the impairment becomes the new basis for the loan ... understate, understate, zero 7 - 16 Test Bank for Intermediate Accounting, Fourteenth Edition MULTIPLE CHOICE—Computational 72 Consider the following: Cash in Bank – checking account of $18,500,... $40,800 c $44,400 d $43,550 7 - 26 Test Bank for Intermediate Accounting, Fourteenth Edition *121 The cash account shows a balance of $90,000 before reconciliation The bank statement does not include... receivables Calculate accounts receivable turnover Calculate accounts receivable turnover Test Bank for Intermediate Accounting, Fourteenth Edition 7-4 MULTIPLE CHOICE—Computational (cont.) Answer d