1

Question 1

how to compute the interest revenue/ Receivable

Answer 1

net proceeds * interest rate * time

Dr accrued interest
Cr interest income

Question 2

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:

Answer 2

Accounts written off: deduction; Increase in accounts receivable balance: deduction

This question is asking to convert from sales during the period to cash collections. Since the company uses the direct write-off method, there is no need to consider any allowance account balance. Thus, the sales for the period only have to be adjusted downwards for any accounts written off, and also downwards for any increases in deferred receipts (in the form of additions to accounts receivables).

Question 3

Which of the following ratios useful in assessing the liquidity position of a company?

Answer 3

The defensive-interval ratio is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable). Thus, it is computed by dividing total quick assets by average daily cash expenditures. This is a liquidity measure, as it assesses how long a company can continue to keep up with its debts.

Return on stockholders’ equity is a profitability measure, based on dividing net income by stockholder’s total equity investment in the company. Return on stockholders’ equity is a performance measure, not a liquidity measure.

Question 4

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?

Answer 4

Accounts receivable: No effect; Allowance for uncollectible accounts: Increase

Cash XXX
Allowance for uncollectible accounts XXX

Question 5

When a loan receivable is impaired but foreclosure is not probable, which of the following may the credi­tor use to measure the impairment?

The loan’s observable market price
The fair value of the collateral if the loan is collateral dependent

Answer 5

Under the appropriate circumstances, both a market price of a debt or a realizable value of collateral available could be used to measure the impairment of a receivable. There are three ways to measure the present fair value of an impaired loan and they are listed in FASB ASC 310-10-35-22:

The present value of the expected future cash flows from the loan discounted at the loan’s original effective rate
The amount the loan could be sold for
The net realizable value of the available loan collateral

The difference between the loan’s carrying value and its fair value is the loan impairment.

Question 6

note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the discounting transaction, the notes receivable discounted account should be:

Answer 6

A note sold with recourse is a promise to pay the financial institution if the maker dishonors the note. When receivables are sold with recourse, the entity has a contingent liability. A contingent liability is an obligation that has to be paid in the future. Therefore, the notes receivable discounted account must be increased by the face amount of the note.
increased by the face amount of the note.

Question 7

how to compute the Carrying value of note receivable

Answer 7

Carrying value of note receivable

= Annual payment x Present value of ordinary annuity factor

Question 8

During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets?

Answer 8

When the allowance method of accounting for bad debts is applied, the accounts that will be eventually written off are in both the accounts receivable and the allowance account balances. When the account is written off, it is taken out of both at the same time, and the bad debt expense had already been taken as an estimated expense when the sale was made. The write-off lowers accounts receivable with a credit, and the allowance account with a debit of the same amount. The write-off entry does not affect expenses, and leaves the net realizable amount of accounts receivable the same.