1 Flashcards
Adam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, 2005. Additional information was as follows:
12/31/04 12/31/05
Accounts receivable $500,000 $650,000
Allowance for uncollectible accounts (30,000) (55,000)
Uncollectible accounts totaling $10,000 were written off during 2005. Under the cash basis of accounting, Adam would have reported 2005 sales of
$2,140,000
$2,150,000
$2,175,000
$2,450,000
Under the cash basis of accounting, sales equals cash collected from customers. An equation or T account may be used to determine this amount:
AR, beginning + Sales - Write-offs - customer collections = AR, ending
$500,000 $2,300,000 $10,000 ? = $650,000
Solving for the unknown (?) amount, customer collections equals $2,140,000.
This is the amount collected from customers, and is the amount that would be reported as sales under the cash basis method of accounting.
On October 31, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in Dingo’s October 31 classified balance sheet?
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability.
The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.
The segregated and regular accounts should be reported as current assets net of the overdraft.
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
Alton Co. had a cash balance of $32,300 recorded in its general ledger at the end of the month, prior to receiving its bank statement. Reconciliation of the bank statement reveals the following information:
Bank service charge: $15
Check deposited and returned for insufficient funds check: $120
Deposit recorded in the general ledger as $258 but should be $285
Checks outstanding: $1,800
After reconciling its bank statement, what amount should Alton report as its cash account balance?
$30,338
$30,392
$32,138
$32,192
Correct! The reconciliation should be as follows:
Book balance $32,300
Less bank fees (15)
Less NSF check (120)
Plus deposit transposition error (285 – 258) 27
Corrected book balance $32,192
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?
Accounts receivable Allowance for uncollectible accounts Increase Decrease Increase No effect No effect Decrease No effect Increase
No effect
Increase
This Answer is Correct
This answer is correct. When an account is written off, the journal entry is debit the allowance for uncollectible accounts and credit accounts receivable. If the account is subsequently collected, an entry is made to reinstate the account receivable by debiting accounts receivable and crediting the allowance for uncollectible accounts. A second entry is made for the cash collection which involves debiting cash and crediting accounts receivable. Therefore, there is no change in accounts receivable when a previously written-off account is collected; accounts receivable is debited for the reinstatement, and credited for the payment. However, when the previously written-off account is collected, there is an increase in the allowance for uncollectible accounts.
dam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, 2005. Additional information was as follows:
12/31/04 12/31/05
Accounts receivable $500,000 $650,000
Allowance for uncollectible accounts (30,000) (55,000)
Uncollectible accounts totaling $10,000 were written off during 2005. Under the cash basis of accounting, Adam would have reported 2005 sales of
$2,140,000
$2,150,000
$2,175,000
$2,450,000
2,300,000 + 500000 - 650000 -10000
or:
Under the cash basis of accounting, sales equals cash collected from customers. An equation or T account may be used to determine this amount:
AR, beginning + Sales - Write-offs - customer collections = AR, ending
$500,000 $2,300,000 $10,000 ? = $650,000
Solving for the unknown (?) amount, customer collections equals $2,140,000.
This is the amount collected from customers, and is the amount that would be reported as sales under the cash basis method of accounting
Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for 2004 were $1,000,000. During 2004, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 2004. In its December 31, 2004 income statement, what amount should Ward report as uncollectible accounts expense? $23,000 $20,000 $18,000 $17,000
20,000
The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% × $1,000,000 = $20,000.
ce Co. sold King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows:
8% 3.992
9% 3.890
What should be the total interest revenue earned by King on this note?
$9,000
$8,000
$5,560
$5,050
5560
Total interest over the life of the note equals the total amount paid by Ace over the life of the note less the proceeds to Ace. The proceeds equal the present value of the payments at the 9% yield rate. The annual payment is found using the 8% rate because that rate is contractually set and determines the annual payment.
The annual payment P is found as: $20,000 = P(3.992). P = $5,010
Total interest revenue = total payments by Ace - proceeds to Ace
= 5($5,010) − $5,010(3.89) = $5,560.
Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank? $540,000 $523,810 $513,000 $495,238
513,000
Maturity value of the note: $500,000(1.08) $540,000
Less discount to the bank: $540,000(.10)(6/12) (27,000)
Equals proceeds to Roth $513,000
The bank charges its discount on the maturity amount, for the period it holds the note. In effect, it is charging interest on interest yet to accrue (for the last six months). This procedure is followed because the maturity value is the amount at risk.
Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the dollar.
Hale holds a $30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book value of $35,000, and a liquidation value of $5,000.
The amount to be realized by Hale on this note is
$5,000
$12,000
$15,000
$17,000
15,000
30000-5000=25000
25000*.40=10000
5000+10000 = 15000
Which of the following contingencies should generally be accrued on the balance sheet as a liability when the occurrence of the contingent event is reasonably possible and its amount can be reasonably estimated?
Expropriation of assets Product warranty obligation No No No Yes Yes Yes Yes No
no no
his answer is correct. Per ASC Topic 450, an estimated loss from a loss contingency should be accrued if the likelihood of occurrence is probable and the amount of the loss can be reasonably estimated. In this case, the likelihood of occurrence is only reasonably possible, so neither would be accrued.
Mann Corp.’s liability account balances at June 30, 20X3 included a 10% note payable in the amount of $3,600,000.
The note is dated October 1, 20X2, and is payable in three equal annual payments of $1,200,000 plus interest. The first interest and principal payment was made on October 1, 20X3.
In Mann’s June 30, 20X4 balance sheet, what amount should be reported as accrued interest payable for this note?
$270,000
$180,000
$90,000
$60,000
180,000
3600000-1200000 (first payment on principal made oct 03) = 2400000
2400000*.10 = 240000
240000 * 9/12 (oct 1 to June 30) = 180000
On October 1, 20X3, the first payment was made. This payment included all interest due to that point, as well as the first $1,200,000 principal payment.
Thus, on that date, the liability balance is $2,400,000 (the remaining two principal payments). June 30, 20X4 is 9 months after this first payment date. The accrued interest for 9 months is $180,000 = $2,400,000(.10)(9/12).
The following information pertains to Camp Corp.’s issuance of bonds on July 1, 20X5:
Face amount $800,000
Term 10 years
Stated interest rate 6%
Interest payment dates Annually on July 1
Yield 9%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of ordinary annuity of 1 for 10 periods 7.360 6.418
What should be the issue price for each $1,000 bond?
$1,000
$864
$807
$700
807
The issue price for one $1,000 face value bond is the present value of all future payments discounted at the yield rate of 9%.
Issue price = $1,000(.422) + .06($1,000)(6.418) = $807
note: FACE: price/issue price use the YIELDED/MARKET RATE and PV OF $1 for X periods
and for INTEREST always use the STATED INTEREST RATE AND PV OF ORDINARY annuity of $1 for X periods THEN calculate that answer using the YIELDED/MARKET RATE PV FACTOR
On January 1, year 1, Boston Group issued $100,000 par value, 5% five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available:
5% 8%
Present value of $1 (n = 5) 0.78353 0.68058
Present value of an ordinary annuity (n = 5) 4.32948 3.99271
What amount is the value of net bonds payable at the end of year 1?
$88,022
$90,064
$100,000
$110,638
90,064
100,000 x .68058 = 68,058
100,000 x .05 = 5,000
5,000 x 3.99271 = 19,964
68,058 + 19,964 = 88,022
For end of year, add back amortization.
88,022 x .08 = 7,042
7042-5000= 2,042
88,022 + 2,042 = 90,064
1/1
Dr Cash 88,022
Dr Discount on BP 11,978
Cr Bonds Payable 100,000
12/31
Dr Interest Expense 7,042
Cr Amortization of Discount 2,042
Cr Interest Payable/Cash 5,000
LOGICAL ANSWER:
When you encounter bond problem like this, you should pay attention which interest you will use
my tip is to calculate the PV of bond principle and interest separately
- PV of bond => use market interest rate => since it is one time payment uses PV of $1
- PV of interest => it is ordinary annuity cuz it is due on 12/31 => firs, calculate the annul interest and find the pv of all interest to be paid over the time
sum 1+2 => give you PV value of the bond and
do not forget amortize it
since it is issued at Discount, you have to add back the amount of atomization at the end of each reporting period.
that will give you
88,022 + 2,042 = 90,064
WILEY ANSWER:
CORRECT! The bonds were issued at a discount because the market interest rate exceeds the stated rate. The net liability at the end of year 1 reflects the issue price at the beginning of the year plus the discount amortization for year 1. Discount is a contra bond payable account. When it is amortized, the contra account is reduced, thus increasing the net bond liability. The bond price is $100,000(.68058) + .05($100,000)(3.99271) = $88,022. Interest expense for year 1 is .08($88,022) = $7,042. The journal entry for the first interest payment is: dr. Interest expense 7,042; cr. Discount 2,042; cr. Cash 5,000. Net liability at end of year 1 = $88,022 + $2,042 = $90,064.
A bond issued on June 1, Year 1, has interest payment dates of April 1 and October 1. The bond interest expense for the year ended December 31, year 1 is for a period of Three months. Four months. Six months. Seven months.
Seven months.
This Answer is Correct
The bonds have been outstanding seven months by the end of year 1. The firm has borrowed money for seven months. Therefore, seven months’ interest should be recognized in year 1.
Only six months of interest was PAID in year 1 because the bonds were issued after April 1 (one of the two interest payment dates per year), but that is not what the question asks.
On January 1, year 2, Southern Corporation received $107,720 for a $100,000 face amount, 12% bond, a price that yields 10%. The bonds pay interest semiannually. Southern elects the fair value option for valuing its financial liabilities. On December 31, year 2, the fair value of the bond is determined to be $106,460. Southern recognized interest expense of $12,000 in its year 2 income statement. What was the gain or loss recognized on the year 2 income statement to report this bond at fair value? $1,260 gain $6,460 gain $12,000 loss $13,260 loss
1260 GAIN
Interest expense can be measured using various methods. In this situation, Southern recognized interest expense by debiting interest expense for $12,000 and crediting cash for $12,000, which represents the coupon interest paid on the bond. Therefore, interest expense was recognized on the income statement as a separate line item. The change in fair value from January 1, year 2, to December 31, year 2, would, therefore, be recognized as a gain or loss to revalue the bond’s carrying value to fair value. The change in value is calculated as beginning of year carrying value of $107,720 less end of year carrying value of 106,460, or $1,260. Since the value of the liability decreased, this indicates a gain of $1,260 that would be recognized on the year 2 income statement
Question 9
AICPA.901111FAR-P1-FA
Included in Lee Corp.’s liability account balances at December 31, 20x4, were the following:
14% note payable issued October 1, 20x4, maturing September 30, 20x5 $125,000
16% note payable issued April 1, 20x3, payable in six equal annual installments of $50,000 beginning April 1, 20x3 200,000
Lee’s December 31, 20x4 financial statements were issued on March 31, 20x5.
On January 15, 20x5, the entire $200,000 balance of the 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 20x5, Lee consummated a noncancelable agreement with the lender to refinance the 14%, $125,000 note on a long-term basis, on readily determinable terms that have not yet been implemented.
Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement’s provisions.
On the December 31, 20x4 balance sheet, the amount of the notes payable that Lee should classify as short-term obligations is
$175,000
$125,000
$50,000
$0
0
Current liabilities that are refinanced before the issuance of the financial statements can be reclassified as noncurrent provided they meet the requirements.
Essentially, as long as the firm actually refinances the liability on a noncurrent basis before issuing the financial statements, or it enters into a non-cancelable agreement to do so (again before issuing the financial statements), then the liability can be reclassified. Thus, both listed liabilities will be classified as noncurrent in the 20x4 balance sheet.
