2 Flashcards
Roth, Inc., received from a customer a 1-year, $500,000 note bearing annual interest of 8%. After holding the note for 6 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?
The maturity amount of the note is $540,000 [$500,000 face value + ($500,000 × 8%)]. The discount is $27,000 [$540,000 × 10% × (6 ÷ 12)]. Consequently, the proceeds equal $513,000 ($540,000 – $27,000).
Under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account
The entry to record bad debt expense under the allowance method is to debit bad debt 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 bad debt 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.
Interest receivable =
face amount * stated rate * time
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?
Answer (B) is correct.
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).
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
Discount on
note receivable
Deferred charge
Absent 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 computed 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 the right to purchase merchandise at a discount from prevailing market prices, a deferred charge (prepaid purchases) also should be recorded at an amount equal to the discount.
Rand, Inc., accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated August 31. On September 30, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not received until October 1. In Rand’s September 30 balance sheet, the amount receivable from the bank, based on a 360-day year, includes accrued interest revenue of
As determined below, the interest received by Rand if it had held the 90-day note to maturity would have been $1,200. The discount fee charged on a note with a maturity amount of $41,200 ($40,000 face amount + $1,200 interest) discounted at 15% for 60 days is $1,030. The difference of $170 ($1,200 interest – $1,030 discount fee) should be reflected as accrued interest revenue at the balance sheet date because the cash proceeds were not received until the next period.
$40,000 × 12% × (90 ÷ 360) =
$1,200
interest
$41,200 × 15% × (60 ÷ 360) =
(1,030)
discount fee
Accrued interest revenue
$ 170
A transfer of financial assets may be treated as a sale if the transferor surrenders control of the assets. Which of the following is one of the criteria that must be met before control is deemed to be surrendered?
Three criteria must be met: (1) The transferred assets are beyond the reach of the transferor and its creditors; (2) transferees may pledge or exchange the assets or interests; and (3) the transferor does not maintain effective control through, for example, (a) an agreement to repurchase or redeem the assets prior to maturity, (b) an ability unilaterally to benefit from causing the holder to return specific assets, or (c) an agreement making it probable that the transferee will require repurchase.
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectible accounts. What impact would the write-off have on net income and total assets?
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.
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 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.
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?
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.
Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward’s credit sales for the current year were $1 million. During the year, Ward wrote off $18,000 of uncollectible accounts. Ward’s allowance for uncollectible accounts had a $15,000 balance on January 1. In its December 31 income statement, what amount should Ward report as uncollectible accounts expense?
When bad debt expense is estimated on the basis of net credit sales, a cost (bad debt expense) is being directly associated with a revenue of the period (net credit sales). Thus, uncollectible accounts expense is $20,000 ($1,000,000 credit sales × 2%).
Under IFRS, which of the following is a criterion that permits the derecognition of a financial asset?
A financial asset is derecognized if the rights to its cash flows have expired. If they have not, one of the conditions for derecognition is transfer of the contract rights to the cash flows from the financial asset. If, in addition, substantially all risks and rewards of ownership have been transferred, the asset is derecognized. If the entity neither transfers nor retains all of the risks and rewards of ownership, the entity derecognizes the asset if it does not retain control. If control is retained, the asset is recognized to the extent of the entity’s continuing involvement.
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?
When an account that was previously written off is subsequently collected, the account receivable must be reestablished by debiting accounts receivable and crediting allowance for uncollectible accounts. The collection of cash is then accounted for by a debit to cash and a credit to accounts receivable. The effects of these entries are (1) an increase in cash, (2) an increase in the allowance for uncollectible accounts, and (3) no net change in accounts receivable.
he following information pertains to Oro Corp.:
Credit sales for the year ended December 31
$450,000
Credit balance in allowance for uncollectible
accounts at January 1
10,800
Bad debts written off during the year
18,000
According to past experience, 3% of Oro’s credit sales have been uncollectible. After provision is made for bad debt expense for the year ended December 31, the allowance for uncollectible accounts balance would be
When uncollectible accounts are written off, a debit must be made to the allowance for uncollectible accounts and a credit to accounts receivable. As indicated in the T-account analysis presented below, the beginning balance in the allowance account is $10,800, write-offs equal $18,000, and bad debt expense is $13,500. Thus, the ending balance is $6,300.
Ace Co. sold to 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?
he equal annual payment based on the terms of the note was $5,010 ($20,000 ÷ 3.992 PV of an ordinary annuity for five periods at 8%). However, the note was discounted at 9%. Thus, the amount King must have paid for the note was the present value of the periodic payments discounted at 9%, or $19,489 ($5,010 × 3.89 PV of an ordinary annuity for five periods at 9%). Total interest revenue earned by King was therefore $5,561 [(5 payments × $5,010) – $19,489 cash paid].
