2B - Trade Receivables Flashcards
Delta, Inc., sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of Delta’s customers take advantage of the discount. Delta uses the gross method of recording sales and trade receivables. An analysis of Delta’s trade receivable balances on December 31, 20X1, revealed the following:
Age Amount Collectible
0 - 15 days $100,000 100%
16 - 30 days 60,000 95%
31 - 60 days 5,000 90%
Over 60 days 2,500 $500
$167,500
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On its December 31, 20X1, balance sheet, what amount should Delta report for the allowance for discounts?
$1,675
$1,000
$2,000
$1,620
$1,000
Note: The question asks for the allowance for discounts, not the allowance for uncollectible accounts.
Only receivables in the “0-15 days” age category are eligible for the cash discount (2/15, net 30) on December 31, 20X1.
Allowance = Amount x Percent taking discount x Discount rate
for discounts = $100,000 x 50% x 2%
= $1,000
Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction. How is this procedure best described?
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross
Loan from Ross to be repaid by the proceeds from Gar’s accounts receivable
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar
Loan from Ross collateralized by Gar’s accounts receivable
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross
Factoring of receivables without recourse is essentially a sale of those receivables because the recipient of the receivables (i.e., Ross Bank) has no recourse if the debtor(s) do(es) not pay amounts owed. All risk of nonpayment is transferred to Ross Bank. (FASB ASC 860-10-55-45)
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:
Accounts written off: deduction; Increase in accounts receivable balance: addition
Accounts written off: addition; Increase in accounts receivable balance: addition
Accounts written off: deduction; Increase in accounts receivable balance: deduction
Accounts written off: addition; Increase in accounts receivable balance: deduction
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)
The following information relates to Jay Co.’s accounts receivable for 20X1:
Accounts receivable (January 1, 20X1) $ 650,000
Credit sales for 20X1 2,700,000
Sales returns for 20X1 75,000
Accounts written off during 20X1 40,000
Collections from customers during 20X1 2,150,000
Estimated future sales returns on December 31, 20X1 50,000
Estimated uncollectible accounts on December 31, 20X1 110,000
What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, on December 31, 20X1?
$925,000
$1,200,000
$1,085,000
$1,125,000
$1,085,000
The question asks for the computation of the end-of-year gross accounts receivable balance. Start with the beginning balance in accounts receivable, add credit sales to it, and deduct the collections, the sales returns, and the accounts written off.
Accounts receivable on January 1, 20X1 $ 650,000
Credit sales for 20X1 + 2,700,000
Subtotal $3,350,000
Sales returns for 20X1 - 75,000
Accounts written off in 20X1 - 40,000
Collection from customers - 2,150,000
Accounts receivable on December 31, 20X1 $1,085,000
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Note: The question concerned the accounts receivable account, not net accounts receivable, so estimated uncollectible accounts were not considered
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
I only
Either I or II
II only
Neither I nor II
Either I or II
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.
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. The difference between the loan’s carrying value and its fair value is the loan impairment. 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 ___ of the expected future cash flows from the loan discounted at the loan’s original effective rate
The amount the loan could be ___ for
The __ realizable value of the available loan collateral
value
sold
net
On July 1, Year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, Year 1 and Year 2. On July 1, Year 2, Kay discounted the note at a bank at an interest rate of 12%. Kay’s proceeds from the discounted note were:
$49,350.
$48,400.
$50,350.
$51,887.
$51,887.
When accounting for a discounted note and computing the cash proceeds, one must first find the maturity value of the note, what will be received by the holder of the note when it comes due. By the time of the discounting, some of the principal has already been paid. At the end of December, Year 2, the $50,000 will be received by the bank along with 10% interest (since the principal will have been outstanding for a whole year). Only the second installment, the final $50,000 principal plus interest of $5,000 ($50,000 outstanding balance × 0.10), will be paid to the bank when due, for a total payment at maturity of $55,000.
The discounted proceeds will be based on this amount, the discount rate (0.12 × 6/12) over the discounting period (from July to December of Year 2, 6 months). The discount amount is thus:
PV (Present value) = Maturity value/(1 + r)n
PV = $55,000/(1 + .06)1
PV = $51,887 (rounded)
On December 31, 20X1, Key Co. received two $10,000 non-interest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in 9 months, was made under customary trade terms, but the note from Omega Co., which is due in 2 years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in 9 months at 8% is 0.944. The present value of $1 due in 2 years at 8% is 0.857. At what amounts should these two notes receivable be reported in Key’s December 31, 20X1, balance sheet?
Alpha $9,440, Omega $10,000
Alpha $10,000, Omega $8,570
Alpha $10,000, Omega $10,000
Alpha $9,440, Omega $8,570
Alpha $10,000, Omega $8,570
Current receivables of less than 1 year acquired as a result of customary trade terms are normally reported at their face value.
Long-term receivables are reported at their present value: $10,000 × 0.857 = $8,570.
Current receivables of less than 1 year acquired as a result of customary trade terms are normally reported at their __ ____.
face value
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?
Net income: No effect; Total assets: No effect
Net income: No effect; Total assets: Decrease
Net income: Decrease; Total assets: No effect
Net income: Decrease; Total assets: Decrease
Net income: No effect; Total assets: No effect
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.
Inge Co. determined that the net value of its accounts receivable on December 31, 20X1, based on an aging of the receivables, was $325,000. Additional information is as follows:
Allowances for uncollectible accounts (01/01/X1) $ 30,000
Uncollectible accounts written off during 20X1 18,000
Uncollectible accounts recovered during 20X1 2,000
Accounts receivable on 12/31/X1 350,000
For 20X1, what would be Inge’s uncollectible accounts expense?
$21,000
$11,000
$15,000
$5,000
$11,000
Balance of “allowance” on 01/01/X1 $30,000
Less balance of “allowance” on 12/31/X1
($350,000 - $325,000) 25,000
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Decrease in “allowance” (i.e., debits) $ 5,000
Net write-offs of accounts receivable
($18,000 - $2,000) $16,000
Less decrease in “allowance” account
($30,000 - $25,000) (5,000)
Uncollectible accounts expense =======
(i.e., credits to “allowance” account) $11,000
Allowance for uncollectible accounts:
Beginning balance $30,000
Uncollectible accounts written off (18,000)
Written-off accounts now collectible 2,000
Uncollectible accounts expense ?
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Year-end balance $25,000
At December 31, Year 1, Gasp Co.’s allowance for uncollectible accounts had a credit balance of $30,000. During Year 2, Gasp wrote off uncollectible accounts of $45,000. At December 31, Year 2, an aging of the accounts receivable indicated that $50,000 of the December 31, Year 2, receivables may be uncollectible. What amount of allowance for uncollectible accounts should Gasp report in its December 31, Year 2, balance sheet?
$20,000
$35,000
$25,000
$50,000
$50,000
This is a basic question about the allowance account for uncollectible accounts receivable. At the end of the year, this allowance account has to have, as a credit balance, the amounts included within accounts receivable that are in doubt as to collection. This amount is stated in the problem, as $50,000.
On January 1, 20X1, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2% of Jamin’s credit sales has been uncollectible. During 20X1, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 20X1 were $9,000,000. On its December 31, 20X1, balance sheet, what amount should Jamin report as allowance for uncollectible accounts?
$180,000
$115,000
$440,000
$245,000
$115,000
The questions asks for the ending balance in allowance for uncollectible accounts. Start with the year’s beginning balance, add the bad debt expense amount to it, and then deduct the accounts written off during the year.
Allowance balance on January 1, 20X1 $260,000
2% of 20X1 credit sales (.02 x $9,000,000) 180,000
Subtotal = $440,000
20X1 write-offs (325,000)
Allowance balance on December 31, 20X1 =$115,000
When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would:
decrease the allowance for uncollectible accounts.
increase the allowance for uncollectible accounts.
have no effect on the allowance for uncollectible accounts.
increase net income.
increase the allowance for uncollectible accounts.
Debit Credit (1) Write an account off:
Allowance for Uncollectibles xx
Accounts Receivable xx (2) Reinstate account previously written off:
Accounts Receivable xx
Allowance for Uncollectibles xx (Entry (2) reverses entry (1) to the extent of cash subsequently collected) (3) Collect the account:
Cash xx
Accounts Receivable xx (Entry (2), the reinstatement, credits or increases the allowance for uncollectible accounts)
Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,483. What should be the total interest revenue earned by Leaf over the life of this note?
$5,045
$8,000
$9,000
$5,562
$5,562
The total amount of interest revenue one earns on a note is related to the total payments but also to the present value of the note, with the discount recognized here initially.
The total amount to be received on this note is 5 years multiplied by $5,009, as specified, for a total of $25,045. Interest is generally the amount returned over and above the amount originally recognized, which was $19,483 originally. Thus, the total interest revenue is $25,045 − $19,483, or $5,562.
The total amount of interest revenue one earns on a note is related to the total payments but also to the ___ ____ of the note, with the discount recognized here initially.
present value
On December 1, 20X1, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 20X2. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its 20X1 income statement?
$0
$2,005
$1,833
$7,833
$2,005
Net proceeds of the loan were $194,000 and the effective interest rate was 12.4%. The journal entry to record the December 31, 20X1, accrual of interest would be:
Debit Accrued Interest Receivable 2,005
Credit Interest Income 2,005
(12.4% × $194,000 × 1/12)
The interest income reflects the effective interest rate applied to the net proceeds received. This is an application of the “effective interest” method.
