Chaptere 6 Flashcards
Receivables
A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that it is probable that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? A. $200,000 B. $185,000 C. $190,000 D. $195,000
Answer (C) is correct.
The company has $200,000 of sales and estimates that 5% of sales will be returned. Sales are recognized only in the amount of consideration to which the entity expects to be entitled. Thus, no sales are recognized for the products expected to be returned. The entity therefore recognizes net sales equal to 95% of gross sales. Net sales recognized are $190,000 ($200,000 × 95%).
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 $19,485. What should be the total interest revenue earned by Leaf over the life of this note? A. $5,560 B. $8,000 C. $5,045 D. $9,000
Answer (A) is correct.
Leaf Co. will receive cash of $25,045 ($5,009 × 5). Hence, interest revenue is $5,560 ($25,045 – $19,485 present value).
On January 1, the Fulmar Company sold personal property to the Austin Company. The personal property had cost Fulmar $40,000. Fulmar frequently sells similar items of property for $44,000. Austin gave Fulmar a noninterest-bearing note payable in six equal annual installments of $10,000 with the first payment due this December 31. Collection of the note is reasonably assured. A reasonable rate of interest for a note of this type is 10%. The present value of an annuity of $1 in arrears at 10% for six periods is 4.355. What amount of sales revenue from this transaction should be reported in Fulmar’s income statement for the year ended December 31? A. $44,000 B. $40,000 C. $43,550 D. $10,000
Answer (A) is correct.
When a noninterest-bearing note is exchanged for property, the note, the sales price, and the cost of the property exchanged for the note should be recorded at the fair value of the property or at the market value of the note, whichever is more clearly determinable. Here, the $44,000 fair value of the property is clearly determinable because Fulmar frequently sells similar items for that amount. Consequently, $44,000 is the proper amount to be recorded as sales revenue from this transaction
On the December 31 balance sheet of Mann Co., the current receivables consisted of the following: Trade accounts receivable $ 93,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (November) 3,000 Selling price of unsold goods sent by Mann on consignment at 130% of cost (not included in Mann’s ending inventory) 26,000 Security deposit on lease of warehouse used for storing some inventories 30,000 Total $150,000 At December 31, the correct total of Mann’s current net receivables was A. $124,000 B. $94,000 C. $150,000 D. $120,000
Answer (B) is correct.
If a receivable is expected to be collected within the longer of 1 year or the operating cycle, it is current. If the receivable is noncurrent, it should be classified as an investment. Thus, the claim against the shipper is most likely a current receivable but the deposit is not. The unsold consigned goods are in the possession of the consignee but are the property of the consignor and are included in the consignor’s inventory. Sales revenue from consigned goods should be recognized by the consignor when the merchandise is sold. Thus, the unsold consigned goods should be included in inventory at cost, not in receivables at their sales price. Consequently, current net receivables should equal $94,000 [($93,000 – $2,000) net trade receivables + $3,000 claim].
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?
A. At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate.
B. At the face amount minus a discount calculated at the imputed interest rate.
C. At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate.
D. At the face amount.
Answer (B) is correct.
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.
Frame Co. has an 8% note receivable dated June 30, Year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1 for Year 2, Year 3, and Year 4. In its June 30, Year 3, balance sheet, what amount should Frame report as a current asset for interest on the note receivable? A. $4,000 B. $12,000 C. $0 D. $8,000
Answer (D) is correct.
Current assets are those reasonably expected to be realized in cash, sold, or consumed during the longer of the operating cycle of a business or 1 year. Given that the date of the balance sheet is 6/30/Yr 3, the interest to be paid on the next day, 7/1/Yr 3, should be classified as a current asset. On 7/1/Yr 3, $8,000 ($100,000 remaining principal × 8%) of interest and $50,000 of principal are to be received. The $8,000 of interest receivable is a current asset.
A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on
A. Aging the receivables.
B. Direct write-off.
C. Credit sales less returns and allowances.
D. Gross sales.
Answer (A) is correct.
Under the allowance method, uncollectible accounts are estimated in two ways. The method that emphasizes asset valuation is based on an aging of the receivables to determine the balance in the allowance for uncollectible accounts. Bad debt expense is the amount necessary to adjust the allowance account to this estimated balance. The method emphasizing the income statement calculates bad debt expense as a percentage of sales.
Johnson Company uses the allowance method to account for uncollectible accounts receivable. After recording the estimate of uncollectible accounts expense for the current year, Johnson decided to write off in the current year the $10,000 account of a customer who had filed for bankruptcy. What effect does this write-off have on the company’s current net income and total current assets, respectively?
Answer (D) is correct.
Johnson uses the allowance method. Thus, when a specific amount is written off, the journal entry is
Allowance for doubtful accounts
$10,000
Accounts receivable
$10,000
The write-off of a bad debt has no effect on expenses, net income, and total current assets.
On March 31, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for uncollectible accounts. An analysis of Vale’s trade accounts receivable at that date revealed the following:
Estimated Age Amount Uncollectible 0-30 days $60,000 5% 31-60 days 4,000 10% Over 60 days 2,000 70% What amount should Vale report as allowance for uncollectible accounts in its March 31 balance sheet? A. $3,000 B. $3,800 C. $4,000 D. $4,800
Answer (D) is correct.
The aging schedule determines the balance in the allowance for uncollectible accounts. Of the accounts that are no more than 30 days old, the amount uncollectible is $3,000 ($60,000 × 5%). Accounts that are 31-60 days old and over 60 days old have estimated uncollectible balances of $400 ($4,000 × 10%) and $1,400 ($2,000 × 70%), respectively. Hence, the amount recorded in the allowance for uncollectible accounts is $4,800 ($3,000 + $400 + $1,400). The $1,000 balance already in the account is disregarded because the aging schedule determines the balance that should be in the account.
nge Co. determined that the net value of its accounts receivable at December 31, based on an aging of the receivables, was $325,000. Additional information is as follows:
Allowance for uncollectible accounts at 1/1
$ 30,000
Uncollectible accounts written off during the year
18,000
Uncollectible accounts recovered during the year
2,000
Accounts receivable at 12/31
350,000
For the year, what would be Inge’s uncollectible accounts expense?
A. $5,000
B. $15,000
C. $21,000
D. $11,000
Answer (D) is correct.
The allowance for uncollectible accounts before year-end adjustment is $14,000 ($30,000 beginning balance – $18,000 write-offs + $2,000 recovered). The balance should be $25,000 ($350,000 year-end A/R – $325,000 net value based on aging). Thus, the allowance account should be credited and uncollectible accounts expense debited for $11,000 ($25,000 desired balance – $14,000).
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? A. $5,560 B. $8,000 C. $9,000 D. $5,050
The 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].
The following information relates to Jay Co.’s accounts receivable for the year just ended: Accounts receivable, 1/1 $ 650,000 Credit sales for the year 2,700,000 Sales returns for the year 75,000 Accounts written off during the year 40,000 Collections from customers during the year 2,150,000 Estimated uncollectible accounts at 12/31 110,000 What amount should Jay report for accounts receivable, before allowance for uncollectible accounts, at December 31? A. $1,200,000 B. $1,165,000 C. $1,125,000 D. $1,085,000
Answer (D) is correct. The ending balance in accounts receivable consists of the $650,000 beginning debit balance, plus debits for $2,700,000 of credit sales, minus credits for $2,150,000 of collections, $40,000 of accounts written off, and $75,000 of sales returns. Accounts Receivable (in 000s) 1/1 $ 650 $ 75 Sales returns Credit sales 2,700 2,150 Collections
40
Write-offs
12/31
$1,085
The $110,000 of estimated uncollectible receivables is not relevant because it affects the allowance account but not gross accounts receivable.
The following information pertains to Tara Co.’s accounts receivable at December 31, Year 2: Days Estimated Outstanding Amount % Uncollectible 0 - 60 $120,000 1% 61 - 20 90,000 2% Over 120 100,000 6% $310,000 During Year 2, Tara wrote off $7,000 in receivables and recovered $4,000 that was written off in prior years. Tara’s December 31, Year 1, allowance for uncollectible accounts was $22,000. Under the aging method, what amount of allowance for uncollectible accounts should Tara report at December 31, Year 2? A. $10,000 B. $9,000 C. $19,000 D. $13,000
Answer (B) is correct.
The aging schedule determines the allowance for uncollectible accounts based on year-end accounts receivable, their age, and their estimated collectibility. This year-end amount is $9,000 [($120,000 × 1%) + ($90,000 × 2%) + ($100,000 × 6%)].
Orr Co. prepared an aging of its accounts receivable at December 31 and determined that the net realizable value of the receivables was $250,000. Additional information is available as follows:
Allowance for uncollectible accounts at 1/1 –
credit balance
$ 28,000
Accounts written off as uncollectible during the year
23,000
Accounts receivable at 12/31
270,000
Uncollectible accounts recovered during the year
5,000
For the year ended December 31, Orr’s uncollectible accounts expense is
A. $15,000
B. $23,000
C. $10,000
D. $20,000
Answer (C) is correct. As indicated in the T-account analysis below, the beginning balance of the allowance is $28,000, the ending balance is $20,000 ($270,000 gross accounts receivable at 12/31 – $250,000 NRV), total debits for write-offs equaled $23,000, and credits for recoveries of accounts written off totaled $5,000. The balancing credit for uncollectible accounts expense is therefore $10,000. Allowance $28,000 1/1 Write-offs $23,000 5,000 Recoveries 10,000 Uncollectible accounts
expense
$20,000
12/31
