Concepts CH 6

Question 1

Determine Uncollectibles - Asset Val

Answer 1

A/R Aging x Expected % (what allow for doubt acct s/b)

Question 2

Determine Uncollectibles - Income Measure

Answer 2

Sales x Expected % (Bad debt expense)

Question 3

Notes Receivable < 3 month original maturity date

Answer 3

NRV

Question 4

NC Notes

Answer 4

PV of Expected CF

Question 5

Transfer of Financial Resources with recourse

Answer 5

Accounted for as sale if transferor surrenders control

Question 6

Factoring

Answer 6

Transfers accounts receivable to a finance company or bank (the factor) on a nonrecourse basis. The arrangement is an outright sale. This allows company to accelerate cash receipts

Question 7

A transfer without recourse

Answer 7

is a sale and the buyer assumes risk of uncollectible accounts

Question 8

Related-party receivables

Answer 8

should be separately stated and fully disclosed

Question 9

Net Income is affected by bad debt

Answer 9

when the expense is recognized not at time of write-off. Hence a write-off has no effect on working capital

Question 10

Tax - Direct write-off method

Answer 10

Not allowed for GAAP, debits bad debt expense and credits A/R

Question 11

Allowance-Method

Answer 11

GAAP, % of sales or % A/R Aging

Question 12

Trade disocunts

Answer 12

A means of establishing a price for a certain quantity or for a particular customer. Neither the buyer or seller reflects trade discounts in accounts

Question 13

A note receivable sold before maturity

Answer 13

has been discounted

Question 14

A pledged receivable is

Answer 14

a security transaction in which the collateral to secure a debt is held by secured party. A borrower agrees to use collections of receivable to repay the loan. Because it is relatively informal it is not reflected in the accounts

Question 15

When an account is written off

Answer 15

Both A/R and allowance for doubtful accounts decrease

Question 16

When a written off account is recovered

Answer 16

Both A/R and allowance for doubtful accounts is increase. The subsequent cash receipt reduces A/R

Question 17

When a non-interest bearing note is exchanged for property, and neither the note nor the property has a clearly determinable exchange price

Answer 17

The PV of note should be the basis for recording the transaction

Question 18

Under the effective-interest method

Answer 18

the effective rate is applied to the carrying amount of receivable to determine periodic interest revenue

Question 19

The entire asset cannot be exchanged without the agreement of all holders

Answer 19

Characteristic of participating interest

Question 20

Transferred assets are note subject to recovery by bankruptcy trustee

Answer 20

criterion for surrender of control

Question 21

A form of continuing involvement by transferor that has relinquished control

Answer 21

Recourse obligation

Question 22

The solving for balance of AR at end of period

Answer 22

Allowance for doubt accounts balance (using Aging AR only) Divided by Estimated %

Question 23

Notes classified as current assets are usually recorded at

Answer 23

face amount minus allowances (NRV).

Question 24

Notes classified as noncurrent assets are recorded at

Answer 24

the present value of the expected future cash flows.

Question 25

Any difference between the proceeds and the face amount must be recognized as

Answer 25

a premium or discount and amortized.

Question 26

Total interest receivable on the note

Answer 26

(face amount × stated rate × note term)

Question 27

Maturity amount

Answer 27

(face amount + total interest receivable)

Question 28

Accrued interest receivable

Answer 28

(face amount × stated rate × note term elapsed)

Question 29

Bank’s discount

Answer 29

(maturity amount × bank’s discount rate × note term remaining)

Question 30

Cash proceeds

Answer 30

(maturity amount – bank’s discount)

Question 31

Carrying amount of the note

Answer 31

(face amount + accrued interest receivable)

Question 32

Gain or loss

Answer 32

(proceeds – carrying amount)

Question 33

Interest reported on an annual basis

Answer 33

Must be prorated for the portion of the year the loan was outstanding

Question 34

Example of transfer of financial assets.

Answer 34

Transfers of financial assets include transfers of (a) an entire financial asset, (b) a group of entire financial assets, and (c) a participating interest in an entire financial asset.

Question 35

Example of continuing involvement.

Answer 35

Control depends, among other things, on the transferor’s continuing involvement with such assets. Examples of continuing involvement are (a) servicing agreements, (b) options written or held, (c) recourse provisions, (d) a beneficial interest in a trust that holds the assets, and (e) a pledge of collateral.

Question 36

Criterion for surrender of control.

Answer 36

A transfer of financial assets over which the transferor relinquishes control is a sale. Surrendering control occurs when the transferred assets are beyond the reach of the transferor and its creditors; transferees may pledge or exchange the assets or interest received; and the transferor does not maintain effective control through, for example, an agreement to reacquire the assets before maturity.