Current Assets & Liabilities

Question 1

How is Days to Collect A/R calculated?

Answer 1

Average A/R / Average Sales per Day

Question 2

How are gain contingencies recorded?

Answer 2

They are NOT accrued due to Conservatism

Question 3

When are loss contingencies recorded?

Answer 3

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don’t accrue or disclose

Question 4

JE for recording sales/receivables at net

Answer 4

Record sales at net
Credit Sales discounts not taken (if not taken) when payment is received

Cash (gross)
A/R (net/reverse)
Sales discount not taken

If payment received within the discount period, DO NOT record any sales discount not taken.

Question 5

JE for recording sales/receivables at gross

Answer 5

1. Record sales at gross
   If allowance method is used: need 2nd entry for the sales discount

Sales Discount
Allowance for Sales Discount

2. Debit Sales Discount upon receipt of payment

Cash
Sales Discount
A/R (gross)

Question 6

Bad Debts JE

Answer 6

1. Direct Write Off

Bad Debts
A/R

2. Allowance method

Bad Debts
Allowance for BD

Allowance for B D
A/R

Question 7

What is transfers and servicing of financial assets?

Answer 7

is the transfer of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset.

Question 8

Transfers and servicing of financial assets include:

Answer 8

securitizations
factoring
transfers of receivables with recourse
repurchase agreements
loan participations
banker's acceptances

Question 9

It is the purchasing and selling securities that are collateralized by a pool of assets such as group of receivables

Answer 9

Securitizations

Question 10

It is the selling of receivables at a discount to obtain immediate cash

Answer 10

Factoring

Question 11

An agreement to sell an asset to a lender and later repurchase the asset; using the asset as collateral for a loan

Answer 11

Repurchase agreements

Question 12

A group of financial institutions purchases a share of financial instruments

Answer 12

Loan participations

Question 13

An order from a customer of a bank for the payment of a specified sum of money (post dated check) that maybe bought and sold

Answer 13

Banker’s acceptance

Question 14

Criteria for a financial asset transfer to be accounted for as a sale:

Answer 14

Transferor surrenders control and

• assets are isolated/beyond reach of the transferor and creditors even in bankruptcy or receivership
• no unreasonable constraints/conditions upon transfer
• transferor does not maintain control over assets or a third beneficial interest in the asset

Question 15

Accounting for liabilities from litigation

Answer 15

If probable and estimable:

Loss from litigation
Liability from litigation
#most conservative amount

Upon settlement:

Liability from litigation
Cash
Recovery of loss from litigation
# if actual settlement is < recorded liability

Question 16

Criteria for accruing compensated absences

JE

Answer 16

1. services already rendered
2. right that accumulates or vests
3. payment is probable
4. can be reasonably estimated

Salaries and wages
Accrued liability for compensated absences

Question 17

Life insurance policy - JE

Answer 17

Monthly/yearly payment
transactions affecting the cash surrender value account are premiums paid and dividends received
Life insurance expense should be netted by the
cash discount received

Premiums paid - addition to CSV of policy
/Dividends received - deduction from the premium
Yearly payment constitutes premium expense and contribution to the cash surrender value of the policy

Premium of life insurance expense
Cash surrender value of LI
Cash

Cash
Premium of life insurance expense

Question 18

GIFT CERTIFICATE ACCOUNTING

Answer 18

Cash
Deferred revenue

Deferred Revenue
Revenue

Question 19

FRANCHISE ACCOUNTING

Answer 19

IF FUTURE SERVICES ARE REQUIRED FOR THE FUTURE PAYMENTS:

Cash 30,000
Notes Receivable 45,000
Discount on NR 9,000
Franchise revenue 30,000 cash received
Unearned franchise fees 36,000 (PV of
installments)

IF NO FUTURE SERVICES ARE REQUIRED, CREDIT 66,000 TO REVENUE

Question 20

Be EXTRA CAREFUL IN computing the Adjusting entry amount for Allowance for Doubtfl Accounts in AR

Answer 20

if it is based on % of AR, this amount is the new target. Compute the amount to be adjusted.

Question 21

Periodic franchise payments based on revenues - how are they recognized?

Answer 21

expensed as incurred