FAR - Receivables 2 Flashcards
Notes with original maturities to the holder of 3 months or less are treated as cash equivalents and accounted for at net realizable value.
TRUE
Notes with original maturities to the holder of 3 months or less are treated as cash equivalents and accounted for at net realizable value.
A note may bear no explicit interest because interest is included in the amount to be paid at maturity.
TRUE
A note may bear no explicit interest because interest is included in the amount to be paid at maturity. The proper accounting treatment is to debit notes receivable for its face (maturity) amount, credit cash (or other appropriate account), and credit a discount account. The discount is amortized to interest revenue.
When a note bears an unreasonable interest rate, an interest rate must be imputed.
TRUE
When a note bears interest at a rate that is unreasonable in the circumstances, interest must be imputed (estimated). A note with imputed interest also results in amortization of discount or premium.
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.
TRUE
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. That presumption is overcome when no interest is stated, the stated rate is unreasonable, or the nominal amount of the note materially differs from the cash sales price of the item or the market value of the note.
On January 1, Year 1, Focus Co. lent Brewers, Inc., $80,000 in exchange for a 3-year note receivable with a face amount of $100,000. The note had no stated interest rate. What is Focus’s journal entry to record this transaction?
DR: Note Receivable $100,000
CR: CASH $80,000
CR: DISCOUNT ON NOTE $20,000
When a note receivable is discounted, the gain or loss on disposition of the note does not have to be calculated.
FALSE
When a note receivable is discounted (i.e., sold, usually at a bank), the gain or loss on disposition of the note must be calculated. The holder is borrowing the maturity amount (principal + interest at maturity) of the note. The bank usually collects the maturity amount from the maker of the note.
If a note receivable is discounted with recourse, it must be disclosed as a contingent liability.
TRUE
If a note receivable is discounted with recourse, the note must be disclosed as a contingent liability. If the maker dishonors the note, the bank will collect from the entity that discounted the note.
After holding a 1-year $200,000 note receivable from Dottie, LLC, for just 3 months, Focus Co. decided to discount the note at a local bank at an effective interest rate of 7%. The note has a stated interest rate of 6%. Prepare the journal entry to record the gain or loss on discounting.
Cash
$200,870
Loss on sale of note receivable
2,130
Note receivable
$200,000
Interest receivable
3,000
The steps in discounting are to compute the following:
1
Total interest receivable:
$200,000 × 6% = $12,000
2
Maturity amount:
$200,000 + $12,000 = $212,000
3
Accrued interest receivable:
$200,000 × 6% × (3 ÷ 12) = $3,000
4
Bank’s discount:
$212,000 × 7% × (9 ÷ 12) = $11,130
5
Cash proceeds:
$212,000 – $11,130 = $200,870
6
Carrying amount of the note:
$200,000 + $3,000 = $203,000
7
Gain or (loss):
$200,870 – $203,000 = ($2,130)
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?
$1,085,000
In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000. What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance-sheet risk?
Risk of Accounting Loss: $230,000
Off-Balance-Sheet Risk: $0
Butler’s risk of accounting loss is measured by the net receivables balance ($250,000 accounts receivable – $20,000 allowance for uncollectible accounts = $230,000). Accounting loss is the loss that may have to be recognized due to credit and market risk as a direct result of the rights and obligations of a financial instrument. However, assuming that the carrying amount of these trade receivables approximates their fair value, the accounting loss cannot exceed the amount recognized as an asset. No off-balance-sheet risk of accounting loss results from reported accounts or notes receivable. Off-balance-sheet risk arises because of the existence of conditional rights and obligations that may expose the entity to a risk of accounting loss exceeding the amount recognized in the balance sheet, for example, recourse obligations on receivables sold.
The following information has been compiled by Able Manufacturing Company:
Sale of company products for the period to customers with net 30-day terms amounting to $150,000.
Sale of company products for the period to a customer, supported by a note for $25,000, with special terms of net 180 days.
Balance of trade receivables at the end of the last period was $300,000.
Collections of open trade receivables during the period was $200,000.
Rental income for the period, both earned and accrued but not yet collected, from the Able Employees’ Credit Union for use of company facilities was $2,000.
The open trade receivables balance to be shown on the statement of financial position for the period is
$250,000
The open trade receivables balance is calculated as follows:
Previous ending balance
$300,000
Add: Sales to customers (terms net 30)
150,000
Minus: Collections during period
(200,000)
Open trade receivables reported
$250,000
The following information applies to Nichola Manufacturing Company, which has a 6-month operating cycle:
Cash sales
$100,000
Credit sales during the sixth month with net 30 days terms
150,000
Credit sale during the fifth month with special terms of net 9 months
10,000
Interest earned and accrued on an investment that matures during month 3 of the next cycle
2,000
The total of Nichola’s trade accounts receivable at the end of the current cycle is
$160,000
A receivable classified as current on the statement of financial position is expected to be collected within the current operating cycle or 1 year, whichever is longer. The total of the trade accounts receivable at the end of the current cycle is therefore $160,000 ($150,000 + $10,000).
On June 1, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40, and the sale was made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. On June 12, Pitt received from Burr a remittance in full payment amounting to
$2,944
A trade discount is a means of establishing a price for a certain quantity or for a particular class of customers. Neither the buyer nor the seller reflects trade discounts in the accounts. Assuming that the 30% discount is applied first, the initial discount is $1,500 ($5,000 × 30%), and the second discount is $700 [($5,000 – $1,500) × 20%]. Thus, the base price is $2,800. (If both discounts apply, it makes no difference which is taken first.) Because the buyer paid within the discount period, the cash equivalent price is $2,744 ($2,800 × 98%). Given that the goods were shipped FOB shipping point, title passed when they were put in the possession of the carrier, and the buyer is responsible for payment of delivery costs. Accordingly, the full amount owed by the buyer was $2,944 ($2,744 + $200 delivery costs).
In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 4, Pulham has a receivable from Angles. How should the receivable be reported in Pulham’s Year 4 financial statements?
The total receivable should be disclosed separately.
Related parties include an entity and its equity-based investees. A receivable from a related party should be separately and fully disclosed. Indeed, nontrade receivables generally are subject to separate treatment.
Which of the following is a false statement about balance sheet disclosure of accounts receivable?
That portion of installment accounts receivable from customers which falls due more than 12 months from the balance sheet date usually would be excluded from current assets.
Current assets are reasonably expected to be realized in cash or to be sold or consumed within 12 months or the operating cycle of the business, whichever is longer. If the ordinary trade receivables of the business fall due more than 12 months from the balance sheet date, then the operating cycle is clearly longer than 12 months and the receivables should be included in current assets.
West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. West should record the cost of this merchandise as
$14,400
When inventory is subject to cash discounts, the purchases may be reflected either net of these discounts or at the gross prices. However, purchases should always be recorded net of trade discounts. A chain discount is the application of more than one trade discount to a list price. Chain discounts should be applied in steps as indicated below.
List price
$20,000
20% discount
(4,000)
After 1st discount
$16,000
10% discount
(1,600)
Cost of merchandise
$14,400
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?
$190,000
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%).
Rue Co.’s allowance for uncollectible accounts had a credit balance of $12,000 at December 31, Year 1. During Year 2, Rue wrote off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for uncollectible accounts was required at December 31, Year 2. What amount of uncollectible accounts expense should Rue report for Year 2?
$86,000
Allowance for Doubtful Accounts
CR: $12,000 on 1/1/year2
DR: $48,000 (Write Offs)
12,000 - 48,000 = ($36,000)
XXX + (36,000)= $50,000?
$86,000
In its December 31, Year 3, balance sheet, Fleet Co. reported accounts receivable of $100,000 before allowance for uncollectible accounts of $10,000. Credit sales during Year 4 were $611,000, and collections from customers, excluding recoveries, totaled $591,000. During Year 4, accounts receivable of $45,000 were written off and $17,000 were recovered. Fleet estimated that $15,000 of the accounts receivable at December 31, Year 4, were uncollectible. In its December 31, Year 4, balance sheet, what amount should Fleet report as accounts receivable before allowance for uncollectible accounts?
$75,000
The question asked for AR ending balance
AR beginning balance : 100
credit sale:
Dr. AR 611<-
Cr. Sale 611
payment from customer:
Dr. Cash 591
Cr. AR 591<-
AR written off:
Dr. Allowance for doubtful debt 45
Cr. AR 45<-
So you have +100+611-591-45=75
recover bad debt is irrelevant
Dr. cash 17
Cr. Allowance 17
Bad Debt estimate is irrelevant
Dr. bad debt expense 15
cr. allowance 15
beg balance of allowance is irrelevant
Bad debt recovery J/E
Dr. Cash 17
Cr. Allowance 17
It won’t affect accounts receivable before allowance for uncollectible accounts
For the year ended December 31, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:
Allowance for uncollectible accounts, 1/1
$42,000
Uncollectible accounts written off, 11/30
46,000
Estimated uncollectible accounts per aging, 12/31
52,000
After year-end adjustment, the uncollectible accounts expense should be
$56,000
Allowance on 1/1 = $42,000
Write Offs = $46,000
Ending = $52,000
42 - 46 = -4;
-4+XXX=52? $56,000
