FAR - Receivables 4 Flashcards
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?
$5,560
Leaf Co. will receive cash of $25,045 ($5,009 × 5). Hence, interest revenue is $5,560 ($25,045 – $19,485 present value).
Roth, Inc., received from a customer a 1-year, $500,000 note bearing annual interest of 8%. After holding the note for 6 months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?
$513,000
The maturity amount of the note is $540,000 [$500,000 face value + ($500,000 × 8%)]. The discount is $27,000 [$540,000 × 10% × (6 ÷ 12)]. Consequently, the proceeds equal $513,000 ($540,000 – $27,000).
After being held for 40 days, a 120-day, 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank upon discounting is the
Maturity amount minus the discount at 15%.
The cash proceeds from discounting the note will equal the maturity amount (face amount + total interest receivable at 12% for 120-day term of the note) minus the bank’s discount (maturity amount × 15% for 80 days).
On July 1, Lee Co. sold goods in exchange for a $200,000 8-month noninterest-bearing note receivable. At the time of the sale, the note’s market rate of interest was 12%. What amount did Lee receive when the note was discounted at a bank at 10% on September 1?
$190,000
The maturity amount of a noninterest-bearing note receivable is its face amount. The discount fee is $10,000 [$200,000 maturity amount × 10% × (6 months ÷ 12)]. Thus, the proceeds equal $190,000 ($200,000 – $10,000).
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?
$5,560
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].
Rand, Inc., accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated August 31. On September 30, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not received until October 1. In Rand’s September 30 balance sheet, the amount receivable from the bank, based on a 360-day year, includes accrued interest revenue of
$170
As determined below, the interest received by Rand if it had held the 90-day note to maturity would have been $1,200. The discount fee charged on a note with a maturity amount of $41,200 ($40,000 face amount + $1,200 interest) discounted at 15% for 60 days is $1,030. The difference of $170 ($1,200 interest – $1,030 discount fee) should be reflected as accrued interest revenue at the balance sheet date because the cash proceeds were not received until the next period.
$40,000 × 12% × (90 ÷ 360) =
$1,200
interest
$41,200 × 15% × (60 ÷ 360) =
(1,030)
discount fee
Accrued interest revenue
$ 170
A 90-day, 15% interest-bearing note receivable is sold to a bank after being held for 30 days. The proceeds are calculated using an 18% interest rate. The note receivable has been
DISCOUNTED: YES
PLEDGED: NO
A note receivable sold before maturity has been discounted. A pledge is a security transaction in which the collateral to secure a debt is held by the secured party. No security has been given in this case.
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
At the end of Year 1, Boller Co. had an ending balance in allowance for uncollectible accounts of $30,000. During Year 2, Boller wrote off $40,000 of accounts receivable. At the end of Year 2, Boller had $300,000 in accounts receivable and determined that 8% of these would be uncollectible. What amount should be reported as uncollectible accounts expense on Boller’s Year 2 income statement?
The Year 2 ending balance for allowance for uncollectible accounts is $24,000 ($300,000 × 8%). The write-off of a particular bad debt has no effect on bad debt expense. It is recognized as a decrease in the balance of allowance for uncollectible accounts. Therefore, the bad debt expense in Year 2 of $34,000 can be calculated as follows:
1/1/Year 2 allowance for uncollectible accounts
$30,000
Accounts written off (40,000) Bad debt expense
34,000
12/31/Year 2 allowance for uncollectible accounts
$24,000
