FAR - Receivables Simulation Flashcards
On January 2, SHB Company receives a 3-year, $10,000, noninterest bearing note, the present value of which is $7,722. The rate implicit on this transaction is 9%. You are completing SHB’s note receivable account.
To prepare each required journal entry:
Enter the corresponding debit or credit amount in the associated column.
Round all amounts to the nearest whole number.
- Prepare the entry to record the acquisition of the note.
Note Receivable (14 Gradable Items)
- The cash price of a noninterest-bearing note receivable is the present value of the face amount discounted at the rate of interest implicit in the transaction. The present value of $10,000 received in 3 years discounted at 9% is ($10,000 × 0.7722% = $7,722). The difference is recorded as a discount ($10,000 – $7,722 = $2,278). A note receivable is recorded at its face amount. Account Name Debit Credit Notes receivable $10,000
Discount on notes receivable
$2,278
Cash
7,722
- Prepare the adjusting entry necessary to record interest revenue at the end of the first year.
- A discount or premium on a note is amortized using the effective interest method. The note’s beginning carrying amount for Year 1 is $7,722 ($10,000 × 0.7722%). This amount is multiplied by the effective rate to arrive at interest revenue for Year 1 ($7,722 × 9% = $695). Account Name Debit Credit Discount on notes receivable $695
Interest revenue
$695
- Prepare the adjusting entry necessary to record interest revenue at the end of the second year.
- A discount or premium on a note is amortized using the effective interest method. The note’s beginning carrying amount for Year 2 is $8,417 ($10,000 carrying face amount – $2,278 discount + $695 Year 1 amortization). This amount is multiplied by the effective rate to arrive at interest revenue for Year 2 ($8,417 × 9% = $758). Account Name Debit Credit Discount on notes receivable $758
Interest revenue
$758
Kern, Inc., which is a privately held company, had the following noncurrent receivable account balances at December 31, Year 4:
Note receivable from the sale of an idle building$750,000
Note receivable from an officer200,000
Transactions during Year 5 and other information relating to Kern’s receivables follow:
The $750,000 note receivable is dated May 1, Year 4, bears interest at 9%, and represents the balance of the consideration Kern received from the sale of its idle building to Able Co. Principal payments of $250,000 plus interest are due annually beginning May 1, Year 5. Able made its first principal and interest payment on May 1, Year 5. Collection of the remaining note installments is reasonably assured.
On April 1, Year 5, Kern sold a patent to Frey Corp. in exchange for a $100,000 noninterest-bearing note due on April 1, Year 7. There was no established exchange price for the patent, and the note had no ready market. The prevailing interest rate for this type of note was 10% at April 1, Year 5. The present value of $1 for two periods at 10% is 0.826. The patent had a carrying amount of $40,000 at January 1, Year 5, and the amortization for the year ended December 31, Year 5, was $8,000. Kern is reasonably assured of collecting the note receivable from Frey.
Complete Kern’s December 31, Year 5, balance sheet using the information above. Enter the appropriate amounts in the designated cells below. Enter all amounts as positive values.
Noncurrent Receivables (10 Gradable Items)
Noncurrent portion of 9% note receivable at 12/31/Year 5: Face amount, 5/1/Year 4 $750,000
Minus installment received 5/1/Year 5
250,000 Balance, 12/31/Year 5 $500,000
Minus installment due 5/1/Year 6 (current portion)
250,000 Noncurrent portion, 12/31/Year 5 $250,000
Noninterest-bearing note, net of imputed interest at 12/31/Year 5: Face amount, 4/1/Year 5 $100,000
Minus imputed interest [$100,000 – ($100,000 ×
0.826 factor for the PV of $1 for 2 periods at 10%)]
17,400 Balance, 4/1/Year 5 $ 82,600
Plus interest earned to 12/31/Year 5 [$82,600 × 10% × (9 ÷ 12)]
6,195 Balance, 12/31/Year 5 $ 88,795
Kern Company has significant amounts of money in trade accounts receivable. Using the exhibits provided, determine the entries required to record the entries as requested below.
To prepare each required journal entry:
Select from the option list provided whether the entry should be a debit or a credit.
Enter the corresponding debit or credit amount in the associated column.
Round all amounts to the nearest whole number.
Not all rows in the table might be needed to complete each journal entry.
Task 1:
A journal entry was recorded on March 25, Year 5. For the selected accounts, enter the journal entry amount and whether the amount was a debit or credit entry.
- $7,000 (7% × $100,000) of the accounts receivable collateral for the note payable with Herb Finance Company was estimated to be uncollectible on March 25 (interoffice email on April 10). The adjusting journal entry is to debit bad debt expense and credit allowance for uncollectible accounts.
Account
Debit or Credit
Amount
Allowance for uncollectible accounts
Credit
7,000
Bad debt expense
Debit
7,000
Task 2:
A journal entry was recorded on March 31, Year 5. For the selected accounts, enter the journal entry amount and whether the amount was a debit or credit entry.
- There are two parts to this answer that are netted together: 1) The payment on the note payable to Herb Finance Company and 2) the payment of interest for the invoice received from Herb Finance Company. The collection of the accounts receivable assigned is beyond the scope of this question.
1) On March 31, Year 5, $20,000 ($100,000 × 20%) of the original $100,000 Group A receivables was collected and remitted to Herb Finance Company towards the note balance. A debit to notes payable reduces the liability on the note, and a credit to cash reduces the cash balance.
Account
Debit or Credit
Amount
Cash
Credit
20,000
Note payable
Debit
20,000
2) An invoice for $1,350 was paid to Herb Finance Company on March 31, Year 5, for interest on the note payable. Interest expense is debited, and a reduction in cash is credited.
Account
Debit or Credit
Amount
Cash
Credit
1,350
Interest expense
Debit
1,350
Task 3:
Indicate the balance in each account listed as of April 1, Year 5. Indicate whether the balance is a debit or credit balance.
- The balances for each account listed are calculated as follows:
Accounts receivable assigned
Debit or (Credit)
Balance
3/1/Year 5 collateral for note payable
100,000
100,000
3/15/Year 5 collections received (25%)
(25,000)
75,000
3/31/Year 5 collections received (20%)
(20,000)
55,000
Allowance for uncollectible accounts
Debit or (Credit)
Balance
3/25/Year 5 estimate of uncollectible balance at 7%
(7,000)
(7,000)
Bad debt expense
Debit or (Credit)
Balance
3/25/Year 5 estimate of uncollectible balance at 7%
7,000
7,000
Note payable
Debit or (Credit)
Balance
3/1/Year 5 loan with Herb Finance Company
(80,000)
(80,000)
3/15/Year 5 collections received (25%)
25,000
(55,000)
3/31/Year 5 collections received (20%)
20,000
(35,000)
Select from the option list provided the best match for each item about transfers of financial assets below. Each choice may be used once, more than once, or not at all.
Item Answer 1. Transfer of a participating interest in an entire financial asset.
- A recourse provision.
- A beneficial interest in a trust holding transferred assets.
- Transferees may pledge the assets received.
- The transferor has made no agreement to reacquire assets before maturity.
Financial Assets II (5 Gradable Items)
- Example of transfer of financial assets. 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.
- Example of continuing involvement. 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.
- Example of continuing involvement. 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.
- Criterion for surrender of control. 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.
- Criterion for surrender of control. 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.
Lambert, Inc., is a manufacturer of men’s casual clothing. The founder and CEO of the company retired on June 30, Year 1, after 10 years of management. During this time, sales and net profits increased modestly, but the CEO was very conservative about taking credit risk.
On July 1, Year 1, Lambert hired a new CEO with a strong marketing background. The company adopted a new business plan, which includes aggressive expansion into new markets and liberalization of the company’s credit policy. This new business plan was implemented in the fourth quarter of Year 1, and resulted in a significant increase in sales for the month of December.
Lambert uses the allowance method to record doubtful accounts for financial statement reporting. In prior years, Lambert estimated its uncollectible accounts receivable by applying an estimated percentage to each category reported on the accounts receivable aging analysis.
- Complete the following spreadsheet to calculate the allowance for doubtful accounts at December 31, Year 1. For columns C, D, E, and F, enter the appropriate values in the designated cells. The totals in column B will calculate automatically based on your entries. If there is nothing to enter in a particular cell, enter a zero (0). Indicate negative amounts with a leading minus (-) sign. Note: To use a formula in the spreadsheet, it must be preceded by an equal sign, e.g., =A1+B1.
Note: the “Total” column sums the values in Columns C through F
A B C D E FTotal0 - 30 days31 - 60 days61 - 90 daysOver 90 days Accounts receivable $0.00
Adjustments $0.00
Adjusted accounts receivable $0.00
Estimated percentage uncollectible
Allowance for doubtful accounts $0.00
Allowance for Doubtful Accounts (25 Gradable Items)
- a. The estimated percentage uncollectible for each category increased by 2%.
Aging Category
Percentage Estimated Uncollectible
0 - 30 days
1% + 2% = 3%
31 - 60 days
9% + 2% = 11%
61 - 90 days
23% + 2% = 25%
Over 90 days
60% + 2% = 62%
b. A $12,000 account (Date: 02/15/Y1) was deemed uncollectible (debit allowance, credit A/R). The balance in the over-90-days category is therefore reduced by $12,000. A collection of $5,000 (Date: 08/12/Y1) was not recorded (debit cash, credit A/R). Accordingly, the adjustment to the over-90-days category is a credit of $17,000 ($12,000 + $5,000).
c. The total allowance for doubtful accounting is $107,060 as calculated in the table below after the adjustment of the over-90-days amount.
A
B
C
D
E
F
Total
0 - 30 days
31 - 60 days
61 - 90 days
Over 90 days
Accounts receivable
$677,000
$225,000
$240,000
$127,000
$85,000
Adjustments
$(17,000)
0
0
0
$(17,000)
Adjusted accounts receivable
$660,000
$225,000
$240,000
$127,000
$68,000
Estimated percentage uncollectible
3%
11%
25%
62%
Allowance for doubtful accounts
$107,060
$6,750
$26,400
$31,750
$42,160
d. The following journal entries should be recorded:
< >Write-off of $19,000 of accounts in Year 1 Allowance for doubtful accounts $19,000
Accounts receivable
$19,000 Recovery of $4,000 of accounts previously written off Accounts receivable $4,000
Allowance for doubtful accounts
$4,000 Cash $4,000
Accounts receivable
$4,000 Additional write-off of $12,000 account deemed uncollectible Allowance for doubtful accounts $12,000
Accounts receivable
$12,000 Error correction for unrecorded A/R collection Cash $5,000
Accounts receivable
$5,000 Allowance for Doubtful Accounts
$ 62,000 beginning balance
Write off of A/R $19,000
Write off of A/R 12,000
4,000 recovery
$ 35,000 adjusted balance
72,060 bad debt expense to be recorded
$107,060 estimated allowance
- Assume that the Lambert accounting staff has already made all necessary adjusting entries at December 31, Year 1, with the exception of the adjustment to record the current-year’s bad debt expense. Use the information above and in the exhibits to prepare the journal entry that records the bad debt expense for Year 1, if any.
- Click on a cell in the Account Name column and select from the option list the appropriate account. Each choice may be used once, more than once, or not at all.
- Enter the corresponding debit or credit amount in the associated column.
- Enter all amounts as positive values. Round all amounts to the nearest whole number.
- Not all rows in the table might be needed to complete each journal entry.
- If no journal entry is needed, select “No entry required” in the Account Name column and leave the Debit and Credit cells blank.
No Entry Required
Account NameDebitCredit
The journal entry is below.
Bad debt expense $72,060
Allowance for doubtful accounts
$72,060
The two approaches to determining the uncollectible accounts expense that are acceptable for tax purposes are the direct write-off method and the allowance method. Indicate the method that corresponds to the description by selecting the appropriate circle.
Description Direct write-off Allowance 1. This method is not consistent with the matching principle. 2. This method is acceptable under GAAP. 3. This method does not state receivables at net realizable value. 4. No immediate charge to expense is made when accounts are written off. 5. Write-offs do not affect the carrying amount of net accounts receivable.
Uncollectible Accounts (5 Gradable Items)
- Direct write-off. This method does not match revenue and expense when the receivable and the write-off are recorded in different periods.
- Allowance. The allowance method is acceptable under GAAP, and the direct write-off method is not.
- Direct write-off. This approach debits bad debt expense and credits accounts receivable at the time the uncollectibility of a specific account is established. Unlike the allowance method, which records an asset contra to gross receivables, the direct write-off method does not state receivables at net realizable value.
- Allowance. No immediate charge is made to expense when the accounts are written off if the allowance method is used. The estimated expense is recognized (debit expense, credit allowance) at the balance sheet date, and the write off is charged to the allowance (debit allowance, credit receivable).
- Allowance. Write-offs do not affect the carrying amount of net accounts receivable because gross accounts receivable and the allowance are reduced by the same amounts.
The following selected information is from Company A’s Year 2 and Year 3 financial statements:
January 1, Year 2, accounts receivable $20,000 Bad debt expense recognized in Year 2 1,480 Accounts receivable written off in Year 2 1,000 January 1, Year 2, allowance for uncollectible accounts 800 Credit sales in Year 2 95,000 Accounts receivable written off in Year 3 2,000 Credit sales in Year 3 100,000 Cash collected from customers in Year 3 85,000
The company uses the balance-sheet approach to calculate the allowance for uncollectible accounts. The company estimates that 4% of its gross accounts receivable will become uncollectible. During Years 2 and 3, no accounts previously written off became payable.
Complete Company A’s balance sheet using the information above. Enter the appropriate amounts in the designated cells below. Enter all amounts as positive values. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).
ItemAmount 1. December 31, Year 2, allowance for uncollectible accounts
- December 31, Year 2, accounts receivable
- Cash collected from customers in Year 2
- December 31, Year 3, accounts receivable
- December 31, Year 3, allowance for uncollectible accounts
- Bad debt expense recognized in Year 3
Accounts Receivable – Measurement (6 Gradable Items)
- $1,280. The December 31, Year 2, allowance for uncollectible accounts can be derived from the Year 2 allowance for uncollectible accounts equation ($800 beginning balance + $1,480 bad debt expense − $1,000 accounts receivable written off = $1,280).
- $32,000. Using the balance-sheet approach, the year-end allowance for uncollectible accounts is equal to the year-end accounts receivable multiplied by the allowance percentage (accounts receivable × 4% = $1,280). This relationship can be used to calculate the balance of accounts receivable at December 31, Year 2 ($1,280 ÷ 4% = $32,000 accounts receivable).
- $82,000. The amount of cash collected from customers can be derived from the Year 2 accounts receivable calculation: Beginning balance
$20,000
Credit sales
95,000
Accounts receivable written off (1,000) Cash collected from customers (X,XXX)
Ending balance
$32,000
Thus, $82,000 was collected from customers in Year 2.
4. $45,000. The December 31, Year 3, balance of accounts receivable can be derived from the Year 3 accounts receivable calculation: Beginning balance
$ 32,000
Credit sales
100,000
Accounts receivable written off (2,000) Cash collected from customers (85,000)
Ending balance
$ 45,000
Thus, $82,000 was collected from customers in Year 2.
- $1,800. Using the balance-sheet approach, year-end allowance for uncollectible accounts is equal to the year-end accounts receivable multiplied by 4% ($45,000 × 4% = $1,800).
- $2,520. The bad debt expense recognized in Year 3 can be derived from the Year 3 allowance for uncollectible accounts calculation. January 1, Year 3, allowance for uncollectible accounts
$ 1,280
Bad debt expense
X,XXX
Accounts receivable written off (2,000)
December 31, Year 3, allowance for uncollectible accounts $(1,800)
Thus, the amount of bad debt expense recognized in Year 3 is $2,520.
Kern, Inc., which is not a public company (an issuer under federal securities laws), has several note receivable accounts.
Use the information provided in the exhibits to calculate the noncurrent and current note receivable balances that should be reported on Kern’s December 31, Year 5, balance sheet.
Enter the appropriate amounts in the designated cells below. Ignore the time value of money. Enter all amounts as positive values. Round all amounts to the nearest whole number. If the correct answer is zero (0), enter a zero (0).
Task 1: Kern, Inc., entered into an installment sales agreement with Barr Co. in Year 5 when Kern sold Barr a parcel of land. Determine the amounts as requested for the note receivable.
Installment sales agreement Amount 1. Contract selling price
- Minus cash down payment
- Contract note balance, 12/31/Year 5
- Principal portion of payment due 7/1/Year 6
Task 2: Determine the noncurrent and current balances for each note receivable at 12/31/Year 5.
Note receivable Noncurrent balance Current balance 5. Note receivable from sale of warehouse
- Note receivable from an officer
- Note receivable from sale of land
- Note receivable from sale of patent
Noncurrent Receivables (12 Gradable Items)
- $400,000.
- $120,000. = $400,000 × 30%
- $280,000. = $400,000 – $120,000
- $60,332. = [$88,332 – ($280,000 × 10%)]
- $250,000, $250,000. As of December 31, Year 5, the note receivable balance is $500,000 ($750,000 – $250,000) since the first installment of the note was received on May 1, Year 5. The second installment for $250,000, due May 1, Year 6, is classified as current. The third installment for $250,000, due May 1, Year 7, is classified as non-current.
- $200,000, $0. The full amount of the note receivable is due December 31, Year 7. Therefore, as of December 31, Year 5, $200,000, or the full amount of the note, is classified as noncurrent.
- $219,688, $60,332. The first payment of $88,332, due July 1, Year 6, is comprised of $28,000 ($280,000 × 10%) interest and $60,332 ($88,332 – $28,000) principal. The principal portion of this payment is classified as current. The remaining loan balance of $219,688 ($280,000 – $60,332) is due in Years 7, 8, and 9 and is classified as noncurrent.
- $0, $100,000. The full amount of the note receivable is due April 1, Year 6. Therefore, as of December 31, Year 5, $100,000, or the full amount of the note, is classified as current.
Lanny Financial offers credit cards to college students at a variable rate on outstanding balances. The company also charges an annual fee for using the line of credit.
Which section of the Accounting Standards Codification best defines how and when Lanny should recognize the annual fee revenue?
Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields. Unless specifically requested, your response should not cite implementation guidance.
Type the topic here.Correctly formatted FASB ASC topics are 3 digits.
Research (1 Gradable Item)
Answer: FASB ASC 310-20-35-5
35-5 Fees deferred in accordance with paragraph 310-20-25-15 shall be recognized on a straight-line basis over the period the fee entitles the cardholder to use the card. This accounting shall also apply to other similar card arrangements that involve an extension of credit by the card issuer.
Select from the option list provided the best match for each item about transfers of financial assets below. Each choice may be used once, more than once, or not at all.
Financial asset transfer item Answer 1. Transferor may be required to repurchase assets.
Sale with recourse 2. Transfer of receivables to a factor.
Nonrecourse basis transaction 3. Sale of beneficial interests in a portfolio of mortgages.
Securitization 4. Formal pledge of collateral.
Secured borrowing 5. Retailer benefits from prompt cash inflow and avoidance of bad debts.
Credit card sale 6. Future revenues from fees, late charges, etc., are inadequate.
Servicing liability 7. Collateral is asset of the transferor.
Secured borrowing
Financial Assets I (7 Gradable Items)
- Sale with recourse. If a sale is with recourse, the transferor (seller) may be required to make payments to the transferee or to buy back receivables in specified circumstances.
- Nonrecourse basis transaction. Factoring discounts receivables on a nonrecourse, notification basis.
- Securitization. Securitization is the transfer of a portfolio of financial assets to a trust or other entity and the sale of beneficial interests in that entity to investors.
- Secured borrowing. A secured borrowing is a formal borrowing arrangement. The borrower signs a promissory note and financing agreement, and specific receivables are pledged as collateral.
- Credit card sale. One common form of factoring is the credit card sale. The retailer benefits by prompt receipt of cash and avoidance of bad debts and other costs.
- Servicing liability. A servicing asset is a contract under which the future revenues from servicing fees, late charges, etc., are expected to more than adequately compensate the servicer. A servicing liability arises when such compensation is inadequate.
- Secured borrowing. A secured borrowing is a formal borrowing arrangement. The borrower signs a promissory note and financing agreement, and specific receivables are pledged as collateral.
