FASB 4 Flashcards

1
Q

Describe the Allowance Method of Accounting for Bad Debts.

A

Determine the amount uncollectible and provide an Allowance to measure Accounts Receivable at net realizable value.

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2
Q

What is the preferred method of accounting for uncollectible accounts receivable?

A

Allowance method.

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3
Q

Describe the Direct Write-Off Method for Bad Debts.

A

Direct write off records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Direct write-off method is rarely used.

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4
Q

Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?

A

The Allowance method.

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5
Q

What purpose does analyzing ending accounts receivable serve?

A

The determination of the needed or desired balance in the allowance account.

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6
Q

Describe the balance sheet approach for calculating an allowance balance.

A

Applies a percentage to ending accounts receivable.

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7
Q

Describe the income statement approach for bad debts.

A

Estimates bad debt expense as a percentage of credit sales.

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8
Q

What is “Interest-bearing notes receivable?

A

The interest element is explicitly stated. For example, the note might be identified as a three-year, 9% note receivable. The amount of cash to be collected from an interest-bearing note is the face amount of the note (principal) plus interest.

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9
Q

What is “Non-interest-bearing note receivable?

A

The interest element is not explicitly stated. For example, the note might be identified as a two-year, $13,000 non-interest-bearing note. The amount of cash to be collected from a non-interest-bearing note is the face amount of the note. That is, the face amount of the note includes principal and interest that will be collected at maturity date.

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10
Q

How is the present value in a noncash transaction determined?

A

The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.

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11
Q

Describe the difference between an interest-bearing and a noninterest-bearing note receivable.

A

Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest;

Noninterest-bearing: the face amount of the note includes principal and interest that will be collected at maturity date.

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12
Q

How is the present value in a cash transaction determined?

A

The amount of cash that exchanged hands.

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13
Q

Define “market rate”.

A

Interest rate used to determine the present value of a note receivable.

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14
Q

What do we call the (1) maker and (2) holder of a note?

A

(1) Maker is the buyer or borrower.

(2) The holder is the seller or lender.

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15
Q

At what value should a note receivable be recorded?

A

The present value of all future cash flows.

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16
Q

In the transfer of receivables, if the three conditions for a sale are not met, what happens?

A

The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.

17
Q

With respect to the transfer of receivable, what are the three conditions of a sale?

A

(1) The transferred assets have been isolated from the transferor, even in bankruptcy; (2) the transferee is free to pledge or exchange the assets; (3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.

18
Q

Describe a transaction with recourse.

A

The transferor is responsible for nonpayment on the part of the original maker of the receivable.

19
Q

Describe a transaction without recourse.

A

Transferor is not responsible for nonpayment on the part of the maker of the receivable.

20
Q

Define “maker”.

A

A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.

21
Q

What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?

A

Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.