FASB 4

Question 1

Describe the Allowance Method of Accounting for Bad Debts.

Answer 1

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

Question 2

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

Answer 2

Allowance method.

Question 3

Describe the Direct Write-Off Method for Bad Debts.

Answer 3

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.

Question 4

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

Answer 4

The Allowance method.

Question 5

What purpose does analyzing ending accounts receivable serve?

Answer 5

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

Question 6

Describe the balance sheet approach for calculating an allowance balance.

Answer 6

Applies a percentage to ending accounts receivable.

Question 7

Describe the income statement approach for bad debts.

Answer 7

Estimates bad debt expense as a percentage of credit sales.

Question 8

What is “Interest-bearing notes receivable?

Answer 8

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.

Question 9

What is “Non-interest-bearing note receivable?

Answer 9

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.

Question 10

How is the present value in a noncash transaction determined?

Answer 10

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

Question 11

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

Answer 11

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.

Question 12

How is the present value in a cash transaction determined?

Answer 12

The amount of cash that exchanged hands.

Question 13

Define “market rate”.

Answer 13

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

Question 14

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

Answer 14

(1) Maker is the buyer or borrower.

(2) The holder is the seller or lender.

Question 15

At what value should a note receivable be recorded?

Answer 15

The present value of all future cash flows.

Question 16

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

Answer 16

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

Question 17

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

Answer 17

(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.

Question 18

Describe a transaction with recourse.

Answer 18

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

Question 19

Describe a transaction without recourse.

Answer 19

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

Question 20

Define “maker”.

Answer 20

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

Question 21

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

Answer 21

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.