Financial Instruments Flashcards
what does 2/10 net 30 mean
2% discount if paid within 10 days and full amt due within 30 days
Which of the following is considered part of cash and cash equivalents?
a)
Publicly traded shares
Correct Answer
b)
U.S. currency bank account
Incorrect Response
c)
A 180-day term deposit
d)
Cash in a bank account to meet minimum balance requirements
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Answer c) is incorrect. Term deposits must mature within three months or less to be considered part of cash and cash equivalents. Answer b) is correct. Foreign currency funds in accounts that are accessible on demand are considered cash and cash equivalents as long as there is a ready market to exchange the funds to the company’s operating currency.
Which of the following is considered part of cash?
a)
Bank overdrafts
b)
Investments in money market funds
c)
Legal tender on hand on business premises
d)
Both a) and b)
Answer a) is incorrect. A bank overdraft is considered a cash equivalent, not cash. Answer c) is correct. Legal tender on hand on business premises is considered cash.
The following accounts were taken from Blue Monkey Inc.’s unadjusted trial balance at December 31, 20X6:
Accounts receivable $850,000
Opening allowance for doubtful accounts (AFDA) January 1, 20X6 ($11,000)
Net credit sales $2,950,000
Blue Monkey estimates that 1.5% of the gross accounts receivable will become uncollectable. At December 31, 20X6, AFDA should have a credit balance of what amount?
a)
$1,750
b)
$11,000
c)
$12,750
d)
$44,250
Answer a) is incorrect. This is the balance of bad debt expense for the year (ending AFDA of $12,750 less opening balance of $11,000). Answer c) is correct. The balance of AFDA would be calculated as $850,000 × 1.5% = $12,750.
Bill’s Balloons (Bill’s) offers terms of 3/10 net 45 on all its sales. Following are the details of its latest sale:
Fred ordered $1,000 of birthday balloons on February 1, 20X7.
Fred received the invoice and the balloons immediately upon sale.
Fred paid the full amount due on February 5, 20X7.
What is the credit entry that Bill’s will record on receipt of Fred’s payment?
a)
Accounts receivable 1,000
Incorrect Response
b)
Cash 970 and Sales discount 30
c)
Sales revenue 1,000
d)
Sales returns 30
Answer b) is incorrect. This is the correct debit, not the correct credit. Answer a) is correct. The journal entry to record the initial sale is:
Dr. Accounts receivable 1,000
Cr. Sales revenue 1,000
The journal entry to record the payment with the discounted terms is:
Dr. Cash 970
Dr. Sales discount 30
Cr. Accounts receivable 1,000
What is restricted cash?
minimum balance requirements in bank accounts
- funds held in escrow
- donations provided for a specific purpose in a not-for-profit organization
Exclusions from C & CE
restricted cash (see discussion below)
- foreign currency where there is a limited market for exchange into the company’s operating currency
- foreign currency where the exchange rate is unstable and subject to material fluctuations
- publicly traded shares
- publicly traded bonds
- term deposits with a maturity date of greater than three months from the date of acquisition
- T-bills with a maturity date of greater than three months from the date of acquisition commodities
A company has the following amounts on its trial balance at the December 31 year end:
Credit sales
$1,200,000
AR
300,000
AFDA
5,000 credit
Bad debt expense
nil
The aging of AR is as follows:
Current (0-30 days)
$120,000
31-60 days outstanding
90,000
61-90 days outstanding
60,000
91+ days outstanding
30,000
Based on past experience, management estimates the uncollectability rates to be as follows:
Current (0-30 days)
1 %
31-60 days
2 %
61-90 days
5 %
91+
50 %
Record the entry for AFDA for the year.
Answer
To calculate AFDA, the uncollectability rate is applied against each of the aging brackets of AR to estimate the expected credit losses.
Days outstanding
Amount
Rate
Uncollectable
0-30
$120,000
1%
$1,200
31-60
90,000
2%
1,800
61-90
60,000
5%
3,000
01+
30,000
50%
15,000
Total
$300,000
$21,000
=======
======
AFDA has been calculated to be $21,000 based on the aged accounts. Therefore:
Opening balance in AFDA
$ 5,000 credit
Required balance
21,000 credit
Adjustment required
$16,000 credit
===========
The journal entry would be:
Dr. Bad debt expense
$16,000
Cr. AFDA
$16,000
After the entry, AFDA will have a balance of ($21,000) and bad debt expense will be $16,000.
Types of investments
Passive = Warren Buffet = FV-NI,FV-OCI, AMORTISED COST Significant = Shark tank = EQUITY METHOD Control = shoppers n loblaws = CONSOLIDATED
FVTPL When to use direct costs of acquisition Dividends Adj. to FV Unrealized gains and losses gain(loss) on disposal
When to use - Equity or debt investments or shares traded in public mkt or designated as FVTPL or just not OCI or AC OR held fro trading
direct costs of acquisition - expensed Dividends - inv income Adj. to FV - every reporting period Unrealized gains and losses - P&L gain(loss) on disposal = SP-NBV, G/L to NI
FVTOCI When to use direct costs of acquisition Dividends Adj. to FV Unrealized gains and losses gain(loss) on disposal
When to use - equity investments and collects contractual CFS n selling the asset
direct costs of acquisition - add to cost
Dividends - inv income
Adj. to FV - every period
Unrealized gains and losses - OCI
gain(loss) on disposal - not recycled to NI when sold
Amortized Cost When to use direct costs of acquisition Dividends Adj. to FV Unrealized gains and losses gain(loss) on disposal
Amortized Cost
When to use - not traded on public mkt, eg, debt instruments
Collect contractual CF solely of Principal n interest
direct costs of acquisition - add to cost
Dividends - inv income
Adj. to FV -no, unless permanent impairment
Unrealized gains and losses - n/a
gain(loss) on disposal = SP-Cost, G/L to NI
initial recognition of investments
Always initially measure at FV
Transaction Costs
FVTPL - Expensed
FVTOCI - Added to carrying value
Amortized Cost - Added to carrying value
ASPE - Fair value
Subsequent Measurement
FVTPL -Fair value and G/L in NI
FVTOCI - amortized cost (effective interest) for debt and equity to FV G/L to OCI
Amortized Cost - amortized cost (effective interest)
ASPE -net income for g/l
