Monetary Current Assets and Current Liabilities

Question 1

On October 31, year 2, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15, year 2 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported in Dingo’s October 31, year 2 classified balance sheet?
The segregated account should be reported as a non-current asset, and the regular account should be reported as a current asset net of the overdraft
The segregated and regular accounts should be reported as current assets net of the overdraft
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a curent liability
The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability

Answer 1

Cash which is segregated and deposited into a bond sinking fund is presented in a classified balance sheet as a noncurrent asset because its use is restricted. Bank overdrafts are presented as current liabilities, unless other accounts at the SAME BANK contain sufficient cash to offset the overdraft. The operating account that has a positive balance, should be presented as a current asset.

Question 2

In preparing its August 31, year 2 bank reconciliation, Apex Corp. has available the following information:
Balance per bank statement, 8/31/y2 $18,050
Deposit in transit, 8/31/y2 3,250
Return of customer’s check for insufficient 600
funds, 8/31/y2
Outstanding checks, 8/31/y2 2,750
Bank service charges for August 100
At August 31, year 2, Apex’s correct cash balance is
17,850
17,550
17,950
18,550

Answer 2

To determine the correct 8/31/y2 cash balance, a partial bank reconciliation should be prepared. The balance per bank statement ($18,050) must be adjusted for any items which the bank has not yet recorded and also for any bank errors (none in this problem)
Balance per bank statement $18,050
Deposits in transit 3,250
Outstanding checks (2,750)
Correct balance 18,550

Question 3

The following accounts were abstracted from Roxy Co. ‘s unadjusted trial balance at December 31, year 2:
Debit Credit
Accounts Receivable $1,000,000
Allowance for uncollectible 8,000
accounts
Net credit sales $3,000,000
Roxy estimated that 3% of the gross accounts receivable will become uncollectible. After adjustment at December 31, year 2, the allowance for uncollectible accounts should have a credit balance of
30,000
38,000
82,000
90,000

Answer 3

The balance in the allowance for doubtful accounts should reflect the amount of accounts receivable that are estimated to be uncollectible. Since it is estimated that 3% of the gross accounts receivable will become uncollectible, the allowance account should have a 12/31/y2 balance of $30,000. Note that bad debt expense of $38,000 would be recorded for year 2

Question 4

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000. What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance-sheet risk?
Risk of accounting loss Off-balance-sheet-risk
230,000 0
230,000 20,000
0 0
250,000 20,000

Answer 4

The total amount of risk of accounting loss related to Butler trade accounts receivable is 230,000. The accounting loss cannot exceed the amount of the account receivable recognized as an asset in the balance sheet. Off-balance-sheet risk refers to a potential loss that may exceed the amount recognized as an asset. There is no

Question 5

Inge Co. determined that the net value of its accounts receivable at December 31, year 2, based on aging of the receivables, was $325,000. Additional information is as follows:
Allowance for uncollectible accounts - 1/1/y2 $30,000
Uncollectible accounts written off during y2 18,000
Uncollectible accounts recovered during y2 2,000
Accounts receivable at 12/31/y2 350,000
For year 2, what would be INge’s uncollectible accounts expense?
15,000
11,000
5,000
21,000

Answer 5

In year 2, 18,000 were written off as uncollectible (debit allowance, credit AR). Also, 2,000 of AR were recovered, leaving a balance in the allowance account of 14,000. The desireed 12/31/y2 balance is 25,000. (350 - 325). Therefore, to increase the allowance from 14,000 to 25,000, uncollectible accounts expense of 11,000 must be recorded

Question 6

A company uses the allowance method to recognize uncollectible accounts expense. What is the effect at the time of the collection of an account previously written off on each of the following accounts?
Allowance for uncollec Uncollectible acc exp
no effec no eeff
increase decrease
no eff decrease
increase no eff

Answer 6

When an account receivable that was previously written off is collected, two entries must be made. The first entry reverses the write-off and re-establishes the receivable.
account receivable xxx
allowance for uncolelct acct xxx
The second entry records the cash receipt
Cash xxx
Accounts receivable s xxx

Question 7

Which of the following is a method to generate cash from accounts receivables?
Assignment Factoring
yes no
no yes
no no
yes yes

Answer 7

An assignment of AR is a financing arrangement whereby the owner of the AR obtains the loan from the lender by pledging the accounts receivable as collateral. A factoring of accounts receivable is basically a sale of, or borrowing on, the receivables. Thus, both of these are methods of generating cash from AR

Question 8

Taylored Corp factored $400,000 of account receivable to Rich Corp. on July 1, year 2. Control was surrendered by Taylored. Rich accepted the receivables subject to recourse for non-payment. Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of forty-one days. The fair value of the recourse obligation is $12,000.
Taylored will receive and record cash of
365,260
377,260
385,260
357,260

Answer 8

Taylored will receive the value of the receivables 400,000, reduced by 20,000 for the amount of holdback, 8,000 withheld as fee income, and $6,740 withheld as interest expense (400,000 .1541/365)

Question 9

Taylored Corp factored $400,000 of account receivable to Rich Corp. on July 1, year 2. Control was surrendered by Taylored. Rich accepted the receivables subject to recourse for non-payment. Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of forty-one days. The fair value of the recourse obligation is $12,000.
Which of the following statements is correct?
Taylored should record a liability of 12,000, but no loss, related to recourse obligation
Rich should record an asset of $8,000 for the recourse obligation
Taylored should record a liability and corresponding loss of $12,000 related to the recourse obligation
No entry for the recourse obligation should be made by Taylored or Rich until the debtor fails to pay

Answer 9

A sale of receivables with recourse is recorded using a financial components approach because the seller has a continuing involvement. Under this approach, the seller would reduce receivable, recognize assets obtained and liabilities incurred, and record gain or loss

Question 10

Taylored Corp factored $400,000 of account receivable to Rich Corp. on July 1, year 2. Control was surrendered by Taylored. Rich accepted the receivables subject to recourse for non-payment. Rich assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of forty-one days. The fair value of the recourse obligation is $12,000.
Assuming all receivables are collected, Taylored’s cost of factoring the receivables woudl be
42,740
14,740
8,000
34,740

Answer 10

If all receivables are collected, Taylored would eliminate its recourse liability and the corresponding loss. The costs incurred by Taylored would include a fee of $8,000 and interest expense of $6,740 for a total of $14,740.

Question 11

Which of the following is used to account for probable sales discounts, sales returns, and sales allowances?
Due from factor Recourse liability
yes no
no yes
no no
yes yes

Answer 11

The seller uses a Due from Factor or Factor’s Holdback account to account for probable sales discounts, sales returns, and sales allowances. The Recourse liability account is recorded to indicate probable uncollectible accounts.

Question 12

Binsar Corporation transfer a financial asset but continues to hold an interest in the servicing asset. How should the interest in the servicing asset that continues to be held be measured at the date of the transfer?
At net realizable value
At the present value of future cash flow
at fair value
at the difference between the previous carrying amount and the amount derecognized

Answer 12

d

Question 13

Company A sells loans with a $2,200 fair value and a carrying amount of $2,000. ABC Company obtains an option to purchase similar loans and assumes a recourse obligation to repurchase loans. ABC Company also agrees to provide a floating rate of interest to the transferee company. The fair values are listed:
Fair values
Cash proceeds $2,100
Interest rate swap 140
Call option 80
Recourse obligation (120)
What is the gain (loss) on the sale?
120
(100)
200
320

Answer 13

Net proceeds from the sale are equal to 2,200
Cash received 2,100
plus: interest rate swap 140
call option 80
less: recourse obligation (120)
net proceeds 2,200
The gain is computed as follows:
net proceeds 2,200
carrying amount of loans sold 2,000
gain on sale 200

Question 14

Company A sells loans with a $2,200 fair value and a carrying amount of $2,000. ABC Company obtains an option to purchase similar loans and assumes a recourse obligation to repurchase loans. ABC Company also agrees to provide a floating rate of interest to the transferee company. The fair values are listed:
Fair values
Cash proceeds $2,100
Interest rate swap 140
Call option 80
Recourse obligation (120)
The journal entry to record the transfer for ABC Company includes:
a credit to cash
a debit to loans
a credit to interest rate swap
a debit to call option

Answer 14

The journal entry to record the transfer for ABC Company is as follows:
Cash 2,100
Interest rate swap 140
Call option 80
Loans 2,000
Recourse obligation 120
Gain on sale 200

Question 15

In accordance with accounting for transfers and servicing, financial assets subject to prepayment should be measured
at cost
at fair value
like investments in debt securities classified as held to maturity
like investments in debt securities classified as available for sale or traing

Answer 15

Financial assets subject to prepayment should be measured like investments in debt securities classified as available for sale or trading

Question 16

In accordance with accounting for transfers and servicing, all of the following would be disclosed except
description of assets or liabilities with estimable fair value
policy for requiring collateral or other security due to repirchase agreements or securities lending transactions
cash flows between the securitization special-purpose entity and the transferor
accounting policiies for measuring inerest that continue to be held

Answer 16

a

Question 17

Cali, Inc. had a $4,000,000 note payable due on March 15, year 3. On January 28, year 3, before the issuance of its year 2 financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its December 31, year 2 financial statements?
As a noncurrent liability, with no separate disclosure required
as a current liability, with separate disclosure of the note refinancing
As a current liability, with no separate disclosure required
as a noncurrent liability, with separate disclosure of the note refinancing

Answer 17

The $4,000,000 note payable is due March 15, year 3 and normally would be classified as a current liabliltiy in the December 31, year 2 financial statements. However, a short-term obligation can be reclassified as long-term if the enterprise intends to refinance the obligation on a long-term basis and the intent is supported by the ability to refinance. Cali demonstrated its ability to refinance by actually issuing bonds and refinancing the note prior to the issuance of the December 31, year 2 financial statements. Since the proceeds from the bonds exceeded the amount needed to retire the note, the entire $4,000,000 notes payable would be classified as a non current liability, with separate disclosure of the note refinancing.

Question 18

Pine Corp. is required to contribute, to an employee stock ownership plan (ESOP), 10% of its income after deduction for this contribution but before income tax. Pine's income before charges for this contribution and income tax was $75,000. THe income tax rate is 30%. What amount should be accrued as a contribution to the ESOP?
7,500
4,773
5,250
6,818

Answer 18

To compute the amount of contribution, the requirement described in the problem must be transalted into an equation. The contribution must equal 10% of income AFTER deduction of the contribution, but BEFORE income tax

Question 19

Management can estimate the amount of loss that will occur if a foreign government expropriates some company assets. If expropriation is reasonably possible, a loss contingency should be
disclosed but not accrued as a liability
accrued as a liability but not disclosed
neither accrued as a liability nor disclosed
disclosed and accrued as a liability

Answer 19

a loss contingency is accrued if it is probable that a liability has been incurred at the balance sheet date and the amount of the loss is reasonably estimable. If no accrual is made for a loss contingency because one or both of the conditions above are not met, disclosure of the contingency shall be made when it is at least reasonably possible that a loss was incurred. Therefore, this loss should be disclosed, but not accrued as a liability.

Question 20

if the payment of employees’ compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to rights that accumulate, the compensation should be
recognized when paid
accured if attributable to emplouees’ services wheteher aleready rendered or not
accured if attributable to emplouees’ services already rednered
accured if atributable to employees’ services not already rendered

Answer 20

accrual of a liability for employees’ compensation for future absences is required if all of the conditions beloew are met
obligation arises from eployee services already performed
obligation arises from rights that vest or accumulate
payment is probable
amount can be reasonably estimated

Question 21

Vadis Co. sells applicances that include a three year warranty. service calls under the warranty are performed by an independent mechanic under a contract with Vadis. Based on exp, warranty costs are estimated @ $30 for each machine sold. When should Vadis recognize these warranty costs?
when payments are made to the mechanic
when the machines are sold
when the service calls are performed
evenly over the life of the warranty

Answer 21

the warranty expense of $30 for each machine sold, although it will be incurred over the 3 year warranty period, is directly related to the sales revenue as an integral and inseparable part of the sale and recognized at the time of the sale. The warranty costs make their contribution to revenue in the year of sale by making the product more attractive to the customer. Therefore, in accordance with the matchining principle, the warranty costs shoudl be expensed when the machines are sold with a corresponding credit to accured liability