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CPAExcel FAR > Receivables > Flashcards

Receivables Flashcards

1
Q

What is the measurement attribute of accounts receivable?

A

Net realizable value.

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2
Q

Does International Financial Reporting Standards (IFRS) permit recognition of accounts receivable when there is a firm sales commitment?

A

In some instances when the recognition criteria have been met.

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3
Q

Are notes receivable typically related to customer transactions?

A

No, they are not typically related.

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4
Q

What factors affect receivable valuation?

A

Trade discounts;
Sales discounts;
Sales returns and allowances;
Uncollectible accounts.

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5
Q

List the two methods of accounting for accounts receivables.

A

Gross

Net.

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6
Q

List the characteristics of notes receivables.

A

Typically non-customer transactions;
Longer time frame;
Have an interest element.

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7
Q

List the characteristics of accounts receivables.

A

Typically related to customer contracts;
Short time frame;
Typically no interest element.

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8
Q

What other name is used for customer accounts receivable?

A

Trade Receivable.

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9
Q

How are receivables accounted for using the gross method?

A

Records receivables at gross invoice price (before cash discount).

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10
Q

Define “contra to sales”.

A

Sales discounts.

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11
Q

If material amounts of cash discounts are expected to be taken by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the gross method.

A

TRUE

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12
Q

If material amounts of cash discounts are expected to be forfeited by customers next year on sales of the current year, they should be recorded in an adjusting journal entry under the net method.

A

FALSE

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13
Q

The gross and net methods of recording sales discounts yield the same net sales if customers take all available discounts.

A

TRUE

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14
Q

Allowance for sales discounts is contra to accounts receivable.

A

TRUE

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15
Q

The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. The amount remitted is $39.51

A

TRUE

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16
Q

The gross method of accounting for cash discounts separately records cash discounts not taken by customers.

A

FALSE

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17
Q

The gross method of accounting for cash discounts records receivables at gross invoice price, which is the price before applying the trade discount.

A

FALSE

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18
Q

Sales discounts forfeited is contra to accounts receivable.

A

FALSE

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19
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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20
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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21
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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22
Q

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

A

Allowance method.

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23
Q

All uncollectible accounts arising from 1998 sales were written off in 1998, although the firm did not know this at the end of 1998. Therefore, the direct write-off and allowance methods of accounting for uncollectible accounts will likely yield the same net income in 1998.

A

FALSE

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24
Q

In most cases, the direct write-off method of accounting for uncollectible accounts is not permissible under US GAAP.

A

TRUE

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25
Q

When specific accounts are written off, bad debt expense is increased under the direct write-off method of accounting for uncollectible accounts.

A

TRUE

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26
Q

The entry to write off an account under the direct write-off method will have no effect on net income.

A

FALSE

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27
Q

The allowance method must be used if bad debts are probable and estimable.

A

TRUE

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28
Q

Describe the income statement approach for bad debts.

A

Estimates bad debt expense as a percentage of credit sales.

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29
Q

Describe the balance sheet approach for calculating an allowance balance.

A

Applies a percentage to ending accounts receivable.

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30
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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31
Q

Recovery of a previously written-off account under the allowance method increases net accounts receivable.

A

FALSE

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32
Q

The entry to write off an account under the allowance method has no effect on net accounts receivable.

A

TRUE

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33
Q

Total sales for a period equals $1,000,000. Of that amount, $400,000 is cash sales. The firm estimates bad debt expense at 8% of credit sales. The preadjusted allowance for doubtful accounts balance is $4,000. Bad debt expense for the period is $48,000.

A

TRUE

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34
Q

When aging of accounts receivable is performed, the sum of the accounts across all age categories equals total gross accounts receivable.

A

TRUE

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35
Q

The ending allowance for doubtful accounts balance before recording the adjustment for bad debt expense affects the amount of bad debt expense to be recorded under both the income statement and balance sheet approaches.

A

FALSE

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36
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.

37
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.

38
Q

How is the present value in a cash transaction determined?

A

The amount of cash that exchanged hands.

39
Q

At what value should a note receivable be recorded?

A

The present value of all future cash flows.

40
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.

41
Q

Define “market rate”.

A

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

42
Q

Interest-bearing notes should be recorded at face value if the stated and market interest rates are the same.

A

TRUE

43
Q

A note pays simple interest each February 28 and August 31. Accrued interest receivable at December 31, the balance sheet date, is based on the stated rate for 4 months.

A

TRUE

44
Q

A mortgage note pays equal monthly payments at the end of each month. Interest revenue for a particular month is based on the principal balance at the end of the month.

A

FALSE

45
Q

A 1-year noninterest-bearing note should be recorded at 91% of face value if the market interest rate is 10%.

A

TRUE

46
Q

A noninterest-bearing note pays no interest.

A

FALSE

47
Q

When the market rate of interest exceeds the stated rate on a note, the note is recorded at a discount.

A

TRUE

48
Q

Define “maker”.

A

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

49
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.

50
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.

51
Q

Describe a transaction with recourse.

A

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

52
Q

Describe a transaction without recourse.

A

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

53
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.

54
Q

When a note is discounted with a financial institution, the note’s interest rate must be used to compute the fee to the financial institution.

A

FALSE

55
Q

When a receivables transfer is accounted for as a loan, the transferor records a loss on the transfer.

A

FALSE

56
Q

ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on the sale of an asset to another party. The discount percentage is 7%. The proceeds to ABC, Inc. equal $1,001.19.

A

TRUE

57
Q

When a transfer of receivables is recorded as a sale, the receivables are removed from the original creditor’s books.

A

TRUE

58
Q

When a transfer of receivables is recorded as a loan, the receivables are removed from the original creditor’s books.

A

FALSE

59
Q

When control over the receivables transferred has passed to the transferee, the transfer is recorded as a sale.

A

TRUE

60
Q

If two of the three criteria for the sale of receivables are met, the transfer of receivables is recorded as a sale.

A

FALSE

61
Q

If the transferor continues to have a financial interest in the receivables transferred, the transfer must be accounted for as a borrowing.

A

TRUE

62
Q

The key issue in accounting for the transfer of receivables is whether control over the receivables has passed from the transferor to the transferee.

A

TRUE

63
Q

When a 6-month note is discounted with a financial institution after being held for 2 months, the maturity value of the note includes 4 months of interest.

A

FALSE

64
Q

When a 6-month note is discounted with a financial institution after being held for 2 months, the financial institution computes its fee using 4 months of interest on the maturity value.

A

TRUE

65
Q

The maker of a note is the original creditor.

A

FALSE

66
Q

Notification means that the maker will remit payment to the third party providing funds in the transfer of receivables.

A

TRUE

67
Q

Define “factoring”.

A

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.

68
Q

Who bears the cost of bad debts when factoring without recourse?

A

The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.

69
Q

Who bears the costs of bad debts when factoring with recourse?

A

The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.

70
Q

What is the accounting treatment when factoring with recourse, as accounted for as a loan?

A

The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.

71
Q

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

A

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.

72
Q

A factoring with recourse can be accounted for as either a sale or a loan.

A

TRUE

73
Q

In a factoring without recourse, the factor bears the cost of uncollectible accounts.

A

TRUE

74
Q

The term “with recourse” means that the maker must pay if the note is defaulted.

A

FALSE

75
Q

The transferor of receivables is the original creditor.

A

TRUE

76
Q

A firm factors $5,000 of receivables with recourse at a fee of 4%. Uncollectible accounts are estimated to be $500. The transfer is accounted for as a sale. The loss to be recorded by the transferor is $700.

A

TRUE

77
Q

In a factoring accounted for as a loan, interest expense is recognized in proportion to cash received on the transferred receivables.

A

TRUE

78
Q

When does loan impairment occur?

A

When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.

79
Q

What is the accounting treatment for loan impairments?

A

The receivable should be written down to:
Present value of future cash flows using original effective interest rate, or
Market value, if this value can be determined.

80
Q

How is the loss on impairment accomplished?

A

With a debit to bad debt expense and a credit to a contra-receivable account.

81
Q

List the methods through which interest revenue is recognized after a write-down has occurred.

A

Interest and cost recovery methods.

82
Q

When a receivable is impaired, what should it be written down to?

A

The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.

83
Q

The new carrying value of an impaired loan is the present value of the remaining payments expected to be received using the original interest rate in the loan

A

TRUE

84
Q

The loss on impairment of a loan is the difference between the note’s carrying value before recognizing the loss, and the present value of the remaining payments expected to be received using the original interest rate in the loan

A

TRUE

85
Q

After an impaired note is written down, no further interest revenue is recognized.

A

FALSE

86
Q

After an impaired note is written down, the interest method must be used to recognize interest revenue.

A

FALSE

87
Q

A note which has two equal remaining payments is considered impaired at the balance sheet date. The first remaining payment is due one year from the balance sheet date, and the second remaining payment is due two years from the balance sheet date. The creditor expects that only 80% of each payment will be collected. The bad debt expense to be recorded at the balance sheet date is 20% of the note’s carrying value at that date.

A

TRUE

88
Q

According to IFRS, value in use is the discounted present value of future cash flows arising from use of the asset and from its disposal.

A

TRUE

89
Q

Under IFRS, the impairment loss on the write down of a loan receivable is not recoverable.

A

FALSE

CPAExcel FAR (9 decks)

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