Receivables

Question 1

WHAT is the journal entry to write-off uncollectible Accounts Receivable (A/R)?

Answer 1

YOU would Debit the Allowance account and Credit the Accounts Receivable (A/R) account

Question 2

WHAT affect if any does a write-off of a customer’s uncollectible account have on Net Income and total assets?

Answer 2

None. Both would be unchanged based on the transactions’ affects

Question 3

HOW would the collection of an account that was previously written off affect Accounts Receivable (A/R) and the Allowance for Uncollectible Accounts?

Answer 3

• NO Affect on Accounts Receivable
• Would Increase Allowance for Uncollectible Accounts

Journal Entry:

A/R XXX
Allowance XXX
Cash XXX
A/R XXX

Question 4

WHAT is one method you may use to calculate your Allowance for doubtful Accounts?

Answer 4

Subtract your Accounts Receivable (A/R) balance from your Accounts Receivable (A/R) net value

• This will provide you an “correct balance” for your Allowance for doubtful Accounts

Question 5

HOW would you decrease an Allowance account?

Answer 5

Writing off an account

i.e. writing off an account decreases the allowance

THIS would be a debit entry

Question 6

HOW would the Allowance for Doubtful accounts be affected if an account previously written off is reinstated?

Answer 6

Increases the Allowance for Uncollectible Accounts

Initial reinstatement would increase both Accounts Receivable (A/R) and the Allowance for Uncollectible Accounts

Question 7

WHAT happens when a one year, noninterest-bearing note is discounted prior to maturity?

Answer 7

THE proceeds from the discounting would be the FACE value of the note at maturity minus the discount (Face Value x Discount Percentage)

Note: The discount would be amortized over the life of the term of the note (e.g. One-year, Two-years, etc.) – So if this discount occurs in August, you would amortize for 5 months

It is important to note that you would 1st have to calculate the “maturity” amount if the discount did not occur prior to maturity

Question 8

WHAT is considered the “Carrying Value” for a noninterest-bearing note?

Answer 8

THE Original carrying amount plus the Amortization discount amount

NOTE: The Original Carrying Amount is the total note minus the discount amount

Question 9

How would you calculate your Accounts Receivable (A/R) to be reported on your balance sheet at Year End?

Answer 9

Beginning Accounts Receivable plus Credit sales minus Sales returns minus Accounts written off minus Collections

Question 10

WHAT does it mean when a company “pledges” its Accounts Receivable (A/R)?

Answer 10

THEY used their Accounts Receivable (A/R) as collateral to secure a loan

This also means that the company retains control of the Receivables

NOTE: This MUST be adequately disclosed in the notes to the Financial Statements (F/S)

Question 11

WHAT happens when a company factors their Receivables without recourse?

Answer 11

The company sold their Receivables to another party (i.e. the buyer) with the buyer assuming the risk that the receivable may NOT be collected

Question 12

WHAT is considered a Trigger Phrase used to indicate a company has a target for Allowance for Doubtful Accounts?

Answer 12

“The Company had $XXX,XXX in accounts receivable and determined that X% of these would be uncollectible”

(1) That X% would be the ending (i.e. Target) balance for your allowance account; and
(2) The plug would be the difference between the yearly transactions and the ending X% (Target) amount of Accounts Receivable estimated to be uncollectible

Question 13

HOW can you calculate your “Effective Annual Interest Rate”

Answer 13

(1) Interest expense/(carrying amount at the beginning of the period) x 2

Question 14

True or False.

Interest payments on term bonds are the same amount every period

Answer 14

TRUE.

Interest payments on term bonds are the same amount every period

So whatever was the payment in the previous period would be the same amount for the following period

Question 15

HOW would you calculate your “Amortization of Bond Discount?”

Answer 15

By taking the difference between interest expense for the period and the amount of interest paid

Question 16

HOW should an entity report their Unrealized Gains on its portfolio of marketable securities in the Statement of Stockholders’ Equity?

Answer 16

(1) With the cumulative amount of net gains reported; and
(2) With a journal entry to report Unrealized Gains with an increase to the Investment (debit) and an increase to Other Comprehensive Income (credit)

Question 17

WHAT is the rate used to calculate the recognized accretion expense for a given year?

Answer 17

The “credit-adjusted” risk-free interest rate

IGNORE the “risk free rate”

Question 18

According to FASB, what is an essential characteristic of an asset?

Answer 18

(1) The Asset provides a future economic benefit within the entity’s control; and
(2) Results from past events or transactions

Question 19

How would you recognize a foreign exchange transaction when the exchange rate changes prior to the settlement date?

Answer 19

AS a gain or loss at settlement

NOTE: This does NOT involve accumulating the gain or loss – Meaning you would take whatever difference that occurred throughout the year and the settlement amount and this would be your gain or loss

Question 20

WHAT is the “accumulated benefit obligation?”

Answer 20

THE Present Value of all future retirement payments that the employee is already entitled to based on services rendered prior to that date