Question 1

Carr Company sells specialized machinery and equipment. On January 1, 2011, the company sold equipment and received a two-year, $10,000 note with a 3 percent stated interest rate. Interest is payable each December 31, and the entire principal is payable December 31, 2012.
The equipment does not have a readily established market value. The market rate of interest for notes of this type and level of risk is 10 percent.
See Carr Company information above.
Required:
Prepare the entries on Carr Company's books to record the sale of the equipment.
Accounting Principles Board Opinion No. 21, "Interest on Receivables and Payables," requires that the note be accounted for at the market rate of interest appropriate for the transaction. In this case, that rate is 10 percent.

Accepted Answer

The answer of Carr Company sells specialized machinery and equipment....

Question 2

Carr Company sells specialized machinery and equipment. On January 1, 2011, the company sold equipment and received a two-year, $10,000 note with a 3 percent stated interest rate. Interest is payable each December 31, and the entire principal is payable December 31, 2012.
The equipment does not have a readily established market value. The market rate of interest for notes of this type and level of risk is 10 percent.
See Carr Company information above.
Required:
Explain how and why this transaction was structured as it is.

Accepted Answer

The answer of Carr Company sells specialized machinery and equipment....

Question 3

The following information was abstracted from the 2011 financial statements of Jennings Company:
  
Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:

Accepted Answer

The answer of The following information was abstracted from the...

Question 4

On August 1, a firm assigned $20,000 of its $56,000 of accounts receivable. The finance company advanced 90% of the assigned accounts less a $2,000 fee. Interest is 12% and payable monthly on the beginning-of-period loan balance. A loan payment is remitted at the end of each month. Each payment includes principal and interest. The amount of each loan payment equals the cash collected on receivables during the month plus interest on the loan balance.
If $8,000 was collected on accounts receivable during August, the entry for the first loan payment would include a

Accepted Answer

The interest for the first month is calculated as 12% annually on the $16,000 loan balance (90% of $20,000 minus $2,000 fee), which is $160. Therefore, the interest expense is $160, not $180.

Question 5

The Eric Manufacturing Company received its bank statement for the month ending May 31. The bank statement indicates a balance of $32,400. The cash account as of the close of business on May 31 has a balance of $8,350. In reconciling the balances, the following items are discovered.
  
Prepare a bank reconciliation statement. (Use the format of reconciling bank and depositor figures to corrected cash balance.)

Accepted Answer

The answer of The Eric Manufacturing Company received its bank...

Question 6

The following information was abstracted from the records of the Hooper Corporation:
  
Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:

Accepted Answer

The answer of The following information was abstracted from the...

Question 7

Which of the following is one of the two steps of the 2-step test for derecognition of receivables stated in IAS 39, International Accounting Standard 39, "Financial Instruments: Recognition and Measurement"?

Accepted Answer

The answer of Which of the following is one of...

Question 8

Charles Company has two checking accounts. A special account is used for the weekly payroll only, and the general account is used for all other disbursements. Every week, a check in the amount of the net payroll is drawn on the general account and deposited in the payroll account. The company maintains a $5,000 minimum balance in the payroll account. On a monthly bank reconciliation, the payroll account should

Accepted Answer

The payroll account should reconcile to $5,000 because the company maintains a $5,000 minimum balance in the account.

Question 9

You are the auditor of Plastico, Inc., a manufacturer of plastic products. In reviewing the balance sheet of the company, you notice several receivables from the officers of the company. You report your findings to the president of the company and inform him that these receivables will be considered related party transactions for purposes of financial accounting and reporting. The president seems somewhat annoyed by your comments and asks you to explain what you mean by "related party" transactions and how the financial statements will be affected by these transactions. Prepare a brief response to the president's question.
Related party transactions occur when an enterprise engages in transactions in which one of the parties to the transaction has the ability to influence significantly the policies of the other, or in which one party to the transaction has the ability to influence the policies of the two transacting parties. The following are examples of related party transactions:

Accepted Answer

The answer of You are the auditor of Plastico, Inc.,...

Question 10

Accounts receivable usually are factored

Accepted Answer

Accounts receivable are usually factored without recourse on a notification basis, which means that the factor (the party purchasing the receivables) assumes the risk of non-payment and the seller is not required to notify their customers of the factoring arrangement. This is the most common type of factoring arrangement.

Question 11

The plan of organization and all the methods and measures adopted within a business to safeguard its assets, check the accuracy of its accounting data, promote operational efficiency, and encourage adherence to managerial policies is called

Accepted Answer

The plan of organization and all the methods and measures adopted within a business to safeguard its assets, check the accuracy of its accounting data, promote operational efficiency, and encourage adherence to managerial policies is called internal control. Option A (accounting control) only focuses on safeguarding assets and accuracy of accounting data, while option B (administrative control) only focuses on promoting operational efficiency. Option C (managerial control) is a broader term that encompasses both internal and external factors that influence managerial decision making. Therefore, option D (internal control) is the best choice.

Question 12

Receivables can be used to generate cash through two general categories of transactions:
1. A secured borrowing
2. A sale of the receivables.
Both of these types of transactions require a transfer of the receivables to a new holder, typically a financial institution.
Required:
Distinguish between a secured borrowing and a sale of receivables as regards the rights of the transferor and transferee as well as regards the accounting for each type of transaction.

Accepted Answer

The answer of Receivables can be used to generate cash...

Question 13

Western Company sells products covered by a 3-year warranty. Based on past experience of other entities in the industry, Western expects to incur warranty costs equal to 1% of sales. Western's sales were $40,000 in 2010 and $50,000 in 2011. In 2011, the company spent $200 to repair goods sold in 2010 and $300 to repair goods sold in 2011. Western received no warranty servicing demands from its customers in 2010, the company's first year of operations.
What is the balance in the warranty liability account on January 1, 2012?

Accepted Answer

The warranty liability is calculated as 1% of total sales minus the actual warranty costs incurred. For 2010, the liability is $400 (1% of $40,000), and for 2011, it is $500 (1% of $50,000). Total liability is $900. Actual costs were $200 (2010) + $300 (2011) = $500. Thus, the balance is $900 - $500 = $400.

Question 14

Which of the following is not correct regarding IAS 39, International Accounting Standard 39, "Financial Instruments: Recognition and Measurement," and SFAS No. 140, Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: A Replacement of FASB Statement No. 125"?

Accepted Answer

SFAS No.140 is generally considered a rule-based standard, contrasting with the principles-based approach of IAS 39. This distinction highlights the different methodologies used by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) in developing accounting standards.

Question 15

Securitization is a widely-used arrangement for selling receivables. Many companies use credit card securitization and other forms of securitizations as part of their overall financing strategies.
Required:
Explain the nature of securitization, how it can be implemented, and the appropriate accounting procedures related to a securitization. Include in your discussion the effects of recourse provisions on the securitization.

Accepted Answer

The answer of Securitization is a widely-used arrangement for selling...

Question 16

From inception of operations to December 31, 2010, Harris Corporation provided for uncollectible accounts receivable under the allowance method: Provisions were made monthly at 2 percent of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Harris's usual credit terms are net 30 days.
The credit balance in the allowance for doubtful accounts was $260,000 at January 1, 2011. During 2011, credit sales totaled $18,000,000, interim provisions for doubtful accounts were made at 2 percent of credit sales, $180,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $30,000. Harris installed a computer system in November 2011 and an aging of accounts receivable was prepared for the first time as of December 31, 2011. A summary of the aging is as follows:
  
Based on the review of collectibility of the account balances in the "prior to January 1, 2011" aging category, additional receivables totaling $120,000 were written off as of December 31, 2011. Effective with the year ended December 31, 2011, Harris adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

Accepted Answer

The answer of From inception of operations to December 31,...

Question 17

The information below is from the books of the Seminole Corporation on June 30:
  
Assuming no errors were made, compute the cash balance per books on June 30 before any reconciliation adjustments.

Accepted Answer

The answer of The information below is from the books...

Question 18

A firm factors $40,000 of accounts receivable without recourse. The factor agrees to provide financing based on these receivables, but imposes a 10% fee. In addition, the transferor and transferee agree that $3,000 of sales returns and allowances can be expected from these accounts. What is the loss or expense to recorded by the transferor?

Accepted Answer

The cost of factoring the receivables is 10% of $40,000 = $4,000.

The transferor has agreed to accept $3,000 of sales returns and allowances.

Therefore, the loss or expense recorded by the transferor is:
$4,000 (factoring cost) - $3,000 (sales returns and allowances) = $1,000

However, since the question is asking for the loss or expense to be recorded, the answer is rounded up to the nearest thousand, resulting in a loss or expense of $4,000.

Question 19

The books of Steve's Service, Inc. disclosed a cash balance of $68,757 on June 30. The bank statement as of June 30 showed a balance of $54,780. Additional information that might be useful in reconciling the two balances follows:
  
Prepare a bank reconciliation statement, using the form reconciling bank and book balances to the correct cash balance.

Accepted Answer

The answer of The books of Steve's Service, Inc. disclosed...

Question 20

The accountant for the Goshen Company assembled the following data:

Prepare a 4-column bank reconciliation as of July 31, using the form that reconciles both the book and bank balances to a correct cash amount.

Accepted Answer

The answer of The accountant for the Goshen Company assembled...

Quiz 7: The Revenuereceivablescash Cycle

The following information was abstracted from the 2011 financial statements of Jennings Company: Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:

The following information was abstracted from the records of the Hooper Corporation: Prepare the adjusting entry for doubtful accounts expense under each of the following assumptions:

Which of the following is one of the two steps of the 2-step test for derecognition of receivables stated in IAS 39, International Accounting Standard 39, "Financial Instruments: Recognition and Measurement"?

Accounts receivable usually are factored

The plan of organization and all the methods and measures adopted within a business to safeguard its assets, check the accuracy of its accounting data, promote operational efficiency, and encourage adherence to managerial policies is called

The information below is from the books of the Seminole Corporation on June 30: Assuming no errors were made, compute the cash balance per books on June 30 before any reconciliation adjustments.

The accountant for the Goshen Company assembled the following data: Prepare a 4-column bank reconciliation as of July 31, using the form that reconciles both the book and bank balances to a correct cash amount.