Question 1

Allowance for doubtful accounts
When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write off method, and (2) allowance method.
Instructions
a) Describe fully both the direct write off method and the allowance method of recognizing bad debt expense.
b) Discuss the reasons why one of the above methods is preferable to the other, and the reasons why the other method is not usually in accordance with generally accepted accounting principles.

Accepted Answer

The answer of Allowance for doubtful accounts
When a company has...

Question 2

Schedule of note discount amortization
On December 31, 2017, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2020, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
 $\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\underline{\text { Interest Rate }}$
$\begin{array}{c}
\begin{array}{lll}
\underline{\text {Table Factors for Three Periods}}\
\text {Future Value of 1}\
\text {Present Value of 1}\
\text {Future Value of Ordinary Annuity of 1}\
\text {Present Value of Ordinary Annuity of 1}
\end{array}
\begin{array}{r}
\underline{5 \%} \
1.15763 \
.86384 \
3.15250 \
2.72325 
\end{array}
\begin{array}{r}
\underline{10 \% }\
1.33100\
 .753100 \
3.31000 \
2.48685 
\end{array}
\end{array}$

Instructions
Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method. (Round to whole dollars.)

Accepted Answer

The answer of Schedule of note discount amortization
On December 31,...

Question 3

Recognition and measurement of long-term notes receivable
Kohl Company lent $49,587 to Hemingway Inc., accepting Hemingway's 2-year, $60,000, zero-interest-bearing note. The implied interest rate is 10%. Prepare Kohl's journal entries for the initial transaction, recognition of interest each year, and the collection of $60,000 at maturity. Kohl Company follows IFRS.

Accepted Answer

The answer of Recognition and measurement of long-term notes receivable
Kohl...

Question 4

Restricted cash balances
Some lending institutions require customers who borrow money from them to keep minimum cash balances in their chequing or savings accounts. What are these balances called? Explain why they might need to be separately reported on the company's statement of financial position.

Accepted Answer

The answer of Restricted cash balances
Some lending institutions require customers...

Question 5

Sales Returns and Allowances
Assume that Olympia Corporation follows ASPE and estimates that approximately 5% of its $1.5 million of trade receivables outstanding will be returned or some adjustment will be made to the sales price.
Instructions
a) Prepare the entry to show expected sales returns and allowances.
b) Explain why it is important to prepare and include this entry in Olympia's financial statements.

Accepted Answer

The answer of Sales Returns and Allowances
Assume that Olympia Corporation...

Question 6

Dishonoured note receivable
On November 1, 2019, Mandrake Corp. and Olivier Ltd. reached an agreement to convert Olivier's outstanding account receivable of $27,000 into a 3-month, 8% note receivable. On February 1, 2020, Olivier dishonoured the note receivable. Prepare all required journal entries for Mandrake for the above transactions, assuming a December 31 year end and assuming adjusting journal entries are recorded at the end of its fiscal year.

Accepted Answer

The answer of Dishonoured note receivable
On November 1, 2019, Mandrake...

Question 7

Amortization of discount on note
On December 31, 2017, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2020, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
 $\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\underline{\text { Interest Rate }}$
$\begin{array}{c}
\begin{array}{lll}
\underline{\text {Table Factors for Three Periods}}\
\text {Future Value of 1}\
\text {Present Value of 1}\
\text {Future Value of Ordinary Annuity of 1}\
\text {Present Value of Ordinary Annuity of 1}
\end{array}
\begin{array}{r}
\underline{5 \%} \
1.15763 \
.86384 \
3.15250 \
2.72325 
\end{array}
\begin{array}{r}
\underline{10 \% }\
1.33100\
 .753100 \
3.31000 \
2.48685 
\end{array}
\end{array}$

Instructions
Determine the present value of the note.

Accepted Answer

The answer of Amortization of discount on note
On December 31,...

Question 8

Cash versus cash equivalents or short-term investments
Explain the difference between cash and cash equivalents or short-term investments and provide two examples of each.

Accepted Answer

The answer of Cash versus cash equivalents or short-term investments
Explain...

Question 9

Reporting of cash and cash equivalents
Lawrence Company has cash in bank of $22,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. How much cash should Lawrence report on their statement of financial position? Explain.

Accepted Answer

The answer of Reporting of cash and cash equivalents
Lawrence Company...

Question 10

Entries for bad debt expense
A trial balance before adjustment included the following:
$\begin{array}{llcc}
  \text {  } &\underline{\text { Debit }}&\underline{ \text {  Credit} }\
 \text { Accounts receivable. } &\$120,000\
 \text { Allowance for doubtful aceounts. } &&\$730\
 \text { Sales } &&51,000\
 \text {  Sales returns and allowances} &8,000&\
\end{array}$

. 
Instructions
Prepare adjusting journal entries assuming that the estimate of uncollectibles is determined by taking 
a) 5% of gross accounts receivable, and
b) 1% of net sales.

Accepted Answer

The answer of Entries for bad debt expense
A trial balance...

Question 11

Classification of accounts receivable
Trade receivables are amounts owed by customers to whom a company has sold goods or services as part of normal business operations. Briefly explain the difference between open accounts receivable and notes receivable.

Accepted Answer

The answer of Classification of accounts receivable
Trade receivables are amounts...

Question 12

Notes received for Property, Goods, or Services
Savannah Corp. sold property in exchange for a six-year note that has a maturity value of $40,250 and no stated interest rate. The property originally cost Savannah $21,000. Assuming that a market interest rate of 9% is known, prepare the journal enjoy to record the sale of this property.

Accepted Answer

The answer of Notes received for Property, Goods, or Services
Savannah...

Question 13

Nontrade receivables
Nontrade receivables are created by a variety of transactions and can be written promises either to pay cash or to deliver other assets. Provide three examples of nontrade receivables.

Accepted Answer

The answer of Nontrade receivables
Nontrade receivables are created by a...

Question 14

Accounts receivable assigned
Moonbeam Ltd. assigned $520,000 of their accounts receivable to Sunbright Finance Company, as security for a loan of $430,000. Sunbright charged a 3.5% commission on the face amount of the loan, and the note bears interest at 9%.
During the first month, Moonbeam collected $260,000 on assigned accounts. This amount was paid to the finance company along with one month's interest on the note.
Instructions
Prepare the required journal entries on Moonbeam's books related to the transfer of the accounts receivable, the loan, and the payment to the finance company.

Accepted Answer

The answer of Accounts receivable assigned
Moonbeam Ltd. assigned $520,000 of...

Question 15

Note with fair value not equal to cash consideration
On January 1, 2020, Cameroon Corp. lent $50,000 to its CEO, interest-free. The loan is repayable in full in five years. The market rate for similar loans (with similar credit risk) is 4%.
Instructions
a)Calculate the present value (fair value) of this loan (round to the nearest dollar). Why is it not the same as the actual cash advanced?
b)Prepare the journal entry to record this transaction.

Accepted Answer

The answer of Note with fair value not equal to...

Question 16

Interest rate terminology
Explain the difference between the following interest rate terms:
Market
Coupon
Effective
Stated
Yield
Face

Accepted Answer

The answer of Interest rate terminology
Explain the difference between the...

Question 17

Zero-interest bearing note
Shepherd Corp. receives a five-year, $40,000, zero-interest bearing note with a present value of $34,504.40. Calculate the implicit rate of interest and provide the related journal entry at the date of issuance.

Accepted Answer

The answer of Zero-interest bearing note
Shepherd Corp. receives a five-year,...

Question 18

Sale of receivables without recourse
Sparwood Manufacturing factored $240,000 of their accounts receivable to General Factor Corp., on a without recourse basis. The receivables are transferred to General Factor, who takes over the full responsibility of collection. General Factor charged a finance charge of 4% of the dollar value of the receivables, and withheld 5% of the receivable value.
Instructions
a) Prepare the general journal entry to reflect this transaction on Sparwood’s books.
b) Prepare the general journal entry to reflect this transaction on General Factor’s books.

Accepted Answer

The answer of Sale of receivables without recourse
Sparwood Manufacturing factored...

Question 19

Accounts receivable analysis and securitization
Discuss why adjustments might have to be made and caution has to be exercised when analyzing accounts receivable due to the increased use of securitization transactions.

Accepted Answer

The answer of Accounts receivable analysis and securitization
Discuss why adjustments...

Question 20

Entries for bad debt expense
Patagonia Corp.'s unadjusted trial balance included the following:
$\begin{array}{llcc}
  \text {  } &\underline{\text { Debit }}&\underline{ \text {  Credit} }\
 \text { Accounts receivable. } &\$140,000\
 \text { Allowance for doubtful aceounts. } &&\$890\
 \text { Sales } &&425,000\
 \text {  Sales returns and allowances} &10,000&\
\end{array}$

Instructions
Prepare adjusting journal entries assuming that the estimate of uncollectibles is determined by using 
a) 4% of gross accounts receivable, and
b) 1.5% of net sales.

Accepted Answer

The answer of Entries for bad debt expense
Patagonia Corp.'s unadjusted...

Quiz 7: Cash and Receivables

Cash versus cash equivalents or short-term investments Explain the difference between cash and cash equivalents or short-term investments and provide two examples of each.

Reporting of cash and cash equivalents Lawrence Company has cash in bank of $22,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. How much cash should Lawrence report on their statement of financial position? Explain.

Classification of accounts receivable Trade receivables are amounts owed by customers to whom a company has sold goods or services as part of normal business operations. Briefly explain the difference between open accounts receivable and notes receivable.

Nontrade receivables Nontrade receivables are created by a variety of transactions and can be written promises either to pay cash or to deliver other assets. Provide three examples of nontrade receivables.

Interest rate terminology Explain the difference between the following interest rate terms: Market Coupon Effective Stated Yield Face

Zero-interest bearing note Shepherd Corp. receives a five-year, $40,000, zero-interest bearing note with a present value of $34,504.40. Calculate the implicit rate of interest and provide the related journal entry at the date of issuance.

Accounts receivable analysis and securitization Discuss why adjustments might have to be made and caution has to be exercised when analyzing accounts receivable due to the increased use of securitization transactions.