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Exam 7: Cash and Receivables

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Question 41

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The GW Co. is owed $1,000,000 by Mason, Inc. under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. GW believes there is a 30% chance that Mason will fail to pay GW all amounts that GW is owed. In that 30% case, GW believes it will only receive amounts equal to a present value of $880,000. -If GW is reporting under current U.S. GAAP, it would recognize an impairment loss of:

A) $0.
B) $60,000.
C) $200,000.
D) $240,000.

E) C) and D)
F) B) and C)

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Question 42

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Which of the following is recorded by a credit to accounts receivable?

A) Sale of inventory on account.
B) Estimating the annual allowance for uncollectible accounts.
C) Estimating annual sales returns.
D) Write-off of bad debts.

E) C) and D)
F) B) and C)

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Question 43

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A company's investment in receivables is affected by several related variables. Give an example of this interrelationship.

Plunder Inc. accepted a six-month noninterest-bearing note for $2,800 on January 1, 2018. The note was accepted as payment of a delinquent receivable of $2,500. What is the correct entry to record the note?

The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a company in managing its investment in receivables.

Hazelton Manufacturing prepares a bank reconciliation at the end of every month. At the end of May, the general ledger checking account showed a balance of $1,360 and the bank statement showed a bank balance of $1,445. Outstanding checks totaled $350 and deposits in transit were $150. The bank statement listed service charges of $30 and NSF checks totaling $85. The corrected cash balance is:

Excerpts from Huckabee Company's December 31, 2018 and 2017, financial statements are presented below: $\begin{array}{lrr}&2018&2017\\\text { Accounts receivable } & \$ 80,000 & \$ 72,000 \\\text { Merchandise inventory } & 58,000 & 72,000 \\\text { Net sales } & 400,000 & 372,000 \\ \text { Cost of goods sold } & 240,000 & 220,000\end{array}$ -Huckabee's 2018 receivables turnover (rounded) is:

Brockton Carpet Cleaning prepares a bank reconciliation at the end of every month. At the end of July, the balance in the general ledger checking account was $2,750 and the bank balance on the bank statement was $2,980. Outstanding checks totaled $680 and deposits in transited were $400. The bank statement revealed that a check written for $120 was incorrectly recorded by Brockton as a $220 disbursement. The bank statement listed service charges and NSF check charges totaling $150. The corrected cash balance is:

NOTE 5: ALLOWANCE FOR LOAN LOSSES The allowance for loan loss is maintained at a level to absorb probable losses inherent in the loan portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans. The following is a summary of the changes in the allowances for loan losses for three years: Winchester also reported (in thousands) in its comparative balance sheet that it held Loans receivable, net, of $6,869,11 and $6,819,209 at December 31, 2018, and December 31, 2017, respectively. -How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?

Sarduchi Imports owes Radnor S&L $50 million under an 8% note with three years remaining to maturity. Due to financial difficulties of Sarduchi, the previous year's interest ($4 million) was not received. Radnor believes it is probable that Sarduchi will default on the note, and that the present value of all amounts it eventually will collect is $25 million. Required: Compute the impairment loss that the bank would record.

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. What is the correct entry for Flores on November 10?

The allowance method for estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to their appropriate carrying value.

The Salamander Company has evaluated its receivables, and has identified the following possible impairments: • Note #1 has recently deteriorated in credit quality. For Note #1, Salamander estimates the present value of credit losses occurring in the next twelve months is $50,000, and the present value of credit losses occurring after twelve months is $20,000. • Note #2 has not deteriorated in credit quality. For Note #2, Salamander estimates the present value of credit losses occurring in the next twelve months is $5,000, and the present value of credit losses occurring after twelve months is $10,000. - If Salamander is reporting under IFRS and therefore uses the ECL model, it would recognize an impairment loss of:

Drebin Security Systems sold merchandise to a customer in exchange for a $50,000, five-year, noninterest-bearing note when an equivalent loan would carry 10% interest. Drebin would record sales revenue on the date of sale equal to:

You have recently been hired as the assistant controller for Clayton, Inc., a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the chief financial officer. The controller has assigned the task of preparing the year-end adjusting entry for bad debts to you. The allowance for uncollectibles accounts has a credit balance of $86,000 before the year-end adjustment. Your analysis indicates that an appropriate balance for the allowance account is $210,000. After showing your analysis to the controller, she tells you to adjust the allowance account to $310,000. Tactfully, you ask the controller for an explanation for the amount and she tells you, "We are having a really good year. Let's bump up the allowance." Required: Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.

Under IFRS, an overdraft in a cash account at one bank can be offset against a positive balance in the account at another bank for purposes of reporting cash on the company's balance sheet.

Galaxy sells used videogames for cash and provides a one-week return right. Returns are material and reasonably predictable. Galaxy should:

On April 1 of the current year, Troubled Company factored receivables with a carrying value of $85,000 for $60,000 in cash from Scrooge Lenders. The transfer was made without recourse. On April 1, Troubled would:

On July 18, 2018, Philly Furniture Factory sold 20 reclining rockers to Dave's Discount Furniture for $8,000, subject to terms 2/10, n/30. Philly uses the net method of accounting for sales discounts. Required: 1. Prepare the journal entry to record the sale. 2. Prepare the journal entry to record receipt of the payment, assuming the correct amount was received on July 26, 2018. 3. Prepare the journal entry to record receipt of the payment assuming the correct amount was received on August 15, 2018.

Under the CECL approach, impairments are only recognized when it is probable that the receivable has been impaired.