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Flashcards in FAR 10 Deck (21):
1

Hall Co.'s allowance for uncollectible accounts had a credit balance of $24,000 on December 31, 2003. During 2004, Hall wrote off uncollectible accounts of $96,000. The aging of accounts receivable indicated that a $100,000 allowance for doubtful accounts was required on December 31, 2004. What amount of uncollectible accounts expense should Hall report for 2004?
A. $172,000
B. $120,000
C. $100,000
D. $96,000

To be fair, we understood this question.

We KNEW there was a debit bal of (72).

BUT, we thought like ass monkeys and thought the difference between 72-100 was the amount we needed. -.-. FOR WHATEVER REASON.

But the answer is the debit bal plus the amount required for an ending balance.

Beginning allowance balance
$24,000
Less write-off
(96,000)
Equals pre-adjustment allowance balance

(72,000)
(debit)
The allowance balance normally is a credit. For the ending balance in the account after adjustment to be $100,000 credit, the account must be increased $172,000 by recognizing uncollectible accounts expense.

Under the aging method, uncollectible accounts expense equals the amount required to increase the allowance balance to the indicated total based on the aging of receivables.

2

On January 1, 2006, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts.
Based on past experience, 2% of Jamin's credit sales have been uncollectible. During 2006, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 2006 were $9,000,000.

In its December 31, 2006 balance sheet, what amount should Jamin report as allowance for uncollectible accounts?

A. $115,000
B. $180,000
C. $245,000
D. $440,000

*When you take the balance in the account and found out what need to get it to that balance, then that is the allowance expense*

They asked what is the account balance. What did we need at the end of the day

C. $245,000

This answer does not consider all three factors affecting the ending allowance balance: the beginning balance, write-offs, and the percent of credit sales recognized as bad debt expense during the year. The correct calculation is:
Beginning balance - Write-offs + 2% of credit sales =
$260,000 - $325,000 + .02($9,000,000) = $115,000

A. $115,000

3

Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of Delta's customers take advantage of the discount. Delta uses the gross method of recording sales and trade receivables. An analysis of Delta's trade receivables balances on December 31, 2004, revealed the following:

Age Amount Collectible
0 - 15 days $100,000 100%
16 - 30 days 60,000 95%
31 - 60 days 5,000 90%
Over 60 days 2,500 $500
$167,500
=========
In its December 31, 2004 balance sheet, what amount should Delta report for allowance for discounts?

A. $1,000
B. $1,620
C. $1,675
D. $2,000

C. $1,675

Bastards...

Incorrect because the discount was applied to the entire amount of receivables at the end of 2004. Only the customers in the 0 - 15 day age category can take the discount.

A. $1,000

Correct

Only the accounts in the 0 - 15 day age category can take the discount, because the discount period ends 15 days after the sale (2/15, n30).
The discount percentage is 2% (2/15, n30). One-half of the customers take the discount. Therefore, the expected discounts to be taken after December 31, 2004 are: (.5)($100,000)(.02) = $1,000. This expected discount amount reduces net sales and net accounts receivable for 2004 because it is based on sales in 2004.

4

Each of Potter Pie Co.'s 21 new franchisees contracted to pay an initial franchise fee of $30,000.
By December 31, 2005, each franchisee had paid a nonrefundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, 2006 and December 31, 2007.
Experience indicates that one franchise will default on the additional payments. Services for the initial fee will be performed in 2006.
What amount of net unearned franchise fees would Potter report on December 31, 2005?

A. $400,000
B. $600,000
C. $610,000
D. $630,000

* so many things to look at here:
C. $610,000


1. The number of franchises available is 21
2. BUT, they want to recognize the probable possibility that 1 franchise will default on future loan payments

New number is 20.

3. BUT! The one that defaulted still paid the 10

4. No services were performed in 2005

The $610,000 net unearned fee revenue = (21)($30,000) - $20,000.

This amount includes the notes received, but does not include the one expected uncollectible note.
The notes receivable balance, recorded along with the unearned revenue, will not reflect the note expected to be uncollectible. Bad debt expense is not recorded for this note because there has been no revenue recognized against which to match the expense.

5

Frame Co. has an 8% note receivable, in the original amount of $150,000, dated June 30, 2003. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 2004, 2005, and 2006.
In its June 30, 2005, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?

A. $0
B. $4,000
C. $8,000
D. $12,000

YOU THOUGHT YOUR DICK WAS 900 INCHES LONG AND THAT YOU DIDN:T NEED TO FOLLOW THE RULES OF LAAAANNNNNNNNDDDD

DO NOT TAKE THE EASY ROUTE SNAKE!
THOSE PRINCIPAL PAYMENTS ARE NOT AT P.V YOU SASSY CARROT



B. $4,000
NOPE SNAKE!

This answer assumes that two payments have been received. That is not the case. Only one payment has been received as of the balance sheet date (the July 1, 2004 payment). That payment occurred one year before the balance sheet date; therefore a full year's interest on the principal balance at that time ($100,000) has been accrued.

C. $8,000
As of June 30, 2005, only one payment has been received (July 1, 2004). Thus, $100,000 of principal balance has been outstanding for an entire year as of the balance sheet date. Interest receivable on June 30, 2005 is thus $8,000 (.08 x $100,000).

6

On June 1, 2005, Yola Corp. loaned Dale $500,000 on a 12% note, payable in five annual installments of $100,000 beginning January 2, 2006. In connection with this loan, Dale was required to deposit $5,000 in a noninterest-bearing escrow account.
The amount held in escrow is to be returned to Dale after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2005. Dale made timely payments through November 1, 2005. On January 2, 2006, Yola received payment of the first principal installment plus all interest due.

On December 31, 2005, Yola's interest receivable on the loan to Dale should be

A. $0
B. $5,000
C. $10,000
D. $15,000

*OMFG YOU READ INTEREST INCOME NOT INTEREST RECEIVABLE*

GOSH WOMEN!

C. $10,000

Because the last interest payment was made on November 1, the interest for November and December is unpaid as of December 31, 2005. Therefore, two months of interest is receivable, as of December 31, 2005, for a total receivable of $10,000 = (2/12)(12%)($500,000). No principal payments have yet been made as of this date.

7

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest.
What is an installment note's receivable balance six months after the sale?

A. 75% of the original sales price.
B. Less than 75% of the original sales price.
C. The present value of the remaining monthly payments discounted at 12%.
D. Less than the present value of the remaining monthly payments discounted at 12%.

C. The present value of the remaining monthly payments discounted at 12%.


The question does not specify the exact meaning of the term "note receivable balance." When the term "gross" is not applied, it is safe to assume that the balance referred to is the net balance, that is, net of interest yet to be recognized.
Notes are reported at present value, which is the amount net of interest yet to be recognized. However, note balances under the installment method include deferred gross margin yet to be realized, because deferred gross margin is subtracted as a separate line item.

Thus, the question is referring to the notes receivable balance exclusive of interest yet to be recognized, but inclusive of deferred gross margin yet to be realized. The note's balance is the present value of the remaining payments. This is a two-year note. Therefore, valuation at present value is required. The note's valuation is the present value of the remaining payments at the original discount rate.

8

On December 1, 2005, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan.
Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, 2006. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000.

What amount of accrued interest receivable should Tigg include in its December 31, 2005 balance sheet?

A. $4,450
B. $2,166
C. $2,000
D. $0

I had no idea:

C. $2,000

The term "accrued interest receivable" refers to the cash amount of interest due. The cash amount of interest due is based on the contractual interest rate and face value. The loan origination fee is a way of increasing the effective interest but it does not affect the cash interest component. The $2,000 accrued interest = (.12)(1/12)($200,000).

9

On December 31, 2005, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity.
The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2005 was 8%. The compound interest factors to convert future values into present values at 8% follow:
Present value of $1 due in nine months: .944
Present value of $1 due in five years: .680

At what amounts should these two notes receivable be reported in Jet's December 31, 2005, balance sheet?

Hart Maxx
$9,440 $6,800
$9,652 $7,820
$10,000 $6,800
$10,000 $7,820

Notes under a year, do not need P.V
Hart Maxx
$10,000 $7,820


The 9-month note is reported at face value ($10,000) because current notes need not be measured at present value. The 5-year note is reported at $7,820, the present value of the future cash flows. The five years of interest is payable at maturity.
$7,820 = [$10,000 + $10,000(.03)(5 years)](.680)], which is the present value of the note plus the present value of the 3% interest

10

Note that the principal, together with all interest, is due November 15, 2005.
When the note was recorded on August 15, which of the following accounts increased?

A. Unearned discount.
B. Interest receivable.
C. Prepaid interest.
D. Interest revenue.

B. Interest receivable.

The note was received one month into its term. Like a bond issued between interest dates and which collects accrued interest from the bondholder since the most recent interest payment date, this note is recorded with interest receivable for one month.
Benet earns only three months of interest revenue because that is the length of time it will hold the note.'

* THIS IS BECAUSE AS THE LONG TIME PASSES THE MONEY IS OWED TO YOU*

11

Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years.
The market rate for a note of this type is 10%. On issuing the note, Jole should record

Discount on note receivable Deferred charge
Yes Yes
Yes No
No Yes
No No

you were but a leaf being pushed around in the ocean:

There are two major issues embedded in this question:
Accounting for a noninterest-bearing note, and
Accounting for a future discount to be received as part of the compensation for the loan.


For accounting purposes, a market rate of interest must be imputed for noninterest notes (and those with an unrealistic stated interest rate) and the note recorded at its present value.

The difference between the present value of the note and the cash to be received from the note is recognized as part of the cost of goods to be acquired in the future at a discount and recorded as a deferred charge (like a "prepayment"). The entry for Jole Co. would be:
DR: Note Receivable [1] $10,000
DR: Deferred Charge [2] 2,487
CR: Discount on Note [1] $2,487
CR: Cash 10,000
[1] PV of Note = $10,000 x (PV of $1 @ 10% for 3 years)
= $10,000 x .75131
= $ 7,513
Face of Note $10,000 - PV ($7,513) = Discount
[2] PV of Note ($7,513) - Cash ($10,000) = Deferred Charge ($2,487)

12

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485.
What should be the total interest revenue earned by Leaf over the life of this note?

A. $5,045
B. $5,560
C. $8,000
D. $9,000

You were the last acorn for the squirrels

B. $5,560

Total interest revenue is the amount received over the term of the note less the present value of the note: 5($5,009) - $19,485 = $5,560.
Leaf paid $19,485 for the note, and will receive 5($5,009) over the note term. The difference is interest revenue.

13

On December 30, 2005, Chang Co. sold a machine to Door Co. in exchange for a noninterest-bearing note requiring ten annual payments of $10,000. Door made the first payment on December 30, 2005. The market interest rate for similar notes at the date of issuance was 8%. Information on present value factors is as follows:
Period
Present value of $1 at 8%
Present value of ordinary annuity of $1 at 8%
9
0.50
6.25
10
0.46
6.71
In its December 31, 2005, balance sheet, what amount should Chang report as note receivable?

A. $45,000
B. $46,000
C. $62,500
D. $67,100

C. $62,500

The note receivable should be reported at the present value of the nine remaining payments. The first payment was made at the date of the sale. The remaining nine payments comprise an ordinary annuity as of December 31, 2005 because the next payment is due one year from that date.
Therefore, the present value and reported note value on that date is 6.25($10,000) = $62,500.

14

Inventory:
Herc Co.'s inventory on December 31, 2005 was $1,500,000, based on a physical count priced at cost, and before any necessary adjustment for the following:
Merchandise costing $90,000, shipped FOB shipping point from a vendor on December 30, 2005, was received and recorded on January 5, 2006.
Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2006. The goods, billed to the customer FOB shipping point on December 30, 2005, had a cost of $120,000.
What amount should Herc report as inventory in its December 31, 2005, balance sheet?

A. $1,500,000
B. $1,590,000
C. $1,620,000
D. $1,710,000

D. $1,710,000

The correct ending inventory balance is $1,710,000 ($1,500,000 + $90,000 + $120,000).
The $90,000 of merchandise is included because it was shipped before year-end and the title was transferred to Herc at the shipping point (before year-end). The $120,000 also is included because the goods have not been shipped. The FOB designation is irrelevant because the goods have not yet reached a common carrier.

15

Inv :
Nomar Co. shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales.
What amount of net inventory on consignment remains on the balance sheet for the first year for Nomar?

A. $0
B. $ 6,000
C. $6,500
D. $20,000

B. $ 6,000

Nomar includes in its inventory account items of inventory it owns, regardless of its location. Nomar's inventory on consignment at Seabright continues to be owned by Nomar and is included in Nomar's inventory at cost. 70% of the inventory shipped has been sold.
Therefore, only 30%, or $6,000 (.30 x $20,000), remains in ending inventory. The commission and advertising costs are not inventory costs and are not included in inventory.

16

Inventory:
The following information applied to Fenn, Inc. for 2005:
Merchandise purchased for resale $400,000
Freight-in 10,000
Freight-out 5,000
Purchase returns 2,000
Fenn's 2005 inventoriable cost was
A. $400,000
B. $403,000
C. $408,000
D. $413,000

C. $408,000

Freight-out is a delivery expense. It is not inventoried because the goods have reached salable condition before incurring this cost. Only costs that contribute to preparing inventory for sale are inventoried.

17

How should the following costs affect a retailer's inventory?
Freight-in Interest on inventory loan
Increase No effect
Increase Increase
No effect Increase
No effect No effect

Freight-in Interest on inventory loan
Increase No effect

All costs necessary to prepare inventory for sale are capitalized to inventory. Freight-in is such a cost. The goods must be shipped to the seller's location before they can be sold. Interest on inventory loans is a financing cost. It does not contribute to the process of making the inventory ready for sale.

18

Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson's assets and retained earnings at year end?

Assets Retained earnings
No effect Overstated
No effect Understated
Understated No effect
Understated Understated

Assets Retained earnings
Understated Understated

Both responses in this choice are correct. FOB shipping point means that the title passed to the buyer at the selling company's warehouse. Therefore, Garson should have included this inventory in the ending inventory. This leaves inventory (assets) understated. This error also has overstated the cost of goods sold, which understates net income and retained earnings.

19

During 2005, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam's 2005 accounting records:
Beginning inventory
$122,000
Purchases
540,000
Freight-in
10,000
Transportation to consignees
5,000
Freight-out
35,000
Ending inventory - held by Kam
145,000
- held by consignees
20,000
In its 2005 income statement, what amount should Kam report as the cost of goods sold?

A. $507,000
B. $512,000
C. $527,000
D. $547,000

B. $512,000

Beg. inventory + Net purchases = End. inventory + Cost of goods sold
$122,000 + ($540,000 + $10,000 + $5,000) = ($145,000 + $20,000) + $512,000

The freight-in and transportation to consignees is added to net purchases because they are costs of placing the inventory into salable condition (the general rule for capitalizing costs to inventory). The goods on consignment are included in ending inventory because they are owned by Kam.

20

The following information was derived from the 2005 accounting records of Clem Co.:
Clem's central warehouse Clem's goods held by consignees
Beginning inventory $110,000 $12,000
Purchases 480,000 60,000
Freight-in 10,000
Transportation to consignees 5,000
Freight-out 30,000 8,000
Ending inventory 145,000 20,000

Clem's 2005 cost of sales was
A. $455,000
B. $485,000
C. $507,000
D. $512,000

D. $512,000

The goods on consignment are included in Clem's inventory and therefore are included in the computation of Clem's cost of goods sold.
The only costs not included in the computation are the two freight-out costs. Freight-out is a distribution expense. This cost does not contribute to the process of placing the goods into salable condition.
Only costs that assist in placing goods into salable condition are inventoried. Because this cost is required to place those items on consignment, freight-in is an inventoriable cost, as is transportation to consignees.
Beginning inventory $110,000 + $12,000 = $122,000
Plus purchases $480,000 + $60,000 = 540,000
Plus freight-in $10,000 = 10,000
Plus trans. in to consignees $5,000 = 5,000
Less ending inventory $145,000 + $20,000 = (165,000)
Equals cost of goods sold $512,000

21

West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable.
West should record the cost of this merchandise as

A. $14,000
B. $14,400
C. $15,600
D. $20,000

B. $14,400

This is a chain discount and the correct recorded cost is $20,000(1 - .20)(1- .10) = $14,400. Each successive discount in a chain discount is applied to the previous net amount.