Flashcards in FAR 10 - Receivables 2 Deck (25):
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?
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).
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 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.
Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books?
A. Change the due date of the invoice.
B. Factor the receivables outstanding.
C. Discount the receivables outstanding.
D. Demand payment from customers before the due date.
B. Factoring is a sale of receivables. This allows Red Co. to sell the receivables and receive cash immediately upon sale.
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?
B. 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.
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?
C. 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).
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?
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.
T/F: Interest-bearing notes should be recorded at face value if the stated and market interest rates are the same
T/F: A 1-year noninterest-bearing note should be recorded at 91% of face value if the market interest rate is 10%.
T/F: A mortgage note pays equal monthly payments at the end of each month. Interest revenue for a particular month is based on the principal balance at the end of the month.
T/F: The maker of a note is the original creditor.
T/F: The key issue in accounting for the transfer of receivables is whether control over the receivables has passed from the transferor to the transferee.
T/F: ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on the sale of an asset to another party. The discount percentage is 7%. The proceeds to ABC, Inc. equal $1,001.19.
T/F: When a receivables transfer is accounted for as a loan, the transferor records a loss on the transfer.
T/F: If two of the three criteria for the sale of receivables are met, the transfer of receivables is recorded as a sale.
All three conditions must be met:
1. The transferred assets have been isolated from the transferor, even in bankruptcy.
2. The transferee is free to pledge or exchange the assets.
3. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.
T/F: When a transfer of receivables is recorded as a loan, the receivables are removed from the original creditor's books.
T/F: When a transfer of receivables is recorded as a sale, the receivables are removed from the original creditor's books.
On November 1, 2004, Davis Co. discounted with recourse at 10%, a one-year, noninterest-bearing, $20,500 note receivable maturing on January 31, 2005.
What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2004?
The firm is contingent for the maturity amount, which for a noninterest-bearing note is the face value. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.
T/F: In a factoring accounted for as a loan, interest expense is recognized in proportion to cash received on the transferred receivables.
T/F: The term "with recourse" means that the maker must pay if the note is defaulted.
A creditor's note receivable has a carrying value of $60,000 at the end of Year 1. Based on information about the debtor, the creditor believes the note is impaired and establishes the new carrying value of the note to be $25,000 at the end of Year 1. During Years 2 and 3, the debtor pays $14,000 on the note each year (total payments, $28,000). For Year 3, under which method of the two indicated is interest revenue recognized?
Interest Method Cost Recovery Method
The interest method recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded. The estimated future cash flows to be received include interest, which is recognized over the remaining term of the note. The cost recovery method recognizes interest revenue only after cash equal to the new carrying value is collected. During Year 3, total collections surpassed the $25,000 new carrying value. $3,000 of interest revenue is recognized under this method in Year 3 ($28,000 - $25,000).
Under IFRS, a cash generating unit (CGU) is:
A. The smallest business segment.
B. Any grouping of assets that generates cash flows.
C. Any group of assets that are reported separately to management.
D. The smallest group of assets that generates independent cash flows from continuing use.
A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.
When a note receivable is determined to be impaired,
A. The note is written-off.
B. No recognition of the impairment is required until a formal troubled-debt restructuring takes place.
C. The note is written down to the nominal sum of future cash flows expected to be collected, including interest.
D. A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received.
D. A note is considered to be impaired if the present value of remaining cash flows is less than book value, using the rate in the note. This is caused by an expected delay in timing of cash flows or reduction in amount of cash flows compared with the original agreement. The creditor makes the determination that the note is impaired and writes the note down to present value. A loss is recorded for the decline in carrying value to present value.
T/F: Under IFRS, the impairment loss on the write down of a loan receivable is not recoverable.
T/F: According to IFRS, value in use is the discounted present value of future cash flows arising from use of the asset and from its disposal.