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Flashcards in FAR 11 Deck (23):
1

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

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).

2

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

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).

3

Ace Co. sold King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows:

8% 3.992
9% 3.890
What should be the total interest revenue earned by King on this note?

A. $9,000
B. $8,000
C. $5,560
D. $5,050

Total interest over the life of the note equals the total amount paid by Ace over the life of the note less the proceeds to Ace. The proceeds equal the present value of the payments at the 9% yield rate. The annual payment is found using the 8% rate because that rate is contractually set and determines the annual payment.
The annual payment P is found as: $20,000 = P(3.992). P = $5,010

Total interest revenue = total payments by Ace - proceeds to Ace
= 5($5,010) - $5,010(3.89) = $5,560.

4

Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?
A. $540,000
B. $523,810
C. $513,000
D. $495,238

Maturity value of the note: $500,000(1.08)
$540,000
Less discount to the bank: $540,000(.10)(6/12)
(27,000)
Equals proceeds to Roth
$513,000
The bank charges its discount on the maturity amount, for the period it holds the note. In effect, it is charging interest on interest yet to accrue (for the last six months). This procedure is followed because the maturity value is the amount at risk.

5

Garr Co. received a $60,000, 6-month, 10% interest-bearing note from a customer. After holding the note for two months, Garr was in need of cash and discounted the note at the United Local Bank at 12%.
The amount of cash Garr received from the bank was
A. $60,480
B. $60,630
C. $61,740
D. $62,520

The calculation leading to the correct answer is:
Maturity value of the note: $60,000 + $60,000(.10)(6/12) =
$63,000
Less discount to bank: $63,000(.12)(4/12) =
2,520
Equals proceeds to Garr
$60,480
The bank charges its discount on the maturity value of the note, for the period of time it will hold the note.

6

On July 1, 2005, Lee Co. sold goods in exchange for a $200,000, 8-month, noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12%.
What amount did Lee receive when it discounted the note at 10% on September 1, 2005?

A. $194,000
B. $193,800
C. $190,000
D. $188,000

Six months remain in the note term at the date of discounting.

Maturity value of note:
$200,000
Less discount: $200,000(.10)(6/12)
(10,000)
Equals proceeds on note
$190,000

7

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. Factor the receivables outstanding.

Factoring is a sale of receivables. This allows Red Co. to sell the receivables and receive cash immediately upon sale.

8

After being held for 40 days, a 120-day, 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal
A. Maturity value less the discount at 12%.
B. Maturity value less the discount at 15%.
C. Face value less the discount at 12%.
D. Face value less the discount at 15%.

B. Maturity value less the discount at 15%

The bank charges its discount (its fee) on the maturity value, which is the face value of the note plus 12% interest for 120 days. The bank charges 15% on this amount for the 80 remaining days in the note term. Thus, the proceeds equal the maturity value less its fee.

9

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?
A. Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.
B. Good Neighbor Financing will assume the responsibility of collecting the receivables.
C. Milton will retain control of the receivables.
D. Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.

C. Milton will retain control of the receivables.

In a pledge arrangement, the title remains with the originator, in this case with Milton Co.

10

On April 1, Aloe, Inc. factored $80,000 of its accounts receivable without recourse. The factor retained 10% of the accounts receivable as an allowance for sales returns and charged a 5% commission on the gross amount of the factored receivables. What amount of cash did Aloe receive from the factored receivables?
A. $68,000
B. $68,400
C. $72,000
D. $76,000

The net cash received when the receivables were factored was $80,000 x .85 (100% - 10% - 5%) = $68,000.

11

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?

A. $0
B. $20,000
C. $20,333
D. $20,500

D. $20,500

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.

12

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.

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.

13

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
Yes Yes
No No
Yes No
No Yes

Interest Method Cost Recovery Method
Yes Yes
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).

14

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 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.

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.

15

Inv:
Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods.
Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?

Insurance premium Advanced commissions
Yes Yes
No No
Yes No
No Yes

Insurance premium Advanced commissions
Yes No

The insurance in transit is included in inventory because it is a cost necessary to bring the inventory into a salable condition. This is the criterion for capitalizing inventory costs.
The advance commissions are not inventoriable. They are not incurred to bring the inventory to a salable condition but rather are selling expenses. The costs will be recognized as such when the goods are sold. At that time, the commission is earned by the consignee and is an expense to the consignor. The commissions are never inventoried.

16

Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data:
Purchases during the year $12.0 million
Shipping costs from overseas 1.5 million
Shipping costs to export customers 1.0 million
Inventory at year end 3.0 million
What amount of shipping costs should be included in Seafood Trading's year-end inventory valuation?

A. $0
B. $250,000
C. $375,000
D. $625,000

C. $375,000
Only transportation-in is treated as a product cost and included in inventory. This cost is considered a cost necessary to bring the inventory to a salable condition. $1.5 million was incurred for this cost - the cost to import. Inventory represents $3/$12 or 25% of total purchases. Therefore, 25% of $1.5 million, or $375,000, of transportation-in is included in inventory. Shipping costs to customers are treated as a period cost.

17

Stone Co. had the following consignment transactions during December 2005:
Inventory shipped on consignment to Beta Co.
$18,000
Freight paid by Stone
900
Inventory received on consignment from Alpha Co.
12,000
Freight paid by Alpha
500
No sales of consigned goods were made through December 31, 2005. Stone's December 31, 2005, balance sheet should include consigned inventory at
A. $12,000
B. $12,500
C. $18,000
D. $18,900`

$18,900

The $18,900 amount to be included in consigned inventory (this would be included in Stone's ending inventory) = $18,000 + $900 freight.
This inventory is owned by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition and location. The inventory Stone received on consignment is not an asset of Stone's and is not included in Stone's inventory. Stone is helping to sell Alpha's inventory, just as Beta is helping to sell Stone's inventory.

18

King Corp.'s trial balance for the year ended December 31, 2005, included the following:

Debit Credit
Sales $300,000
Cost of sales $120,000
Administrative expenses 30,000
Loss on sale of equipment 18,000
Sales commissions 20,000
Interest revenue 10,000
Freight-out 6,000
Loss on early retirement of long-term debt 20,000
Bad debt expense 6,000 __________
$220,000 $310,000
========= =========
Other information
Finished goods inventory:
January 1, 2005 $200,000
December 31, 2005 180,000
In King's 2005 multiple-step income statement, the cost of goods manufactured was

A. $100,000

Finished goods manufactured
+ beginning inventory
- ending inventory
= cost of goods sold
X + $200,000 - $180,000 = $120,000
X = $100,000 = cost of goods manufactured

19

The following items were included in Opal Co.'s inventory account on December 31, 2004:
Merchandise out on consignment, at sales price, including 40% markup on selling price
$40,000
Goods purchased, in transit, shipped FOB shipping point
36,000
Goods held on consignment by Opal
27,000
By what amount should Opal's inventory account at December 31, 2004 be reduced?

A. $103,000
B. $67,000
C. $51,000
D. $43,000

D. $43,000

The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment.
The goods held on consignment should be removed from the inventory because these goods do not belong to Opal.

Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.

20

On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:

Packaging for shipment
$1,000
Shipping
1,500
Special handling charges
2,000
These goods were received on December 31, 2005. In Kerr's December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?

A. $54,500
B. $53,500
C. $52,000
D. $50,000

D. $50,000

Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.

Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr's recorded cost is $50,000.

21

On December 1, 2004, Alt Department Store received 505 sweaters on consignment from Todd. Todd's cost for the sweaters was $80 each, and they were priced to sell at $100. Alt's commission on consigned goods is 10%. December 31, 2004, five sweaters remained.
In its December 31, 2004, balance sheet, what amount should Alt report as payable for consigned goods?

A. $49,000
B. $45,400
C. $45,000
D. $40,400

C. $45,000

A total of 500 sweaters have been sold.
Alt earns 10% of the sales price ($10) as commission, and thus must pay Todd $90 for each sweater sold. Thus, the ending payable balance to Todd is $45,000 ($90 x 500). There is no liability for the sweaters remaining as these assets belong to Todd and are not reflected on Alt's balance sheet.

22

On October 20, 2005, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs.
On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission.
What amount should Grimm recognize as consignment sales revenue for 2005?

A. $7,700
B. $8,500
C. $9,800
D. $10,000

D. $10,000



Consignment sales revenue is the revenue recognized on consignment sales.
In this case, total consignment revenue is 10 x $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.

23

What is the appropriate treatment for goods held on consignment?
A. The goods should be included in the ending inventory of the consignor.
B. The goods should be included in ending inventory of the consignee.
C. The goods should be included in cost of goods sold of the consignee only when sold.
D. The goods should be included in cost of goods sold of the consignor when transferred to the consignee.

A. The goods should be included in the ending inventory of the consignor

Consigned goods belong to the consignor and are included in the consignor's ending inventory.