Flashcards in FAR 9 - Cash and Cash Equivalents and Receivables 1 Deck (24):
On October 31, 2005, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15, 2005, payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in Dingo's October 31, 2005, classified balance sheet?
A. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability.
C. The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.
D. The segregated and regular accounts should be reported as current assets net of the overdraft.
A. The accounts are with different banks. Thus, the accounts cannot be offset against one another.
The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount.
The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.
T/F: The effective rate of interest on a 1-year, 5%, $5,000 loan requiring a $300 compensating balance to be maintained is 5.3%.
T/F: Bank overdrafts must be shown as a liability under IFRS.
T/F: U.S. currency is included in cash equivalents.
T/F: Compensating cash balance for a loan is not included in the cash account.
T/F: Cash equivalents are included in the cash account.
Hilltop Co.'s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:
Bank service charge $ 10
Insufficient funds check 650
Checks outstanding 1,500
Deposits in transit 350
Check deposited by Hilltop and cleared by the bank for $125,
but improperly recorded by Hilltop as $152
What is the net cash balance after the reconciliation?
The reconciling items that need to be adjusted to the bank balance are: checks outstanding (-1,500) and deposit in transit (+350). The net cash after the reconciliation is: Bank balance $54,200 - 1,500 + 350 = $53,050. The bank service charge and insufficient funds are already reflected in the bank balance. The error is on Hilltop's books, not on the bank statement and therefore does not need to be included in the reconciliation.
On June 30, Almond Co.'s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond's general ledger balance as $59. The check was correctly listed in the bank statement at $95.
The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50.
What was Almond's adjusted cash balance on June 30?
The adjusted cash balance is computed as $10,012 - corrected #101 amount ($95 - $59) + $35 interest - $50 service charge = $9.96. Check #101 was recorded for $59 but should have been recorded for $95.
T/F: A note is collected by the bank as part of its services to the depositor. The note is interest bearing and requires the interest to be paid at maturity. The adjusting entry to be recorded when the reconciliation is prepared includes Cr. Notes receivable only.
T/F: Sales discounts forfeited is contra to accounts receivable.
T/F: The gross method of accounting for cash discounts separately records cash discounts not taken by customers.
T/F: The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. The amount remitted is $39.51
T/F: The gross and net methods of recording sales discounts yield the same net sales if customers take all available discounts.
T/F: Allowance for sales discounts is contra to accounts receivable.
Under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account
A. Increases the allowance for uncollectible accounts.
B. Has no effect on the allowance for uncollectible accounts.
C. Has no effect on net income.
D. Decreases net income.
C. The entry is
Dr. Allowance for uncollectible accounts
Cr. Accounts receivable
This entry decreases the allowance because the purpose for which the account was created has now been realized (an uncollectible account). The entry has no effect on income because neither account in the entry is an income account.
When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would
A. Increase the allowance for uncollectible accounts.
B. Increase net income.
C. Decrease the allowance for uncollectible accounts.
D. Have no effect on the allowance for uncollectible accounts.
A. The entries are:
dr. Accounts receivable
cr. Allowance for uncollectibles
cr. Accounts receivable
The first entry reinstates the amount of allowance used up when the account was originally written off. The normal balance in the account is a credit. The first entry increases the account.
In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000.
What is the total amount of risk of accounting loss related to Butler's trade accounts receivable, and what amount of that risk is off-balance sheet risk?
Risk of accounting loss / Off-balance sheet risk
This question requires an understanding of two accounting concepts:
1. Risk of accounting loss on accounts receivable (credit risk). This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler's net carrying value of accounts receivable is $230,000 ($250,000 - $20,000), that is the amount of risk of accounting loss.
2. Off-balance sheet risk: This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler's net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.
Rue Co.'s allowance for uncollectible accounts had a credit balance of $12,000 on December 31, 2002. During 2003, Rue wrote-off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for uncollectible accounts was required on December 31, 2003. What amount of uncollectible accounts expense should Rue report for 2003?
The preadjusted ending 2003 allowance balance is a $36,000 debit ($12,000 cr. beginning balance - $48,000 dr. from write-offs). When accounts are written off, the allowance is debited and accounts receivable is credited. The aging schedule indicates that a $50,000 ending credit allowance balance is required. Therefore, $86,000 of uncollectible accounts expense must be recognized to change the allowance balance from $36,000 dr. to $50,000 cr. An equation or T account approach also can be used to analyze the allowance account: Beginning balance $12,000 - write-offs $48,000 + uncollectible accounts expense (?) = Ending balance $50,000. Solving for uncollectible accounts expense yields $86,000.
T/F: The entry to write off an account under the direct write-off method will have no effect on net income.
T/F: In most cases, the direct write-off method of accounting for uncollectible accounts is not permissible under US GAAP.
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?
The ending allowance balance equals:
Beginning balance - write-offs + 2% of credit sales =
$260,000 - $325,000 + .02($9,000,000) = $115,000
Write-offs reduce the allowance balance, and the adjusting entry at the end of the year recognizes 2% of credit sales as bad debt expense by increasing the allowance balance.
Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for 2004 were $1,000,000. During 2004, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 2004. In its December 31, 2004 income statement, what amount should Ward report as uncollectible accounts expense?
The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% x $1,000,000 = $20,000.
T/F: The entry to write off an account under the allowance method has no effect on net accounts receivable.