Trade Receivables Flashcards
(22 cards)
Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales, only sales on account. Some customers take advantage of the discount, resulting in discounting of only 50% of eligible credit sales. Delta uses the gross method of recording sales and trade receivables. An analysis of Delta’s trade receivables balances on December 31, Year 3, 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 5%
In its December 31, Year 3, balance sheet, what amount should Delta report for allowance for discounts?
A. $1,000
B. $1,620
C. $1,675
D. $2,000
A. $1,000
Read the problem more thoroughly
The following information relates to Jay Co.’s accounts receivable for Year 2:
Accounts receivable, 1/1/Year 2 $ 650,000
Credit sales 2,700,000
Accounts written off 40,000
Collections from customers 2,150,000
Estimated future sales returns at 12/31/Year 2 50,000
Estimated allowance for credit losses 110,000
What amount should Jay report as gross accounts receivable on December 31, Year 2?
A. $1,050,000
B. $1,110,000
C. $1,160,000
D. $1,200,000
C. $1,160,000
Accounts written off is included in Gross AR I guess.
On July 1, Year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. The fair value option was not elected. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, Year 1 and Year 2. On July 1, Year 2, Kay discounted the note at a bank at an interest rate of 12%. Kay’s proceeds from the discounted note were
A. $48,400
B. $49,350
C. $50,350
D. $51,700
D. $51,700
The discount is based on the bank’s discount rate (ie, 12%) and the time remaining from the discount date until the maturity date (eg, December 31, Year 2). In this scenario, Kay Corp. discounts the note for which it received a $50,000 principal payment plus accrued interest. Now the outstanding balance is $50,000 ($100,000 − $50,000). At the time of discounting, the note has six months remaining until maturity. However, interest due at maturity is calculated from the last payment date (ie, one year accrued from 12/31/Y1 to 12/31/Y2). Net proceeds will be $51,700, calculated as follows:
Face value of N/R
$100,000
− Principal payment
(50,000)
Outstanding balance
$50,000
+ Interest at maturity ($50,000 × 10% × 12/12) 5,000
MV
$55,000
− Bank’s discount ($55,000 × 12% × 6/12) (3,300)
Net cash proceeds
$51,700
On January 2, Year 2, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest bearing note due January 2, Year 5. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, Year 2, was 10%. The present value of 1 at 10% for three periods is 0.75. In Emme’s Year 2 income statement, what amount should be reported as interest income?
A. $9,000
B. $45,000
C. $50,000
D. $60,000
B. $45,000
Interest on PV of note.
What does without recourse mean when factoring receivables
The risk of collecting the receivables transfers to the buyer (without the company)
What does with recourse mean when factoring receivables
The risk of collecting the receivables stays with the seller (within the company)
In its December 31, Year 4 balance sheet, Demark Inc. reported accounts receivable of $800,000 before allowance for credit losses of $25,000. Credit sales during Year 5 were $630,000, and collections from customers, excluding recoveries of $5,000, totaled $740,000. During Year 5, accounts receivable of $20,000 were written off. Demark estimated that $35,000 of the accounts receivable at December 31, Year 5, was uncollectible. In its December 31, Year 5 balance sheet, what amount should Demark report as accounts receivable before allowance for credit losses?
A. $635,000
B. $670,000
C. $675,000
D. $690,000
B. $670,000
The reinstated accounts will both be debited and credited.
What does the T account for AR look like?
Beg. Balance Ending Balance
Credit sales Write offs
Reinstated accts Recovery collections
End Balance
On December 31, Year 1, 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, Year 1, was 8%. The compound interest factors are as follows:
Future value of $1 due in nine months at 3% 1.0225
Future value of $1 due in five years at 3% 1.1593
Present value of $1 due in nine months at 8% .944
Present value of $1 due in five years at 8% .680
Jet does not use the fair value option for reporting its financial assets. At what amounts should these two notes receivable be reported in Jet’s December 31, Year 1, balance sheet?
A. $9,440 $6,800
B. $9,652 $7,820
C. $10,000 $6,800
D. $10,000 $7,820
D. $10,000 $7,820
Must include the interest
Here, both notes are at an unreasonable interest rate (ie, 3%). The note from Hart meets both of the above requirements: due within nine months and made under customary trade terms. Therefore, the interest component can be ignored, and the note is recorded at its $10,000 face value (Choices A and B). However, the note from Maxx fails to meet the requirements and is recorded at PV using the fair rate of interest (ie, 8%).
Maxx’s PV is $7,820 as shown below.
Face value $10,000
Interest payable at maturity 1,500*
Maturity value $11,500
PV factor (single sum, 8%) × .680
PV $7,820
*($10,000 × 3% × 5 years)
In Year 4, a company has a two-year $50,000, 8% interest bearing note receivable. In Year 5, when there is one year remaining on the note, the company discounted the note with recourse to a local bank which has a 10% discount rate. Which of the following statements is not true regarding the discounting of the note receivable in Year 5?
A. The company received $52,200 cash proceeds from the bank.
B. The company recorded a note receivable discounted for $50,000.
C. The company recorded a current liability of $58,000.
D. The company disclosed, in the footnotes to the financial statements, a contingent liability of $58,000.
C. The company recorded a current liability of $58,000.
The discounting can be with recourse (ie, seller retains risk of uncollectibility) or without recourse. For N/R that have been discounted with recourse, it is reasonably possible the customer may default. Therefore, the company is not required to record a liability but instead must disclose, in the footnotes to the financial statements, the amount that might have to be paid (ie, the MV) to the bank as a contingent liability.
The company has discounted a $50,000, 8% N/R, subject to a 10% discount rate. The proceeds are $52,200, as shown below (Choice A).
Face value of N/R
$50,000
+ Interest at maturity ($50,000 × 8% × 2 years) 8,000
Maturity value
$58,000
− Bank’s discount ($58,000 × 10% × 1 year) (5,800)
Net cash proceeds
$52,200
Because the N/R was discounted with recourse, the company will record a $50,000 note receivable discounted (a contra account) and disclose the $58,000 MV in the footnotes as a contingent liability (Choices B and D).
What is the journal entry for writing off an AR?
Debit allowance for credit losses
Credit AR
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser recognizes credit losses according to the current expected credit loss model. What impact would the write-off have on net income and total assets?
Net income Total assets
A. Decrease Decrease
B. Decrease No effect
C. No effect Decrease
D. No effect No effect
D. No effect No effect
The write off entry is debiting Allowance and crediting AR so there is nothing affected on the IS and the assets balance out.
Under the current expected credit loss (CECL) model, what impact will collecting a previously written-off account have on the balances of accounts receivable and allowance for credit losses?
AccountsreceivableAllowance forcredit losses
A. No change Decrease
B. No change Increase
C. Increase Decrease
D. Increase No change
B. No change Increase
You are only looking at the reinstating JE and the collecting JE which is why AR doesn’t change and Allowance increases.
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
B. $5,560
Leaf Co. purchases a $20,000 face value N/R with a net present value of $19,485, indicating there is $515 discount. The $515 will be amortized as additional interest revenue. Because the future value of the N/R is $25,045 ($5,009 × 5 payments), Leaf will earn interest revenue of $5,045 ($25,045 − $20,000) (Choice A). Therefore, the total interest revenue is $5,560 ($5,045 + $515).
On August 1, Year 1, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. Note principal, together with all interest, is due February 28, Year 2. The journal entry that the company should make on December 31, Year 1, should include which of the following as a debit?
A. Discount on notes receivable.
B. Interest receivable.
C. Prepaid interest.
D. Interest revenue.
B. Interest receivable.
Which following statement is a correct statement about the direct write-off method for calculating credit loss expense?
A. It is in accordance with GAAP.
B. It uses an allowance for credit losses account.
C. It tends to understate accounts receivable on the balance sheet.
D. It recognizes credit loss expense when a specific account is determined to be uncollectible.
D. It recognizes credit loss expense when a specific account is determined to be uncollectible.
A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers.
Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the company at any point in time, assuming a 365-day year?
A. $684.93
B. $1,808.22
C. $27,123.30
D. $45,205.48
D. $45,205.48
This answer is correct. The average accounts receivable balance is calculated as: Credit sales per day x Average collection period = [(10,000 units × $66 unit price) / 365] × 25 days = $45,205.48. To get average credit sales per day, first calculate annual sales (10,000 units × $66 per unit), then divide by 365 days = $660,000/365 = $1,808.22 per day. Once you have that, multiply by the average collection period, which is given as 25 days. Therefore, you have $1,808.22 per day outstanding × 25 days = $45,205.48.
On July 1, Year 1, 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, Year 1?
A. $188,000
B. $190,000
C. $193,800
D. $194,000
B. $190,000
Non interest bearing so you take 200,000 less 10,000 (200,000.106/12)
Last year, an entity wrote off a $3,000 accounts receivable that was deemed uncollectible. During the current year, the entity recovered $2,000 of the $3,000 account previously written off. All of the following statements regarding the recovery of the accounts receivable are true except:
A. Accounts receivable balance is unchanged.
B. Carrying value of accounts receivable decreases.
C. Allowance for credit losses balance increases.
D. Credit loss expense decreases.
D. Credit loss expense decreases.
On November 1, Year 2, Davis Co. discounted, with recourse, a $20,000, 10%, one-year, interest-bearing note receivable. The note is scheduled to mature on January 31, Year 3, and the bank’s discount rate is 12%. What amount, if any, must Davis disclose as a contingent liability for the year ended December 31, Year 2?
A. $0
B. $20,000
C. $21,340
D. $22,000
D. $22,000
For N/R that have been discounted with recourse, it is reasonably possible that the customer will default. Therefore, the company must disclose, in the footnotes to the financial statements, the amount that might have to be paid (ie, maturity value) to the bank as a contingent liability(Choice A). The company generally records a corresponding contra account, notes receivable discounted, to offset the N/R on the balance sheet.
Note: N/R discounted without recourse have essentially been sold and are removed from the balance sheet.
Because Davis Co. discounted the note with recourse, it must disclose the maturity value, $22,000 ($20,000 + [$20,000 × 10% × 12/12]), as a contingent liability.
Frame Co. has an 8% note receivable dated June 30, Year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, Year 2, Year 3, and Year 4. The fair value option is not elected and there is no allowance for credit losses. In its June 30, Year 3, 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
C. $8,000
In general, when an entity has a note receivable (N/R), it is originally measured as the principal balance of the loan, reduced by an allowance for credit losses and adjusted for any discount or premium. It is carried at its amortized cost unless the fair value election is made. For each period, the interest is calculated on the outstanding principal of the N/R or the carrying value if a discount or premium is involved.
Frame Co. has an interest-bearing N/R, due in installments, plus an accrued interest. Because no discount or premium exists, the carrying value of the note is the same as the outstanding principal. The company has a June 30 year end and the payment is not due until July 1 of the following year, so a full year of interest revenue must be reported. On June 30, Year 3, the N/R has a balance of $100,000 ($150,000 − $50,000 installment). The interest receivable is $8,000 ($100,000 × 8% × 12/12). The journal entries are:
June 30, Year 3
Interest receivable 8,000
Interest revenue
8,000
July 1, Year 4
Cash 58,000
Notes receivable
50,000
Interest receivable
8,000
Bee Co.’s accounts receivable balance at December 31, Year 2, increased over its January 1, Year 2, beginning balance. At December 31, Year 2, how would Bee Co. determine the amount of cash collected from customers?
A. Deduct from credit sales the accounts written off and deduct any increase in accounts receivable balance.
B. Add to credit sales the accounts written off and deduct any increase in accounts receivable balance.
C. Deduct from credit sales the accounts written off and add any increase in accounts receivable balance.
D. Add to credit sales the accounts written off and add any increase in accounts receivable balance.
A. Deduct from credit sales the accounts written off and deduct any increase in accounts receivable balance.
Accounts receivable (A/R) result from sales of goods or services on credit. Changes in the A/R balance are affected by various transactions during the year. A/R beginning balance is increased by credit sales and the reinstatement of written-off accounts. It is decreased by accounts written off and cash collections from customers (including collections from recovered accounts).
Although GAAP requires the accrual basis of accounting because it provides more relevant information than the cash basis, there are times when it may be necessary to convert from the accrual basis to a cash basis (eg, direct method of the statement of cash flows).
In this case, analyzing the transactions that affect accounts receivable, Bee Co. can solve for cash collected from customers as follows:
Credit sales $XXX
Deduct: write-offs (XXX)
Deduct: increase in the A/R balance (XXX)
Equals: cash collected from customers $XXX
Note: The difference between the ending A/R balance and beginning A/R balance will result in either an increase in A/R, which is deducted, or a decrease in A/R, which is added.
