Chapter 7 Cash and Receivables Complete Test Bank - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
CHAPTER 7
CASH AND RECEIVABLES
CHAPTER STUDY OBJECTIVES
1. Understand cash and accounts receivable from a business perspective. Companies often have a significant amount of accounts receivable, which require time and effort to manage and control. Companies strive to ensure that their collection policy is restrictive enough to minimize large losses in the form of uncollectible accounts receivable, while not being so restrictive that it interferes with the ability to attract new customers. Typical accounts receivable related categories include trade receivables, loans receivable, and nontrade receivables (including items like interest receivable and amounts due from officers, and advances to employees).
2. Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported. Financial assets are a major type of asset, defined as cash, a contractual right to receive cash or another financial asset, an equity holding in another company, or a contractual right to exchange financial instruments under potentially favourable conditions. To be reported as cash, an asset must be readily available to pay current obligations and not have any contractual restrictions that would limit how it can be used in satisfying debts. Cash consists mainly of coins, currency, and available funds on deposit at a bank. Savings accounts are usually classified as cash. Cash equivalents include highly liquid short-term investments (that is, those maturing three months or less from the date of purchase) that can be exchanged for known amounts of cash and have an insignificant chance of changing in value. Examples include treasury bills, commercial paper, and money-market funds. In certain circumstances, temporary bank overdrafts may be deducted in determining the balance of cash and cash equivalents.
Cash is reported as a current asset in the SFP, with foreign currency balances reported at their Canadian dollar equivalent at the date of the SFP. The reporting of other related items is as follows: (1) Restricted cash: Legally restricted deposits that are held as compensating balances against short-term borrowing are stated separately in current assets. Restricted deposits held against long-term borrowing arrangements are separately classified in non-current assets either in investments or other assets. (2) Bank overdrafts: These are reported in the current liabilities section and may be added to the amount reported as accounts payable. (3) Cash equivalents: This item is often reported together with cash as “cash and cash equivalents.”
3. Define receivables, and identify the different types of receivables from an accounting perspective. Receivables are claims held against customers and others for money, goods, or services. Most receivables are financial assets. The receivables are described in the following ways: (1) current or non-current; (2) trade or nontrade; and (3) accounts receivable or notes or loans receivable.
4. Account for and explain the accounting issues related to the recognition and measurement of accounts receivable. The entity becomes a party to the contractual provisions of the accounts receivable financial instrument only when it has a legal claim to receive cash or other financial assets. Therefore, the timing of recognition of accounts receivable is intertwined with the timing of recognition of revenue, as we discussed in Chapter 6. For most companies, when the sale is recognized, either cash is received (realized) or an account receivable is recognized.
Two issues that may complicate the measurement of accounts receivable are (1) the availability of discounts (trade and cash discounts) and (2) the length of time between the sale and the payment due dates (the interest element). Ideally, receivables should be measured initially at their fair value, which is their present value (discounted value of the cash to be received in the future). Receivables that are created by normal business transactions and are due in the short term are excluded from present value requirements.
5. Account for and explain the accounting issues related to the impairment in value of accounts receivable. Short-term receivables are reported at their net realizable value—the net amount that is expected to be received in cash, which is not necessarily the amount that is legally receivable. Determining net realizable value requires estimating uncollectible receivables and any future returns or allowances and discounts that are expected to be taken. The adjustments to the asset account also affect the income statement amounts of loss on impairment, sales returns and allowances, and sales discounts. The assessment of impairment is usually based on an aged accounts receivable report, with higher percentages of uncollectible accounts shown for older amounts outstanding. Even if a company estimates losses on impairment each period as a percentage of sales, the accounts receivable at the date of the SFP are analyzed to ensure the balance in the allowance account is appropriate.
6. Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable. The accounting issues for short-term notes receivable are similar to those of accounts receivable. However, because notes always contain an interest element, interest income must also be properly recognized. Notes receivable either bear interest on the face amount (interest-bearing) or have an interest element that is the difference between the amount lent and the maturity value (non–interest-bearing). Long-term notes and loans receivable are recognized initially at their fair value (the present value of the future cash flows) and subsequently at their amortized cost. Transaction costs are capitalized. This requires amortizing any discount if the item was issued at less than its face value, or any premium if it was issued for an amount greater than its face value, using the effective interest method. The straight-line method may be used under ASPE. Amortization of the premium (or discount) results in a reduction of (or increase in) interest income below (or above) the cash amount received.
7. Account for and explain the basic accounting issues related to the derecognition of receivables. To accelerate the receipt of cash from receivables, a company may transfer its receivables to another entity for cash. The transfer of receivables to a third party for cash may be done in one of two ways: (1) Secured borrowing: The creditor requires the debtor to designate or pledge receivables as security for the loan. (2) Sale (factoring or securitization) of receivables: Factors are finance companies or banks that buy receivables from businesses and then collect the remittances directly from the customers. Securitization is the transfer of receivables to a special purpose entity that is mainly financed by highly rated debt instruments. In many cases, transferors have some continuing involvement with the receivables they sell. For the transfer to be recorded as a sale, IFRS focuses on whether the risks and rewards of ownership have been transferred to the transferee. ASPE focuses on whether the transferor has surrendered control and has continued involvement with the receivables.
8. Explain how receivables and loans are reported and analyzed. Disclosure of receivables requires that (1) valuation accounts be appropriately offset against receivables, (2) the receivables be appropriately classified as current or non-current, and (3) pledged or designated receivables be identified. As financial instruments, specific disclosures are required for receivables so that users can determine their significance to the company’s financial position and performance and can assess the nature and extent of associated risks and how these risks are managed and measured. Private entities require less disclosure than those reporting under IFRS. Receivables are analyzed in terms of their turnover and age (number of days outstanding), and in terms of relative changes in the related sales, receivables, and allowance accounts.
9. Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future. The two sets of standards are very similar, with minor differences relating to what is included in cash equivalents. ASPE does not require use of the effective interest method, whereas IFRS does require it for financial asset investments that are not held for trading purposes. Impairment provisions were updated when IFRS 9 was issued, and the changes under IFRS 9 have led to additional differences between IFRS and ASPE.
10. Explain common techniques for controlling cash. The common techniques that are used to control cash are as follows: (1) Using a variety of bank accounts: A company can vary the number and location of banks and the types of accounts to meet its control objectives. (2) The imprest petty cash system: It may be impractical to require small amounts of various expenses to be paid by cheque, yet some control over them is important. (3) Physical protection of cash balances: Adequate control of receipts and disbursements is part of protecting cash balances. Every effort should be made to minimize the cash on hand in the office. (4) Reconciliation of bank balances: Cash on deposit is not available for counting and is proved by preparing a bank reconciliation.
Answer No. Description
b 1. Management of accounts receivable
b 2. Management of accounts receivable
d 3. Management of accounts receivable
c 4. Management of shareholder receivable
a 5. Management of accounts receivable
d 6. Definition of financial asset
a 7. Identification of cash item
c 8. Identification of cash item
d 9. Classification of bank overdraft
b 10. Classification of bank overdraft
c 11. Compensating balance
c 12. Reporting cash in the statement of financial position
b 13. Calculation of cash in the statement of financial position
d 14. Reporting of nontrade receivables
a 15. Nontrade receivables
d 16. Classification of dividends and interest receivable
b 17. Calculation of current net receivables
b 18. Loan receivable
c 19. Note receivable
b 20. Standards for recognition and measurement of accounts receivable
c 21. Trade discounts
b 22. Classification of sales returns and allowances
a 23. Non-recognition of interest element
c 24. Valuation of short-term receivables
a 25. Valuation of receivables
b 26. Recording of receivables
c 27. Recording of receivables when discount is not taken
d 28. Calculation of net realizable value of accounts receivable
a 29. Sales returns (ASPE)
c 30. Sales returns (IFRS)
c 31. Definition of credit risk
b 32. Classification of allowance for expected credit losses
c 33. Write off of receivables
a 34. Loss on impairment and the matching concept
b 35. Direct write-off method
c 36. Effect of write-off entry
d 37. Collection of a previously written off account receivable
a 38. Relation of loss on impairment to accounts receivable
b 39. Identification of impaired accounts receivable
c 40. Recording loss on impairment
b 41. Calculation of loss on impairment using aging of receivables
d 42. Calculation of loss on impairment
c 43. Calculation of loss on impairment
a 44. Calculation of actual loss on impairment
b 45. Calculation of allowance for expected credit losses balance
b 46. Calculation of allowance for expected credit losses (percentage of sales)
b 47. Direct write-off
c 48. Notes receivable
d 49. Recording of notes receivable
a 50. Recording of revenue
c 51. Straight-line method of amortization
c 52. Valuation of notes receivable
b 53. Note issued at less than face value
a 54. Note issued above face value
d 55. Present value of zero-interest-bearing note
a 56. Recording notes receivable at year end
b 57. Calculation of implicit interest rate for zero-interest-bearing note
c 58. Recognition of interest income in the first year
b 59. Recognition of interest income in subsequent year
b 60. Calculation of term for a zero-interest-bearing note
c 61. Calculation of term on a note receivable
b 62. Receivables used as collateral
d 63. Factoring of receivables
b 64. Factoring and securitization differences
a 65. Recording a loss on disposal of receivables
c 66. Amount owed when receivables are factored
c 67. Calculation of cash proceeds from transfer of receivables
c 68. Entry to record collection of assigned receivables
b 69. Factoring receivables without recourse
c 70. Factoring receivables with recourse
b 71. Factoring receivables with recourse
a 72. Factoring receivables without recourse
d 73. Accounts receivable turnover ratio
b 74. Liquidity of accounts receivable
d 75. Requirements for presentation and disclosure under IFRS and ASPE
c 76. Receivables turnover ratio
c 77. Accounts receivable turnover ratio
d 78. Days accounts receivable
c 79. Treatment of cash and cash equivalents
a 80. Receivables recognition and measurement
c 81. Straight-line vs. effective interest rate
a 82. Effective interest rate vs. straight-line
c *83. Purpose of Cash Over and Short account
c *84. Bank reconciliation journal entries
b *85. Treatment of bank error on bank reconciliation
c *86. Reconciling item on bank reconciliation
b *87. Cash balance on bank reconciliation
d *88. Entry to replenish petty cash
a *89. Calculation of correct cash balance
b *90. Calculation of correct cash balance
c *91. Calculation of correct cash balance
c *92. Calculation of correct cash balance
a *93. Calculation of correct cash balance
b *94. Calculation of correct cash balance
c *95. Calculation of correct cash balance
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item Description
E7-96 Cash management from a business perspective
E7-97 Accounts receivable planning and control
E7-98 Credit politics
E7-99 Terminology
E7-100 Definitions
E7-101 Reporting of cash
E7-102 Reporting of cash and cash equivalents
E7-103 Restricted cash balances
E7-104 Cash versus cash equivalents or short-term investments
E7-105 Classification of accounts receivable
E7-106 Nontrade receivables
E7-107 Sales returns and allowances (ASPE)
E7-108 Sales returns and allowance (IFRS)
E7-109 Entries for loss on impairment
E7-110 Allowance for expected credit losses
E7-111 Entries for loss on impairment
E7-112 Aged receivables
E7-113 Dishonoured note receivable
E7-114 Amortization of discount on note
E7-115 Schedule of note discount amortization
E7-116 Note with fair value not equal to cash consideration
E7-117 Recognition and measurement of long-term notes receivable
E7-118 Notes received for property/goods
E7-119 Interest rate terminology
E7-120 Zero-interest bearing note
E7-121 Write-off of a zero-interest bearing note
E7-122 Accounts receivable assigned
E7-123 Sales of receivables without recourse
E7-124 Issues with derecognition of accounts receivable
E7-125 Accounts receivable analysis and securitization
E7-126 Presentation and disclosure of receivables
E7-127 ASPE/IFRS differences
*E7-128 Reconciliation of cash account
*E7-129 Bank reconciliations
* E7-130 Control of petty cash
*This topic is dealt with in an Appendix to the chapter.
PROBLEMS
Item Description
P7-131 Entries for loss on impairment
P7-132 Loss on impairment
P7-133 Aged receivables and loss on impairment
P7-134 Notes received for services provided
P7-135 Amortization of discount under the straight-line and effective interest methods
P7-136 Note with fair value not equal to cash consideration
P7-137 Record note receivable
P7-138 Accounts receivable assigned
P7-139 Factoring accounts receivable
P7-140 Reasons for selling receivables
P7-141 Secured borrowings vs. factoring of receivables
P7-142 Receivables management and securitization of receivables
*P7-143 Bank reconciliation
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE
1. Which of the following statements is correct regarding receivables?
a) Receivables are written promises of the purchaser to pay for goods or services.
b) Receivables are claims held against customers and others for money, goods, or services.
c) Receivables are non-financial assets.
d) Receivables that are expected to be collected within a year are classified as non-current.
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
2. Which of the following actions would NOT be considered good management of accounts receivable?
a) assessing creditworthiness of new or potential customers
b) very loose or flexible credit terms to encourage sales
c) offering discounts to encourage faster payment
d) regular aged receivables analysis
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. Which of the following is the reason(s) why companies should monitor accounts receivable levels carefully?
a) to maximize costs of collection
b) to encourage prompt payment from their customers
c) to minimize the stress on working capital and related bank debt
d) B and C only
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. A shareholder approaches the management of the company and asks to borrow $30,000 for a period of 9 months. Management agrees but is unsure of how to book the entry. What is the debit entry?
a) Accounts Receivable
b) Notes Receivable
c) Due from Shareholder
d) Interest Receivable
Difficulty: Medium
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
5. A company that extends credit to its customers should consider several factors. Which of the following would be the highest risk factor?
a) repayment history
b) dollar amount of the transactions
c) length of time given to repay
d) industry that the customer operates in
Difficulty: Medium
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
6. Which of the following is NOT a financial asset?
a) a contractual right to receive cash or other financial asset from another party
b) an equity instrument of another entity
c) a contractual right to exchange financial instruments with another party under potentially favourable conditions
d) a contractual right to pay cash or another financial asset to another party
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
7. Which of the following is considered “cash” for reporting purposes?
a) money-market chequing accounts
b) certificates of deposit (CDs)
c) travel advances to employees
d) postdated cheques
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. A company is preparing its December 31, 2023 year-end reporting and is trying to understand what to include in the total of cash and cash equivalents. The following amounts have been identified:
Operating bank account balance $2,500
15-day treasury bill $3,000
Undeposited cheques dated December 31, 2023 $1,000
Petty cash stored in the back office $300
What is the total amount to be reported in cash and cash equivalents?
a) $5,500
b) $6,800
c) $5,800
d) $3,800
Difficulty: Medium
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
9. Bank overdrafts are generally reported as
a) a current asset.
b) a contra account.
c) a non-current asset.
d) a current liability.
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
10. Bourbon Corp. has the following balances in its bank accounts at June 30. All the below accounts are held with the same financial institution.
Bank Account #1 $3,500
Bank Account #2 ($1,000)
Bank Account #3 $200
What would be reported under Current Assets and/or Current Liabilities with regards to these balances?
a) Cash and cash equivalents $3,700 and Bank overdraft $1,000
b) Cash and cash equivalents $2,700
c) Bank overdraft $1,000
d) Cash and cash equivalents $3,700
Difficulty: Medium
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
11. The portion of any demand deposit that a customer keeps as support for its existing or maturing obligations is called
a) an account receivable.
b) a bank overdraft.
c) a compensating balance.
d) restricted cash.
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
12. Grieves Company has the following items at year end:
Cash in bank $42,000
Petty cash 1,500
Short-term paper with maturity of 2 months 6,500
Postdated cheques 3,400
Grieves should report cash and cash equivalents of
a) $42,000.
b) $43,500.
c) $50,000.
d) $46,600.
Difficulty: Medium
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $42,000 + $1,500 + $6,500 = $50,000
13. Brighton Inc. reported the following amounts:
Cash in bank—chequing account of $37,000
Cash on hand of $1,000
Postdated cheques received totalling $3,500
Certificates of deposit totalling $248,000
How much should be reported as cash in the statement of financial position?
a) $37,000
b) $38,000
c) $45,000
d) $286,000
Learning Objective: Define financial assets and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $37,000 + $1,000 = $38,000
14. Because of their special nature, nontrade receivables are generally
a) reported as cash and cash equivalents.
b) classified and reported as separate items under the noncurrent liabilities section on the statement of financial position.
c) have almost no liquidity.
d) classified in a note that is cross referenced to the statement of financial position.
Difficulty: Medium
Learning Objective: Define receivables, and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
15. Which of the following is NOT an example of a nontrade receivable?
a) amounts arising from sale of goods or services
b) dividends and interest receivable
c) claims against insurance companies for losses suffered
d) amounts owing from a purchaser on sale of capital
Difficulty: Easy
Learning Objective: Define receivables, and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
16. Dividends and interest receivable would be classified as
a) loans receivable.
b) trade receivables.
c) notes receivable.
d) nontrade receivables.
Difficulty: Easy
Learning Objective: Define receivables, and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
17. On Marlon Corp.’s December 31, 2023 statement of financial position, the current receivables consisted of the following:
Trade accounts receivable $ 74,000
Allowance for expected credit losses (3,500)
Claim against shipper for goods lost in transit (Nov. 2023) 4,000
Selling price of unsold goods sent by Marlon on consignment
at 130 percent of cost (not included in Marlon’s ending inventory) 29,000
Security deposit on lease of warehouse used for storing
some inventories 24,000
Total $127,500
At December 31, 2023, the correct total of Marlon’s current net receivables was
a) $78,000.
b) $74,500.
c) $70,500.
d) $66,500.
Difficulty: Medium
Learning Objective: Define receivables, and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $74,000 – $3,500 + $4,000 = $74,500
18. McGee Family Trust made an investment in a local business to finance the growth and expansion of the business. The investment was in the form of a 6%, $500,000 loan repayable in 5 years with interest due annually, and principal due at maturity. How would this appear on the Statement of Financial Position at inception?
a) Loans Payable $500,000
b) Loans Receivable $373,630
c) Loans Receivable $500,000
d) Loans Payable $373,630
Difficulty: Medium
Learning Objective: Define receivables, and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: FV $500,000 x PV Factor .74726 = $373,630
19. White Rabbit Consulting does a variety of strategic planning type of engagements with its clients. Credit terms of 30 days are offered to clients who engage in long-term projects of higher value. Alice Corp. owes White Rabbit Consulting $30,000 for a project that was completed 45 days ago. Alice Corp. is having cash flow problems and cannot currently pay the outstanding amount. White Rabbit has restructured the receivable to be due in 3 months from now and has established a 4% interest rate arrangement. What would be the journal entry to record this transaction?
a) Notes Receivable 30,000
Allowance for Expected Credit Losses 30,000
b) Allowance for Expected Credit Losses 30,000
Accounts Receivable 30,000
c) Notes Receivable 30,000
Accounts Receivable 30,000
d) No entry required as it is still a receivable to White Rabbit Consulting.
Difficulty: Medium
Learning Objective: Define receivables, and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
20. The general accounting standards for recognition and measurement of accounts receivable include
a) measuring the receivable initially at amortized cost.
b) measuring the receivable initially at fair value.
c) after initial recognition, measuring the receivable at fair value.
d) not recognizing the receivable until it is paid.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
21. Trade discounts are generally NOT used to
a) avoid frequent changes in catalogues.
b) quote different prices for different quantities purchased.
c) encourage faster payment.
d) hide the true invoice price from competitors.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
22. “Sales Returns and Allowances” are reported as
a) an expense.
b) a deduction from Sales Revenue.
c) a deduction from Accounts Receivable.
d) an addition to Accounts Receivable.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
23. The interest element for trade receivables
a) is usually not recognized because of materiality considerations.
b) must always be recognized and be accounted for.
c) is included in the net realizable value of the receivables.
d) becomes more significant as the time between the sale and payment shortens.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
24. Assuming that the ideal measure of short-term receivables in the statement of financial position is the discounted value of the cash to be received in the future, failure to follow this practice usually does NOT result in misleading financial statements because
a) most short-term receivables are not interest-bearing.
b) the allowance for uncollectible accounts includes a discount element.
c) the amount of the discount is not material.
d) most receivables can be sold to a bank or factor.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
25. Receivables are initially valued based on
a) fair value.
b) estimated amount collectible.
c) lower-of-cost-and-market value.
d) historical cost.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
26. Playtime sold toys listed at $280 per unit to Jack Inc. for $252. A trade discount of 10 percent is applied. Jack Inc. in turn sells the toys in the market at $265. Jack should record the receivable and related sales revenue (per unit) at
a) $280.
b) $265.
c) $252.
d) $227.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $265 is provided in the question.
27. Cupcake Corp. has sold goods at terms 2/10, n/30. If the discount is not taken, the amount receivable is $8,725. The entry to record the sale is
a) a debit and credit of $7,852.50 to Accounts Receivable and Sales respectively.
b) a debit and credit of $8,550.50 to Accounts Receivable and Sales respectively.
c) a debit and credit of $8,725 to Accounts Receivable and Sales respectively.
d) debits of $8,550.50 and $174.50 to Accounts Receivable and "Sales Discounts Forfeited" respectively, and a credit to Sales for the total.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
28. During the year, Popsicle Inc., which uses the allowance method, made an entry to write off a $4,000 uncollectible account. Before this entry was posted, the balance in accounts receivable was $80,000 and the balance in the allowance account was $7,000. The net realizable value of accounts receivable after the write-off entry was
a) $80,000.
b) $77,000.
c) $76,000.
d) $73,000.
Difficulty: Hard
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($80,000 – $4,000) – ($7,000 – $4,000) = $73,000
29. At year end, Night Sky Inc. started the process to review its $3,500,000 of accounts receivable to estimate what amount outstanding could potentially be returned by the customer. There was a recent memo from the production manager that stated a process error was found in one of the assembly lines potentially causing a defect in the output. As a result, a significant amount of product is expected to be returned. Assuming a 15% estimated return rate, what would be the entry to journalize this under ASPE?
a) Sales Returns and Allowances 525,000
Allowance for Sales Returns and Allowances 525,000
b) Allowance for Bad Debts 525,000
Accounts Receivable 525,000
c) Sales Revenue 525,000
Refund Liability 525,000
d) Bad Debt Expense 525,000
Allowance for Doubtful Accounts 525,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
30. At year end, Gold Sky Inc. started the process to review its $3,500,000 of accounts receivable to estimate what amount outstanding could potentially be returned by the customer. There was a recent memo from the production manager that stated a process error was found in one of the assembly lines, potentially causing a defect in the output. As a result, a significant amount of product is expected to be returned. Assuming a 15% estimated return rate, what would be the entry to journalize this under IFRS?
a) Sales Returns and Allowances 525,000
Allowance for Sales Returns and Allowances 525,000
b) Allowance for Expected Credit Losses 525,000
Accounts Receivable 525,000
c) Sales Revenue 525,000
Refund Liability 525,000
d) Loss on Impairment 525,000
Allowance for Expected Credit Losses 525,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
31. The likelihood of loss because of the failure of the other party to fully pay an amount owed is called
a) accounting risk.
b) loss on impairment.
c) credit risk.
d) currency risk.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
32. “Allowance for Expected Credit Losses” is a(n)
a) expense account.
b) contra account.
c) liability account.
d) current asset.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
33. Using the allowance method, when an account receivable is written off, the account to be debited is
a) Accounts Receivable.
b) Loss on Impairment.
c) Allowance for Expected Credit Losses.
d) Cash.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
34. Which of the following approaches to determine a loss on impairment best achieves the matching concept?
a) percentage of sales
b) percentage of ending accounts receivable
c) percentage of average accounts receivable
d) direct write-off
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
35. The direct write-off method of accounting for the impairment of receivables
a) is never acceptable.
b) is an acceptable method when the effect of not applying the allowance method would be highly immaterial.
c) is specifically disallowed under IFRS.
d) usually results in the same net income as the allowance method.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
36. Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account
a) increases the allowance for expected credit losses.
b) has no effect on the allowance for expected credit losses.
c) has no effect on net income.
d) decreases net income.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
37. Under the allowance method of recognizing uncollectible accounts, the entry to recognize the collection of a previously written off uncollectible account
a) increases net income.
b) has no effect on the allowance for expected credit losses.
c) decreases the allowance for expected credit losses.
d) increases the allowance for expected credit losses.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
38. The advantage of relating a company's loss on impairment to its outstanding accounts receivable is that this
a) gives a reasonably correct valuation of the receivables in the statement of financial position.
b) best relates loss on impairment to the period of sale.
c) is the only generally accepted method for valuing accounts receivable.
d) makes estimates of uncollectible accounts unnecessary.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
39. What is the single most important indicator used to identify impaired accounts receivable?
a) the customer’s payment history
b) the age of the accounts
c) credit reports and references
d) industry in which the company operates
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
40. What is the normal journal entry for recording a loss on impairment under the allowance method?
a) debit Allowance for Expected Credit Losses, credit Accounts Receivable
b) debit Allowance for Expected Credit Losses, credit Loss on Impairment
c) debit Loss on Impairment, credit Allowance for Expected Credit Losses
d) debit Accounts Receivable, credit Allowance for Expected Credit Losses
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
41. The following information is available for Pirate Company:
Allowance for Expected Credit Losses at December 31, 2023 $ 7,000
Credit Sales during 2024 270,000
Accounts Receivable deemed worthless and written off during 2024 2,800
As a result of a review and aging of Accounts Receivable in early January 2025, it was determined that an Allowance for Expected Credit Losses balance of $7,500 is required at December 31, 2024. What amount should Pirate record as loss on impairment for calendar 2024?
a) $4,200
b) $3,300
c) $7,500
d) $74,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $7,000 – $2,800 = $4,200 unadjusted credit balance
$4,200 – $7,500 desired balance = $3,300 loss on impairment
42. Lebanon Ltd. prepared an aging of its accounts receivable at December 31, 2023 and determined that the net realizable value of the receivables was $290,000. Additional information for calendar 2023 follows:
Allowance for expected credit losses, beginning $ 34,000
Uncollectible account written off during year 23,000
Accounts receivable, ending 320,000
Uncollectible accounts recovered during year 5,000
For the year ended December 31, 2023, Lebanon’s loss on impairment should be
a) $20,000.
b) $23,000.
c) $16,000.
d) $14,000.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Allowance for Expected Credit Losses account balance
$34,000 + $5,000 – $23,000 = $16,000 (before loss on impairment)
$320,000 – $290,000 – $16,000 = $14,000 loss on impairment
43. For the year ended December 31, 2023, Ferguson Corp. estimated its allowance for expected credit losses using the year-end aging of accounts receivable. Additional information for calendar 2023 follows:
Allowance for expected credit losses, beginning $74,000
Estimated uncollectible accounts during 2023
(1% of credit sales of $8,000,000) 80,000
Uncollectible accounts written off during year 104,000
Estimated uncollectible accounts per year-end aging 148,000
For the year ended December 31, 2023, Ferguson’s loss on impairment should be
a) $74,000.
b) $104,000.
c) $178,000.
d) $252,000.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $148,000 – $74,000 + $104,000 = $178,000
44. Sudan Ltd.'s allowance for expected credit losses was $85,000 at the end of 2023 and $105,000 at the end of 2022. For the year ended December 31, 2023, Sudan reported a loss on impairment of $18,000 in its income statement. What amount did Sudan debit to allowance for expected credit losses during 2023 to write off actual bad debts?
a) $38,000
b) $34,650
c) $20,000
d) $12,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
Feedback: $105,000 + $18,000 – $85,000 = $38,000
45. The following accounts were included on Mali Co.'s unadjusted trial balance at December 31, 2023:
Debit Credit
Accounts receivable $850,000
Allowance for expected credit losses 11,000
Net credit sales $2,950,000
Mali estimates that 1.5 % of the gross accounts receivable will become uncollectible. After the proper adjustment at December 31, 2023, the allowance for expected credit losses should have a credit balance of
a) $23,750.
b) $12,750.
c) $11,000.
d) $1,750.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
46. Golden Arch Inc. uses the percentage of sales approach to estimate its allowance for expected credit losses. Credit sales for the year was $1,800,000 and management estimates 1.75% of credit sales to be uncollectible. What would be the balance in the allowance for expected credit losses account if the fiscal year opening balance was $40,000?
a) $31,500
b) $71,500
c) $8,500
d) $40,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $40,000 + ($1,800,000 * .0175)
47. Carry It All Ltd. Is a small retailer of household items in the local community. Sales are always made in exchange for cash payment. On an exception basis, the store owner decided to let a customer pay in 15 days. The amount of the sale was $55. Three months have passed, and the customer has been unreachable. The store owner has decided to write off the account receivable using the direct write-off method. What is the journal entry?
a) Loss on Impairment 55
Allowance for Expected Credit Losses 55
b) Loss on Impairment 55
Accounts Receivable 55
c) Allowance for Expected Credit Losses 55
Accounts Receivable 55
d) Allowance for Expected Credit Losses 55
Loss on Impairment 55
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
48. Which of the following statements is correct?
a) There is no interest included in a zero-interest-bearing note.
b) A long-term note’s fair value and present value are always the same.
c) All notes contain an interest element because of the time value of money.
d) A note is signed by the payee in favour of the maker.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
49. At the beginning of 2023, Graham Company received a three-year zero-interest-bearing $5,000 trade note. The market rate for equivalent notes was 10% at that time. Graham reported this note as a $5,000 trade note receivable on its 2023 year-end statement of financial position and $5,000 as sales revenue for 2023. What effect did this accounting for the note have on Graham's net earnings for 2023, 2024, 2025, and its retained earnings at the end of 2025, respectively?
a) overstate, overstate, understate, zero
b) overstate, understate, understate, understate
c) overstate, overstate, overstate, overstate
d) overstate, understate, understate, zero.
Difficulty: Hard
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: The answer is overstate, understate, understate, zero.
50. Assume Sentinel Corp., an equipment distributor, sells a piece of machinery with a list price of $700,000 to Arch Inc. Arch Inc. will pay $725,000 in one year. Sentinel Corp. normally sells this type of equipment for 80% of list price. How much should be recorded as revenue?
a) $560,000
b) $580,000
c) $700,000
d) $725,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $700,000 × .80 = $560,000
51. The straight-line method of amortization for the discounts and premiums of long-term notes
a) is allowed by both IFRS and ASPE.
b) reflects the economic reality of the loan.
c) is only allowed by ASPE.
d) requires more complicated calculations than the effective interest method.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
52. When the stated rate and market rate of a note receivable are the same,
a) the note's face value would be different.
b) the note’s face value would be indeterminable.
c) the note's face value and fair value would be the same.
d) it must be a zero-interest-bearing note.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
53. If a note receivable was issued at an amount that is less than its face value, then
a) the note was issued at a premium.
b) the note was issued at a discount.
c) the note's stated rate was the same as the prevailing market rate of interest.
d) it must be a zero-interest-bearing note.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
54. If a note receivable was issued at an amount that is more than its face value, then
a) the note was issued at a premium and the note's stated rate was different from the prevailing market rate of interest.
b) the note was issued at a premium and the note's stated rate was the same as the prevailing market rate of interest.
c) the note was issued at a discount and the note's stated rate was the same as the prevailing market rate of interest.
d) the note was issued at a discount and the note's stated rate was different from the prevailing market rate of interest.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
55. When a zero-interest-bearing note is issued, its present value is
a) zero.
b) the face value plus interest.
c) the face value.
d) the cash paid to the issuer.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
56. On December 31, 2023, Flint Corporation sold for $100,000 an old machine having an original cost of $180,000 and a book value of $80,000. The terms of the sale were as follows:
$20,000 down payment,
$40,000 payable on December 31 each of the next two years.
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2023, rounded to the nearest dollar?
a) $70,364
b) $90,364
c) $80,000
d) $140,728
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911
$40,000 × 1.75911 = $70,364
57. Cookie Ltd. receives a four-year, $100,000, zero-interest-bearing note. The present value of this note is $82,270. What is the implicit rate of interest?
a) 3%
b) 5%
c) 7%
d) 9%
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 4 n, –82,270 PV, 100,000 FV, CPT I = 5%
58. Cookie Ltd. receives a four-year, $100,000, zero-interest-bearing note. The present value of this note is $82,270. Assuming the note was issued on January 1, 2023, and the effective interest method is used, the interest income to be recognized for calendar 2023 is
a) $5,000.
b) $9,000.46.
c) $4,113.50.
d) $6,587.31.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $82,270 x 5% = $4,113.50
59. Cookie Ltd. receives a four-year, $100,000 zero-interest-bearing note. The present value of this note is $82,270. Assuming the note was issued on January 1, 2021, and the effective interest rate method is used, the interest income to be recognized for calendar 2022 is
a) $10,000.
b) $4,319.18.
c) $8,227.00.
d) $7,910.75.
Difficulty: Hard
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($82,270 + $4,113.50) x 5% = $4,319.18
60. Cookie Ltd. receives a $100,000, zero-interest-bearing note. The present value of this note is $85,480. If the implicit rate of interest is 4%, what is the term of the note?
a) 3
b) 4
c) 7
d) 2
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: PV = -85,480, i = 4%, FV = 100,000, compute n
61. Jon Hamm Corp. sells farm equipment. Typically, customers prefer to finance these purchases and make payments over time. Assuming a $500,000 purchase price with a $75,000 down payment, how many equal annual payments of $119,853.36 would it take to pay off the balance assuming a 5% interest rate?
a) 6
b) 7
c) 4
d) 5
Difficulty: Hard
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Synthesis
AACSB: Analytic
Feedback: PMT = 119,853.36, PV = -425,000, I = 5%, compute n
62. If receivables are used as collateral in borrowing transactions,
a) the receivables generally come under the control of the lender.
b) a liability is reported on the borrower’s statement of financial position.
c) the receivables will be reported as a liability.
d) the transaction would be reported as a sale.
Difficulty: Easy
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
63. Which of the following is INCORRECT regarding factoring of receivables?
a) Factoring usually involves a sale to only one company.
b) The fees are relatively high.
c) The quality of the receivables may be lower.
d) The seller usually continues to service the receivables.
Difficulty: Easy
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
64. Which of the following is NOT a difference between factoring and securitization of receivables?
a) In securitization, many investors are involved, whereas factoring usually involves only one company.
b) Receivables are derecognized when securitized, but not when factored.
c) The quality of receivables factored tends to be lower than those securitized.
d) The seller retains responsibility to collect amounts due when securitized, but not when factored.
Difficulty: Easy
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Feedback: The opposite is true. Receivables are derecognized when factored, but not when securitized.
Use the following information for questions 65–66.
Braun Company factors $300,000 of accounts receivable with Schick Factors Inc. on a without recourse basis. The receivables records are transferred to Schick Factors, which takes over full responsibility for collections. Schick assesses a finance charge of 4% and withholds an initial amount equal to 7% of the accounts receivable for returns and allowances.
65. The loss on disposal of receivables recorded by Braun is
a) $12,000.
b) $21,000.
c) $33,000.
d) $0.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $300,000 x 4%= $12,000
66. The cash paid by Schick Factors to Braun Company is
a) $300,000.
b) $288,000.
c) $267,000.
d) $279,000.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $300,000 x (4% + 7%) = $33,000; $300,000 - $33,000 = $267,000.
67. Starlight Ltd. assigned $600,000 of Accounts Receivable to Moonbeam Management as security for a loan of $580,000. Moonbeam charged a 3% commission on the amount of the loan and the interest rate on the loan was 10%. During the first month, Starlight collected $320,000 of the assigned accounts, after deducting $500 of discounts. As well, Starlight accepted returns worth $2,600 and wrote off assigned accounts totalling $4,500. The amount of cash Starlight received from Moonbeam at the time of the transfer was
a) $378,000.
b) $582,000.
c) $562,600.
d) $280,000.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $580,000 x 97% = $562,600
68. Starlight Ltd. assigned $600,000 of Accounts Receivable to Moonbeam Management as security for a loan of $580,000. Moonbeam charged a 3% commission on the amount of the loan and the interest rate on the loan was 10%. During the first month, Starlight collected $320,000 of the assigned accounts, after deducting $500 of discounts. As well, Starlight accepted returns worth $2,600 and wrote off assigned accounts totalling $4,500. Entries made by Starlight during the first month would include a
a) debit to Cash of $322,600.
b) debit to Loss on Impairment of $4,500.
c) debit to Allowance for Expected Credit Losses of $4,500.
d) debit to Accounts Receivable of $324,500.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
69. On February 1, 2023, Strawberry Corp. factored receivables with a carrying amount of $250,000 to Shortcake Inc. Shortcake assessed a finance charge of 3% of the receivables and retained 5% of the receivables. Relative to this transaction, determine the amount of loss on disposal to be reported in the income statement of Strawberry Corp. for February. Assume that Strawberry factors the receivables on a without recourse basis. The loss to be reported is
a) $ 0.
b) $7,500.
c) $15,000.
d) $14,550.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $250,000 × .03 = $7,500
70. On February 1, 2023, Strawberry Corp. factored receivables with a carrying amount of $250,000 to Shortcake Inc. Shortcake assessed a finance charge of 3% of the receivables and retained 5% of the receivables. Relative to this transaction, determine the amount of loss on disposal to be reported in the income statement of Strawberry Corp. for February. Assume that Strawberry factors the receivables on a with recourse basis. The recourse obligation has a fair value of $1,000. The loss to be reported is
a) $17,000.
b) $7,000.
c) $8,500.
d) $1,000.
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($250,000 × .03) + $1,000 = $8,500
71. On February 1, 2023, Strawberry Corp. factored receivables with a carrying amount of $250,000 to Shortcake Inc. Shortcake assessed a finance charge of 3% of the receivables and retained 5% of the receivables. Assume that Strawberry factors the receivables on a with recourse basis. The recourse obligation has a fair value of $1,000. What is the value of the holdback that would be due from factor?
a) $1,000
b) $12,500
c) $7,500
d) $13,500
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $250,000 * 5% = $12,500
72. Once Upon a Credit offers retail store credit card programs to its customers. It has an ongoing practice of factoring its receivables to maximize cash on hand so that it can keep expanding its credit program to its customers. Assuming that their factoring is all done on a without recourse basis, which option provides the most cash immediately on a $300,000 receivable.
- Finance Charge 2% and Holdback of 4%
- Finance Charge 4% and Holdback of 5%
- Finance Charge 5% and Holdback of 2%
- Finance Charge 5% and Holdback of 5%
a) i.
b) ii.
c) iii.
d) iv.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Sum the percentages, the lowest means the most cash return (2%+4% = 6%)
73. The accounts receivable turnover ratio is calculated by dividing
a) gross sales by ending net trade receivables.
b) gross sales by average net trade receivables.
c) net sales by ending net trade receivables.
d) net sales by average net trade receivables.
Difficulty: Easy
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
74. The ratio that is used to assess the liquidity of accounts receivable is the
a) current ratio.
b) receivables turnover ratio.
c) quick ratio.
d) inventory turnover ratio.
Difficulty: Easy
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
75. The requirements for presentation and disclosure of receivables under IFRS are different than those required by ASPE. Which of the following statements is true about these disclosures?
a) More information is required under ASPE than IFRS.
b) IFRS requires extensive quantitative and qualitative information about all accounts.
c) Under ASPE, a reconciliation of changes in the allowance account during the period must be reported.
d) Far less information about risk exposures and fair values is required under ASPE.
Difficulty: Easy
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
76. Which of the following statements is NOT true regarding the receivables turnover ratio?
a) The higher the turnover number during the year, the better.
b) It measures the number of times, on average, that receivables are collected during the period.
c) It is calculated by dividing average sales by gross receivables outstanding during the year.
d) It is used to assess receivables’ liquidity.
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
CPA: Management Accounting
Bloomcode: Knowledge
AACSB: Analytic
77. The following is select information from the adjusted year-end financial statements of Shark Inc.:
2023 2024
Sales $750,000.00 $825,000.00
Credit Sales $465,000.00 $325,000.00
Accounts Receivable $95,000.00 $65,000.00
Allowance for Expected Credit Losses $15,000.00 $50,000.00
Calculate the accounts receivable turnover ratio.
a) 4.07
b) 10.00
c) 6.84
d) 4.94
Difficulty: Medium
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
CPA: Management Accounting
Bloomcode: Application
AACSB: Analytic
Feedback: $325,000 / (($80,000 + $15,000) / 2)
78. The following is select information from the adjusted year-end financial statements of Shark Inc.:
2023 2024
Sales $750,000.00 $825,000.00
Credit Sales $465,000.00 $325,000.00
Accounts Receivable $95,000.00 $65,000.00
Allowance for Expected Credit Losses $15,000.00 $50,000.00
Calculate the average collection period (round to 2 decimal places).
a) 89.85
b) 73.92
c) 36.5
d) 53.36
Difficulty: Medium
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
CPA: Management Accounting
Bloomcode: Application
AACSB: Analytic
Feedback: 365/6.84 = 53.36 days
79. Which of the following statements regarding treatment of cash and cash equivalents under ASPE vs. IFRS is NOT correct?
a) IFRS allows preferred shares acquired close to their maturity date to qualify as a cash equivalent.
b) Cash equivalents under ASPE may be highly liquid investments readily convertible to cash.
c) Cash equivalents under ASPE may be investments convertible to unknown amounts of cash with material risk of change and value.
d) Cash equivalents under IFRS may be highly liquid investments readily convertible to cash.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
80. Which of the following statements regarding receivables recognition and measurement under the IFRS standard is correct?
a) It requires the effective interest method be used to recognize interest and related premiums or discounts.
b) It requires the straight-line method be used to recognize interest and related premiums or discounts.
c) It allows a choice between the effective interest and straight-line methods.
d) None of these statements is correct.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
81. On the Fence Inc. is looking at adopting IFRS as its accounting standards framework. Currently it is using the straight-line method to amortize the discount/premium on its zero-interest note receivable portfolio. The Controller is concerned that the change to IRFS and the requirement to use the effective interest method will result in lower investment income. As the company’s Revenue Analyst, you have been asked to review a 5-year zero-interest note with a face value of $500,000, and a present value of $410,963. The straight-line based interest income for the year is $17,807. What would be the difference in interest income if the effective interest rate method is adopted?
a) $1,368 higher
b) $17,807 higher
c) $1,368 lower
d) $16,439 lower
Difficulty: Hard
Learning Objective: Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Evaluation
AACSB: Analytic
Feedback: Solve for i = 4%; $410,963 * 4% = $16,439. $17,807 current revenue less $16,439 new revenue = $1,368 less
82. On the Fence Inc. is looking at moving to ASPE for its accounting standards framework from IFRS as it is no longer publicly traded and is more comparable to companies who are using ASPE. Currently it is using the effective interest rate method to amortize the discount/premium on its zero-interest note receivable portfolio. The Controller would like to lessen the amount of work where possible and would like to understand the impact to interest income if the company switches to straight line as allowed under ASPE. As the company Revenue Analyst, you have been asked to review a 5-year zero-interest note with a face value of $500,000, and a present value of $410,963. The effective interest rate method interest income for the year is $16,439. What would be the difference in interest income if the straight-line interest rate method is adopted?
a) $1,368 higher
b) $17,807 higher
c) $1,368 lower
d) $17,807 lower
Difficulty: Medium
Learning Objective: Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Feedback: $500,000 less $410,963 = $89,036 total discount to be amortized. $89,036 / 5 = $17,807 investment income per year, less $16,436 means revenue higher by $1,368
*83. A Cash Over and Short account is
a) not generally acceptable under Canadian GAAP.
b) debited when the sum of the receipts and the cash in the fund is more than the imprest amount.
c) debited when the sum of the receipts and the cash in the fund is less than the imprest amount.
d) a contra account to Cash.
Difficulty: Easy
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*84. The journal entries related to a bank reconciliation
a) are taken from the "balance per bank" section only.
b) may include a credit to Bank Charges Expense for bank service charges.
c) may include a debit to Accounts Receivable for an NSF cheque.
d) may include a debit to Accounts Payable for an NSF cheque.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*85. When preparing a bank reconciliation, a deposit credited to the company account by the bank in error is
a) added to the bank statement balance.
b) deducted from the bank statement balance.
c) added to the balance per books.
d) deducted from the balance per books.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*86. Which of the following is NOT a common reconciling item recorded in preparation of a company’s bank reconciliation(s)?
a) deposits in transit
b) bank charges
c) cash in other accounts
d) bank credits
Difficulty: Easy
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*87. In preparing its bank reconciliation for the month of April 2023, Henke Inc. has the following information available:
Balance per bank statement, 4/30/23 $34,140
NSF cheque returned with 4/30/23 bank statement 450
Deposits in transit, 4/30/23 5,000
Outstanding cheques, 4/30/23 5,200
Bank service charges for April 20
What is the correct / adjusted cash balance at April 30, 2023?
a) $34,370
b) $33,940
c) $33,490
d) $33,470
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $34,140 + $5,000 – $5,200 = $33,940
*88. If a petty cash fund is established in the amount of $550, and contains $500 in cash and $45 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts:
a) Petty Cash, $45.
b) Petty Cash, $50.
c) Cash, $45; Cash Over and Short, $5.
d) Cash, $50.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $550 – $500 = $50
*89. If the month-end bank statement shows a balance of $51,000, outstanding cheques are $14,000, a deposit of $3,000 was in transit at month end, and a cheque for $800 was erroneously charged by the bank against the account, the correct / adjusted balance in the bank account at month end is
a) $40,800.
b) $51,000.
c) $28,800.
d) $14,800.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $51,000 – $14,000 + $3,000 + $800 = $40,800
*90. In preparing its bank reconciliation at April 30, 2023, Delta Inc. has the following information available:
Balance per bank statement $45,700
NSF cheque returned with April bank statement 420
Deposits in transit 2,500
Outstanding cheques 16,000
Bank service charges for April 25
The correct cash balance at April 30, 2023 is
a) $45,280.
b) $32,200.
c) $48,200.
d) $61,700.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $45,700 + $2,500 – $16,000 = $32,200
*91. In preparing its bank reconciliation at May 31, 2023, Kennedy Co. has the following information available:
Balance per bank statement $78,000
Deposit in transit 15,600
Outstanding cheques 4,200
Note collected by bank in May 7,200
The correct cash balance at May 31, 2023 is
a) $95,600.
b) $94,800.
c) $89,400.
d) $84,000.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $78,000 + $15,600 – $4,200 = $89,400
*92. In preparing its September 30 bank reconciliation, Frieda Corp. has the following information available:
Balance per bank statement $34,510
Deposit in transit 4,650
Customer’s cheque returned NSF 325
Outstanding cheques 1,925
Bank service charges for September 40
Frieda’s correct cash balance at September 30 is
a) $36,910.
b) $36,870.
c) $37,235.
d) $34,510.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $34,510 + $4,650 – $1,925 = $37,235
*93. Congo Ltd. prepared the following bank reconciliation at March 31:
Balance per bank statement $37,200
Add: Deposit in transit 10,300
47,500
Less: Outstanding cheques 12,600
Correct cash balance per bank, March 31 $34,900
Data per bank statement for the month of April follows:
Deposits $47,700
Disbursements 49,700
All reconciling items at March 31 cleared the bank in April. Outstanding cheques at April 30 totalled $5,000. There were no deposits in transit at April 30. What is the correct cash balance per books at April 30?
a) $30,200
b) $32,900
c) $35,200
d) $40,500
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $37,200 + $47,700 – $49,700 = $35,200 (4/30 balance per bank)
$35,200 – $5,000 = $30,200
*94. If the month-end bank statement shows a balance of $16,000, outstanding cheques of $9,000, a deposit in transit of $2,200 at month end, and a cheque for $550 erroneously charged by the bank against the account, the correct / adjusted balance in the bank account at month end is
a) $8,650.
b) $9,750.
c) $22,250.
d) $16,000.
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $16,000 - $9,000 + $2,200 + $550 = 9,750
*95. Safari Inc. prepared the following bank reconciliation at June 30:
Balance per bank statement $57,100
Add: Deposit in transit 5,400
62,500
Less: Outstanding cheques 11,700
Correct cash balance per banks June 30 $50,800
Data per bank statement for the month of July follows:
Deposits $6,300
Disbursements 19,000
All reconciling items at June 30 cleared the bank in July. Outstanding cheques at July 31 totalled $4,000. There were no deposits in transit at July 31. What is the correct cash balance per books at July 31?
a) $45,800
b) $34,100
c) $40,400
d) $40,500
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $57,100 + $6,300 – $19,000 = $44,400 (7/31 balance per bank)
$44,400 – $4,000 = $40,400
EXERCISES
Ex. 7-96 Cash management from a business perspective
Cite and explain three (3) practices and/or procedures companies engage in to manage cash balances.
Solution 7-96
Practices and/or procedures companies engage in to manage cash balances include:
- preparation of cash flow budgets to help anticipate cash needs and minimize borrowing requirements
- preparation of the statement of cash flows to provide insight into the sources and uses of the company’s cash balances
- preparation of bank reconciliations to detect any discrepancies between cash movement as per the general ledger and transactions flowing through the company’s bank account(s)
- physical controls over cash such as keeping of petty cash, cheques, and banking information under lock and key, and limiting those with access and authorization to the company’s bank accounts
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 7- 97 Accounts receivable planning and control
It is important for management to carefully consider how to manage and control its accounts receivable balances. Explain two (2) reasons why and what companies must communicate regarding receivables management with its sales team.
Solution 7-97
Reasons why receivables management is important include:
- Overly aggressive sales team might enter into contracts with higher risk customers, resulting in collectability difficulties
- Discounts offered by salespeople to encourage faster payment of outstanding balances come with an associated cost to the company. The company must consider whether this cost and the additional sale from the customer is in its long-term best interest
- Overall, businesses want to have accurate estimates of anticipated cash on hand to minimize both borrowing requirements and “idle” cash.
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. 7-98 Credit policies
What are the implications if credit policies are too “tight” or restrictive versus too “loose” or flexible?
Solution 7-98
If credit policies are too “tight,” or restrictive, potential sales could be lost to competitors. On the other hand, if the credit policy is too “loose,” or flexible, an aggressive sales team might enter into contracts with higher-risk customers, resulting in collectibility difficulties.
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable.
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-99 Terminology
In the space provided, write the word or phrase that is defined or described.
1. The minimum balances that may have 1. ______
to be kept in chequing or savings accounts.
2. Cash that has been set aside for 2. ______
investment or financing purposes.
3. Receivables with underlying 3. ______
contractual rights to receive cash.
4. The reduction from a supplier’s 4. ______
list price.
5. The method used to amortize discounts 5. ______
and premiums for notes receivable
that results in the recognition of equal
amounts of interest expense or interest
income over the term of the notes.
6. The value at which receivables 6. ______
should be reported.
7. The method used to account for the 7. ______
estimated impairment of receivables.
8. The approach that specifically 8. ______
recognizes the assets and liabilities
when receivables are sold.
Solution 7-99
1. compensating balances
2. restricted cash
3. a financial asset
4. a trade discount
5. the straight-line method
6. their net realizable value
7. the allowance method
8. the financial components approach
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-100 Definitions
Provide clear, concise answers for the following:
1. What are cash and cash equivalents and how are they reported?
2. What are receivables and how are they reported?
3. How are receivables measured?
4. How are impairments relating to uncollectible receivables accounted for?
5. How can receivables be “converted” to cash prior to the collection from customers?
6. How are receivables analyzed?
7. Identify the main differences between private entity GAAP and IFRS with respect to the accounting for receivables?
Solution 7-100
1. Cash and cash equivalents are financial assets. Cash consists of coins, currency, and available funds on deposit at a bank, as well as negotiable instruments. Cash equivalents are highly liquid short-term investments that can be exchanged for known amounts of cash. Together these are usually reported as a current asset, “cash and cash equivalents,” in the statement of financial position, unless the funds are restricted or otherwise encumbered.
2. Receivables are claims against customers and others for cash or other financial assets. They are classified according to their nature as trade, nontrade, and accounts receivable (or notes receivable). Current receivables are expected to be collected within one year or during the current operating cycle, whichever is longer.
3. Receivables are initially measured at fair value (i.e., the present value rather than the future value) with interest recognized as the future value is reached at collection. This principle is generally not applied to short-term receivables, as the interest element is usually not material when compared with the net income for the period.
4. The potential impairment is assessed based on management’s estimate of uncollectible accounts. This is commonly accomplished through a review of aged receivables, with special consideration given to older items. Based on that review, the allowance for expected credit losses is then adjusted to reduce the value of gross receivables accordingly. Companies often use a mix of procedures; whereby, losses on impairment are initially estimated based on a percentage of sales and are then adjusted based on the aged receivables report.
5. This can be accomplished through a secured borrowing arrangement or through the sale of the underlying receivables. In secured borrowing, the receivables are merely used as collateral for a loan. In a sale, the receivables are either sold outright to “factors” or “securitized”, where the seller usually retains some involvement.
6. Receivables are analyzed in terms of turnover, age, and change relative to related accounts. A key ratio used by analysts is the receivables turnover ratio. It is calculated by dividing net sales by average net receivables outstanding and is a measurement of the liquidity of a company’s receivables.
7. The two standards are for the most part very similar. Differences include the disclosure requirements, which are more extensive under IFRS, and the use of the effective interest method for the amortization of discounts and premiums for financial assets (mandated by IFRS, but optional under ASPE).
Difficulty: Easy
Learning Objective: Understand cash and accounts receivable from a business perspective.
Section Reference: Understanding Cash and Accounts Receivable
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analysis of Receivables
Learning Objective: Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-101 Reporting of cash
At December 31, 2023, Burkina Ltd.’s general ledger Cash balance was $24,600. In addition, Burkina held the following items in its safe on December 31:
1. A cheque for $780 from Zambia Ltd. received December 30, 2023 that was not deposited until January 2, 2024.
2. A cheque from Zanzibar Inc. for $1,800 that was deposited on December 20 but was returned NSF on December 29. The cheque was to be re-deposited on January 3, 2024. The original deposit has been included in the December 31 chequebook balance.
3. Coin and currency on hand: $2,630.
Instructions
Calculate the proper amount to be reported as cash on Burkina’s statement of financial position at December 31, 2021.
Solution 7-101
Cash G/L account $24,600
Undeposited cheque 780
Coin and currency 2,630
Less NSF cheque (1,800)
Cash to be reported $26,210
Difficulty: Medium
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-102 Reporting of cash and cash equivalents
Lawrence Company has $22,000 cash in the bank, $4,000 of restricted cash in a separate account, and a $2,000 bank overdraft in an account at another bank. How much cash should Lawrence report on its statement of financial position? Explain.
Solution 7-102
Lawrence should report $22,000 as cash on its statement of financial position.
The restricted cash of $4,000 is considered a cash equivalent, or short-term investment because of the restrictions placed upon it.
For a similar reason, the overdraft of $2,000 available at another bank is not considered cash, as there are likely penalties associated with its use.
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-103 Restricted cash balances
Some lending institutions require customers who borrow money from them to keep minimum cash balances in their chequing or savings accounts. What are these balances called? Explain why they might need to be separately reported on the company’s statement of financial position.
Solution 7-103
These balances are called compensating balances. They must be reported separately in current or non-current assets, as appropriate, to ensure that investors are not misled about the amount of cash that is available to meet recurring obligations.
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 7-104Cash versus cash equivalents or short-term investments
Explain the difference between cash and cash equivalents or short-term investments and provide two examples of each.
Solution 7-104
Cash consists of coins, currency, and other available funds that are on deposit at a bank. Negotiable instruments such as money orders, certified cheques, cashier’s cheques, and bank drafts are also viewed as cash. Money-market funds that give chequing account privileges are usually classified as cash.
It is more appropriate to classify money-market funds, certificates of deposit, and similar types of deposits and “short-term paper” that allow investors to earn interest as cash equivalents or short-term investments than as cash. The reason for this is that there are usually restrictions or penalties on these securities if converted to cash before maturity. Money-market funds that give chequing account privileges, however, are usually classified as cash.
Difficulty: Easy
Learning Objective: Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.
Section Reference: Cash
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-105 Classification of accounts receivable
Trade receivables are amounts owed by customers to whom the company has sold goods or services as part of normal business operations. Briefly explain the difference between open accounts receivable and notes receivable.
Solution 7-105
Open accounts receivable are short-term extensions of credit based on a purchaser’s verbal promise to pay for goods and services that the customer has purchased. The receivables are normally collectible between 30 to 60 days, but credit terms may be longer—or shorter—depending on the industry. Notes receivable are written promises to pay a certain amount of money on a specified future date. Notes Receivable may arise from sales of goods and services, or from other transactions.
Difficulty: Easy
Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-106 Nontrade receivables
Nontrade receivables are created by a variety of transactions and can be written promises either to pay cash or to deliver other assets. Provide three examples of nontrade receivables.
Solution 7-106
Examples of nontrade receivables include the following:
- advances to officers and employees, or to subsidiaries or other companies
- amounts owing from a purchaser on the sale of capital assets or investments where delayed payment terms have been agreed upon
- amounts receivable from the government for income taxes paid in excess of the amount owed, GST/HST payments recoverable, investment tax credits, or other tax rebates receivable
- dividends and interest receivable
- claims against insurance companies for losses the company has suffered; against trucking companies or railways for damaged or lost goods; against creditors for returned, damaged, or lost goods; or against customers for returnable items (crates, containers, etc.)
Difficulty: Easy
Learning Objective: Define receivables and identify the different types of receivables from an accounting perspective.
Section Reference: Receivables
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 7-107 Sales returns and allowances (ASPE)
Assume that Olympia Corporation follows ASPE and estimates that approximately 5% of its $1.5 million of trade receivables outstanding will be returned or some adjustment will be made to the sales price.
Instructions
- Prepare the entry to show expected sales returns and allowances.
- Explain why it is important to prepare and include this entry in Olympia’s financial statements.
Solution 7-107
a)
Sales Returns and Allowances 75,000
Allowance for Sales Returns and Allowances 75,000
* $1.5 million x 5% = $75,000
b) It is important to prepare and include this entry in Olympia’s financial statements because it is material in amount. Leaving out a $75,000 charge could have a material impact on net income and significantly impact the decisions of financial statement stakeholders.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-108 Sales returns and allowances (IFRS)
Assume that Athens Corporation follows IFRS and estimates that approximately 3.5% of its $2.5 million of trade receivables outstanding will be returned or some adjustment will be made to the sales price.
Instructions
a) Prepare the entry to show expected sales returns and allowances.
b) Explain why it is important to prepare and include this entry in Athens’ financial statements.
Solution 7-108
a)
Sales Revenue 87,500
Refund Liability 87,500
* $2.5 million x 3.5% = $87,500
b) It is important to prepare and include this entry in Athens’ financial statements because it is material in amount. Leaving out a $87,500 charge could have a material impact on net income and significantly impact the decisions of financial statement stakeholders.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.
Section Reference: Recognition and Measurement of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-109 Entries for loss on impairment
Patagonia Corp.’s unadjusted trial balance includes the following:
Debit Credit
Accounts receivable $140,000
Allowance for expected credit losses $890
Sales 425,000
Sales returns and allowances 10,000
Instructions
Prepare adjusting journal entries assuming that the estimate of uncollectible accounts is determined by using
a) 4% of gross accounts receivable, and
b) 1.5% of net sales.
Solution 7-109
a) Loss on Impairment 4,710
Allowance for Expected Credit Losses 4,710
Gross receivables $140,000
Rate 4%
Total allowance needed 5,600
Present allowance (890)
Adjustment needed $ 4,710
b) Loss on Impairment 6,225
Allowance for Expected Credit Losses 6,225
Sales $425,000
Less sales returns and allowances 10,000
Net sales 415,000
Rate 1.5%
Loss on impairment $ 6,225
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-110 Allowance for expected credit losses
When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize a loss on impairment. There are basically two methods of recognizing a loss on impairment: (1) direct write-off method, and (2) allowance method.
Instructions
a) Describe fully both the direct write-off method and the allowance method of recognizing loss on impairment.
b) Discuss the reasons why one of the above methods is preferable to the other, and the reasons why the other method is not usually in accordance with generally accepted accounting principles.
Solution 7-110
a) There are basically two methods of recognizing a loss on impairment: (1) direct write-off and (2) allowance.
The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any loss on impairment is recognized. At the time a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of loss on impairment is recognized.
The allowance method requires an estimate of loss on impairment for a period of time by reference to the composition of the accounts receivable balance at a specific point in time (aging) or to the overall experience with credit sales over a period of time. Thus, total loss on impairment expected to arise because of operations for a specific period is estimated, the valuation account (allowance for expected credit losses) is appropriately adjusted, and a corresponding amount of loss on impairment is recognized. As specific accounts are identified as uncollectible, the account is written off. It is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for expected credit losses). Net accounts receivable do not change, and there is no charge to loss on impairment when specific accounts are identified as uncollectible and written off using the allowance method.
b) The allowance method is preferable because it matches the cost of making a credit sale with the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period. Since the direct write-off method does not recognize the loss on impairment until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the matching principle and does not achieve a proper carrying value for accounts receivable at the end of a period.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-111 Entries for loss on impairment
A trial balance before adjustments included the following:
Debit Credit
Accounts receivable $120,000
Allowance for expected credit losses $730
Sales 510,000
Sales returns and allowances 8,000
Instructions
Prepare adjusting journal entries assuming that the estimate of uncollectible accounts is determined by taking
a) 5% of gross accounts receivable, and
b) 1% of net sales.
Solution 7-111
a) Loss on Impairment 5,270
Allowance for Expected Credit Losses 5,270
Gross receivables $120,000
Rate 5%
Total allowance needed 6,000
Present allowance (730)
Adjustment needed $ 5,270
b) Loss on Impairment 5,020
Allowance for Expected Credit Losses 5,020
Sales $510,000
Sales returns and allowances 8,000
Net sales 502,000
Rate 1%
Loss on impairment $ 5,020
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-112 Aged receivables
Sunshine Limited sells sun visors and hats to wholesalers and distributors. It has been expanding over the last few years and increased the amount of credit sales to its customers. The following is an aged receivable listing:
Amount
% Estimate of Outstanding at
Uncollectable Dec 31, 2023
0 to 30 1.5% $125,000
31 to 60 4.5% 100,000
61 to 90 7.0% 85,000
91 to 120 15.0% 75,000
Over 120 25.0% 55,000
Instructions
a) Assuming that there is no existing balance in the allowance for expected credit losses account, what is the net realizable value of accounts receivable to be reported on the Statement of Financial Position.
b) The manager from the sales department is reviewing the financial statements and is concerned that the value for the accounts receivable does not reflect the full value outstanding. How would you respond?
Solution 7-112
a)
A B
Amount
% Estimate of Outstanding at A * B Allowance
Uncollectable Dec 31, 2023
0 to 30 1.5% $125,000 = $ 1,875
31 to 60 4.5% 100,000 = 4,500
61 to 90 7.0% 85,000 = 5,950
91 to 120 15.0% 75,000 = 11,250
Over 120 25.0% 55,000 = 13,750
Total 440,000 37,325
Net Realizable Value 402,675
*440,000 – $37,325
b) Accounts receivables as reflected on the financial statements should include the amount that is estimated to be uncollectable. This ensures that the user understands what is outstanding and what may not be collected in the future.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-113 Dishonoured note receivable
On November 1, 2023, Mandrake Corp. and Olivier Ltd. reached an agreement to convert Olivier’s outstanding account receivable of $27,000 into a 3-month, 8% note receivable. On February 1, 2024, Olivier dishonoured the note receivable.
Instructions
Prepare Mandrake’s journal entries for the following dates,
- November 1, 2023
- December 31, 2023
- February 1, 2024
Solution 7-113
2023
- Nov 1 Notes Receivable 27,000
Accounts Receivable. 27,000
To convert Olivier’s account receivable to a 3-month, 8% note receivable
- Dec 31 Interest Receivable. 360
Interest Income ($27,000 x 8% x 2/12) 360
To record accrued interest—Olivier Ltd.
2024
- Feb 1 Accounts Receivable. 27,540
Interest Receivable 360
Interest Income ($27,000 x 8% x 1/12) ) 180
Notes Receivable 27,000
To record Olivier Ltd. dishonoured note receivable
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-114 Amortization of discount on note
On December 31, 2023, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2026, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not easily determined and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
Interest Rate
Table Factors for Three Periods 5% 10%
Future Value of 1 1.15763 1.33100
Present Value of 1 .86384 .75132
Future Value of Ordinary Annuity of 1 3.15250 3.31000
Present Value of Ordinary Annuity of 1 2.72325 2.48685
Instructions
Determine the present value of the note.
Solution 7-114
Present value of interest = $30,000 × 2.48685 = $ 74,606
Present value of maturity value = $600,000 × .75132 = 450,792
$525,398
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-115 Schedule of note discount amortization
On December 31, 2023, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2026, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not easily determined and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
Interest Rate
Table Factors for Three Periods 5% 10%
Future Value of 1 1.15763 1.33100
Present Value of 1 .86384 .75132
Future Value of Ordinary Annuity of 1 3.15250 3.31000
Present Value of Ordinary Annuity of 1 2.72325 2.48685
Instructions
Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method. (Round to whole dollars.)
Solution 7-115
Green Company
Schedule of Note Discount Amortization
Effective Interest Method
5% Note Discounted at 10% (Imputed)
Cash Effective Unamortized Present
Interest Interest Discount Discount Value
Date (5%) (10%) Amortized Balance of Note
12/31/23 $74,606 $525,394
12/31/24 $30,000 $ 52,539 $22,539 52,067 547,933
12/31/25 30,000 54,793 24,793 27,274 572,726
12/31/26 30,000 57,274* 27,274 0 600,000
$90,000 $164,602 $74,606
*$1 adjustment for rounding.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-116 Note with fair value not equal to cash consideration
On January 1, 2023, Cameroon Corp. lent $50,000 to its CEO, interest-free. The loan is repayable in full in five years. The market rate for similar loans (with similar credit risk) is 4%.
Instructions
a) Calculate the present value (fair value) of this loan (round to the nearest dollar). Why is it not the same as the actual cash advanced?
b) Prepare the journal entry to record this transaction.
Solution 7-116
a) $50,000 (PV*5, 4%) = $50,000 (0.82193) (Table A.2) = $41,097
The fair value is less than the actual cash advanced due to the interest component. The present value actually represents the principal portion of the loan.
b) Notes Receivable…………………………………………………… 41,097
Salaries and Wages Expense 8,903
Cash 50,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-117 Recognition and measurement of long-term notes receivable
Kohl Company follows IFRS and lent $49,587 to Hemingway Inc., accepting Hemingway's 2-year, $60,000, zero-interest-bearing note. The implied interest rate is 10%.
Instructions
Prepare Kohl's journal entries for (round to the nearest dollar)
- the initial transaction
- recognition of interest each year
- the collection of $60,000 at maturity.
Solution 7-117
Notes Receivable 49,587
Cash 49,587
Notes Receivable ($49,587 x 10%) 4,959
Interest Income 4,959
Notes Receivable (($49,587 + $4,959) x 10%) 5,454
Interest Income 5,454
Cash 60,000
Notes Receivable 60,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-118 Notes received for property/goods
Savannah Corp. sold property in exchange for a six-year note that has a maturity value of $40,250 and no stated interest rate. The property originally cost Savannah $21,000. Assuming that a market interest rate of 9% is known, prepare the journal entry to record the sale of this property.
Solution 7-118
In this case, the proceeds from the sale are equal to the present value of the note.
This is a non–interest-bearing note, so the only cash flow is the $40,250 received in 6 period’s time: $40,250 x .59627 (Table A-2) = $24,000.
The entry to record the sale is:
Notes Receivable 24,000
Land 21,000
Gain on Disposal of Land ($24,000 – $21,000) 3,000
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-119 Interest rate terminology
Explain the difference between the following interest rate terms:
Market
Coupon
Effective
Stated
Yield
Face
Solution 7-119
The stated interest rate, also referred to as the face rate or the coupon rate, is the rate that is included as part of the note contract. The effective interest rate, also referred to as the market rate or the yield rate, is the rate that is used in the market to determine the note’s value; that is, the discount rate that is used to determine its present value.
Difficulty: Easy
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-120 Zero-interest bearing note
Shepherd Corp. receives a five-year, $40,000, zero-interest bearing note with a present value of $34,504.40. Calculate the implicit rate of interest and provide the related journal entry at the date of issuance.
Solution 7-120
PVF5,?% = $34,504.40 / $40,000
PVF5,?% = 0.86261
Table A-2: Where n = 5 and PVF = 0.86261, i = 3%
Notes Receivable 34,504.40
Cash 34,504.40
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-121 Write-off of a zero-interest bearing note
Wolf Corp. has a three-year, $75,000, zero-interest bearing note with an original present value of $70,673 as of Jan 1, 2023. At year end, the note is being written off.
Instructions
Record the
- original entry
- subsequent entry on December 31st, 2023 that is required to write-off the note.
Solution 7-121
- PVF3,?% = $70,673 / $75,000
PVF3,?% = 0.9423
Table A-2: Where n = 3 and PVF = 0.9423, i = 2%
January 1, 2023
Notes Receivable 70,673
Cash 70,673
b)
December 31, 2023
Notes Receivable 1,413
Interest Income 1,413
* 1,413 = 70,673 * 2%
Loss on Notes Receivable 72,086
Notes Receivable 72,086
*Updated Carrying Value of Note – 70,673 * 1.02 = 72,086 or 70,673 + 1,413
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-122 Accounts receivable assigned
Moonbeam Ltd. assigned $520,000 of its accounts receivable to Sunbright Finance Company, as security for a loan of $430,000. Sunbright charged a 3.5% commission on the face amount of the loan, and the note bears interest at 9%.
During the first month, Moonbeam collected $260,000 on assigned accounts. This amount was paid to the finance company along with one month's interest on the note.
Instructions
Prepare the required journal entries on Moonbeam’s books related to the
- obtaining the loan in exchange for a note
- the collection
- the payment to the finance company.
Solution 7-122
Cash……………………………………………………………………… 414,950
Finance Expense ($430,000 x 3.5%) 15,050
Notes Payable 430,000
Cash 260,000
Accounts Receivable 260,000
Notes Payable 260,000
Interest Expense ($430,000 x 9% /12) 3,225
Cash 263,225
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-123 Sale of receivables without recourse
Sparwood Manufacturing factored $240,000 of its accounts receivable to General Factor Corp., on a without recourse basis. The receivables are transferred to General Factor, who takes over the full responsibility of collection. General Factor charged a finance charge of 4% of the dollar value of the receivables, and withheld 5% of the receivable value.
Instructions
a) Prepare the general journal entry to reflect this transaction on Sparwood’s books.
b) Prepare the general journal entry to reflect this transaction on General Factor’s books.
Solution 7-123
a) Entry on Sparwood’s books:
Cash ($240,000 – $9,600 – $12,000) 218,400
Due from Factor ($240,000 x 5%) 12,000
Loss on Disposal of Receivables ($240,000 x 4%) 9,600
Accounts Receivable 240,000
b) Entry on General Factor’s books:
Accounts Receivable 240,000
Due to Customer ($240,000 x 5%) 12,000
Finance Revenue ($240,000 x 4%) 9,600
Cash 218,400
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 7-124 Issues with derecognition of accounts receivable
Consider the standards set out in IFRS 9:
a) Briefly summarize the conditions used to indicate whether receivables have been transferred by an entity, supporting treatment as a sale.
b) How would your response differ under ASPE?
Solution 7-124
a) The entity transfers a financial asset, such as accounts receivable, if the entity:
1. transfers the contractual rights to receive cash flows from the accounts receivable; or
2. retains the contractual rights to receive cash flows from the accounts receivable but has a contractual obligation to pay the cash flows to one or more recipients.
Three additional conditions also must be met:
i) The entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts from the original receivable.
ii) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows.
iii) The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay.
b) Accounting for transfers of receivables under ASPE also focuses on whether a company has retained or given up control of the receivables. Under ASPE, if all three conditions as referenced above do not apply, the transferring company records the transfer as a secured borrowing. Only when all three conditions are satisfied is control over the assets assumed to be given up, and the transaction accounted for as a sale. If accounting for the transaction as a sale is appropriate but there is continuing involvement, the specific asset components retained need to be identified, as well as any liability components that were assumed.
Difficulty: Easy
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-125 Accounts receivable analysis and securitization
Discuss why adjustments might have to be made and caution must be exercised when analyzing accounts receivable due to the increased use of securitization transactions.
Solution 7-125
Securitization is a financing transaction, so the cash flows are from financing, not from operations. When the company has engaged in securitization transactions, adjustments would have to be made to receivables on the statement of financial position for accounts sold but not yet collected. These adjustments would be required before you could assess ratios such as receivables turnover and days sales uncollected. Liquidity ratios would also be affected. The complexity of these transactions requires that the analyst exercise caution and read carefully all disclosures related to securitizations.
Difficulty: Easy
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analysis of Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 7-126 Presentation and disclosure of receivables
When financial statements are prepared, the presentation of and disclosures related to receivables has to be addressed. What is the objective of these disclosures?
Solution 7-126
The objective of presentation and disclosure of receivables is to allow users to be able to evaluate the significance of these financial assets (the receivables) to the entity’s financial position and performance and to allow users to assess the nature and extent of the associated risks.
Difficulty: Easy
Learning Objective: Explain how receivables and loans are reported and analyzed.
Section Reference: Presentation, Disclosure, and Analysis of Receivables
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 127 ASPE/IFRS differences
With respect to receivables recognition and measurement, recognition of interest income and amortization of any discounts or premiums, requirements set out under ASPE differ from those under IFRS. Briefly explain the difference in these requirements and the related implications for a company considering which standard to apply.
Solution 7-127
IFRS requires use of the effective interest method for recognizing income, and amortizing discounts and premiums. ASPE does not require use of the effective interest method of recognizing interest income and amortizing any discounts or premiums; therefore, either the straight-line method or the effective interest method may be used.
Implication: The requirements under IFRS require much more administrative time and a greater level of detail in reporting. Preparation of these figures cost time and money to the company; however, the figures reflected are likely a closer approximation to fair value, and, therefore, more accurate. More accurate figures may better inform management decision making depending on the materiality of receivables and the related interest/premium/discount in the context of the overall organization and its operations.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and accounting standards for private enterprises (ASPE), and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
*Ex. 7-128 Reconciliation of cash account
Bestway Corp.’s book balance of the cash account shows an unadjusted balance of $72,000 before reconciliation. The following data was also available:
1. The bank statement does not include a deposit of $3,100 made on the last day of the month.
2. The bank statement shows a collection of a note receivable by the bank of $1,400 and a customer's cheque for $420 was returned because it was NSF.
3. A customer's cheque for $450 was recorded on the books as $540.
4. A cheque written for $185 was recorded as $851.
Instructions
Calculate the correct balance in the cash account.
*Solution 7-128
Unadjusted Cash G/L account $72,000
Note receivable collected 1,400
Less NSF cheque (420)
Less error re: deposit $(540 – $450) (90)
Add cheque error ($851 – $185) 666
Correct cash balance $73,556
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 7-129 Bank reconciliations
Benson Plastics Company deposits all receipts and makes all payments by cheque. The following information is available from the cash records:
MARCH 31 BANK RECONCILIATION
Balance per bank $26,746
Add: Deposits in transit 2,100
Deduct: Outstanding cheques (3,800)
Balance per books $25,046
Month of April Results
Per Bank Per Books
Balance April 30 $29,495 $28,855
April deposits 11,784 13,889
April cheques 11,100 10,080
April note collected (not included in April deposits) 3,000 -0-
April bank service charge 35 -0-
April NSF cheque of a customer returned by the bank
(recorded by bank as a charge) 900 -0-
Instructions
a) Calculate the following amounts at April 30:
1. Deposits in transit
2. Outstanding cheques
b) What is the April 30 adjusted cash balance? Show all work.
*Solution: 7-129
a) 1. Deposits in transit, $4,205 [$13,889 – ($11,784 – $2,100)]
2. Outstanding cheques, $2,780 [$10,080 – ($11,100 – $3,800)]
b) Adjusted cash balance at April 30, $30,920
($29,495 + $4,205 – $2,780) OR ($28,855 + $3,000 – $35 – $900)
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 7-130 Control of petty cash
Under an imprest petty cash system, the petty cash custodian has a significant amount of responsibility. Describe two (2) procedures a company could put in place to obtain more complete control over the petty cash fund.
*Solution 7-130
Procedures a company could put in place to obtain more complete control over the petty cash fund include:
- Surprise counts from time to time by a superior of the petty cash custodian to determine that the fund is being accounted for satisfactorily.
- Cancelled or mutilation of petty cash receipts after they have been submitted for reimbursement so they cannot be used again.
Difficulty: Easy
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
PROBLEMS
Pr. 7-131 Entries for loss on impairment
Nairobi Corp.’s unadjusted trial balance includes the following balances:
Dr. Cr.
Accounts receivable $150,000
Allowance for Expected Credit Losses $ 3,500
Sales Revenues 720,000
Sales returns and allowances 30,000
Instructions
a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 5% of gross accounts receivable and (2) 2% of net sales.
b) Assume that all the information above is the same, except that the Allowance for Expected Credit Losses Account has a debit balance of $3,500 instead of a credit balance.
Solution 7-131
a) (1) Loss on Impairment 4,000
Allowance for Expected Credit Losses 4,000
Gross receivables $150,000
Rate 5%
Total allowance needed 7,500
Present allowance (3,500)
Bad debts expense $ 4,000
(2) Loss on Impairment 13,800
Allowance for Expected Credit Losses 13,800
Sales $720,000
Sales returns and allowances (30,000)
Net sales 690,000
Rate 2%
Bad debts expense $ 13,800
b) The percentage-of-receivables approach would be affected as follows:
Gross receivables $150,000
Rate 5%
Total allowance needed 7,500
Present allowance 3,500
Additional amount required $ 11,000
The journal entry is therefore as follows:
Loss on Impairment 11,000
Allowance for Expected Credit Losses 11,000
Note that the balance in the allowance account does not affect calculations for the percentage-of-sales method.
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-132 Loss on impairment
The following account balances were found for Jetson Corp. at the beginning of its fiscal year, January 1, 2023:
Accounts Receivable $1,240,250
Allowance for Expected Credit Losses 19,220
Sales for the year were $8,100,000, of which 60% was on credit, and sales returns were $146,000. Cash collections, excluding recoveries, were $5,416,000. Jetson had also written off $62,500, of which half was later recovered and collected. The company’s credit and collection manager has estimated that 6% of outstanding accounts receivable are uncollectible.
Instructions
Calculate the loss on impairment for the year and record the appropriate journal entry.
Solution 7-132
Loss on Impairment 9,325
Allowance for Expected Credit Losses 9,325
Accounts receivables (Jan 1) $1,240,250
+Credit sales ($8,100,000 x .60) 4,860,000
– Cash collections (5,416,000)
– Sales returns (146,000)
– Write-off (62,500)
= Accounts receivables (Dec 31) 475,750
x Rate @ 6% 6%
= Total allowance needed 28,545
– Present allowance (19,220)
= Loss on impairment $ 9,325
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-133 Aged receivables and loss on impairment
Rainy Day Corp. produces and distributes umbrellas around the world to both wholesalers and direct retailers. Rainy Day Corp. sells most of the products on credit to its customers. The December 31, 2023 aged receivables report is as follows:
Amount
% Estimate of Outstanding at
Uncollectable Dec 31, 2023
0 to 30 2% $225,000
31 to 60 5% 175,000
61 to 90 8% 57,000
Over 90 20% 25,000
Instructions
a) Calculate the allowance for expected credit losses at Dec 31, 2023 assuming that there is an existing balance in the allowance for expected credit losses account of Dr. $1,500 prior to any year-end adjusting entries.
b) Prepare the required year-end journal entry to recognize Loss on Impairment.
c) Calculate the net realizable value of accounts receivable as it would appear on the Statement of Financial Position.
Critical Thinking
Take the role of the Account Receivable Analyst for Rainy Day Corp. The Controller of the company has asked for an explanation of how the estimate of uncollectable percentages were determined. Using predictive (data) analytics, what types of factors would be considered in determining these estimates?
Solution 7-133
Amount
% Estimate of Outstanding at A * B Allowance
Uncollectable Dec 31, 2023
0 to 30 2% $225,000 = $ 4,500
31 to 60 5% 175,000 = 8,750
61 to 90 8% 57,000 = 4,560
Over 90 20% 25,000 = 5,000
Total 28,810
a) Existing Balance 1,500 Debit
Desired Balance 22,810 Credit
Adjusting Entry 24,310
b) Loss on Impairment 24,310
Allowance for Expected Credit Losses 24,310
c) Total Accounts Receivable 482,000
Allowance for ECL –22,810
NRV 459,190
Critical Thinking
Estimates should be based on a risk assessment of the Rainy Day Corp’s customer base. This assessment would be done using information from a variety of sources including:
- Information from our database or Customer Relationship Management system (CRM) that would allow us to predict customer repayment behaviour
- Number of contacts between the company and the client
- Past repayment history
- Volume of past transactions
- Geographic location along with local market economic conditions
- Responsiveness to queries from Rainy Day Corp
- External Sources
- Credit rating agencies
- Local market research about the customers from other suppliers
- End users (the customers of our customer)
- Public record regarding garnishment orders, insolvency, etc.
- Industry comparisons
- What do others in our industry use for %s?
- Benchmarks
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the impairment in value of accounts receivable.
Section Reference: Impairment of Accounts Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-134 Notes received for services provided
Mr. Handy Electric Inc. provides electrician services to commercial builders in a large metropolitan area. Typically, fees are due within 30 days of completion of work. Mr. Handy Electric did some work for a large project that will take two years to complete. The general contractor will not be paid until the end of the project after a final walkthrough. Mr. Handy Electric has agreed to defer payment for 18 months for its services. The value of the work completed today is $52,000. Mr. Handy Electric agreed to accept $55,000 in 18 months from today, July 1, 2023.
Instructions
Using the information above complete the following:
a) What is the present value of the receivable assuming that Mr. Handy Electric requires a 6% return on its use of cash?
b) Prepare the journal entry to record the Receivable.
c) What is the required year-end entry(ies) assuming a December 31st, 2023 fiscal year end?
d) Assuming that $52,000 is the Present Value of the $55,000 Receivable, what is the implied interest rate under this arrangement.
Solution 7-134
a) Future Value $55,000.00
Time (months) 18.00
Rate 6%
Monthly Rate 0.50%
PV –50,277.49
b)
July 31, 2023
Notes Receivable 50,277.49
Revenue 50,277.49
Note: The Present value of the receivable is the relevant value to use for recognizing the sale. While the value of the work may be $52,000, Mr. Handy Electric has chosen to forgo payment, and the value of that decision is the present value of the future cash inflow of $55,000.
Dec 31, 2023
Interest Receivable 1,508.32
Interest Income 1,508.32
1508.32 = 50,277.49 x 6 months x .5%
d) If calculator, use the following inputs:
PV 52,000
FV 55,000
N 1.5
Calculate
I/Y 3.81%
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-135 Amortization of discount under the straight-line and effective interest methods
On January 1, 2023, Ethiopia Corporation receives a four-year, $50,000, zero-interest-bearing note in payment of goods sold. The present value of the note equals the agreed upon sales price of $32,936.55. Ethiopia is a privately held company and follows ASPE.
Instructions
a) Assuming Ethiopia uses the straight-line method to amortize the note's discount, prepare the journal entry to record the sale on January 1, and the interest accrual on December 31, 2023.
b) Assuming Ethiopia uses the effective interest (as required under IFRS) method to amortize the note's discount, prepare the journal entry to record the sale on January 1, and the interest accrual on December 31, 2023.
Solution 7-135
a) Straight-line
Notes Receivable 32,936.55
Sales Revenue 32,936.55
To record the sale and issue of the note on Jan 1
Notes Receivable ($50,000 – $32,936.55) / 4 4,265.86
Interest Income 4,265.86
To record the interest accrual on Dec 31
b) Effective Interest
Notes Receivable 32,936.55
Sales Revenue 32,936.55
To record the sale and issue of the note on Jan 1
Notes Receivable ($32,936.55 x 11%) 3,623.02
Interest Income 3,623.02
To record the interest accrual on Dec 31
Implicit rate of interest: 4 N, –32,936.55 PV, 50,000 FV, CPT I = 11%
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-136 Note with fair value not equal to cash consideration
On January 1, 2023, Tanzania Corp. lent $50,000 to its CEO, interest-free. However, the loan is repayable in five instalments, each December 31, until paid. The market rate for similar loans (with similar credit risk) is 4%.
Instructions
a) Calculate the present value (fair value) of this loan (round to the nearest dollar).
b) Prepare the journal entry to record this transaction.
c) Record the required year end entry at December 31, 2023 for the repayment of the loan.
Solution 7-136
a) 5 N, 4 I, 10,000 PMT, CPT PV = 44,518.
b) Notes Receivable…………………………………………………………. 44,518
Salaries and Wages Expense 5,482
Cash 50,000
c) Cash…………………………………………………………. 10,000
Notes Receivable………………………………………... 8,219
Interest Income……………………………………. 1,781
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-137 Record note receivable
On January 1, 2023, Jumpstart Corp. makes a loan to TryStar Company and receives a $100,000, five-year note bearing interest at 4% semi-annually. The market rate for similar loans (with similar credit risk) is 6%.
Instructions
a) Calculate the present value (fair value) of this loan (round to the nearest dollar).
b) Prepare the journal entry to record this transaction.
Solution 7-137
a) 10 N, 3 I, $2,000 PMT, FV = $100,000, CPT PV = $91,470.
b) Notes Receivable 91,470
Cash 91,470
Difficulty: Medium
Learning Objective: Account for and explain the accounting issues related to the recognition and measurement of notes and loans receivable.
Section Reference: Notes and Loans Receivable
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-138 Accounts receivable assigned
Prepare journal entries for Tanzania Inc. for:
a) Accounts receivable of $700,000 that were assigned to Chad Finance Co. by Tanzania as security for a loan of $580,000. Chad charged a 4% commission on the value of the accounts receivable; the interest rate on the note is 11%.
b) During the first month, Tanzania collected $300,000 on assigned accounts. As well, Tanzania wrote off a $1,100 assigned account as a bad debt.
c) Tanzania paid Chad the amount collected plus one month's interest on the note.
Solution 7-138
a) Cash………………………………………………………………… 552,000
Finance Expense ($700,000 x 4%) 28,000
Notes Payable 580,000
b) Cash 300,000
Allowance for Expected Credit Losses 1,100
Accounts Receivable 301,100
c) Notes Payable 300,000
Interest Expense ($580,000 x 11% / 12) 5,317
Cash 305,317
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-139 Factoring accounts receivable
On April 1, Morocco Ltd. factored $500,000 of accounts receivable with Kenya Finance Corp. on a without recourse basis. Under the arrangement, Morocco was to handle disputes concerning service, and Kenya Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Kenya Finance assessed a finance charge of 5% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts.
Instructions
a) Prepare the journal entry required on Morocco's books on April 1.
b) Prepare the journal entry required on Kenya Finance’s books on April 1.
c) Instead, assume Morocco factors the $500,000 of accounts receivable with Kenya Finance on a with recourse basis. The recourse provision has a fair value of $12,000. Prepare the journal entry required on Morocco’s books on April 1.
Solution 7-139
a) Cash…………………………………………………………………………… 465,000
Due from Factor (2% × $500,000) 10,000
Loss on Disposal of Receivables (5% × $500,000) 25,000
Accounts Receivable 500,000
b) Accounts Receivable 500,000
Due to Customer 10,000
Finance Revenue 25,000
Cash 465,000
c) Cash 465,000
Due from Factor 10,000
Loss on Disposal of Receivables ($25,000 + $12,000) 37,000
Accounts Receivable 500,000
Recourse Liability 12,000
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-140 Reasons for selling receivables
List at least three reasons why a business might sell its receivables to another party.
Solution 7-140
1. A business may sell its receivables because it needs the cash now and access to normal credit is not available or is too expensive.
2. A business may sell its receivables (instead of borrowing) to avoid violating debt covenant agreements.
3. A business may sell its receivables to avoid billing and collection activities, which are often costly and time-consuming.
4. For competitive reasons, many industries offer sales financing to encourage sales. However, the company may not be able to finance customers over long periods of time, so it will sell or factor the receivables to obtain the cash more quickly.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Pr. 7-141 Secured borrowings vs. factoring of receivables
Explain the difference between secured borrowings and factoring.
Solution 7-141
Secured borrowing uses accounts receivable (or other receivables, such as notes) as collateral to borrow money, usually from a bank. This is common business practice in Canada. The receivables are assigned or pledged as security for the loan. The assignor retains ownership and control of the receivables; therefore, the receivables remain as an asset on the assignor’s statement of financial position. The liability is recorded in the same way as any other liability. As the assigned receivables are collected, the proceeds are used to pay down the loan. Any interest or finance charges paid are expensed.
Factoring receivables is an outright sale to a factor or lender. The factor buys the receivables and deducts a fee upfront, which is recorded as a “Loss on Disposal of Receivables.” The receivables are transferred to the factor, who now has ownership and control of them, and the transferor derecognizes them from its books.
Receivables can be sold without recourse where the factor assumes the risk of collection and absorbs any bad debts. The factor may also keep a “holdback” (recorded as “Due from Factor” – a current asset) to cover any sales discounts or returns.
On the other hand, receivables are more commonly sold with recourse where the risk of bad debts remains with the transferor. In this case, a recourse liability must be recorded, which will increase the loss on disposal.
Difficulty: Medium
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 7-142 Receivables management and securitization of receivables
Starburst Corp. has the following select information available regarding its revenues and accounts receivable from its financial statements:
2023 2024 2025
Revenue $2,000,000 $2,500,000 $3,250,000
Accounts Receivable 112,000 125,000 275,000
It is estimated that 60% of all revenues are on credit, and Starburst Corp. offers customers 15-day credit terms.
Instructions
a) Calculate the Accounts Receivable Turnover and Average Collection Period for 2024 and 2025 and determine if there has been an improvement or deterioration in these ratios. What is the cash impact as a result of the change in these ratios from one period to the next? (round to 2 decimal places)
b) Data Analytics – if you were to do an analysis of what factors led to the improvement or deterioration of these performance metrics, what would you investigate.
c) The Controller has asked you to find ways to generate additional cash from the receivables. What options do you have though?
i. Managing accounts receivable
ii. Securitization / Factoring
Solution 7-142
a) 2024 2025
Accounts Receivable Turnover 12.66 9.75
Average Collection Period 28.84 37.44
Average Credit Sales/Day 5,342.47
Incr. in # of days to collect 8.60
Cash Impact (=5,342.47 x 8.60) 45,950
There has been a deterioration in both Accounts Receivable Turnover and Average Collection Period. It is taking approximately 9 days longer to collect on its receivables. The cash impact of this deterioration is $45,950.
b) Items that require investigation would include:
- Did the estimates to loss on impairment change? If so, why?
- Did we take on new customers with different risk profiles?
- Did the size of our sales transactions change?
- Is the 15-day term policy being managed appropriately?
- What kind of collection practices are being undertaken?
- How many letters are being sent and how frequently?
- What kind of credit application is required if any?
- What kind of diligence is completed on customer repayment history?
c) Two options include:
Managing accounts receivable:
- Work with the collections department to adhere to the 15-day term policy and reduce overall days outstanding to improve cash collection.
- Engage a collection agency to help collect outstanding receivables.
Securitization and Factoring:
- Engage a factoring service provider to sell off all or part of the receivables.
- Engage a financing institution to securitize the receivables against a lending facility like a line of credit or term loan.
Difficulty: Hard
Learning Objective: Account for and explain the basic accounting issues related to the derecognition of receivables.
Explain how receivables and loans are reported and analyzed
Section Reference: Derecognition of Receivables
CPA: Financial Reporting
Bloomcode: Evaluation
AACSB: Analytic
*Pr. 7-143 Bank reconciliation
Benin Company deposits all receipts daily and makes all payments by cheque. The following information is available from the cash records:
March 31 Bank Reconciliation
Balance per bank $35,160
Add: Deposits in transit 4,200
Deduct: Outstanding cheques (3,200)
Balance per books $36,160
Month of April Results
Per Bank Per Books
Balance April 30 $38,000 $42,140
April deposits recorded 11,200 17,300
April cheques recorded 12,010 11,320
Items on bank statement but not in books:
Note collected by bank 5,500 -0-
Bank service charge 50 -0-
Customer’s NSF cheque returned by the bank 1,800 -0-
Instructions
a) Calculate the amount of the April 30:
1. Deposits in transit
2. Outstanding cheques.
b) What is the April 30 adjusted cash balance? Show all work.
c) Prepare the adjusting entries required per the books on April 30.
*Solution 7-143
a) 1. Deposits in transit: $10,300 ($17,300 + $4,200 – $11,200)
2. Outstanding cheques: $2,510 ($11,320 – $12,010 + $3,200)
b) Adjusted cash balance at April 30: $45,790 ($42,140 + $5,500 – $50 – $1,800)
c) Cash 5,500
Notes Receivable 5,500
Bank Charges Expense……………………………………… 50
Cash 50
Accounts Receivable………………………………………………………… 1,800
Cash 1,800
Difficulty: Medium
Learning Objective: Explain common techniques for controlling cash.
Section Reference: Methods for Controlling Cash (Appendix 7A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
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Intermediate Accounting v1 13e | Canada | Test Bank
By Donald E. Kieso