Exam 8: Receivables

On December 31,2014,Barbie Bank securitized $3,000,000 of notes receivable using a securitization entity it had established.The cash received from the securitization entity was exactly $3,000,000,so it recognized no gain or loss on the transaction.Barbie Bank has the following account balances at December 31,2014 before the securitization was recorded: Assets Notes receivable \ 5,000,000 All other assets 15,000,000 Total assets \2 0,000,000 Liabilities and equity Liabilities \ 14,000,000 Equity 6,000,000 Total liabilities and equity \2 0,000,000 Net income for the year ended December 31,2014 \1 ,600,000 Required: a.Compute Barbie Bank's return-on-assets ratio and debt-to-equity ratio after completing this transaction assuming that the transaction was viewed as a sale under authoritative literature. b.Compute Barbie Bank's return-on-assets ratio and debt-to-equity ratio after completing this transaction assuming that the transaction was viewed as a collateralized borrowing under authoritative literature. The following table contains the data needed to compute the required ratios.

With a loan collateralized by receivables,

The sale of receivables to a third party is called

Non-interest bearing notes are initially recorded at

The matching principle requires that bad debts be treated as an expense in the year

In a troubled debt restructuring,there is a lack of symmetry in the financial reporting of the borrower and lender.

Lenders are willing to restructure a customer's loan to help the customer resolve present financial difficulties and stay in business and also because lenders often receive more through restructuring than they would get from foreclosure.

The Palmer Corporation sells goods to its customers on a note basis with 10% credit terms and interest payable at the end of each quarter. All notes are due in one year. Palmer makes the following sales on July 1, 2014: Customer Note Maturity Interest Due Interest Rate J. Perez \ 100,000 Quarterly 10\% P. Berg \ 100,000 - None To encourage sales, Berg was given a special deal on interest. Additional information: Future value of $100,000 in one year (quarterly interest) is $110,381. Present value of $100,000 for one year (quarterly interest) is $90,595. -What amount will Palmer use to record the sale to Berg?

Authoritative accounting literature provides little guidance regarding revenue recognition when a sales agreement contains conditions that may allow the buyer to return the product.

When a company transfers receivables with recourse

Companies occasionally adopt "aggressive" revenue recognition practices which then generate significant returns in later periods.

If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than that yielded,on average,by the mortgages in the portfolio,the selling price

XYZ Co.'s 2015 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2014.To evaluate whether the reduction in XYZ's ratio is reasonable,an analyst should

When a company sells its accounts receivable to a factor with recourse,it records a recourse obligation on its books.

Many receivables recognition irregularities can be discovered by tracking the relationship between changes in sales and changes in receivables.

For long-term credit sales transactions utilizing notes receivable,interest income is recorded each period over the note's term to maturity using the prevailing borrowing rate in effect at the end of each reporting period.

While collectibility of receivables requires forecasts which could later prove to be inaccurate,typical audit procedures of the current period will ensure that extreme overstatement of net receivables is rare.

The net realizable value of accounts receivable is decreased when a bad debt is written off.

The sales returns and allowances account is a contra-asset account.

Determining whether the allowance for uncollectibles is adequate requires judgment.