Exam 7: Cash and Receivables

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.

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.

Which of the following is NOT a financial asset?

Classification of accounts receivable Trade receivables are amounts owed by customers to whom a company has sold goods or services as part of normal business operations. Briefly explain the difference between open accounts receivable and notes receivable.

Which of the following statements is/are true regarding the receivables turnover ratio?

Allowance for doubtful accounts 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 bad debt expense. There are basically two methods of recognizing bad debt expense: (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 bad debt expense. 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.

On February 1, 2020, 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, you are to 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

Which of the following is INCORRECT regarding factoring of receivables?

Schedule of note discount amortization On December 31, 2017, 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, 2020, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable 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: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\underline{\text { Interest Rate }}$ Future Value of 1 Present Value of 1 Future Value of Ordinary Annuity of 1 Present Value of Ordinary Annuity of 1 1.15763 .86384 3.15250 2.72325 1.33100 .753100 3.31000 2.48685 Instructions Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method. (Round to whole dollars.)

Which of the following approaches to determine bad debts expense best achieves the matching concept?

When preparing a bank reconciliation, a deposit credited to our account by the bank in error is

Amortization of discount on note On December 31, 2017, 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, 2020, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable 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: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\underline{\text { Interest Rate }}$ Future Value of 1 Present Value of 1 Future Value of Ordinary Annuity of 1 Present Value of Ordinary Annuity of 1 1.15763 .86384 3.15250 2.72325 1.33100 .753100 3.31000 2.48685 Instructions Determine the present value of the note.

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, and certificates of deposit totalling $248,000. How much should be reported as cash in the statement of financial position?

Record note receivable On January 1, 2020, 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.