Exam 7: Cash and Receivables

Discounts on notes receivable are recognized as interest earned over the term of the related note.

Excerpts from Huckabee Company's December 31, 2018 and 2017, financial statements are presented below: 2018 2017 Accounts receivable \ 80,000 \ 72,000 Merchandise inventory 58,000 72,000 Net sales 400,000 372,000 Cost of goods sold 240,000 220,000 - Huckabee's 2018 average collection period (rounded) is:

Briefly compare and contrast the two approaches to estimating bad debt expense. In your answer, indicate which approach, if either, is superior.

During Burns Company's first year of operations, credit sales totaled $140,000 and collections on credit sales totaled $105,000. Burns estimates that bad debt losses will be 1.5% of credit sales. By year-end, Burns had written off $300 of specific accounts as uncollectible. Required: 1. Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense. 2. Show the year-end balance sheet presentation for accounts receivable.

On October 1, 2018, Watergate Hotels borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivables as collateral. Additionally, Watergate was charged a finance fee equal to 1% of the accounts receivable assigned. At the end of December, $300,000 of the assigned receivables were collected and remitted to the lender along with accrued interest. Required: Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.

In the balance sheet at the end of its first year of operations, Dinty Inc. reported an allowance for uncollectible accounts of $82,000. During the year, Dinty wrote off $32,000 of accounts receivable it had attempted to collect and failed. Credit sales for the year were $2,200,000, and cash collections from credit customers totaled $1,950,000. -What accounts receivable balance would Dinty report in its first year-end balance sheet?

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. What is the correct entry for Flores on November 17, assuming the correct payment was received on that date?

On June 30, 2018, Blondie Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $400,000 in accounts receivable to Dogwood Finance Company without recourse for a 5% fee. Option Two calls for Blondie to transfer the $400,000 in receivables to Dogwood with recourse. Dogwood's charges a 4% fee for receivables factored with recourse. Option Two meets the conditions to be considered a sale, but Blondie estimates a $3,000 recourse liability. Under either option, Dogwood will immediately remit 90% of the factored receivables to Blondie, and retain 10%. When Dogwood collects the remaining receivables, it remits the amount, less the fee, to Blondie. Blondie estimates that the fair value of the final 10% of the receivables is $25,000 (ignoring the factoring fee). Required: 1. Prepare any necessary journal entry or entries if receivables are factored under Option One. 2. Prepare any necessary journal entry or entries if receivables are factored under Option Two.

Long-term notes receivable issued for noncash assets at an unrealistically low interest rate will be:

Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom's would credit accounts receivable and debit:

-For each posted entry in the allowance account during 2015, prepare the journal entry.

Costa Co. has the following cash balances at local banks as of 12/31/2018: National Bank: \ 100,000 K\&P Bank: 25,000 Insolvent Trust: (5,000) Required: 1. Prepare the Current Assets and Current Liabilities section of Costa's 2018 balance sheet, assuming Parker reports under U.S. GAAP. 2. Prepare the Current Assets and Current Liabilities section of Costa's 2018 balance sheet, assuming Parker reports under IFRS.

Cash that is restricted and not available for current operations is reported in the balance sheet as:

Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending balance of accounts receivable. During 2018, Chez Fred's credit sales and collections were $125,000 and $131,000, respectively. What was the balance of accounts receivable on January 1, 2018, if $180 in accounts receivable were written off during 2018 and if the allowance account had a balance of $750 on December 31, 2018?

Sales returns and trade discounts are both examples of variable consideration that must be accounted for when receivables are recognized.

Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2018. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%. The entry to record interest on December 31, 2018 would be:

Baker Inc. acquired equipment from the manufacturer on 10/1/2018 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2019 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2018 year-end financial statements, what is its imputed annual interest rate?

Belushi, Inc. owes Cusack County Trust $40 million under an 5% note with six years remaining to maturity. Due to financial difficulties of Belushi, the previous year's interest ($2.5 million) was not received. Cusack believes there is a 20% chance that Belushi will default on the note, and that, if Belushi defaults, the present value of all amounts Cusack eventually will collect is $22.5 million. Required: 1. Compute the impairment loss that Cusack would record. 2. Assume Cusack is reporting under ASU 2016-13 and therefore using the CECL model. Compute the impairment loss that Cusack would record.

The income statement approach to calculating bad debt expense should not be used if it results in a carrying value of accounts receivable that is materially different from what would be obtained under a balance sheet approach.

Companies can have accounts receivable from ordinary trade customers and from related parties (e.g., directors, employees or large shareholders). How does U.S. GAAP differ from IFRS in its requirements regarding separate disclosure of trade receivables and related-party receivables? Why might separate disclosure of related party receivables be useful?