[QUESTION]
REFER TO: Ref. 08_05
52. If the note were discounted on August 1 under the terms of agreement with National Bank,
which one of the following journal entries would Jones record?
a.
DR Cash
$39,867
CR Note payable—National Bank
$39,867
b.
DR Cash
$40,000
CR Note receivable
$40,000
c.
DR Cash
$39,867
DR Interest expense
123
CR Note receivable
$40,000
d.
DR Cash
$39,867
DR Loss on sale of note receivable
123
CR Note payable—National Bank
$40,000
53. If a note receivable from a customer is discounted at a bank with recourse and the customer
defaults on final payment, the seller
a. has no obligation to the bank.
b. must repay the full amount of the note plus interest to the bank.
c. must refund the proceeds of the discounting to the bank.
d. must repay the principal only to the bank.
54. Per authoritative accounting literature, the determination of whether a transfer of receivables
is a sale or collateralized borrowing hinges on whether the
a. transfer was with or without recourse.
b. transferor collects payments directly from the customer.
c. transferor surrenders control over the receivable.
d. customer ultimately defaults.
55. Jones Co. sells on credit and maintains an allowance for doubtful accounts equal to 2% of the
company’s total $3,450,000 receivables balance as an estimate of accounts eventually becoming
actually uncollectible. Due to a cash shortfall, Jones sells $275,000 of its receivables with
recourse to Ninth National Bank and the bank withholds $12,000 from the factoring proceeds to
cover possible noncollections. At the time of discounting, the $12,000 was agreed upon as a
reasonable estimate and there was no recourse obligation recorded. If the noncollections
eventually amount to $15,000, the entry on Jones’ books when notified of this fact would be:
a.
DR Allowance for doubtful accounts
$3,000
CR Accounts receivable (specific customers)
$3,000
b.
DR Allowance for doubtful accounts
$15,000
CR Accounts receivable (specific customers)
$15,000
c.
DR Bad Debt provision
$3,000
CR Cash
$3,000
d.
DR Allowance for doubtful accounts
$15,000
CR Due from Ninth National Bank
$12,000
CR Cash
3,000
56. Ambiguity can arise as to whether receivables have been sold or instead are being used as
collateral for a loan whenever certain obligations, duties, or rights regarding the transferred
receivables are retained by the transferor. In distinguishing between sales and collateralized
borrowings using receivables, the critical issue
a. is whether the terms regarding the transfer were initiated by the transferor or transferee.
b. is whether the transferor surrenders control over the receivables.
c. comes down to how clearly the rights, etc. being retained are specified in the transfer
agreement.
d. is whether any gain or loss related to the transfer is recognized in earnings.
57. If a transfer of receivables is actually a borrowing but is erroneously treated as a sale,
a. both assets and liabilities are understated.
b. both assets and liabilities are overstated.
c. both assets and equity are understated.
d. ratios like debt-to-equity are consequently distorted by the overstatements.
58. Regan, Inc. implemented a program to improve the collection of its receivables. Over the
past two years, the company has collected 88% of its receivables, up from 80%. A review of the
company’s financial statements would be expected to show
a. a reduction in the percentage of the bad debt provision to receivables.
b. an increase in the percentage of the bad debt provision to receivables.
c. no difference in the percentage of the bad debt provision to receivables.
d. None of these answer choices are correct.
59. When receivables are bundled and transferred to another organization that issues securities
collateralized by the transferred receivables, the arrangement is defined as
a. collateralization.
b. discounting.
c. factoring.
d. securitization.
60. Which of the following is not a reason a company might accelerate cash collections?
a. The company may have an immediate need for cash but be short of it.
b. Current GAAP allows “off–balance sheet” treatment of factored receivables and collateralized
borrowings, thus enabling management to “window dress” the company’s financial position.
c. There may be an imbalance between the credit terms of the company’s suppliers and the time
required to collect customer receivables.
d. Competitive conditions require credit sales, but the company is unwilling to bear the cost of
processing and collecting receivables.
61. If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower
than the average yield on the mortgages in the portfolio, the selling price
a. is equal to the carrying value of the mortgages on the bank’s books.
b. is lower than the carrying value of the mortgages on the bank’s books.
c. is higher than the carrying value of the mortgages on the bank’s books.
d. cannot be determined by examining the carrying value of the mortgages on the bank’s books
because the selling price is determined purely by the market.
62. Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it
has formed should treat the transfer as a collateralized borrowing instead of a sale if the
transferor has
a. the power to direct the activities of the SE and the right to participate in the SE’s gains and
losses..
b. the power to direct the activities of the SE but not the right to participate in the SE’s gains and
losses.
c. limited control over the sale of the securities.
d. None of these answer choices are correct.
Use the following to answer questions 63 – 66:
REFERENCE: Ref. 08_06
Corona Industries purchased a stamping machine on January 2, 2018, for $100,000. It made an
initial payment of $20,000 and financed the balance over 5 years at State Bank. The loan terms
were for annual payments of $16,000 plus 10% interest, payable on December 31 each year. The
year 2021 proves to be a difficult year and on December 1, 2021 Corona negotiates a debt
restructuring with State Bank. The settlement calls for cash payment of accrued interest plus
$4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000.
The land has a current fair value of $22,000.
[QUESTION]
REFER TO: Ref. 08_06
63. On December 1, 2021, how much interest is accrued on this loan?
a. $2,933
b. $3,200
c. $6,933
d. $18,933
64. Which one of the following entries will Corona make to adjust for the land just prior to
transfer?
a.
DR Land
$7,000
CR Note payable—State Bank
$7,000
b.
DR Loss on disposal of asset
$7,000
CR Land
$7,000
c.
DR Land
$7,000
CR Gain on disposal of asset
$7,000
d.
DR Note payable—State Bank
$7,000
CR Gain on disposal of asset
$7,000
65. What is the amount of the restructuring gain or loss to Corona?
a. $6,000 loss
b. $6,000 gain
c. $8,933 loss
d. $13,000 gain
$28,933
66. What is the amount of the receivable restructuring gain or loss to State Bank?
a. $6,000 loss
b. $6,000 gain
c. $13,000 loss
d. $8,933 gain
67. The determining factor for accounting treatment of a troubled debt restructuring when there
is a continuation with modification of terms is whether
a. there is a gain or loss on the transaction to the debtor.
b. there is a gain or loss on the transaction to the lender.
c. the undiscounted sum of the future cash flows under the restructured note is above or below
the note’s carrying value (including accrued interest) at the restructuring date.
d. the discounted sum of the future cash flows under the restructured note is above or below the
note’s carrying value (including accrued interest) at the restructuring date.
68. When the sum of the future cash flows of a restructured note is above the current note’s
carrying value, the debtor recognizes
a. a gain on the debt restructure.
b. a loss on the debt restructure.
c. neither a gain nor a loss on the debt restructure.
Use the following to answer questions 69 – 74:
REFERENCE: Ref. 08_07
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued
interest. On October 1, 2018. Island and Mutual Bank execute an agreement whereby Island will
pay Mutual $128,000 on the due date of the note on October 1, 2020.
[QUESTION]
REFER TO: Ref. 08_07
69. Island will record this transaction to recognize
a. a debt restructuring gain of $20,000.
b. a debt restructuring loss of $20,000.
c. a debt restructuring gain of $8,000.
d. neither a gain nor a loss from debt restructuring.
70. What will be Island’s carrying value of the restructured note?
a. $100,000
b. $108,000
c. $118,000
d. $128,000
71. What effective interest rate will Island use for the restructured note?
a. 8.7%
b. 8.9%
c. 10.0%
d. 13.1%
72. If the present value interest factor for two years at 10% is .82645, what will be the new note
receivable balance for Mutual Bank?
a. $89,256
b. $105,786
c. $108,000
d. $128,000
73. Mutual Bank will record this transaction to recognize
a. a receivable restructuring gain of $2,214.
b. a debt restructuring loss of $8,000
c. neither a gain nor a lost from debt restructuring.
d. a debt restructuring loss of $2,214.
74. What effective interest rate will Mutual Bank use for the restructured note?
a. 8.7%
b. 8.9%
c. 10.0%
d. 13.1%
75. In a troubled debt restructuring, the restructured loan can differ from the original loan in any
of the ways listed below except:
a. Scheduled interest and principal payments may be reduced or eliminated.
b. The repayment schedule may be extended over a longer time period.
c. The repayment schedule is shortened and the interest rate is significantly increased.
d. The customer and lender can settle the loan.
76. When troubled debt is restructured via continuation with modification of debt terms, the
original loan is
a. continued but interest and principal payments may be reduced or eliminated.
b. continued but the repayment schedule may be extended over a longer time period.
c. continued but the amount of collateral securing the loan is increased.
d. cancelled and a new loan agreement is signed.
77. Under IFRS, the general accounting for accounts and notes receivable
a. presumes off-balance sheet treatment when these assets are sold.
b. has yet to be determined by the IASB.
c. is different than U.S. GAAP in that IFRS does not allow the fair value option.
d. is similar to the accounting under U.S. GAAP.
78. Which of the following is false regarding uncollectible accounts?
a. Most companies establish credit policies by weighing the expected cost of credit sales against
the expected benefit of increased sales.
b. Accrual accounting requires that some estimate of uncollectible accounts be offset against
current period sales.
c. Companies are generally not able to adopt stringent credit standards to keep bad debt losses at
a minimum.
d. To manage bad debts, companies often choose a profit-maximizing balance which makes
uncollectible accounts unavoidable.
79. Which of the following statements is true regarding a troubled debt restructuring?
a. In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the
borrower and lender.
b. A troubled debt restructuring can only be accomplished through a continuation with
modification of debt terms including cancelation of the original loan and execution of a new loan
agreement.
c. In a troubled debt restructuring, GAAP restructuring gains and losses for accounting are equal
to real economic gains and losses for the companies involved.
d. All accounting aspects of a troubled debt restructuring are explicitly covered by IFRS.
80. Regarding accounts receivable and an allowance for uncollectible accounts, which of the
following statements is false?
a. Net realizable value equals the sales price of an item less reasonable further costs to both make
the item ready to sell and to sell it.
b. An aging of accounts receivable is a determination of how long each receivable has been on
the books.
c. The net realizable value of accounts receivable is decreased when a bad debt is written off.
d. Receivables that result from transactions other than trade receivables, if material, are to be
separately disclosed on the balance sheet.
81. Which of the following statements is true regarding sales returns and allowances?
a. Ignoring estimated future returns and allowances has a minimal impact on reported earnings
when the amount of actual returns and allowances is not material and does not vary greatly from
year-to-year.
b. The sales returns and allowances account is a contra-asset account.
c. When sales returns occur, they should be debited to the sales account.
d. Estimated sales returns and allowances are often material in relation to accounts receivable.
82. Which of the following statements is false regarding accounts receivable reporting?
a. Growth in accounts receivable could exceed sales growth because a firm allows its customers
more time to pay.
b. Many irregularities in receivables recognition can be discovered by tracking the relationship
between changes in sales and changes in receivables.
c. When a company adopts an aggressive revenue recognition policy, it can lead to significant
journal entries of sales returns in later periods.
d. When a firm’s sales growth exceeds its growth in receivables, it could be an indication of
aggressive revenue recognition policies.
83. Which of the following statements is false regarding interest on receivables?
a. Interest must be imputed when the stated rate is lower the prevailing borrowing rate at the time
of the transaction.
b. Interest must be accounted for on all long-term notes receivable whether the interest rate is
stated or not.
c. Interest must be imputed when the stated rate is higher than the prevailing borrowing rate at
the time of the transaction.
d. For long-term credit sales transactions using notes receivable, interest income should be
recorded over the term of the note using the prevailing borrowing rate at the time of the
transaction.
84. Which of the following statements is true regarding the fair value option?
a. If a company does not elect the fair value option, it still must disclose the fair value of all its
notes receivable.
b. A firm may choose the fair value option for either a single financial instrument or a group of
financial instruments.
c. If a company does not elect the fair value option, it still must disclose the fair value of all its
accounts receivable.
d. Under U.S. GAAP, the only option a firm has is to value notes and accounts receivable is net
realizable value.
85. Which of the following statements is false regarding factoring receivables?
a. When a company factors its receivables with recourse, it cannot be required to make a
payment to the factor if a customer’s account proves to be uncollectible.
b. When a company accepts credit cards, it is engaging in a form of factoring.
c. Factoring can be done either with or without recourse.
d. When a company sells its accounts receivable to a factor with recourse, a recourse obligation
that is recorded would be a credit entry on its books.