Question 1

Lester Company received a seven-year zero-interest-bearing note on February 22, 2014, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2014, 7.5% on December 31, 2014, 7.7% on February 22, 2015, and 8% on December 31, 2015. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2014 and 2015, respectively?

Accepted Answer

The interest rate used to calculate interest revenue for a zero-interest-bearing note should be the prevailing rate at the time the note was issued, which was 7% on February 22, 2014. This rate is used for the duration of the note, regardless of changes in interest rates after the issuance date.

Question 2

On December 31, 2014, 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 yearsThe 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, 2014 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)

Accepted Answer

The present value of the two $40,000 payments is calculated using the present value of an ordinary annuity factor: $40,000 * 1.75911 = $70,364. The notes receivable net of the unamortized discount is $70,364.

Question 3

McGlone Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $25,000. During 2014, it wrote off $18,000 of accounts and collected $5,250 on accounts previously written off. The balance in Accounts Receivable was $500,000 at 1/1 and $600,000 at 12/31. At 12/31/14, McGlone estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for Doubtful Accounts at 12/31/14?

Accepted Answer

The answer of McGlone Corporation had a 1/1/14 balance in...

Question 4

Use the following information for questions 104 and 105.
A trial balance before adjustments included the following: 
-If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is

Accepted Answer

The amount of the adjustment is $8,600. The estimate of uncollectibles is made by taking 10% of gross account receivables, which is $86,000. Therefore, the amount of the adjustment is $8,600.

Question 5

Jones Company has notes receivable that have a fair value of $570,000 and a carrying amount of $750,000. Jones decides on December 31, 2014, to use the fair value option for these recently-acquired receivables. Which of the following entries will be made on December 31, 2014 to record the unrealized holding gain/loss?

Accepted Answer

The answer of Jones Company has notes receivable that have...

Question 6

Equestrain Roads accepted a customer's $50,000 zero-interest-bearing six-month note payable in a sales transaction. The product sold normally sells for $46,000. If the sale was made on June 30, how much interest revenue from this transaction would be recorded for the year ending December 31?

Accepted Answer

The answer of Equestrain Roads accepted a customer's $50,000 zero-interest-bearing...

Question 7

Lankton Company has the following account balances at year-end:  Lankton should report accounts receivable at a net amount of

Accepted Answer

The answer of Lankton Company has the following account balances...

Question 8

During the year, Kiner Company made an entry to write off a $16,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $200,000 and the balance in the allowance account was $18,000. The net realizable value of accounts receivable after the write-off entry was

Accepted Answer

Before the write-off entry, the net realizable value of accounts receivable was $182,000 ($200,000 - $18,000). After the write-off entry, the accounts receivable balance would be reduced by $16,000 to $184,000 ($200,000 - $16,000). The allowance for doubtful accounts balance would also be adjusted to reflect the write-off, resulting in a new balance of $18,000 ($18,000 - $16,000). Therefore, the net realizable value of accounts receivable after the write-off entry would be $166,000 ($184,000 - $18,000).

Question 9

Vasguez Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $30,000. During 2014, it wrote off $21,600 of accounts and collected $6,300 on accounts previously written off. The balance in Accounts Receivable was $600,000 at 1/1 and $720,000 at 12/31. At 12/31/14, Vasguez estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2014?

Accepted Answer

The answer of Vasguez Corporation had a 1/1/14 balance in...

Question 10

Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $80,000 payment in two years? (The present value of $1 for two periods at 10% is 0.82645).

Accepted Answer

The answer of Assuming the market interest rate is 10%...

Question 11

Sun Inc. factors $3,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $115,000. What would be recorded as a gain (loss) on the transfer of receivables?

Accepted Answer

The calculation for the loss on the transfer of receivables is as follows: Sun Inc. factors $3,000,000 of its accounts receivables. The finance charge is 5% of $3,000,000, which equals $150,000. The finance company retains 10% of the accounts receivable, which is $300,000, for possible adjustments. However, this retained amount is not a direct cost to Sun Inc. but rather an amount withheld from the proceeds. The fair value of the recourse liability is $115,000, but this liability represents an additional obligation of Sun Inc. and does not directly impact the calculation of the gain or loss on the transfer. The loss is calculated solely based on the finance charge, which is $150,000. Therefore, Sun Inc. records a loss of $150,000 on the transfer of receivables.

Question 12

Shelton Company has the following account balances at year-end:  Shelton should report accounts receivable at a net amount of

Accepted Answer

To report accounts receivable at a net amount, we need to deduct the allowance for doubtful accounts from the total accounts receivable balance. The allowance for doubtful accounts is calculated as a percentage of the accounts receivable balance based on historical experience and current economic conditions. In this case, the allowance is calculated as 8% of $120,000 ($9,600). Therefore, the net amount of accounts receivable is $112,800 ($120,000 - $9,600).

Question 13

Use the following information for questions 104 and 105.
A trial balance before adjustments included the following: 
-If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is

Accepted Answer

The answer of Use the following information for questions 104...

Question 14

Equestrain Roads sold $80,000, of goods and accepted the customer's $80,000 10%,1-year note payable in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30?

Accepted Answer

The note payable is for $80,000 and has an interest rate of 10% per year. Since the sale was made on June 30, only half of the year has passed until December 31. Therefore, the interest expense for the year ending December 31 would be half of the annual interest rate:

$80,000 x 10% x 1/2 = $4,000

So, the correct answer choice is (C) $4,000.

Question 15

Before year-end adjusting entries, Dunn Company's account balances at December 31, 2014, for accounts receivable and the related allowance for uncollectible accounts were $1,200,000 and $90,000, respectively. An aging of accounts receivable indicated that $125,000 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is

Accepted Answer

To calculate the net realizable value of accounts receivable after adjustment, we need to subtract the allowance for uncollectible accounts from the accounts receivable balance, and then subtract the estimated amount of uncollectible accounts from that sum.

Accounts Receivable balance: $1,200,000 
Less: Allowance for Uncollectible Accounts balance: $90,000 
= Net Accounts Receivable before adjustment: $1,110,000

Net Accounts Receivable before adjustment: $1,110,000 
Less: Estimated Uncollectible Accounts: $125,000 
= Net Realizable Value of Accounts Receivable after adjustment: $985,000

Therefore, the correct answer is B) $1,075,000.

Question 16

Smithson Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $20,000. During 2014, it wrote off $14,400 of accounts and collected $4,200 on accounts previously written off. The balance in Accounts Receivable was $400,000 at 1/1 and $480,000 at 12/31. At 12/31/14, Smithson estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2014?

Accepted Answer

The answer of Smithson Corporation had a 1/1/14 balance in...

Question 17

The following information is available for Murphy Company:  As a result of a review and aging of accounts receivable in early January 2015, it has been determined that an allowance for doubtful accounts of $11,000 is needed at December 31, 2014. What amount should Murphy record as "bad debt expense" for the year ended December 31, 2014?

Accepted Answer

The necessary allowance for doubtful accounts at December 31, 2014 is $11,000. This means that $11,000 worth of accounts receivable is estimated to be uncollectible. To record this necessary allowance, Murphy Company must increase their allowance for doubtful accounts by $11,000. This would be done through a credit to the allowance for doubtful accounts account on the balance sheet. The corresponding debit would be to an expense account, called bad debt expense, on the income statement. Therefore, the amount of bad debt expense recorded for the year ended December 31, 2014 would also be $13,000 (11,000 increase in allowance for doubtful accounts from the current balance of $2,000).

Question 18

Equestrain Roads sold $80,000, of goods and accepted the customer's $80,000 10%,1-year note receivable in exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to record the sale?

Accepted Answer

The correct debit in this journal entry is to Notes Receivable for $80,000, as the company accepted a note receivable in exchange for the goods sold, and the amount of the note matches the sales amount.

Question 19

Black Corporation had a 1/1/14 balance in the Allowance for Doubtful Accounts of $18,000. During 2014, it wrote off $12,960 of accounts and collected $3,780 on accounts previously written off. The balance in Accounts Receivable was $360,000 at 1/1 and $432,000 at 12/31. At 12/31/14, Black estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at 12/31/14?

Accepted Answer

The Allowance for Doubtful Accounts at 12/31/14 is calculated as follows: Start with the beginning balance of $18,000, subtract write-offs of $12,960, add recoveries of $3,780, and adjust to the estimated uncollectible amount of 5% of the ending Accounts Receivable balance ($432,000 * 5% = $21,600). The adjustments for write-offs and recoveries result in a balance of $8,820 before the year-end adjustment. To reach the required ending balance of $21,600, an additional adjustment is made, resulting in the final reported Allowance for Doubtful Accounts of $21,600.

Question 20

Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $600,000 to Arch Inc. Arch Inc. will pay $650,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?

Accepted Answer

Revenue should be recorded at the amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In this case, Royal Palm Corp. normally sells this type of equipment for 90% of the list price, which is $600,000 * 90% = $540,000. The fact that Arch Inc. will pay $650,000 in one year includes an interest component and does not affect the revenue recognition amount for the sale of the machinery.

Quiz 7: Cash and Receivables

Use the following information for questions 104 and 105. A trial balance before adjustments included the following: -If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is

Equestrain Roads accepted a customer's $50,000 zero-interest-bearing six-month note payable in a sales transaction. The product sold normally sells for $46,000. If the sale was made on June 30, how much interest revenue from this transaction would be recorded for the year ending December 31?

Lankton Company has the following account balances at year-end: Lankton should report accounts receivable at a net amount of

During the year, Kiner Company made an entry to write off a $16,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $200,000 and the balance in the allowance account was $18,000. The net realizable value of accounts receivable after the write-off entry was

Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $80,000 payment in two years? (The present value of $1 for two periods at 10% is 0.82645) .

Shelton Company has the following account balances at year-end: Shelton should report accounts receivable at a net amount of

Use the following information for questions 104 and 105. A trial balance before adjustments included the following: -If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is

Equestrain Roads sold $80,000, of goods and accepted the customer's $80,000 10%,1-year note payable in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30?

Equestrain Roads sold $80,000, of goods and accepted the customer's $80,000 10%,1-year note receivable in exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to record the sale?

Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $600,000 to Arch Inc. Arch Inc. will pay $650,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?