Under Compensating Balances arrangement:•Borrower is asked to maintain a specified balance in a low interest or non-interest-bearing account at the bank.
•Required balance equals some percentage of the committed amount.
•Borrower pays effective interest rate higher than the stated rate on the debt.Jenks borrowed $13,000,000 from a bank at a 10% rate of interest. The bank requires Jenks to maintain a $3,000,000 compensating balance. What is Jenks' effective interest rate?a. 7.7%.
b. 10%.
c. 13%.
d. 23%.__________ created when sellers recognize revenue associated with a credit sale.Accounts ReceivableTrade Discounts: (NOT VARIABLE CONSIDERATION)•A percentage reduction from the list price.
•Quantity discounts to large customers.Sales Discounts•Reductions in the amount to be paid by a credit customer if paid within a specified period of time.
•Intended to provide incentive for quick payment.2/10 , n/30meaning a 2% discount if paid within 10 days otherwise full payment within 30 daysGROSS METHOD
The Hawthorne Manufacturing Company offers credit customers a sales discount: 2/10, n/30. On October 5, 2021, Hawthorne sold merchandise at a price of $20,000. The customer paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4.Oct. 5 JE
dr: Accounts receivable
20,000
cr: Sales revenue
20,000
Oct. 14 JE
dr: Cash 13,720
dr: sales discount (xRev) 280,
cr: AR 14,000
Nov. 4 JE
dr: Cash 6000
cr: AR 6000NET METHOD
The Hawthorne Manufacturing Company offers credit customers a sales discount: 2/10, n/30. On October 5, 2021, Hawthorne sold merchandise at a price of $20,000. The customer paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4Oct. 5 JE
dr: Accounts receivable
19,600 (20,000*.98)
cr: Sales revenue
19,600
Oct. 14 JE
dr: Cash 13,720
cr: AR 13,720
Nov. 4 JE
dr: Cash 6000
cr: AR 5880
cr: sales disc forfeited 120Which of the following is not true about recording sales discounts?a. The gross method records sales discounts taken when payment occurs during the discount period.
b. The net method records sales discounts not taken as sales discounts forfeited.
c. Net sales revenue is higher under the gross method than under the net method.
d. Net sales revenue is the same under both methods.Sales ReturnsMerchandise is returned for a refund or for credit to be applied to other purchases.allowanceSpecial price reduction that may be given as an incentive for the customer to keep the merchandise rather than returning it.Five Dollar Stores (FDS) sells merchandise for cash. It began 2021 with a refund liability of $0, made sales of $1,000,000 during 2021 which cost FDS $600,000 (or 60%), estimates that 1% of all sales will be returned, and experiences $8,000 of returns during 2021. When accruing its estimate of remaining returns at the end of 2021, FDS would debit sales returns and credit the refund liability for:b. $10,000.
c. $8,000.
d. $2,000. (1% of 1m is 10K, 8K has already been returned.)Five Dollar Stores (F D S) sells merchandise for cash. It began 2021 with a refund liability of $0, made sales of $1,000,000 during 2021 which cost F D S $600,000 (or 60%), estimates that 1% of all sales will be returned, and experiences $8,000 of returns during 2021. When accruing its estimate of remaining returns at the end of 2021, F D S would debit Inventory—estimated returns and credit COGS for:a. $6,000.
b. $4,800.
c. $1,200.
d. $0.How should we account for the fact that not every account receivable is likely to be collected?.•Direct Write-Off Method (NOT GAAP).
•Allowance Method (GAAP).Direct Write-Off Method (NOT GAAP).Wait until a particular account is deemed uncollectible and write it off at that time.
two shortcomings:
1.Overstates the balance in accounts receivable in the periods prior to the write-off.
2, Distorts net income by postponing recognition of any bad debt expense until the period in which the customer actually fails to payDirect Write Off Method JEdr BDE
cr ARAllowance Method (GAAP)•Required by GAAP whenever the amount of bad debts is material.
•Is recognized earlier, when accounts are estimated to be uncollectible and the allowance is created.
•Later, when a specific account receivable is deemed actually uncollectible, both the allowance and the specific account receivable are reduced to write off the receivable.Green Valley Steel had sales of $1,000,000 and collections of $760,000, leaving a balance of $240,000 in accounts receivable as of December 31, 2021. Analysis indicates it expects to collect $200,000 of its accounts receivable. How would it set up an allowance for uncollectible accounts?a. Debit accounts receivable for $40,000 and credit bad debts for $40,000.
b. Debit bad debt expense for $40,000 and credit allowance for uncollectible accounts for $40,000.
c. Debit allowance for uncollectible accounts for $40,000 and credit accounts receivable for $40,000.
d. Debit allowance for uncollectible accounts for $40,000 and credit bad debts for $40,000.balance sheet approach•Base bad debt expense on the appropriate carrying value of accounts receivable.
•Company estimates what the ending balance of the allowance for uncollectible accounts should be, and then records the amount of bad debt expense necessary to adjust the allowance to that desired balance.Accounts Receivable Aging Schedulea report listing customer account balances by length of time outstandingIncome Statement ApproachEstimate bad debt expense directly as a percentage of each period's net credit sales.Berkley Associates uses the balance sheet approach to estimate bad debts expense. It started 2021 with a credit balance of $10,000 in its allowance for uncollectible accounts. Berkley wrote off $200,000 of bad debts during 2021, and its aging of accounts receivable at 12/31/21 indicates it should have a credit balance of $5,000 in the allowance for uncollectible accounts. No other journal entries to the allowance have been made. Berkley's journal entry to record bad debts expense should include a:a. Debit to bad debt expense of $195,000.
b. Debit to the allowance for $5,000.
c. Credit to bad debt expense for $200,000.
d. Credit to the allowance for $200,000.Notes ReceivableClassified as either current or noncurrent depending on expected collection date.
•Less than a year → short-term note.
More than a year→long-term note.Finkel sold merchandise to a customer in exchange for a four-year, non-interest-bearing note for $10,000. An equivalent loan would have a 10% interest rate. Finkel would record sales revenue on the date of sale equal to:a. $0.
b. $10,000.
c. The present value of $10,000, discounted at a 10% discount rate for four years.
d. $9,000, equal to $10,000 − (10% × $10,000).On June 1, 2021, Detert accepted a six-month note paying $100,000 plus 8% interest in exchange for services rendered. Detert immediately discounted the note at SouthBank, paying a 10% discount rate. On June 1, Detert will receive how much cash from SouthBank?a. $98,800.
b. $97,200.
c. $100,000.
d. $108,000.Disclosures- Information that transferors must provide in disclosures includes•The transfer.
•Any continuing involvement with the transferred assets.
•Any ongoing risks to the transferor.
•How fair values were estimated when recording the transaction.
•Any cash flows occurring between the transferor and the transferee.
How any continuing involvement in the transferred assets will be accounted for on an ongoing basis
