Inclass Questions CH 7 - solution in class practice PDF

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INCLASS QUESTIONS BRIEF EXERCISE 7.4

1. 2. 3. 4. 5.

(a) Current, (b) Trade receivable (a) Current, (b) Not a receivable; current liability (a) Current, (b) Nontrade receivable (a) Noncurrent, (b) Trade receivable (a) Noncurrent, (b) Nontrade receivable

BRIEF EXERCISE 7.7

Bad Debt Expense1........................................................... 37,400 Allowance for Doubtful Accounts.......................... 1

37,400

($42,000 – $4,600)

BRIEF EXERCISE 7.8

Bad Debt Expense1

45,000

Allowance for Doubtful Accounts

45,000

1

($42,000 + $3,000)

BRIEF EXERCISE 7.9

a. 11/1/20

Notes Receivable

20,000

Sales Revenue 12/31/20 Interest Receivable

20,000 200

Interest Income1

200

1

($20,000 X 6% X 2/12)

5/1/21

Cash

20,600 Notes Receivable

20,000

Interest Receivable

200

Interest Income2

400

($20,000 X 6% X 4/12)

b. 1/1/21

Interest Income

200

Interest Receivable

5/1/21

Cash

200

20,600 Notes Receivable

20,000

Interest Income

600

BRIEF EXERCISE 7.10

Notes Receivable

47,573

Cash

47,573

To record initial transaction

Cash

49,000 Notes Receivable Interest Income

47,573 1,427

To record collection at maturity BRIEF EXERCISE 7.11 a. Notes Receivable

30,053

Cash

30,053

To record initial transaction Notes Receivable

3,005

Interest Income1

3,005

1

($30,053 X 10%)

To record interest income in the first year Notes Receivable

3,306

Interest Income2

3,306

1

([$30,053 + $3,005] X 10%)

To record interest income in the second year Notes Receivable

3,636

Interest Income3

3,636

3

([$30,053 + $3,005 + $3,306] X 10%)

To record interest income in the third year Cash Notes Receivable To record collection at maturity

40,000 40,000

BRIEF EXERCISE 7.14

Alpha Inc. Cash

2,480,000

Finance Expense ($3,000,000 X 4%)

120,000

Notes Payable

2,600,000

Alberta Provincial Bank Notes Receivable

2,600,000

Cash

2,480,000

Finance Revenue

120,000

Note: No interest charge is calculated since no time has passed since the note’s issuance BRIEF EXERCISE 7.15

Landstalker Cash

682,500

Due from Factor1

37,500

Loss on Disposal of Receivables2

30,000

Accounts Receivable 1

($750,000 x 5%)

2

($750,000 x 4%)

750,000

Leander Accounts Receivable Accounts Payable

750,000 37,500

Financing Revenue

30,000

Cash

682,500

BRIEF EXERCISE 7.16

Cash

682,500

Due from Factor2

37,500

Loss on Disposal of Receivables2

39,000

Accounts Receivable Recourse Liability ($750,000 x 5%) 2 ($750,000 x 4% = $30,000 + $9,000) EXERCISE 7.5

750,000 9,000

1

a. 7/1 Accounts Receivable........................................................ 9,000 Sales Revenue......................................................... 9,000 7/3 Sales Returns and Allowances........................................ 700 Accounts Receivable..............................................

700

7/5 Cash ($19,000 X 91%)........................................................ 17,290 Loss on Disposal of Receivables.................................... 1,710 Accounts Receivable .............................................19,000 7/9

Cash ................................................................................... 10,670 Finance Expense ($11,000 X 3%)..................................... 330

Notes Payable.......................................................... 11,000 To record note payable

12/29 Allowance for Doubtful Accounts................................... 7,470 Accounts Receivable................................................ 7,470 [$9,000 – $700 = $8,300; $8,300 – (10% X $8,300) = $7,470]

b.

If the receivables are factored without recourse, the transaction would be treated as a sale of receivables under ASPE and IFRS. The risks and rewards are assumed to have been transferred and control is also assumed to have been transferred. c. If the receivables are factored with recourse, under IFRS the risks and rewards will not be considered to have been transferred. There is no transfer because Janut is guaranteeing payment if the customer does not pay the receivable. One of the IFRS 9 criteria of risks and rewards being transferred has not been met: “The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original receivable.” The receivables, therefore, remain on the books of Janut and a loan liability is recorded.

Under ASPE, Janut uses the decision tree provided under the standard. Assuming they have surrendered control (assets are isolated, transferee can pledge/sell assets, no repurchase agreement), Janut can use a financial components approach and the

receivables can be removed from the books. A recourse obligation (liability) is recorded for the estimated amount that would have to be paid for the debtors who do not pay their receivables balance, as well as an estimated liability for any servicing costs. EXERCISE 7.6

a.

Morganfield Ltd. accounts receivable write-off: Allowance for Doubtful Accounts................................... 20,000 Accounts Receivable..............................................

20,000

McKinley Ltd. reinstatement of partial accounts receivable for amounts previously written off and now determined to be collectible: Accounts Receivable—McKinley Ltd.............................. 6,000 Allowance for Doubtful Accounts..........................

6,000

($60,000 X 10%)

b.

Accounts Receivable (Book Value) Allowance for Doubtful Accounts Net Realizable Value

* $2,500,000 - $20,000 + $6,000

Before

After

Adjustments

Adjustments

$ 2,500,000 120,000 $ 2,380,000

$2,486,000* 106,000** $ 2,380,000

** $120,000 - $20,000 + $6,000

The net realizable value is also $2,380,000 before and after the adjustments. EXERCISE 7.7

Balance, January 1, 2020 Bad debt expense accrual .8% X ($80,000,000 X 0.9)

$400,000 576,000 976,000

Uncollectible receivables written off Balance, December 31, 2020 before adjustment Allowance adjustment Balance, December 31, 2020

(500,000) 476,000 49,000 $525,000

Bad Debt Expense............................................................ 49,000 Allowance for Doubtful Accounts.......................... 49,000 EXERCISE 7.8

a.

The direct write-off approach is not theoretically justifiable. Direct write-off does not match (bad debt) expense with revenues of the period, nor does it result in receivables being stated at estimated realizable value on the balance sheet.

b.

Bad Debt Expense using the allowance method and percentageof-sales approach = 2% of Sales = $64,000 ($3,200,000 X 2%)

NI will decrease by 64,000

Bad Debt Expense using the direct write-off method = $33,330 ($7,700 + $6,800 + $12,000 + $6,830)

NI will decrease by 33,330

Net income would be $30,670 ($64,000 – $33,330) lower under the allowance method and percentage-of-sales approach.

c.

The direct write-off method is not considered appropriate, except when the amount uncollectible is highly immaterial. EXERCISE 7.9

a. 1.

Bad Debt Expense1........................................................... 6,150 Allowance for Doubtful Accounts..........................6,150 1

[($105,000 X 4%) + $1,950]

2.

Bad Debt Expense2........................................................... 7,758 Allowance for Doubtful Accounts..........................7,758

2

($36,000 X .01 + $48,000 X .05 + $12,200 X .12 + $8,800 X .18) + $1,950 5808

3.

Bad Debt Expense3........................................................... 2,250 Allowance for Doubtful Accounts..........................2,250 3

4.

[($105,000 X 4%) - $1,950]

Bad Debt Expense4........................................................... 3,858 Allowance for Doubtful Accounts..........................3,858

4

($36,000 X .01 + $48,000 X .05 + $12,200 X .12 + $8,800 X .18) − $1,950

a. An unadjusted debit balance in allowance for doubtful accounts at year end is generally a result of write-offs during the year exceeding the total of beginning credit balance in allowance for doubtful accounts, plus the current year bad debt expense accrual. As an independent reviewer, ensure that  bad debt expense accrual in the current year is needed to ensure there is a sufficient credit balance in the allowance for doubtful accounts at the end of the year.  ensure that accounts receivable (net) is valued at net realizable value on the balance sheet.  management to make an estimate of uncollectible accounts which would place the allowance for doubtful accounts appropriately in a credit balance. c.  When an entity assesses lifetime expected credit losses, it should examine all possible default events over the life of the accounts receivable.  It would use information available at the reporting date to evaluate a range of possible outcomes (based on past events, current conditions, and forecasts of future economic conditions) and their probability of occurring.  The allowance method examines the composition of the receivables at the reporting date.  A percentage-of-sales approach relies on historical bad debt losses only and may not reflect all the expected credit losses.  If a percentage-of-sales approach is used during the accounting period, the allowance method should be applied at the reporting date to further examine the makeup of the receivables at that time.

 Using the percentage-of-sales approach would only be appropriate if there is also an assessment of the year-end receivables to ensure that the Allowance account is appropriate (a mix of procedures).  An adjustment may be needed to the account with the offsetting debit or credit being made to Bad Debt Expense.  Chloe uses an allowance method and the approach used in #2 and #4 are likely best, as the aging information should provide more information to assess collectability.  Chloe would also want to ensure that information on current and forecasted conditions (considering factors like industry and geographic conditions) are also assessed in reviewing the receivables at the reporting date.  This approach would be more consistent with IFRS 9 where impairment represents "expected credit losses resulting from all possible default events" (that is, more consistent with an expected loss model).  In some circumstances, there is an agreement in place with a particular customer, giving that customer an additional grace period in paying their account.  In this case, the age of the account should not be the primary criteria in assessing whether or not the account is likely to be collected.  Such accounts should be assessed separately (based on the unique client arrangements and correspondence with the client) and excluded from the aging schedule calculation.  Chloe’s approach to accounting for sales returns would differ under IFRS. For sales with a right of return, under IFRS, a Refund Liability account is credited and Sales Revenue is debited rather than Sales Returns and Allowances.

EXERCISE 7.17

a.

To be recorded as a sale under ASPE, all of the following conditions must be met: 1.

The transferred assets have been isolated from the transferor (put beyond reach of the transferor and its creditors, even in bankruptcy or receivership).

2.

The transferee has obtained the right to pledge or to sell either the transferred assets or beneficial interests in the transferred assets.

3.

b.

The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity.

Calculation of net proceeds: Cash received ($600,000 X 92.25%) Due from factor ($600,000 X 5.25%) Less: Recourse obligation Net proceeds

$553,500 31,500 $585,000 6,000 $579,000

Calculation of gain or loss: Carrying amount of receivables Net proceeds

$600,000 579,000

Loss on disposal of receivables

$ 21,000

Note: Loss on disposal of receivables can also be calculated as the finance expense assessed plus the fair value of the recourse obligation (in this case, [$600,000 X 2.5%] + $6,000 = $21,000). b. (continued)

The following journal entry would be recorded on August 15, 2020: Cash.......................................................................... 553,500 Due from Factor....................................................... 31,500 Loss on Disposal of Receivables........................... 21,000 Recourse Liability............................................

6,000

Accounts Receivable.......................................

600,000

c.

Factoring the accounts receivable will improve the accounts receivable turnover ratio, if it were calculated on August 15, 2020, immediately after recording the entry in (b) above. The balance of accounts receivable used in the denominator will be reduced by the average of $600,000 and any amounts factored at the other date(s) used in determining the average accounts receivable, thereby making the ratio higher. If, on the other hand, the calculation is made well after the factoring transaction, for example, at the fiscal year end, the balances of sales and average accounts receivable would be unaffected by this transaction and therefore the accounts receivable turnover ratio would not be affected.

c.

If the entity prepares financial statements under IFRS, the following conditions are used to indicate whether treatment as a

sale is appropriate. The receivable is considered transferred (treatment as a sale is appropriate) if: 1. The entity transfers the contractual rights to receive cash flows from the receivable; or 2. Retains the contractual rights to receive cash flows from the receivable, but has a contractual obligation to pay the cash flows to one or more recipients. In addition, three conditions must be met: i. ii.

iii.

The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original receivable. The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows. The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay.

In this situation, Cheesman has factored receivables with recourse meaning it is responsible for payment if the customer does not pay. This would mean that the criteria of #2 i above has not been met and the receivable has not been transferred. Therefore, the receivables would remain on the books of Cheesman and a liability would be recorded for the amount borrowed....