Chapter 7 - problems

Question 1

P7-11 - Effects on the Income Statement

Answer 1

• think about the items on an IS: expenses, losses, revenue and gains - a commision you pay to another company when they give you an advance for your A/R is an EXPENSE - a loss on a sale is shown on the IS - be aware of the amounts you receive the last day of the period - so no accrued interest

Question 2

P7-9

1. note receivable paid in ‘rate’ => principal + interest
2. note receivable paid at the end and only the interest is due at certain intervals
3. cash flow from notes

Answer 2

1. be careful - the interest is not the same for all payments! It has to be calculated on the rest of the amount owing.

Daca due date e in mijlocul anului ai grija cand calculezi interest pt ca dupa due date, trebuie sa calculezi interest pt suma care a ramas de platit.

2. the interest is the same (the disclosed %) as the amount owing doesn’t change
3. make a table and take into calculation only the entries where the Cash account is involved. Think of the journal entries involved:
   dr. Cash
   cr. Note receivable
   dr. Cash
   cr. Interest income

Question 3

P7-9

3. Non/Zero-interest bearing note

Answer 3

3. No such thing. Time has money value

If the whole amount of the note is due in the future - that means some of it is interest.

So you can take the PV of the note and calculate the Interest for the # of months required.

• use prevailing rate of interest

Question 4

Note receivable (at discount)

Answer 4

• you record it at the face value (no discount on Notes Rec account)
• dr. Cash 1,000
• dr. Notes Rec 142
• cr. Interest income 1,142 = the ‘cash’ part is calculate it in the first column at the market interest rate - ex: 10% instead of 12%
  *

Question 5

P7-10 - factoring receivables

1. finance charge
2. amount withheld (ca un fel de garantie)
3. recourse obligation

Answer 5

1. = loss on the sale
2. = Due from Factor acc - asset account! (that is taken temporary for eventualy returns and allowances)
3. = libility acc : Recourse liability
   dr. Cash 36,000
   dr. **Due from Factor ** 2,400
   dr. Loss on Sale of Recevable 5,600 (4,000 + 1,600 recourse liability)
   cr. A/R 40,000
   cr. *Recourse Liability * 4,000

Question 6

P7-10 - selling a receivable - journal entry

Acc Rec turnover ratio

IFRS same as ASPE

Answer 6

1. Be careful if you have interest accrued on the Note Receivable!
   dr. Cash 50,904 (52,750 - 1,846)
   dr. Loss on Sale 1,846 (= 3,5 finance % )
   cr. Note Receivable 50,000
   cr. Interest receivable 2,750
2. Credit sales/Avg acc receivable

Question 7

Allowance for Sale returns

Answer 7

• is a contra-account to A/R => increases with a credit:
  dr. Sale returns and allowances (contra sales account)
  cr. Allowance for Sale returns
• as returns occur:*
  dr. Allowance for Sale returns

cr. A/R