QUESTIONS
1. What may be included under the heading of “cash”?
2. In what accounts should the following items be classified?
(a) Coins and currency.
(b) U.S. Treasury (government) bonds.
(c) Certificate of deposit (matures in 5 months).
(d) Cash in a bank that is in receivership.
(e) NSF check (returned with bank statement).
(f) Deposit in foreign bank (exchangeability limited).
(g) Postdated checks.
(h) Cash to be used for retirement of long-term bonds.
(i) Deposits in transit.
(j) 100 shares of HP stock (intention is to sell in one year or less).
(k) Savings and checking accounts.
(l) Petty cash.
(m) Stamps.
(n) Travel advances.
3. Define a “compensating balance.” How should a compensating balance be reported?
4. Springsteen Inc. reported in a recent annual report “Restricted cash for debt redemption.” What section of the balance sheet would report this item?
5. What are the reasons that a company gives trade discounts?
Why are trade discounts not recorded in the accounts like cash discounts?
6. What are two methods of recording accounts receivable transactions when a cash discount situation is involved?
Which is more theoretically correct? Which is used in practice more of the time? Why?
7. Discuss the accounting for sales allowances and how they relate to the concept of variable consideration.
8. What are the basic problems that occur in the valuation of accounts receivable?
9. What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?
10. Indicate how the percentage-of-receivables method, based on an aging schedule, accomplishes the objectives of the allowance method of accounting for bad debts.
What other methods, besides an aging analysis, can be used for estimating uncollectible accounts?
11. Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
12. Explain how the accounting for bad debts can be used for earnings management.
13. Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt.
Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company— none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
14. What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?
15. On January 1, 2017, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargent’s zero-interest-bearing note for $1,000,000 payable in 5 years. What entry would Lombard make to record the sale, assuming that Lombard frequently sells similar items of property for a cash sales price of $640,000?
16. What is “imputed interest”? In what situations is it necessary to impute an interest rate for notes receivable?
What are the considerations in imputing an appropriate interest rate?
17. What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?
18. Indicate three reasons why a company might sell its receivables to another company.
19. When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
20. Moon Hardware is planning to factor some of its receivables.
The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
21. Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable $789,000. This balance consists of the following items:
Illustrate how these items should be shown in the balance sheet as of December 31.
22. What is the accounts receivable turnover, and what type of information does it provide?
23. You are evaluating Woodlawn Racetrack for a potential loan. An examination of the notes to the financial statements indicates restricted cash at year-end amounts to $100,000. Explain how you would use this information in evaluating Woodlawn’s liquidity.
*24. Distinguish among the following: (1) a general checking account, (2) an imprest bank account, and (3) a lockbox account.
*25. What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?
*26. Describe the estimation of the allowance, based on expected cash flows.
2. In what accounts should the following items be classified?
(a) Coins and currency.
(b) U.S. Treasury (government) bonds.
(c) Certificate of deposit (matures in 5 months).
(d) Cash in a bank that is in receivership.
(e) NSF check (returned with bank statement).
(f) Deposit in foreign bank (exchangeability limited).
(g) Postdated checks.
(h) Cash to be used for retirement of long-term bonds.
(i) Deposits in transit.
(j) 100 shares of HP stock (intention is to sell in one year or less).
(k) Savings and checking accounts.
(l) Petty cash.
(m) Stamps.
(n) Travel advances.
3. Define a “compensating balance.” How should a compensating balance be reported?
4. Springsteen Inc. reported in a recent annual report “Restricted cash for debt redemption.” What section of the balance sheet would report this item?
5. What are the reasons that a company gives trade discounts?
Why are trade discounts not recorded in the accounts like cash discounts?
6. What are two methods of recording accounts receivable transactions when a cash discount situation is involved?
Which is more theoretically correct? Which is used in practice more of the time? Why?
7. Discuss the accounting for sales allowances and how they relate to the concept of variable consideration.
8. What are the basic problems that occur in the valuation of accounts receivable?
9. What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?
10. Indicate how the percentage-of-receivables method, based on an aging schedule, accomplishes the objectives of the allowance method of accounting for bad debts.
What other methods, besides an aging analysis, can be used for estimating uncollectible accounts?
11. Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
12. Explain how the accounting for bad debts can be used for earnings management.
13. Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt.
Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company— none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
14. What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?
15. On January 1, 2017, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargent’s zero-interest-bearing note for $1,000,000 payable in 5 years. What entry would Lombard make to record the sale, assuming that Lombard frequently sells similar items of property for a cash sales price of $640,000?
16. What is “imputed interest”? In what situations is it necessary to impute an interest rate for notes receivable?
What are the considerations in imputing an appropriate interest rate?
17. What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?
18. Indicate three reasons why a company might sell its receivables to another company.
19. When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
20. Moon Hardware is planning to factor some of its receivables.
The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
21. Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable $789,000. This balance consists of the following items:
Illustrate how these items should be shown in the balance sheet as of December 31.
22. What is the accounts receivable turnover, and what type of information does it provide?
23. You are evaluating Woodlawn Racetrack for a potential loan. An examination of the notes to the financial statements indicates restricted cash at year-end amounts to $100,000. Explain how you would use this information in evaluating Woodlawn’s liquidity.
*24. Distinguish among the following: (1) a general checking account, (2) an imprest bank account, and (3) a lockbox account.
*25. What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?
*26. Describe the estimation of the allowance, based on expected cash flows.
